China steelmaker Baowu and Rio Tinto have signed a Memorandum of Understanding (MoU) to explore a range of new projects in China and Australia for the future de-carbonisation of the steelmaking process.

The joint projects include researching and building a pilot-scale electric smelter at one of Baowu’s steel mills in China. This would enable low-carbon steelmaking utilising direct reduced iron (DRI) produced from low- and medium-grade ores. Another part of the collaboration between Baowu and Rio Tinto would be the optimisation of the pelletisation technology for Australian ores as a feedstock for DRI reduction.

Last March, BHP announced that it signed an agreement to design and build an electric smelting furnace (ESF) pilot plant in Australia. The facility aims to demonstrate a pathway to lower carbon dioxide (CO2) intensity in steel production using iron ore from BHP’s Pilbara mines for steelmaking customers.

These announcements are no coincidence, and they show that the large iron ore miners are positioning themselves to be involved at the very beginning of the Chinese steel industry’s de-carbonisation process. China aims at reaching peak emissions in 2030 and being carbon neutral by 2060. The steel industry generates about 15% of China’s emissions and therefore is becoming a prime target for carbon reductions.

About 90% of China’s steel production comes from blast furnaces (BFs) with the remaining 10% from electric arc furnaces (EAFs). In theory, EAFs can produce half the carbon emissions compared to BFs, but that would be using only scrap, an option rarely possible, because of the impurities contained in scrap metal. Therefore, pure metallics, such as DRI or pig iron (PI) are added to enhance the quality of the final steel product. DRI is usually produced with high-grade Fe and low-impurities DR pellets as feedstock, and future DRI production could be constrained by DR pellets availability. Miners and steelmakers need to increase collaboration to source more DRI, preferably from lower-grade ores.

Project Blue believes that the Chinese steel industry’s de-carbonisation will take longer than expected and that the government’s target of producing 15% of its steel through EAFs in 2025 will be difficult to achieve. The first reason is that China’s steel industry has passed its peak and is slowly shifting to a decline in terms of production and consumption. The second is that China’s BFs are relatively ‘young’ at a 12-year average and are efficient. It is unlikely that steel mills will mothball such operations and replace them with new EAFs. Thirdly, high-quality scrap is not plentiful in China and would have to be imported. Finally, DRI availability would be another constraint.

The collaboration between the Australian iron ore miners and the Chinese mills for the de-carbonisation of the steel industry also has a political angle. The Chinese authorities have regularly suggested that the large iron ore miners are ‘controlling’ the iron ore market. They also hinted that China could establish an entity which would control and supervise iron ore imports. Furthermore, the trade relationship between China and Australia has recently soured.

Considering the various threads outlined above, preserving future iron ore revenues from exports to China while at the same time integrating with China’s green schemes is a strategic decision.