Australia’s high-grade iron ore marks as a key player as the world transitions towards reduced carbon emissions

High Grade Iron Ore Report Part 1.
A huge part of the global climate debate is spoken in absolutes. Debate rages over authenticity of scientific reports and clear, broad definitions. Politicians, key business sectors and various business parties have all seen fit to bend narratives in their favour, with defined two sided questions dividing the public for decades.

However, a new narrative is beginning to appear that is shading grey into some of these margins. People have long argued that an economic case for a transition away from a coal-reliant economy would simply bankrupt our economy immediately, so whatever positive flow on effects our environment and temperature would therefore not be worth the risk, or even be utterly pointless depending on your respective personal bias.

However prominent economists, not scientists, such as Ross Garnaut are beginning to lay out the foundations for Australia’s economic opportunity in a future without carbon, not just in the future, but in the key period of a transition away from coal and carbon reliant power systems.

Similarly, there remains no argument that Iron Ore and associated products are a key ingredient to the success of Australia’s current economy. A price spike caused by the Vale disaster in Brazil was alone considered enough by prominent economists to ward off fears of a long predicted recession in 2019. This key resource certainly has a part to play in our immediate future.

It is worth looking at some of our neighbours to see how they are approaching this key period of transition. Around the world, governments in countries such as China and Sweden are getting serious about emission reduction programs. More than 60 countries have set net-zero emissions targets by 2050. As a result, governments are looking to limit pollution from pollution heavy practices, such as steel-making.

There is a huge global demand for steel, yet steel-production is one of the most polluting and energy-hungry industries in the world. A lot of this steel is produced using low grade Iron Ore, which is inefficient, more cost intensive and crucially, worse for the environment.

But where do Australia’s ore exporters come into play into this changing landscape?

High Grade Iron Ore and lower pollution

The shifts in the sector are causing a huge re-evaluation in the significance of the grade of Iron Ore. Iron ore products (especially pellets) of a higher grade are becoming prioritised above all else (specifically Iron Ore with a grade of 64% or above). At this grade, during the production process you have a dual benefit of optimization of output whilst minimizing pollution.

High Grade pellets can be processed directly into blast furnaces, and do not require going through a dirtier process known sintering, where low-grade ore is mixed with other products to create a blast furnace fuel.

This ultimately results in a full two thirds reduction in energy output

As this move becomes more in vogue, processing mills are also beginning to switch to larger furnaces to align with their switch to better grades of Iron Ore products. The reasons for this are numbered, not limited to efficiency improvement, improved air permeability and further production positives. It is much more expensive to fix a large furnace than a small one. So overall, the landscape of the industry even at a processing level is beginning to change, and the switch to high grade materials will become more and more necessary.

China’s recent carbon reduction policies

In the 1980s, 85% of the population lived on less than $1.25 a day. By the end of the 2020s, it’s expected that China’s economy will surpass that of the US.

China’s speedy development is due to its swift industrialisation which has created a huge demand for steel. China needs steel to build and expand cities. It also needs it to meet the demands for cars and appliances from its growing middle class. 

Industrialisation has been great for China’s prosperity. But it has caused serious socio-economic and environmental ramifications. Chinese industrial centres are enveloped by heavy smog, causing one million deaths a year as well as crop losses which drains the economy of an annual $38 billion. 

The Chinese Communist Party has gone to war on pollution by imposing ultra-low emission standards in 2018, targeting steel-producers in particular. 

The role of high-grade iron ore in China’s lower pollution future

China is the biggest steel producer in the world. It accounts for nearly half the world’s total crude steel production. Steel is integral to the Chinese economy, both as a domestic and an export product. 

In China, steel-manufacturers typically use low-grade iron ore, and use a sintering process to turn it into steel. Simply put, this means they process the low-grade iron ore in a coal-powered blast furnace, a process that is very bad for the environment. 

As a result, steel-production is the country’s biggest industrial polluters. In 2017, the Chinese steel sector emitted 2.81 million tonnes of particulate matter, making up 20% of the total emissions. 

To combat pollution, the CCP imposed stringent emissions reduction programs on steel. They suspended millions of tonnes of steel production capacity and limited coal consumption. 

These environmental protection measures could result in more demand for high-grade iron ore. By using high-grade iron ore, manufacturers can bypass the sintering process, which can cut emissions by up to 95%, along with the aforementioned efficiency benefits.

Sweden is decarbonising steel – where does high-grade iron ore stand?

Like China, Sweden’s biggest polluter is the steel industry. It contributes to 37% of Sweden’s total emissions. To cut emissions, Sweden has made a long-term commitment to zero-carbon steel production funded by the government.Instead of using coal, their new zero carbon steel production process is fueled by green hydrogen, turning low-grade iron ore into steel, without the pollution of traditional sintering. 

There’s a downside to this production method. It’s 20% more expensive. The cost would be a significant obstacle to bottom-line focused steel-makers. 

Steel’s future is in Australian high-grade iron ore products

Countries are moving towards their net zero-emission targets but this cannot be achieved overnight. Decarbonising the steel industry completely is a while off yet but this doesn’t mean that steps to decarbonising can’t make a difference. As we’ve seen, China and Sweden are already implementing measures to address the issues. 

In the transition between traditional steel processing and decarbonisation, high-grade iron ore is a key player as a more cost-effective and energy-efficient option. Matt Simpson, the former General Manager of  Mining for Rio Tinto’s Iron Ore Company of Canada, said high-grade iron ore has a positive effect on steel-makers’ bottom lines. High-grade iron ore enables global producers to make low-emission, cost-effective steel. 

Only 4% of the world’s iron ore is considered high-grade and Australia crucially holds the keys to has most of it. Australia’s high-grade iron ore products are likely to be a huge asset to our economy through the 2020s as Australia, along with the rest of the world, transitions into less polluting and more cost-effective methods of steel-making.

Continue reading part two of our series, How high-grade iron ore and clean energy could make Australia an energy superpower, and why High Grade Iron Ore and the economics behind it will play such a crucial role in our slow transition to implementing more renewable energy sources. 

*Reach Markets have been engaged by CAP to assist with private investor management.

Sources:

• The Fifth Estate: Sweden aims for the first place in zero carbon steel race
• The Courier: Economist Ross Garnaut returns to Ballarat for forum on renewable economy opportunities
• Investing News: China’s War on Pollution Driving Demand for High-grade Iron Ore Pellets
• The Guardian: Ross Garnaut: three policies will set Australia on a path to 100% renewable energy
• Renew Economy: Energy Insiders Podcast: Ross Garnaut and why Australia can be a renewable superpower
• ABC: Tepid growth tipped as iron ore and coal hold up Australia’s recession free run