| Steelmakers are increasingly touting efforts to lower their carbon footprints, but the availability of raw materials could present an issue as steelmaking processes shift. Source: U.S. Steel Corp. |
A shortage of high-quality iron ore in the marketplace presents a significant hurdle for steelmakers who are trying to reduce their carbon emissions.
Green hydrogen-based technologies use less carbon to produce steel, but the process requires higher iron ore grades than traditional blast furnaces. A dearth of ore with an iron content above 65%, combined with a shortage of mining projects in the pipeline, could disrupt the steel industry's climate goals, the Institute for Energy Economics and Financial Analysis, or IEEFA, concluded in a new report.
Steel accounts for 7% of energy sector CO2 emissions, according to a 2020 report from the International Energy Agency. Demand is growing for greener steel operations, with automakers among those leading the charge.
One cleaner way to produce steel uses direct reduced iron, or DRI, in which ore is reduced with hydrogen and carbon monoxide. If global steelmaking follows a path to net-zero emissions by 2050, demand for direct reduced, or DR-grade, iron ore could rise tenfold, IEEFA Energy Finance Analyst Simon Nicholas said.
"As it stands, DR-grade iron ore makes up less than 5% of global iron ore supply," said Nicholas, an author of the report by IEEFA, a financial think tank supporting a transition to cleaner energy. "Given the long lead times for iron ore projects, ramping up DR-grade ore supply to meet any large increase in demand could prove difficult."
Iron deficient
In a May 2022 report, the International Iron and Metallics Association concluded that by the early 2030s there would be a significant shortage of commercially available DR-grade iron ore pellets.
"From the quantitative perspective, iron ore supply should not be an issue," the trade association report states. "However, from the qualitative perspective, there is a potentially serious problem."
Based on a review of forecasts, the potential for new DR-grade iron capacity by 2030 ranges from 40 million tonnes per year to an "optimistic high" of 100 million tonnes per year, IEEFA analysts wrote. Data from European think tank Agora Industry indicates that DRI projects will require about 80 million tonnes of iron ore per year by 2030 if all announced projects proceed, they said.
Under a net-zero scenario, DR-grade iron ore pellet demand could increase more than fivefold in the next three decades, driving a similar increase in supply, said Isha Chaudhary, a research director following steel and raw materials at Wood Mackenzie. Expanding DR-grade iron ore projects will likely require government incentives along with interest from the mining community, Chaudhary added.
"In our view, a large part of the supply will come from Brazil, followed by Canada, but there aren't enough investments that are happening toward that front," Chaudhary said.
Thin pipeline of new projects
Much of the world's higher-grade iron ore comes from Brazil. Vale SA, for example, has achieved mined iron grades of 65% Fe from its Northern System operations. However, there are major iron projects in other parts of the world as well, including the closely watched Simandou project from Rio Tinto and a consortium of Chinese entities, which is capable of producing 200 million tonnes of high-grade iron per year from West Africa.
While there are exceptions, there are relatively few new iron ore projects being deployed.
"For the big four [iron ore] producers, mining of blast furnace-grade iron ore is a hugely profitable business done at large scale with low costs per tonne," Nicholas said. "It's easy to see why they would be keen to continue this business as usual."
China has been slowing down its steel production, which could leave a lot of iron ore miners hesitant to invest in much new mining capacity, S&P Global Commodity Insights principal analyst Ronnie Cecil said.
"Why should [miners] Rio Tinto PLC and BHP Group Ltd. be thinking, 'well, we'll invest in loads more mines if our main growth market is starting to plateau off'?" Cecil said. "So, there's not a lot of development projects in the pipeline."
Higher-grade resources can also be difficult to find, said Julia Attwood, head of the sustainable materials team at Bloomberg New Energy Finance. Many miners are likely awaiting stronger demand signals from steel producers that hydrogen is their most likely path forward, but there are also some resource challenges.
"Of course, people always say these are just known reserves and if we were really looking for it we might find a lot more," Attwood said. "I think that's kind of unrealistic with something that is as well used and well explored as iron."
Making green steel cost more
Tightness in the market may also drive up the premium on DR-grade ores over the next year, depending on how quickly the mining sector responds and which paths steelmakers choose to take toward decarbonization.
Many steel companies have rolled out plans for pilot-scale or even larger green hydrogen DRI projects, but those processes are expensive compared with other steelmaking techniques. Making steel with hydrogen costs about $787/ton. That could fall to $489/ton by 2050 and compete with today's production technologies, Attwood said. However, if higher-grade iron ores are in short supply, yields could be reduced, increasing that $489/ton price tag by 20%. According to Wood Mackenzie, in 2020 the global average cash cost for finished steel was about $415/ton.
Asia will be the region to watch for early supply chain crunches, Attwood said. Demand for high-grade ore pellets in China, Japan and South Korea is expected to rise 12% to 429 million tonnes per year by 2030, with 389 million tonnes of that demand coming from China.
Waiting for steelmaking technology and supply to catch up could be detrimental to climate goals. IEEFA reports about 71% of existing global blast furnace capacity will reach the end of its operational life before 2030. If technology and supply chains are not in place for greener steelmaking processes, steelmakers could continue to invest in heavier-emitting, coal-based facilities and operate them for several more decades. Miners can supply those operations with ores made up of a lower grade of iron, and many have aligned investment in their mining portfolios accordingly.
Looking for solutions
Options to resolve the issue include ramping up the mining of higher-grade ores, concentrating the iron in lower-quality ores or advancements in green steelmaking technology that would enable the use of lower-iron ore.
Iron ore miners could also pivot from hematite ores toward magnetite ores. While magnetite tends to have lower iron content, the magnetic properties within the ore make it easier to concentrate the quality in processes collectively known as beneficiation.
"At this early stage of the technology transition in the steel sector, one solution as a single answer to the problem of high-grade iron ore supply probably isn't the way to go," Nicholas said. "A combination of new mining priorities and new technology configurations is likely to be needed."
Fortescue Metals Group Ltd. is aiming to bring its Scope 1 and Scope 2 emissions to zero by 2030. It plans to reach net-zero Scope 3 emissions, including emissions from customers who use its products, by 2040. The company's Iron Bridge magnetite project is one of only a few iron ore growth projects globally. Fortescue expects to produce 22 million tonnes of high-grade magnetite concentrate containing 67% iron from the project annually.
Fortescue CEO Elizabeth Gaines said in an emailed statement that Australia is in a unique position to scale green iron and steel production. Subsidiary Fortescue Future Industries Pty. Ltd. is evaluating several pathways to that end, including electrochemically converting iron ore and the use of green hydrogen in the steelmaking process.
"In line with our strategy to invest in the future of our core iron ore business and diversify to commodities that support decarbonization, we are taking a broad value chain approach," Gaines said.
The other three large global miners — BHP, Vale and Rio Tinto — did not immediately return a request for comment.
In the short term, there are only a few green hydrogen-based steel facilities in a sea of traditional steelmakers.
"I get the feeling that blast furnace will be around a lot longer than the rest of my life," Cecil said. "It probably will be fueled by hydrogen, but you're probably looking at 2040 before we start seeing a big shift toward that kind of capacity."
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