Australia will require substantial investment and government support to establish a globally competitive green iron industry and capitalize on the global transition toward low-carbon steelmaking, according to a new briefing note from the Institute for Energy Economics and Financial Analysis (IEEFA).
Australia‘s annual green iron export revenues could reach A$96 billion by 2040, based on forecasts cited by the federal government. However, realizing this potential would require investment of approximately A$170 billion per year over the next 14 years, approaching investment levels recorded during the peak of Australia‘s mining boom in the 2000s.
According to Lachlan Wright, energy finance analyst for global steel at IEEFA, green iron production is highly capital intensive. In addition to ironmaking furnaces and electrolyzers, projects require significant investments in solar and wind generation, battery storage and electricity transmission infrastructure. Additional rail and port infrastructure would also be required to transport iron ore to green iron production facilities and deliver the resulting product to international markets.
Green iron could offset declining fossil fuel exports
As the global steel industry moves toward decarbonization, demand for green iron is expected to increase while Australia‘s traditional coal and gas exports are forecast to decline.
IEEFA stated that developing a green iron industry could therefore help reduce global carbon emissions while providing Australia with an alternative source of export revenues. However, despite the potential for green iron to command a price premium, production is not yet cost competitive due largely to the significant amount of clean energy required.
The Australian government’s estimate of A$96 billion in annual export revenues assumes that the country’s metallurgical coal exports are replaced by an equivalent volume of green iron. Australia currently exports approximately 150 million mt of metallurgical coal annually, equivalent to around 270 million mt of green iron, based on an assumption that approximately 0.55 mt of metallurgical coal is required to produce one metric ton of iron.
One million mt of capacity could require A$7-10 billion
According to Wright, developing one million mt of annual green iron production capacity in Australia at current prices would require approximately A$7-10 billion in capital investment. This estimate covers ironmaking facilities and electrolyzers as well as the solar, wind and battery capacity needed to provide low-carbon electricity. Renewable energy infrastructure alone could represent approximately half of the total capital expenditure required for a typical Australian green iron project.
The scale of electricity demand also represents a significant challenge. Even South Australia, which has one of the country’s most advanced renewable energy sectors, would need to more than double its utility-scale solar and battery capacity to supply the electricity required for the proposed Whyalla green iron project.
Government policy seen as critical for investment
Despite these challenges, IEEFA believes Australia‘s abundant renewable energy and mineral resources provide a strong foundation for establishing a competitive green iron industry. Policies previously used to accelerate renewable energy investment, including renewable portfolio standards, contracts for difference and feed-in tariffs, could potentially be adapted to support green iron projects.
According to IEEFA, without policy measures of sufficient scale and duration to provide investor confidence, Australia is unlikely to attract the enormous amounts of capital required to turn its green iron ambitions into a globally competitive industry.