China’s push to decarbonise its steel industry could dramatically reshape one of Australia’s most important export relationships. 

Iron ore is Australia’s single largest export, worth around $385 billion in the 2024–25 financial year. China is by far the world’s largest steel producer and is the destination for more than 80 per cent of Australian iron ore exports. 

However, China’s demand for iron ore is falling as its infrastructure boom slows and more scrap steel becomes available for recycling. These factors combined mean that Chinese iron ore consumption could fall by more than half by 2050. 

At the same time, China set the ambitious goal of reaching net zero by 2060. Steelmaking is highly carbon-intensive, accounting for around 7-9 per cent of global emissions. In China, because of its high consumption levels of steel, the process accounts for as much as 18 per cent of domestic emissions. This means that China’s remaining demand will need to be met by green steel. 

While this is a major challenge for Australia’s iron exports, it also creates an opportunity to move up the value chain by developing a domestic green iron industry. 

ANU researchers Dr Jorrit Gosens, Dr Alireza Rahbari, Associate Professor John Pye, Professor Frank Jotzo, and Associate Professor Fiona Beck, together with colleagues at Curtin University, have examined these challenges and opportunities in a policy brief produced as part of ongoing research with the Heavy Industry Low-carbon Transition Cooperative Research Centre (HILT CRC). 

Conventional steelmaking relies on blast furnaces that use coal to process iron ore, making it one of the most carbon-intensive industrial activities. Low-carbon alternatives are emerging, with the most proven pathway currently being hydrogen-based direct reduced iron combined with electric arc furnaces. These technologies use hydrogen to remove oxygen from iron ore, producing solid iron that is then smelted and converted to steel using renewable electricity. However, this process works best with very high-grade ores, exposing Australia to increased competition from suppliers such as Brazil and Guinea. 

Hydrogen costs are crucial in the development of an Australian green iron industry. If the cost of producing green hydrogen in Australia is the same as in China, then it is more economical to produce green iron in China rather than in Australia. This is because China has several comparative advantages over Australia including its low labour costs. If Australian producers can produce green hydrogen just $0.50 per kilogram cheaper than in China, Australia could competitively supply China with substantial quantities of green iron. 

The development of Australia’s green steel industry also hinges on the development of the Electric Smelter Furnace (ESF). The ESF is a process step following the production of direct reduced iron. This emerging technology allows for the production of high grade iron from lower grade Pilbara hematite ores, which form the bulk of Australia’s iron ore exports. Crucially, the development of this technology would spur demand for Australian ores regardless of whether the processing happens in Australia or China. This makes it a high-priority area for research and investment by both industry and the Australian government. 

Work is ongoing at the Centre for Climate and Energy Policy (CCEP) at ANU Crawford School to expand this model to other key global markets, as part of a broader research program that investigates the economics and policies of the global steel industry transition and evolving Australia’s role in it.

Read the full policy brief here.