Bulk Buys: Iron ore miners have one last roll of the dice at this green steel thing before 2022 is up
Green steel is the holy grail of the investment world – a technology, like nuclear fusion – bound to make anyone a legend if they can truly crack the nut.
Nuclear fusion’s recent breakthrough — producing enough energy to power up to 20 kettles — was a reminder not just of how far the technology has come, but also of how elusive total success remains.
Developments in green steel have been similarly miragelike, with studies proving the bones of the technology while experts in the field warn it will remain a long and difficult transition.
The problem with steel is thus. CO2 emissions from steel production, almost 60% of which is done in China, account for around 8% of the global total.
Most steel, especially in the largest and fastest growing steel markets of China and India, is produced in relatively young blast furnaces, billions of dollars of investment in infrastructure that will be useful for decades to come.
Blast furnaces require coking coal to reduce iron ore to steel. That makes scope 3 emissions from the steel factory customers of BHP (ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue Metals Group (ASX:FMG) the largest contributors to their CO2 demerits.
So surely, to contain emissions, we ramp down production?
That’s not palatable to countries with growing middle classes hoping to maintain economic growth like China and India. And it may even end up a net negative for the environment.
Steel is a critical ingredient in electric vehicles and renewables like wind turbines. BHP’s economists say steel is a net winner from the energy transition.
According to BHP’s CEO Mike Henry and chairman Ken Mackenzie, who fielded questions about green steel from shareholders at the miner’s AGM in November, there is not enough scrap steel in the world to make the greenest form of commercial steelmaking currently — electric arc furnace — the dominant technology.
The prevailing thought is that the main technology for green steel will be direct reduced iron, which doesn’t required coke, with hydrogen as a reducing agent.
Potentially the biggest road block is the availability of iron ore that is of high enough grade to support that transition.
That’s equivalent to half the current seaborne iron ore market, and five times the current production rate of DR-grade iron ore, generally between 66-68%.
Most Pilbara iron ore fines are under 62% Fe and are only suited to blast furnaces. Experiments to beneficiate the ore to higher grades have not been successful, and while some mines like BHP’s new South Flank are a lump product that results in lower emissions because they do not need to be sintered, it is not the same. Fortescue is opening the 22Mtpa Iron Bridge magnetite mine — product grade 68% — over the next year.
But it is costing up to US$3.8b to build, over a billion dollars above original estimates, and neither BHP nor Rio view magnetite as the best way to increase their grade profile even though they own operating magnetite assets in Brazil (BHP’s Samarco) and Canada (Rio’s Iron Ore Company of Canada) respectively.
And the Pilbara is home to the world’s richest endowment of iron ore deposits, its lowest cost profile and its best infrastructure worth billions to replicate, meaning it will likely be the steel industry’s ‘food bowl’ for decades to come.
The hope is to turn those low grade iron ore deposits into sources for green steelmaking.
Rio Tinto recently encountered some success with its “Bioiron” process, using biomass instead of coal to produce low emissions steel from Pilbara grade iron ores.
The latest iron ore giant to encounter some technological success is Andrew Forrest’s FMG, which yesterday announced it would have project planning completed by November 2023 on a “groundbreaking” green ironmaking plant in collaboration with Primetals Technologies and voestalpine.
It fits Fortescue’s new M.O., combining its current business of iron ore production with its the future business it wants to build with its Fortescue Future Industries green energy and green hydrogen arm.
The partners are planning to design and engineer an industrial scale prototype plant at Austrian steelmaker voestalpine’s site in Linz. It will hinge on Primetals’ HYFOR and Smelter tech, the latter described as the world’s first DR process for iron ore fines that do not require agglomeration steps (i.e. sintering or pelletising).
Primetals has run test campaigns since the end of 2021 on FMG ore. Its Smelter technology is a furnace powered by electrical energy, which produces green hot metal by melting and reducing lower grade iron ores to iron.
voestalpine is planning to begin its shift from the blast furnace route to a “hybrid-electric steel pathway” from 2027, a similar timeline for the start of the transition to green steel as fellow Euro steelmakers ThyssenKrupp and SSAB (part of the Hybrit Consortium in Sweden).
FMG will provide knowledge to the partnership on “iron ore quality and preparation” along with supplying ore for the plant.
“Global demand for iron ore and steel will remain strong for years to come, but we need cleaner, greener industry powered by green energy to eliminate emissions,” FFI CEO Mark Hutchinson said.
This will almost certainly be our last normal Bulk Buys for 2022. So let’s take a look at what’s driving the market currently.
It’s China and Covid and Covid and China and everything in between, which is also China and Covid.
Chinese authorities have relaxed virus controls forcing people everyone to stay at home, which has in turn led to a sudden rise in cases that has everyone terrified and staying at home.
Prices fell on Monday, but Singapore futures were looking more positive on Tuesday, up 0.82% to US$108.45/t.
China’s Central Economic Work Conference signposted that plans to revitalise China’s economy and its deflated, debt-addled property sector will be front and centre of its post-virus economic strategy next year.
If that comes to fruition it should be supportive of iron ore.
On the bourse Mark Creasy’s CZR Resources (ASX:CZR) has convinced FMG to part with an exploration tenement immediately south of Rio’s Mesa F iron ore project in the Pilbara.
CZR owns the Robe Mesa project north of Mesa F and the P529 deposit between Mesa F and the new tenement (E08/2137) picked up from Fortescue.
P529 contains a small resource of 4.2Mt at 53% Fe (59.2% Fe.ca), with a higher grade zone extending into the new tenement, consolidating a 1.1km strike length.
CZR’s Robe Mesa project contains 42.5Mt at 56% Fe (62.7% Fe.ca) after a mineral resource upgrade last week, and is looking into an infrastructure sharing arrangement with fellow junior Strike Resources (ASX:SRK) that would help them ship ore through the Port of Ashburton.
“While our P529 deposit is small in comparison to the Robe Mesa ore body, we recognised a higher grade zone that crosses into E08/2137 which has the potential to develop into a satellite deposit to feed the Robe Mesa processing plant,” CZR MD Stefan Murphy said.
“E08/2137 has heritage clearance over drill lines in the target higher-grade zone and we hope to be drilling early in the new year in preparation for a P529 Resource update.”
“In addition to the resource potential on E08/2137, CZR has pegged two tenements as potential haul routes that cross through the tenement. Securing the potential for road construction materials on the southern flank of Rio Tinto’s Mesa F deposit made the acquisition even more attractive to CZR.”
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Australia’s combined thermal coal and metallurgical coal exports will overtake iron ore in value in FY23, with energy coal sales trending up 63% to $76 billion, just $37b shy of iron ore.
Met coal sales will total $57b, forecasts from the Department of Industry, Science, Energy and Resources’ Office of the Chief Economist showed on Monday in the Resources and Energy Quarterly.
Thermal and coking coal exports are expected to moderate 27% and 19% respectively to $55b and $46b in FY24, but collectively will still be worth more than iron ore ($95b).
It is a remarkable turnaround for a commodity which just two years ago was facing twin pressures of a Covid-related demand collapse and ESG pressures to hasten the industry’s closure.
Canberra continues to foreshadow strong prices in historical terms over the coming years.
While iron ore prices are expected to drop to US$85/t in 2023 and US$73/t in 2024 from US$143/t across 2021 and US$102/t in 2022, met coal and thermal coal prices are expected to remain above historical levels for the next two years.
Coking prices are expected to drop from an average of US$377/t in 2022 to US$257/t next year and US$229/t in 2024, with steam coal to fall from US$375/t in 2022 to US$319/t in 2023 and US$215/t in 2024.
While the latter is a 34.1% drop, it should be noted thermal coal never traded above US$200/t until late last year, with a major supply shortage and Russia’s invasion of Ukraine pouring fuel on the fire in 2022.
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