The prize is worth billions of dollars, but winning it is the key: Russell

Decarbonising steel is one of the biggest challenges to meeting climate goals. However, it could be extremely profitable for those companies and governments willing to take on the risk.

Steel value chain is responsible for 7 to 9% global carbon emissions. It is the biggest industrial contributor, and therefore a primary target for many countries' and companies' goals for net-zero in 2050.

About 80% of the steel emissions are caused by one single process. This is the removal of oxygen and other impurities from iron ore to produce pig iron, or crude iron. The process now requires vast amounts of coal.

While the final steel product will not be emission-free, the carbon intensity can be reduced to about 300 kg (661 pounds) per ton, which is one-seventh the current 2.2 tonnes of emissions.

The bad news is, it will take massive amounts of green energy, coordinated government regulations, and incentives from all countries, including resource producers such as Australia, to steelmakers like China and Japan, in order to adopt these technologies on a large scale.

Australia is the largest iron ore producer in the world, exporting nearly 1 billion metric tonnes a year. Of this, more than 80% go to China, which is the biggest steel maker and importer of the world.

Australia is the world's largest exporter of iron ore and the metallurgical coal that is used to produce steel is also in the top five. This means the country is highly exposed to any shift in global steel production in order to reduce emissions.

The Green Iron and Steel Forum, held in Perth this week, put the importance of a shift to low-emissions steel and the size of the challenge at the forefront.

Australia's exports of iron ore and metallurgical coke are valued at $85 billion each year, while metallurgical slag is worth another $34 billion. However, the value increase that could be achieved by producing green iron to export has been estimated as high as $252 billion per year.

This assumes that most of the iron ore volume is converted to green iron by using hydrogen produced from renewable energy sources such as wind and solar.

The value of green iron, which is 40% of the iron ore production by 2050, would still be around $110 billion annually. To this value you could add the 60% of iron that's still being shipped.

The capital required to build the infrastructure for energy production and processing will be huge, reaching hundreds of billions.

Costs of solar panels and wind turbines will likely continue to fall, particularly if massive quantities are demanded in China, resulting in increased economies of scale.

Investors will still need some degree of certainty before they deploy such large amounts of capital.

COMMITMENTS ARE NEEDED

Steel mills from existing heavyweights such as China, Japan, and South Korea must commit to buying green iron.

The steel industry will need to invest in electric arc furnaces that can convert green iron to steel without the use of coal.

Steelmakers will also be required to invest in Australian green-iron plants and share upfront capital costs.

The mining industry is good at shipping and digging iron ore. However, they need to find partners who have expertise in the construction of renewable power plants, hydrogen production plants, and other green technologies to transform this raw ore.

The challenge is to bring all parties together and kick-start a brand new industry using an existing raw materials.

The governments of Australia and Asia also have a significant role to play.

The production of low-emissions products will be more costly than the high-emissions version.

The experience suggests that consumers will not pay more for low-emissions products. Therefore, the steel industry must either be penalized by carbon taxes or encouraged by subsidies to make a switch.

There are carbon taxes in some Asian countries and incentives for green projects. However, there is still no coordinated regional framework to provide investors with certainty and encourage investment.

The Perth conference revealed that Australia has the technology to go green and is willing to do so.

The switch from the dig-and ship model to beneficiating green iron in Australia will likely be as big a snowball.

The green iron dream looks like a snowball on top of a hill. It needs to gain some initial momentum before it can start rolling downhill.

It will take time for the avalanche to gain speed and size. However, if you can avoid hitting obstacles on the way down the mountain it could turn into an actual avalanche.

These are the views of the columnist, who is also an author. Clarence Fernandez edited this article

(source: Reuters)