High Grade Iron Ore Report Part 2.

Could Australia ever become an energy superpower without a total reliance on natural resources? Economist Ross Garnaut suggests that this is a very real possibility. 

In his new book, ‘Superpower’, Garnaut contends that Australia could become an energy ‘superpower’ if we paired our natural resources with renewable energy, and he makes a compelling case.

According to financial experts, the economics of renewables are becoming more of a reality, as is the fiscal argument of taking advantage of free, renewable energy sources like wind and solar.

Moving towards renewable energy however will require two things, both Investment and Time. It will require capital investment in renewable sources to be able to light our high demand energy grid, and it will most certainly not happen overnight. 

Australia has many natural resources that are in demand. Iron ore products are just one of these. Australia produces 30% of the world’s iron ore, and much of this is super high-grade.

As we learned in Part One of this series, high grade iron ore products certainly have a large role to play during this long transition period. The natural resource is becoming more and more favoured at home and abroad as a source of immediate carbon Abatement, and crucially, only 4% of the world’s iron ore is considered high-grade and Australia has most of it. Australia’s high-grade iron ore is likely to be a huge asset to our economy through the 2020s and likely allow for us to turn the first page in our next chapter of continuing as an energy superpower. 

The 2020s: Australia’s Iron Age 

Some eras are hallmarked by their resource booms. It is hard to think of what Australia would be today without the gold rush in the 1850s or uranium in the 1940s. As we enter the 2020s, it could be argued that Australia is going to experience an Iron Age.

The main reason for this is the global demand for high grade iron ore. 

Iron ore is in huge demand amongst steelmakers, particularly in emerging economies. Steel mills in China and India are working overtime to meet demands for new buildings, cars and appliances, and these steel mills need raw material in the form of iron. While they can use locally mined iron, the grade of this iron is not nearly as high as what is seen in Australia. 

Last year, Chinese imports of Australian iron hit a record high of $117 billion. As we have mentioned, it has been considered that higher than average exports and prices protected Australia from a long predicted recession in 2019. 

The average iron ore price forecast for 2020 was recently lifted to $61.70 / mt, which is 3% higher than the initial figures of $60 / mt predicted in September 2019. In terms of volume, Australia is expected to export 864 million mt in iron ore this year.

Within the past week, there has been a higher weekly utilisation rate at the 247 steel mills across China, recording an increase from 76.89% to 78.40%. While this indicates a firm demand for iron ore, we may have to wait until after the Chinese New Year to see if this trend continues, as mills are winding down for the holiday break.

As emission offset programs roll out across the world, steelmakers are looking to high-grade iron ore products due to their efficiency, lower pollution rates and overall better margins. This is good news for Australia, as a majority of the higher grade materials lie in our own backyard. 

Australia’s superpower potential 

Australia has the opportunity to redefine its economic model in the next decade, based specifically around high-grade iron ore. This redefinition could further allow for its next stage, a move to more renewable energy sources. 

Four sectors use 75% of the world’s industrial energy consumption. Steel production and iron extraction are two of them. Steel production is so power-hungry that 40% of its production costs go to energy use. 

As the economic case becomes stronger, bottom-line focused industries have already shown a propensity for adaptation to stringent emissions protocols. It’s likely these industries will be looking for ways to cut energy costs and non-renewable consumption. The first country to decarbonise steel production would arguably be at a huge competitive advantage. Sweden is already on its way with China taking initial steps.

Australia – transitioning towards decarbonisation and carbon abatement 

While Australia doesn’t have the infrastructure to go renewable overnight, we are currently going through the first steps of a transitioning phase. The cost of cutting emissions has fallen far below what models predicted a decade ago.

Prominent economist Ross Garnaut provides three key recommendations for this transition period, with the hope that Australia would create a clean electricity system three times its current capacity by 2030, of which one has already been adopted in part by the Morrison Government.

He argues that ‘No other developed country has a comparable opportunity for large-scale, firm, zero-emissions power, supplied at low cost,” and believes fully that once Australians see that a transition to more renewable sources is both cost effective as well as reliable, then more and more Australians will see the potential.

He also said the cost of cutting emissions had fallen “far below” what modelling suggested 11 years ago, which means we’re at an optimal time to tap into the potential of this transitional phase, through natural resources and infrastructure that is already well established.

Australia could use this multi-decade transition period to decarbonise the steel industry 

Recent droughts and fires suggest Australia has more to lose from climate change than some other wealthy nations. 

But it also has more to gain from acting against them with resources such as the wind, sea, year-round sunshine, and a mind-boggling amount of empty space. 

In combination with green hydrogen steel-production, renewable energy combined with carbon abated natural resources could transform the Australian steel and iron ore sectors. From the Pilbara to Broken Hill, this would benefit industrial centres in every Australian state, and hopefully create extra jobs and a boost to our economy in an area that it is sorely needed. This transition period shapes to define Australia’s true power in the 2020’s in more ways than one.

Catch up on Part 1 of the High Grade Iron Ore Report: Australia’s high-grade iron ore marks as a key player as the world transitions towards reduced carbon emissions.

*Reach Markets have been engaged by CAP to assist with private investor management.