China’s changing steel sector could leave Australian iron ore behind

As China’s steel industry faces up to declining demand and growing pressure to decarbonise, its massive steel market is “Australia’s game to lose,” a top analyst says.

For decades, Australia has shipped iron ore to China, accounting for around three-fifths of its partner’s supply of this key input for blast-furnace steelmaking. Some Australian miners have racked up profit margins of 60% on this dependable trade.

But China is getting serious about achieving net zero nationally before 2060 and 15% of its carbon emissions come from steel. This puts Australia at a fork in the road. It can risk losing its main buyer by continuing to sell its raw iron ore, which is potentially of lesser use in a future of lower demand and fewer blast furnaces in China. Or, it could harness its mineral reserves and renewable energy potential to produce “green iron”, a form of the metal processed using renewables that could be vital to near-zero emissions steelmaking, in China and beyond.

That 60% margin is not only unsustainable as the market shifts away from “dig and ship” to more sophisticated solutions. China will simply not allow it to continue, according to Tim Buckley, the director of Climate Energy Finance, an independent Australian think-tank.

“At the end of the day, the bigger question is, does China allow [mining companies] BHP and Rio [Tinto] and Hancock to keep making obscene rates of return if they’re not investing in solutions that China wants?” Buckley told Dialogue Earth. “No business sector sustainably generates 60% returns on capital employed … if there isn’t a perfect moat around your business.” Could that moat be about to be breached?

For the past few years, the main factor behind emissions reductions in China’s steel sector has been falling production amid weakened domestic demand. Its rollout of electric arc furnaces – cleaner alternatives to blast furnaces, fed by both recycled scrap and direct reduced iron (DRI) – has stalled. China missed a 2025 target for 15% of production via this route. But its government has recently recommitted to reforming the industry, and signalled towards a low-carbon transition.

Australia’s potential to make green iron has been much-hyped, though projects to actually produce it remain in the early stages. Analysts also told Dialogue Earth of uncertainties over China’s future demand for green iron. Though a changing relationship in iron and steel may be on the horizon, experts across both Australian and Chinese industry also spoke of project progress, and a range of bilateral partnerships looking to support steel decarbonisation.

Green iron ambitions need money, lots of it

Beyond think-tanks such as Climate Energy Finance, the green iron opportunity has been highlighted by Australian commentators, miners and policymakers. But the issue of who will develop it first – and pay for it – remains open.

In December 2025, Australia and China signed a memorandum of understanding committing the nations to a “policy dialogue” on steel decarbonisation, but those talks are yet to formally begin. In July this year, Australia’s prime minister, Anthony Albanese, said “it will be industry that drives the major developments to decarbonise the sector”.

The government has itself launched two main sources of funding that green iron advocates are eyeing: the Future Made in Australia Innovation Fund, which has earmarked AUD 750 million (USD 530 million) for “green metals” technology, and the separate AUD 1 billion Green Iron Investment Fund. But the latter has already allocated half of its capital to overhauling the troubled steelworks at Whyalla, South Australia. An announcement on how the other AUD 500 million will be spent is expected soon.

While the Australian government is making moves to kick-start the greening process, transforming the iron export industry is impossible without private capital, Buckley said: “There is no way the federal government can use taxpayer money to transform the world’s largest iron ore market into green iron. They just … don’t have the capacity. They don’t have the credibility. It’s not their job. What they can do is facilitate and encourage private industry to do it.”

Figures from the Institute for Energy Economics and Financial Analysis (IEEFA) support that view. In an August 2026 report, the think-tank said it would cost AUD 170 billion (USD 121 billion) every year for the next 14 years to gear up to replace all the metallurgical coal Australia currently exports for steelmaking with green iron.

Though analysts including Buckley shared concerns over the pace of action on green iron development in some parts of the industry, the miners have not been doing nothing: Fortescue has been actively attempting to set up its production, while Albanese himself highlighted that every major Australian miner is involved in a research project or development deals with Chinese partners. A green industry roundtable involving leading companies from both countries was hosted in Perth this July, while academic and industry partners met at an event in Shanghai in September to establish the China-Australia Green Iron Research Platform.

“Technically, Australia has excellent renewable resources. The more difficult question is whether very large quantities of renewable electricity can be delivered reliably, at sufficiently low cost, together with the required transmission, hydrogen, water, processing and port infrastructure,” Changlong Wang told Dialogue Earth.

Wang, who is associate director for industry and policy at Monash University’s Monash Energy Institute in Melbourne, said: “Green iron is an energy-system challenge as much as an ironmaking challenge.”

Even if Australia does overhaul its iron exports in time, the product will cost more – likely forcing miners to eat into their huge profit margins. The IEEFA analysis suggests that “voluntary” green iron purchasers will pay up to 30% more for the environmentally friendly product. However, IEEFA energy finance analyst Soroush Basirat told Dialogue Earth: “It is still early days for the green iron transition, and we also need to recognise that iron and steel are highly price-sensitive commodities. The market will need time to adjust to and absorb the green premium.”

“As more projects come online, additional examples will help establish a clearer benchmark for the global cost premium for products such as green iron,” he added.

Green iron groundwork and gains

Monash’s Wang believes that the sector has made “significant progress” in the past few years. “There is now much greater research, industry and investment activity around green iron and lower-emissions steelmaking in Australia,” he said.

“For me, three issues remain particularly important: reducing renewable electricity and hydrogen costs; developing technologies that work effectively with Australian ore characteristics; and understanding future market requirements and product specifications.”

In practical terms, it is still early stages even for the Australian miner most keen on greening, Fortescue. Its test site in Western Australia has just produced its first “hot metal”. But the company’s director of research and development and green metal, Tijana LaBianca said: “The material is not representative of the metal we ultimately expect to provide to customers for testing in their steel plants.”

“Our longer-term objective is to combine Fortescue ore, renewable energy and low-emissions processing to develop a competitive pathway to green iron production,” she told Dialogue Earth. 

An iron ore mine in the Pilbara region of Western Australia. The Pilbara accounts for over 40% of global iron ore trade (Image: Aaron Webber / Alamy)

LaBianca said the Pilbara – the region of Western Australia that accounts for over 40% of global iron ore trade – “has supplied the world” for decades. “The opportunity now is to explore whether we can create more value from that resource here in Australia.” 

The company has signed two steel decarbonisation partnerships focused on green iron technology with subsidiaries of the world’s largest steelmaker, China’s Baowu.

Wang said the recent production by Fortescue was “an important step” but that “it is important for Australia to continue exploring a range of technological pathways”, including hydrogen-based DRI, electric smelting, and domestic upgrading of its ores, which are typically lower in iron content than the grades demanded by greener steel technologies.

If not China, then who?

In a 2023 report, analysts ACIL Allen projected that developing a green iron export industry could generate up to AUD 85 billion (USD 60 billion) in gross domestic product for Australia by 2050. And a 2025 report from the Organisation for Economic Development and Cooperation put the value of a green iron transition at between AUD 83 billion and AUD 304 billion in annual exports.

For Australia to secure the Chinese market – which has been increasingly centralising its iron trade agreements via its China Mineral Resources Group – Buckley said China will want more.

He believes China wants to buy from “a country that wants Chinese capital, wants Chinese technology, wants Chinese value-add, and is willing to partner with China. And so there is a very implied threat there that if Australia won’t work with our top trade partner … that is a national geopolitical threat to Australia’s economic future.” He added that historical Australian caution on dealing with China could work against cooperation.

Belinda Schäpe is the China team lead for the Centre for Research on Energy and Clean Air (CREA). She said China is still feeling the sting of trade disputes with Australia in the early 2020s. Generally, she said Chinese leader Xi Jinping’s “dual circulation” strategy is an effort to “make everyone else more dependent on China and make China less dependent on everyone else”, and the country may want to diversify its suppliers.

IEEFA’s Basirat has written that the potential pressure from new supply sources should not be overlooked. “China could increasingly access high-grade iron ore for green iron production through the newly opened Simandou mine in Guinea, as well as other suppliers such as Brazil,” he told Dialogue Earth. China itself is also building its own hydrogen-based steelmaking capacity.

Schäpe cautioned against expecting China to be an automatic market for green iron in the near future, given its recent slowdown in both overall production and its current focus towards using scrap steel in electric arc furnaces as a carbon-reduction measure.

But even if China does not take up what Australia might offer in the way of green iron, there may be flow-on effects in helping green the supply chains of smaller steelmaking nations, and a way to diversify markets. Jorrit Gosens, a fellow at the Australian National University’s Centre for Climate and Energy Policy, said: “Japan, South Korea and even India, where the steel industry is still building up, they project really rapid growth in steel demand.” Such countries may face higher costs or constraints on renewables at home, and thus may be willing to pay for Australian green iron, he said.

CREA’s Schäpe added that Australia can play an important role globally in “standard setting” for green steel and by using its own buying power. “I think there’s a moment now for Australia to step up and shape this discussion on what green steel is, green steel standards and also shaping global green steel demand.”

China-Australia steel partnerships span sectors

Away from the geopolitics and mining interests are the researchers and businesspeople who are trying to make this green transition all add up.

Researchers like Wang are working with international counterparts on identifying different regions’ “different strengths”. He visited China in August, talking to steel companies, research institutes and universities, and found a “strong commitment to decarbonisation and interest in the development of lower-emissions iron and steel technologies”.

A Cooperative Research Centre funded by the Australian government, with membership across the sector and from overseas, is also developing low-carbon technical solutions for steel, iron, aluminium and other heavy industries.

Gosens feels that between China and Australia “researcher-to-researcher relationships are very good. I think corporate-to-corporate relationships probably as well. But I do think the government has a very important role here.”

While there are major technological and sector-structure issues to iron out, Gosens believes that with the right will and investment, they can be dealt with in time to meet overall global climate targets. He highlighted International Energy Agency scenarios that “backload” steel decarbonisation, projecting the technology enabling deeper emissions cuts to come into play in the 2040s. “It is important we get our skates on developing these technologies, but broad rollout is for the medium-term future,” he added.

But Buckley fears Australia could be left behind if it fails to respond to the likely changes ahead. He said that if the country “drops the ball and lets complacency and incumbency and inaction and the vested interests of our myopically short-term major mining companies prevail, China’s going to do it anyway”, tackling its transition without Australian partners.

“The question is, does Australia want to work with our biggest trade partner to help them deliver on their objectives, or do we want to just stay a dig-and-ship quarry to the world?”