Australia’s heavy industry must ready itself to become a global renewables superpower, or find itself left in the dust.
That’s according to a new report by the EY Net Zero Centre, which says Australia should capitalise on its $40 billion-per-year opportunity by investing heavily in industries like green iron and green steel, critical minerals and metals, and hydrogen.
The report adds to a growing corpus of ‘energy superpower’ pathways designed by various players in the public and private sectors. So what’s new about this one?
The economics
The EY report assesses the value of these emerging opportunities by modelling two scenarios, ‘Energy Superpower’ and ‘Lost Opportunity’, both within the context of strong (but not extreme) climate action consistent with a 2-degree pathway.
In the first, Australia rolls out renewable energy at scale to grow its share of global materials and energy-intensive production, in particular in the iron and steel sector. New energy generation and storage is positioned close to raw materials for ore processing and early-stage refinement. Meanwhile, the country builds efficient industrial “ecologies” to service key markets, particularly in Asia.
In the Lost Opportunity scenario, on the other hand, policy settings and business strategies don’t do enough to support the required scaling of renewables and low-carbon tech; investment becomes less attractive, and Australia falls behind countries with better-coordinated energy strategies.
Both those scenarios are set against a backdrop of serious global population and economic growth: by 2050, the global economy will have doubled, while the number of people living in high income countries will have tripled, resulting in soaring demand for energy and material-intensive products.
In the Energy Superpower scenario, Australia’s national income (GNI) could benefit from a $40 billion-a-year injection, while the country’s gross domestic product (GDP) could have $65 billion value added.
That represents a 1.4% boost to national income and a 2.3% boost to GDP, relative to the baseline scenario. And that’s a conservative estimate, according to the report’s authors.
Australia’s competitive advantage
The analysis finds Australia is uniquely positioned to “catch a wave” of opportunity based on its abundance of renewable resources in the form of sun and wind, as well as the valuable metals and minerals beneath the ground – demand for which will increase as countries race to meet their net-zero commitments.
In particular, the report highlights three key areas of opportunity: clean, low-carbon heavy industry, including green steel and iron production; lithium, copper, nickel and other critical minerals and metals, including mining, initial processing and exporting; and hydrogen for use within Australia, including as an input for the production of other exports.
Let’s take a look at those in more detail.
Steel and iron production
Iron and steel are widely used in the construction of major infrastructure including bridges, buildings and roads, as well as appliances, skyscrapers, airport infrastructure and so on.
Australia is one of the largest iron ore producers in the world, with Western Australia making up 99% of total iron ore production. In 2021, Australia exported $118 billion worth of the ore, a compound of iron, oxygen and other trace minerals which forms the primary material for the making of iron and steel (almost 98% of all global iron ore is used in steelmaking).
On the other hand, Australia makes only about 5.5 million tonnes of steel per year (as of 2021), compared with the 900 million tonnes of iron ore it exports: a 2020 Grattan Institute report found that if Australia captured about 6.5% of the global ‘green’ steel market, it could generate $65 billion in annual export revenue.
Steel is generally made by combining iron ore with coke (a derivative of coal) and scrap steel in a blast furnace. This process produces about 2 tonnes of CO2 for every tonne of steel, making it one of the most emissions intensive sectors in the world – steelmaking is estimated to account for about 8% of global CO2 emissions.
The use of less emissions-intensive electric arc furnaces (ARFs), which are powered by electricity and natural gas, are on the rise, though, and industry is investigating ways to reduce emissions even further, for example by powering the reaction with hydrogen – which burns to produce just energy and water.
Iron is also typically made in a highly-polluting blast furnace, though Fortescue Future Industries recently announced it had successfully produced “green iron” from ore using a renewable-powered electrolysis process.
The EY report finds iron and steel have the largest potential of any heavy industry sector in Australia for emissions reductions, not least because they require vast quantities of renewable energy and suitable iron ore – both of which Australia possesses in abundance.
The report also finds Australia is well positioned to capitalise on the transitional phase of iron production, which is likely to initially involve using natural gas as a reductant in the directly reduced iron (DRI) process, until the gas can be replaced with green or blue hydrogen.
Critical metal and mineral exports
Australia is rich not just in iron ore but in a plethora of minerals and metals that are increasingly in demand. These include lithium, cobalt, nickel, manganese, the rare-earth elements, and copper. All these metals and minerals are essential components of clean-energy technologies, from EVs to batteries, wind turbines to solar panels. They’re also used in all sorts of electrical equipment, including mobile phones.
The below table, from an International Energy Agency (IEA) report on the mineral requirements for the energy transition, details various critical minerals and their importance in various technological contexts.
Fortunately, Australia benefits from rich deposits of most of these minerals, including the world’s largest supply of nickel, rutile, tantalum and zircon. The country is also in the top five globally for reserves of cobalt, lithium, copper, antimony, niobium and vanadium. In fact, many of these minerals can be produced on the side of copper, bauxite, zinc and iron ore mining – all of which are already major Australian industries.
That combination of abundance and existing mining expertise is partly why mineral exports have been earmarked as a potential goldmine for Australia in a net-zero world. According to the EY report, in many cases Australia accounts for between one-tenth to one-quarter of global reserves.
Hydrogen
Controversial as it is, hydrogen has been central to the energy conversation in Australia, with the Federal government investing big.
Seen by some as the fuel of the future – and others as a costly distraction – hydrogen, the most abundant element in the universe, burns cleanly to produce just energy and water vapour.
If it’s made by the electrolysis of water using renewable electricity, it’s considered ‘green’ – fully non-polluting. If it’s made using more traditional processes like gasification using coal, but the emitted CO2 is captured and stored, it’s considered ‘blue’ hydrogen. Controversy over whether blue hydrogen is truly ‘clean’ continues to swirl, particularly in the face of major allegations of methane leakage.
Currently, Australia’s plans coalesce around creating a lucrative export industry as well as using hydrogen onshore to make green metals, green fertiliser, and green chemicals.
But the EY report finds that Australia’s best bet for benefiting from hydrogen is in using it at home to help create other exports, rather than exporting hydrogen itself.
Though hydrogen exports have garnered media attention, with Australia striking up relationships with Japan and South Korea to create hydrogen export industries, the report argues that conversion and transport-related losses – many of which have yet to be overcome – will make building an export industry complicated.
Using it close to source, on the other hand, would add value in Australia, the report says. Specific domestic opportunities it identifies include green iron and steel, fertiliser and chemicals, alumina refining, and synthetic fuels.
How to capture the value?
The report concludes that realising the dream of being an “energy superpower” will require targeted, nuanced investments.
Government support must be targeted to those industries with the most promise, and those locations that have resources, local infrastructure and proximity to key markets.
“Australia cannot win a bidding war against Europe or the United States,” say the report’s authors. “Instead, we need clear-eyed policy.”
Report co-author Steve Hatfield-Dodds, Associate Principal at EY Port Jackson Partners, says Australia’s history on climate change has reflected an underlying tension around the implications of climate action.
“Australia has had a long period where we have felt conflicted about action on climate change,” he says. “We’ve recognised we’re one of the most exposed nations to climate change impacts, but have been concerned that Australia has a lot of money at stake in fossil fuel exports.”
“Against that backdrop, what this report says to Australia is that the emerging low-emissions world is a high-income world that will continue to need heavy industry, and Australia will continue to be good at producing many of these essential materials. Minerals, iron and steel, other energy intensive commodities – all the things you need to build a country.”
“In fact, in a range of areas we can be more competitive in a low-emissions world than we are now.”
According to Hatfield-Dodds, the opportunity is unprecedented, but will have to be seized upon.
“Previously the goal of Australian industry policy has been to establish industries that are already competitive somewhere else, but that have not been present and competitive in Australia. The history of that has not gone well,” he says.
“This time, it’s different – this time there is no established industry anywhere in the world, and we’re not trying to replicate something that already exists somewhere else. Instead, we’re saying we need to be part of this new global push.”
The report’s authors liken it to surfing: you have to already be paddling when the wave hits in order to capture the momentum.
Similarly, “when the opportunity emerges, we need some established capacity that we can build on,” Hatfield-Dodds says. “Otherwise we will miss the wave.”
