Iron ore’s critical role in decarbonizing steelmaking

Iron ore plays a critical role in decarbonizing steelmaking. What does greener steel mean for global iron ore markets? And what part will China play in driving change? Our global steel and iron experts weigh in.

Steel producers have yet to shake their heavy reliance on primary iron ore, and coke, the big polluter. Most iron ore producers are still at the very early stages of formulating a decarbonization strategy. Today, low-carbon steel has a tiny share of global steel markets, and the energy-intensive steel industry produces more carbon than steel. 

We asked our leading steel and iron ore experts how iron ore can help shape the future of steelmaking, what these changes might mean for global iron ore markets, and what role China will play.
The steel industry produces more carbon than steel. How will the industry respond to pressure to clean up production, and what does that mean for markets?
As surprising as it may seem, the steel industry produces more carbon than steel. For every tonne of crude steel produced, there is almost twice as much carbon produced. The challenge in cutting carbon emissions for industry is that a third of its energy demand is for high-temperature heat and, so far, there are few mature alternatives to fossil fuels.

Merely improving existing integrated steelmaking methods will not be sufficient to cut emissions and meet climate goals. The question is, how can we get away from coke, the big polluter?

The average integrated plant in Europe is close to 50 years old and this has increased the appetite for investing in emerging technologies. Some European steelmakers are now leading the development and commercialization of hydrogen-based DRI.

There is simply not enough top quality iron ore or scrap to meet the high DRI quality criteria, so BF-BOF steelmaking, which relies on primary iron units and metallurgical coal, will continue to be the dominant processing route in steelmaking for some time.

Miriam Falk, Senior Analyst

Is the global iron ore industry fit for purpose? 
To succeed in decarbonizing the global steelmaking industry there needs to be a greater recognition of how much the iron ore supply base needs to change. Vast volumes of existing production will need to be replaced by higher-grade supply, first to meaningfully reduce CO2 emissions from the prevailing BF/BOF technology, and later to meet the demands of a DRI sector at least an order of magnitude larger than it is today.
Iron is not a rare element, but producing the right kinds of ore whilst also meeting increasingly stringent ESG standards is set to be a huge challenge over the coming decades. The per-tonne cost base will have to be significantly higher than the low double-digits we are accustomed to, though even greater price differentiation between product grades according to their emissions profile upon consumption should increasingly offset this. Unless more forward-thinking investments are made, ore supply will be a major rate-determining bottleneck in decarbonization ambitions.

Peter Hannah, Index Manager

China’s steelmaking sector is evolving quickly. How might this impact global iron demand? 
China’s mammoth steelmaking industry will continue to evolve and change in the coming years, especially with the continued drive by the Chinese government to reduce carbon emissions and increase living standards for its citizens. 

For example, China is attempting to reduce its dependency on imported raw materials by instituting strict capacity replacement ratios for blast furnaces and encouraging more scrap-based electric-arc furnaces in its steelmaking industry. However, at the same time, it is heavily reliant on iron ore and coking coal as the key steelmaking raw materials.

Another key development to watch will be its continual re-structuring of the major Chinese steelmakers, some of which are state-directed. This will create new bases of market power in the region.

The changes in ferrous trade flows and commodity pricing will be interesting to watch across the entire supply chain as they react to the changing market environment.

Paul Lim, Asia Steel Editor 

Is it time for a new iron ore pricing mechanism?
In late 2020 the China Iron & Steel Association (CISA) declared that the iron ore market’s pricing mechanism had “failed”, was “unreasonable”, and that suppliers and consumers should “study and establish a new mechanism”. While Fastmarkets does not agree with this sentiment, we do support efforts to optimize and improve the current pricing ecosystem to protect the remarkable gains in maturity that iron ore has made over the past decade. 

Fastmarkets’ iron ore methodology is structurally designed to support and prioritize best-practice price discovery, with fixed-price activity on transparent trading platforms receiving the greatest weightings in its index calculations. We encourage market participants to increase the frequency of these ‘gold standard’ spot price data points as the most effective means of managing the integrity of the physical/financial market interface and safeguarding trust in the mechanism. 

Though pricing mechanisms may undoubtedly continue to evolve in the future, alternatives currently lack the standardization and efficiency of the incumbent seaborne/CFR indices.

Peter Hannah, Index Manager

To learn more about the challenges facing the iron ore market and how to prepare for the future of steelmaking – join our expert speakers Peter Hannah, Paul Lim, and Miriam Falk at the two-day virtual event Global Iron Ore 2021 on March 17-18.

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