Australia’s iron ore riches challenged by green steel and African rival

More than five decades after iron ore was first shipped from Western Australia’s remote Pilbara region to China, the region’s red dirt is still helping to make the rest of the country rich.

“Iron ore is the bedrock of Australia’s prosperity and the thread which binds us to the global economy,” mining minister Madeleine King said as she opened the Pilbara’s latest iron ore mine this year, to the sound of giant red rocks being dumped by crusher trucks. 

Chinese appetite for iron ore has powered the growth of Australian miners such as Rio Tinto, co-owner of the new Western Range mine along with China Baowu, and BHP, which dig hundreds of millions of tonnes annually and export it via a vast network of trains, ports and ships.

The whole country has benefited. Iron ore shipments accounted for 4 per cent of GDP in the year to March, according to bank CBA. Iron ore is so consequential for the country that its price influences annual budgets.

Yet the optimism embedded in Rio’s new mine, and the assumption that the Pilbara and the Australian economy will continue to benefit from global steel demand, is being challenged.

The iron ore price has been volatile, weakened by the collapse of the Chinese property sector. Steel production in China was down 4.6 per cent year on year in September, according to government data, while domestic steel consumption was down 5.8 per cent, according to data cited by Bloomberg.

China is also trying to bear down on prices for iron ore. Its China Mineral Resources Group, founded three years ago to consolidate purchases for leading steel producers, has recently started to flex its muscles in negotiations with BHP.

Meanwhile a push to decarbonise the global steel industry, which accounts for around 8 per cent of emissions according to the International Energy Agency, has added to the concerns over Pilbara iron ore, used in coal-fired blast furnaces.

While those plants have a long way to run, Pilbara iron ore grades are not as compatible with modern smelting methods to make “greener”, less carbon-intensive steel. Steelmakers across Asia, including Baowu and Mitsui, have set decarbonisation targets and committed to net zero by 2050 as the sector has pushed to reduce emissions.

Andrew Forrest, the billionaire behind Pilbara iron ore miner Fortescue, has warned Australian iron ore producers to adapt. “If the Pilbara refuses to change, it will lose its relevance,” he told the Financial Times while on a trip to Beijing.

Forrest pointed to Guinea’s Simandou mine, also controlled by Rio and Chinese companies, as a source of higher quality iron ore that steelmakers will need.

Some in Australia have dubbed Simandou, which will officially open in November, a “Pilbara killer” for its potential effect on Australian output.

“You’re standing in front of a freight train,” Forrest said of Australia’s iron ore industry.

Still Pilbara will remain far more significant to the iron ore market than Simandou, which will produce 60mn tonnes a year by 2028 and has the potential for 150mn tonnes annually. That is a fraction of the 866mn tonnes exported from Western Australia last year.

Simon Trott, speaking at Western Range prior to becoming Rio’s chief executive, dismissed any concerns over his company’s commitment to the Pilbara, where Rio intends to invest more than A$20bn ($13bn) over the next five years.

“It’s not going to be some Mad Max-style wasteland . . . we’re going to be in the Pilbara for decades to come but we have got to do the work,” he told the Financial Times of the need to adapt.

In October Rio unveiled its latest investment in the Pilbara when it revealed a A$1.1bn expansion of its West Angelas iron ore mine alongside its Japanese partners Mitsui and Nippon Steel, a further sign of commitment to the region.

There are emerging signs of caution, however, as the outlook for iron ore has weakened. BHP, which produced a record 290mn tonnes of Pilbara iron ore last year, has lowered its long-held target of 330mn tonnes as it tilts investment towards copper and potash. It now expects to produce 305mn tonnes a year from 2028.

Chief executive Mike Henry said that, with Simandou coming on line, and Chinese steel production set to plateau, further investment depended on the market outlook.

“Can the market bear another circa 25mn tonnes per annum, and what would the impact of those tonnes be in the market? We’re not feeling an urgency around pulling the trigger on that growth,” he said on an analyst call in August.

Some Australian policymakers say the country should use renewable energy such as hydrogen to produce more of its own “green” steel.

Guy Debelle, a former deputy governor of the Reserve Bank of Australia and Fortescue executive, said Australia was in danger of getting “its lunch cut” by other regions if it did not adapt.

“We’ve got the opportunity, we should seize it. The underlying demand for steel is going to be there,” he said.

A number of companies along with state and federal governments have subsidised the creation of a pilot electric smelting furnace in Western Australia to test technologies and methods to use lower grade Pilbara iron ore in modern steel furnaces. Meanwhile Fortescue has established a “green energy hub” in the Pilbara to trial hydrogen-fuelled electric furnace technology.

Yet the largest miners have not fully bought into a vision of transitioning away from simply digging and shipping iron ore. Geraldine Slattery, BHP’s head of Australia, said producing steel in Australia costs twice as much as in China or the Middle East. Australia and its miners should instead secure a position as a “world beater in upstream production”, she said during a trip to China this year.

Fiona Haslam-McKenzie, an academic with the University of Western Australia, said the beauty of Pilbara iron ore has been its low cost to exploit. “You dig it, put it on a train and ship it,” she said.

Now, she said, Australia needed to consider other drivers of growth, even if the returns of investment were not as compelling. “We need to adapt to a post-iron ore world,” she said.

Financial Times