China’s ‘Green Steel’ and its Implications for Australia

In June 2022, the Chinese Ministry of Ecology and Environment and sixteen other government departments jointly released their ‘National Climate Change Adaptation Strategy’. The document outlined plans for the People’s Republic of China (PRC) to become a ‘climate-resilient society’ by 2035. It emphasised the need for adaptation and mitigation, namely, reducing emissions through new technologies and renewable energy.

Coming out less than two years after President Xi Jinping announced the PRC’s 2030-2060 targets, the Strategy reaffirms China’s determination to achieve its decarbonisation goals, stating that China’s CO2 emissions would peak before 2030 and reach carbon neutrality before 2060.

The iron and steel industry is the second largest carbon emitter in China and accounts for about 17 percent of its total emissions. ‘Green steel’, made from a carbon-free reductant such as hydrogen (a source of renewable energy) instead of coal, is hailed by scientists and policy makers as a global solution for reducing carbon emissions. China’s push towards greener steel production, even though this cannot happen overnight and requires costly changes within the industry, will have a profound impact on Australia’s export industry.

Decarbonising the Steel Industry

Adopting low-emission technologies is just one of the three main approaches that the PRC has adopted to accelerate the decarbonisation of the steel industry.

Less production means less emission. In the early 2010s, China addressed the issue of over-production by closing down steel mills that failed to meet standards of pollutant emissions and energy consumption. In 2018, the Ministry of Industry and Information Technology (MIIT) set up ‘capacity replacement’ rules, stating that a new steel mill can only be built if its capacity is less than 80 percent of the one that it’s replacing. Essentially, new steel mills are required to produce less.

Since the 2030-2060 targets were announced in September 2020, the steel sector has moved further to reduce steel output. In 2021, China’s crude steel output was 1.03 billion tons, a 3 percent drop from the year before. It was the first decrease in six years. Steel output during the first five months of 2022 dropped a further 3.81 million tons, or 8.7 percent year-on-year.

To further decarbonise the steel sector, China plans to use more recycled scrap steel as feedstock, instead of iron ore. Scrap steel comes from various sources including offcuts from the steel industry itself as well as obsolete materials, such as railroad tracks, ships, cars and steel cans. Comparatively speaking, the proportion of China’s crude steel production from scrap steel is still relatively low, lagging far behind other big steel producing powers, like the European Union and the United States, where steel produced from scrap accounts for half of the overall production. However, things are changing quickly. In 2020, China used 220.3 million tons of scrap to produce 20.7 percent of its crude steel, replacing 410 million tons of iron ore. The lifting of China’s ban on the import of scrap steel in January 2021 is a clear sign of an increased domestic demand for recycled steel. Experts have projected an increase of around 500 million tons in China’s domestic scrap steel resources in the next three decades, with the majority of it coming from end-of-life of steel-containing products.

Hydrogen-based Steelmaking Comes Slowly and With a Price Tag

There are two ways that hydrogen can be used in steelmaking, either as an auxiliary reducing agent being injected in a blast furnace (technically referred to as H2-BF), or as the sole reducing agent in a process known as direct reduction of iron (H2-DRI). Although the former shows promise, the cooling effect of hydrogen limits injection rates (the volume of hydrogen being injected per minute). This method reduces emissions by only about 15 percent. The second method, on the other hand, requires high-quality iron ore with an iron content of 67 percent or more. High grade iron ores are in short supply and can be very costly to produce.

In January 2022, the Ministry of Industry and Information Technology, the National Development and Reform Commission and the Ministry of Ecology and Environment jointly published the ‘Guiding Opinion on Promoting High-Quality Development of the Iron and Steel Industry’. The guide stipulated that the steel industry should invest 1.5 percent of its profit on developing green technologies, including the use of hydrogen in steel production. This is the first time that hydrogen-based steel making has been formally included in national policy.

Although major state-owned steelmakers like Baowu Steel (the world’s top steel producer since 2020) and Ansteel Group have started trialing hydrogen-based steel production, this does not mean China is already entering into a new era of carbon-free steelmaking. A shift towards hydrogen entails a total reconstruction of the steel industry and its value chain, including various processes from producing goods to delivering products.

Currently, more than 92 percent of steel in China is still produced using blast furnace-basic oxygen furnaces (BF-BOF) with coking coal acting as both a heating source and reductant. And the average age of China’s BF-BOF mills is just over eight years old, since most of them were built or rebuilt to meet the high standards on air pollutants emissions set in the early 2010s. Upgrading or rebuilding steel mills is not only wasteful but also financially risky as new technologies are still under development.

So for now, reducing steel output remains the primary approach to reducing emissions and is projected to account for 45 percent of China’s decarbonisation of steel industry to be achieved by 2060. Scrap-use will reduce emissions by another 39 percent; hydrogen’s contribution will be less than 10 percent.

End of the Road for Australian Iron Ore?

China is the world’s largest importer of iron ore. It imports around one billion tons of iron ore annually, constituting 82.3 percent of China’s iron ore consumption. Australian iron ore accounts for about 67 percent of the total imports.

However, Australia is close to losing its place as China’s number one supplier for several reasons. First, China has been looking for new suppliers of high-grade iron ores. It has previously turned to Brazilian producers and more recently towards Guinea’s iron ore to wean itself off reliance on Australia. Second, China is unhappy with Australia’s domination over the pricing of iron ore. To counter this, Beijing plans to set up a centrally controlled group that will act on behalf of all Chinese companies to get lower prices on iron ore through larger bulk purchases. Last but not least, China’s move to decarbonise the steel sector will in itself reduce demands for Australia’s iron ore as well as other raw materials such as coking coal. Recent research projects Australian coal exports to fall by 20 percent by 2025.

Australia has abundant natural resources. But it is not sustainable for its economy and environment to depend on metallurgical coal and iron ore exports to China. Australian policy makers and investors need to proactively consider a more sustainable use of Australia’s resources, such as shifting to domestic manufacturing of ‘green’ steel, which aided by Australia’s abundant solar and wind resources, will be of significant value to Australia’s future exports.