Spotlight on Australia - July 2025

The world’s biggest steel maker needs to decarbonise its steel. Every year, China’s 1 billion tonnes of steel production results in around 2 billion tonnes of carbon dioxide. If China’s steel industry was a country, it would be the fifth-largest emitter of carbon. Australia provides 60% of the iron ore to the Chinese steel industry and sees a strategic opportunity to help green Chinese steel. Some may even call it a necessity.

GHG emissions from China’s steel

Steel making contributed around 11% of global carbon emissions in 2019. Being the world’s top steel maker, with 53% of steel production in 2019, China contributed over half of those emissions (see chart below). In other words, by itself, the Chinese steel industry contributed around 6% of total carbon emissions. For China, steel contributed 17% of its carbon emissions in 2019. 

Source: Net-Zero Roadmap for China’s Steel Industry, Global Efficiency Intelligence and Lawrence Berkeley National Laboratory

Most of the carbon emissions from traditional steel making (Blast Furnace - Blast Oxygen Furnace) comes from transforming coal into coke and from using coke and coal to turn iron ore into molten iron (pig iron). Every blast furnace is like a mini coal-fired power station! Scope two emissions are also generated through the use of electricity during the process.

The use of modern furnaces to make direct reduced iron (DRI) and then turning that DRI into steel with electric arc furnaces (EAF) produces a lot less carbon than the traditional process: 1.4 tonnes of carbon per tonne of steel versus 2.2 tonnes. However, this is still a lot of carbon. EAFs are also much lower in number than traditional furnaces because they are a newer technology and have a higher initial cost. In March 2025, only 32% of global steel came from EAFs; for China this falls to 15%.

China is also committed to increasing the use of scrap iron with EAFs to make new steel. For every tonne of scrap iron used in place of iron ore, around 1.5 tonnes of carbon emissions is avoided. However, China’s tight supply of scrap steel is an issue.

Chinese’s path to net-zero emissions from steel

China remains committed to its Paris Climate Agreement target of peak-carbon emissions by 2030 and net-zero emissions by 2060 despite backsliding by the US.

China leads the world in renewable energy. However, carbon emissions have been higher than expected since the end of its pandemic restrictions. As a result, China is lagging its carbon-intensity reduction goal for 2025 (14th five-year plan) and its 2030 Paris Agreement goal.

Given the Chinese steel industry’s large contribution to Chinese carbon emissions, reducing emissions from the steel industry at a faster rate would help China get back on target.

The April 2025 announcement that steel will be added to China’s Emission Trading Scheme provides an additional incentive for Chinese steel makers to decarbonise, even if the price of carbon is relatively low compared to the EU’s and others’ schemes.

The chart below shows where most of the carbon reductions in the Chinese steel industry are expected to come from according to a 2023 study. The area with the largest expected reduction is the shift to low-carbon steel making technology. The three most promising areas are the aforementioned use of scrap steel with EAFs, green hydrogen with DRI and EAFs, and iron ore electrolysis.

Impact of CO2 Reduction Options from Net-Zero Scenario for Chinese Steel Industry

Source: Net-Zero Roadmap for China’s Steel Industry, Global Efficiency Intelligence and Lawrence Berkeley National Laboratory

Australia wants to help

As a good trade partner, Australia is keen to help China reduce carbon emissions from its steel industry. 

Iron ore was Australia’s largest export by value in 2023, with 84.7% of its iron exports going to China (see chart below).

  Australian Exports by Value and Iron Ore Exports by Destination, 2023

Source: Observatory of Economic Complexity

Further, Australian iron ore exports are feeling pressure from multiple fronts so Australia wants to give its iron ore a green competitive edge.

Chinese steel production and iron ore demand has likely peaked following the pandemic and recent trouble in the Chinese property sector (see chart below).

Australia is also facing the prospect of increased competition in supply from Africa. China has invested heavily in various projects in sub-Saharan Africa over the last decade in order to diversify its iron ore supply from reliance on Australia and Brazil. Australia’s iron ore miners have reacted by also investing in Africa. For example, Rio Tinto’s 1.5 billion tonne Simandou iron ore mine in Guinea is expected to start production by the end of 2025.

The Middle East is also looking to establish itself in the green iron supply chain using its geographical position and push into renewable energy. As of November 2024, the Middle East produced 28% of total global DRI (conventional and green).

Australia also wants to safeguard its iron ore exports as demand for its coal exports continues to fall because of the global switch to greener electricity and green iron.

Source: Bloomberg

Australia and green iron

Australia has little incentive to help China with its scrap steel and EAF approach. But it is willing to help China with new technology to produce “green iron”, namely, DRI produced using low-carbon technology, such as green hydrogen. China can then turn Australian green iron into Chinese green steel.

On his six-day official visit to China in July, 2025, Australian Prime Minister Anthony Albanese chaired a one-day roundtable on decarbonising steel. Held in Shanghai, attendees included Australia’s leading iron ore exporters: BHP, Rio Tinto, and Fortescue; and China’s largest steel companies: Ansteel Group, Baowu Steel, Hebei Iron and Steel, Hunan Iron and Steel, Shagang Group, and Shougang Group.

Albanese wanted to highlight and encourage several Australian-Chinese private sector steel decarbonisation projects. These include projects where Australia is aiming to produce green iron or is helping Chinese companies produce green iron with Australian iron ore.

In 2022, Rio Tinto and Shougang Group agreed on decarbonisation efforts focused on optimising blast furnaces, carbon capture, utilisation of slag, and low-carbon sinter (the iron ore, flux, and coke mixture that goes into a blast furnace).

In 2023, Rio, Shougang, and the University of Queensland announced that they had developed a sinter with 23% less coke. In 2024, this technology was incorporated into a demonstration facility at the Jingtang plant with results showing a 10% reduction in carbon emissions per tonne of the sinter used.

In 2021, BHP and HBIS Group agreed to invest USD 15 million over three years in decarbonisation research. This led to HBIS building a hydrogen-based DRI-EAF demonstration plant in Zhangjiakou. The plant is optimised to use BHP iron ore from the Pilbara region in Western Australia. A new agreement was reached in 2024 to develop commercial-scale operations.

Fortescue is building a AUD 50 million green hydrogen green iron pilot plant in the Pilbara, but is not continuing with similar projects in Gladstone Queensland and Arizona, USA. In January 2025, it announced an MOU with China Baowu Steel to develop green iron technology.

"The Pilbara is in a position to produce green iron ore and therefore must, to maintain its huge value to the Chinese people," Andrew Forrest, Fortescue, founder and executive chairman.

Also during his trip, Albanese with Premier Li Qiang of China also announced the creation of an official ongoing policy dialogue on steel decarbonisation. This is designed to provide public focus and policy support for private projects.

“Achieving the goals of the Paris Agreement will require the decarbonising of steel value chains, presenting an opportunity for Australia and China to progress our long-term economic interests.” Anthony Albanese, Roundtable on Decarbonising Steel, opening remarks, 14 July, 2025.

These efforts in reaching out to China are also on top of the Australian public funding for green steel projects. In February, 2025, the government announced a AUD 1 billion fund for developing “green iron”.

Australia’s advantage in green iron

So why would Australia have an advantage in green iron when it does not have an advantage in conventional iron or steel?

It turns out that turning iron ore into iron (DRI) is the most energy intensive part of the steel making process. So countries with large amounts of surplus renewable energy will have an advantage in producing green iron. Those countries will be helped further as other countries adopt carbon pricing.

Renewable energy is cleaner and cheaper than fossil fuels and is cheaper than nuclear with no radioactive byproduct. However, unlike fossil fuels, renewable energy is not so easy to transport. So traditional steel powerhouses Japan and South Korea, which do not have large sources of renewable energy will struggle to produce green iron.

China has large amounts of renewable energy but also has a large population with an increasing appetite for electricity (see chart below).

Australia has large amounts of renewable energy, with loads more potential, and a small population. Australia is thus well placed to make green iron.

Further, unlike the Middle East, it has large amounts of iron ore. It turns out that turning iron ore into DRI is a simple process and not labour intensive - it just needs lots of energy. Australia thus has a clear opportunity to trade its leadership in iron ore exports for leadership in green iron exports. Countries with cheaper labour and existing leadership in steel production, like China, can then turn Australia’s green iron ore into green steel.

“The decarbonisation of the global steel value chain will likely necessitate a drastic re-orientation of supply chains. This would see the decoupling of ironmaking from steelmaking, shifting iron production to regions with close proximity to iron ore supply and high renewable energy resources.” Green Metal Statecraft: Forging Australia’s Green Iron Industry, Climate Energy Finance, 2024.

There is one small issue. 95% of Australia’s iron ore exports are hematite iron ore, but hematite is less suited to making DRI for EAFs than magnetite iron ore. Fortunately, 38% of Australia’s iron ore is magnetite. The Pilbara area does have magnetite but new mines will be needed in the Pilbara, South Australia and elsewhere to meet future magnetite demand.

Final thoughts

Australia has the opportunity to move up the value chain and move from being the world leader in iron ore exports to the world leader in green iron. Australia, China, and the world would benefit as a result. Australian industry has made a start and the government is committed so now is the time to deliver. 

“We've got the resources, the workers, and the know-how – the only thing we don't have is time to waste.” Anthony Albanese.