China’s shifting steel sector may leave Australia’s iron ore exports vulnerable

SHANGHAI, 12 OCTOBER 2026 —

Steel slowdowns and signals of a low-carbon transition in China are putting Australian iron ore at a crossroads, as bilateral partnerships look to step up green iron development.

As China’s steel industry faces declining demand and growing pressure to decarbonise, its massive steel market represents Australia's game to lose. Some Australian miners have racked up profit margins of 60 percent on this dependable trade, but China is getting serious about achieving net zero nationally before 2060, with 15 percent of its carbon emissions coming from steel.

This puts Australia at a fork in the road between risking its main buyer by continuing to sell raw iron ore of lesser use in a future of lower demand and fewer blast furnaces, or harnessing its mineral reserves and renewable energy potential to produce green iron processed using renewables.

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

Buckley told Dialogue Earth that China will question whether it should allow mining companies BHP, Rio Tinto and Hancock to keep making high rates of return if they are not investing in solutions that China wants, noting that no business sector sustainably generates 60 percent returns on capital employed without a perfect moat.

Buckley questioned whether Australia wants to work with its biggest trade partner to help them deliver on their objectives or stay a dig-and-ship quarry to the world.

For the past few years, the main factor behind emissions reductions in China’s steel sector has been falling production amid weakened domestic demand, while its rollout of electric arc furnaces as cleaner alternatives to blast furnaces fed by recycled scrap and direct reduced iron has stalled after missing a 2025 target for 15 percent of production via this route. The Chinese 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, alongside uncertainties over China’s future demand for green iron. Despite a changing relationship in iron and steel on the horizon, experts across Australian and Chinese industry spoke of project progress and a range of bilateral partnerships looking to support steel decarbonisation.

Beyond think tanks, the green iron opportunity has been highlighted by Australian commentators, miners and policymakers, though the question 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, though those talks are yet to formally begin. In July, Australian Prime Minister Albanese said that industry will drive the major developments to decarbonise the sector, while the government has launched two main sources of funding eyed by green iron advocates.

These comprise the Future Made in Australia Innovation Fund, which has earmarked funds for green metals technology, and the separate Green Iron Investment Fund. The latter has already allocated half of its capital to overhauling the troubled steelworks at Whyalla in South Australia, with an announcement on how the remaining funds will be spent 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, according to Buckley, who stated that the federal government cannot use taxpayer money to transform the world’s largest iron ore market into green iron because it lacks capacity and credibility, making its role one of facilitation and encouragement.

Figures from the Institute for Energy Economics and Financial Analysis support that view, with an August report from the think tank stating the cost required annually over 14 years to gear up to replace all the metallurgical coal Australia currently exports for steelmaking with green iron.

While analysts including Buckley shared concerns over the pace of action on green iron development in some parts of the industry, miners have not been idle. Fortescue has been actively attempting to set up its production, while Albanese highlighted that every major Australian miner is involved in a research project or development deal with Chinese partners.

A green industry roundtable involving leading companies from both countries was hosted in Perth in July, and academic and industry partners met at an event in Shanghai in September to establish the China-Australia Green Iron Research Platform.

Changlong Wang, associate director for industry and policy at Monash University’s Monash Energy Institute in Melbourne, told Dialogue Earth that Australia has excellent renewable resources technically, but the more difficult question is whether very large quantities of renewable electricity can be delivered reliably at sufficiently low cost, together with required transmission, hydrogen, water, processing and port infrastructure. Wang described green iron as an energy-system challenge as much as an ironmaking challenge.

Even if Australia overhauls its iron exports in time, the product will cost more, likely forcing miners to eat into their huge profit margins.

Analysis suggests that voluntary green iron purchasers will pay up to 30 percent more for the environmentally friendly product, though IEEFA energy finance analyst Soroush Basirat told Dialogue Earth that it is still early days for the green iron transition and that iron and steel are highly price-sensitive commodities requiring time for the market to adjust to and absorb the green premium.

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

Monash’s Wang believes the sector has made significant progress in the past few years, citing much greater research, industry and investment activity around green iron and lower-emissions steelmaking in Australia. Wang noted that 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, whose test site in Western Australia has just produced its first hot metal. However, Tijana LaBianca, the company’s director of research and development and green metal, stated that the material is not representative of the metal ultimately expected to be provided to customers for testing in their steel plants.