Iron ore exports face new competition and problems

Andrew ‘Twiggy’ Forrest with Anthony Albanese in Shanghai. Picture: NewsWire / Joseph Olbrycht-Palmer

Deep reflection about reducing the over-reliance on trade between Australia and China has never been a one-way street. Where Australian exporters have been challenged to look for markets elsewhere to sell their primary products, China has been busy building alternative suppliers for the raw commodities that are the real meat in the Australia-China trade sandwich. This is particularly true for iron ore, which is Australia’s biggest export commodity and according to the Department of Foreign Affairs and Trade was worth about $138bn in 2023-24, or 20 per cent of total exports. The big three commodity exports – coal, natural gas and iron ore – account for about 45 per cent of our total exports.

Unlike coal, wine, barley and lobsters, iron ore was not hit by coercive sanctions as part of Beijing’s “wolf warrior” diplomacy because there was little alternative supply. That is about to change when the first shipments leave the Simandou mine in Guinea sometime later this year. China owns 75 per cent of the Simandou mine, which is expected to ramp up quickly to 120 million tonnes of iron ore production a year. Rio Tinto, which is a major producer of iron ore in Western Australia’s Pilbara region, owns the other 25 per cent.

While Simandou represents less than 15 per cent of Australia’s exports by volume, more significant is the fact Simandou will become the world’s largest mine for high-grade iron ore, a critical input in low-carbon steelmaking. The project will supply ore with an iron content of about 65.3 per cent, which is higher than most of what Rio and other producers in the Pilbara can offer.

High-grade iron ore is of rising importance because it allows for greater efficiencies in steelmaking, which is a vital part of decarbonisation. The shift to a higher-grade iron ore, stagnant demand in China and increased supply from Guinea are all negative for the price of iron ore exports. This is the context for Andrew Forrest’s recent dire forecasts about the possible end of the Pilbara iron ore business unless it can go green. It is a problem for the federal budget as well because iron ore is a critical part of national income when the focus of government has been to borrow and spend while increasing the cost of doing business with changes to industrial relations laws as mining unions fight to get back into the iron ore mining sector.

This is all essential background for why Anthony Albanese and the heads of Australia’s major iron ore companies were so keen to make iron ore a key part of the Prime Minister’s China visit. In his opening remarks to a steel decarbonisation roundtable in Shanghai on Monday, Mr Albanese said Australian miners were responsible for almost 60 per cent of China’s iron ore imports, which were used to produce 50 per cent of global steel production. Lower-emissions technologies for steelmaking are being championed as a common interest but the major companies and steel producers are taking a range of different approaches. China increasingly is using electric arc furnaces for metal recycling, which can reduce greenhouse gas emissions by one-third. The Chinese government wants to see greater efficiencies in the traditional steelmaking sector using blast furnaces as well as more competition in the market for raw materials. Australia is at a disadvantage because it has a dominant market share position and most of the iron ore mined in the Pilbara has impurities such as silica, alumina and phosphorous that make it unsuitable for use in electric arc furnaces without pre-treatment.

Australian producers are working with Chinese buyers to maximise future opportunities. BHP is working with Chinese steelmaker Baowu on a commercial-scale direct reaction iron trial using Pilbara ores. Rio Tinto is working with Shougang to optimise its steelmaking process. Hancock is researching low-carbon processing technologies suitable for Pilbara ores. Dr Forrest’s Fortescue is building a hydrogen-based green iron pilot at Christmas Creek in the Pilbara. The plant plans to use green hydrogen in a reduction furnace to convert iron ore into sponge iron, which is further processed in an electric smelting furnace to produce high-purity green iron metal. This can replace iron ore in steel plants. Dr Forrest’s vision is for Australia to build its largest industry in green iron, and China its largest in green steel. The developments are an important investment in our major commodity export industry. The competition is higher-grade ores from overseas mines that can be fed into more efficient traditional blast furnaces.

The challenge for government is to stay firmly rooted in reality. There is a long history of attempts to downstream process iron ore reserves to add value before export. Billions of dollars have been lost in the pursuit of an industry and government dream that mostly failed to materialise.

Mr Albanese said government would have an important role to play but “we know it will be industry that drives the major developments to decarbonise the sector”. Taxpayers will benefit from any success in what is an uncertain pathway to decarbonisation of steel production. But they certainly don’t need another low-emissions boondoggle and must hold the Prime Minister to his word.