Beyond green iron: What China’s steel transition really means for Australia

Australia has big ambitions for green iron – produced by using renewable electricity and hydrogen rather than fossil fuels to extract iron from ore. But the hope largely rests on a bet about China’s steel trajectory. China produces more than half (Opens in new window) of the world’s steel, making its decarbonisation pathway critical to the future of global green iron trade.

As Canberra looks beyond raw iron ore exports towards green iron, it is often assumed that China’s steel decarbonisation will create a major new market for low-emissions iron. But if Canberra misreads how China decarbonises steel, it risks misjudging both the size and timing of one of Australia’s most consequential future export opportunities.

The anticipation is understandable. Around the world, deep decarbonisation of steel is associated with hydrogen-based direct reduced iron (DRI), making countries with abundant renewable energy and high-quality iron ore, such as Australia, obvious candidates to export green iron.

Yet this assumption overlooks an important reality: China’s steel industry is larger, younger, and structurally different from those of Europe or Japan. The opportunity for Australian green iron will depend less on whether China decarbonises its steel sector than on how it chooses to do so.

Rather than replacing one production route with another, China is likely (Opens in new window) to combine more efficient blast furnaces, greater scrap use, gradual expansion of electric arc furnaces (EAF), hydrogen demonstration projects, and declining steel demand to achieve its steel decarbonisation targets.

Unlike Europe or Japan, China has invested heavily in modern blast furnace capacity over the past two decades. Rather than scrapping them prematurely, China is more likely to pursue emissions reductions by improving the efficiency of existing facilities, increasing scrap use, and progressively introducing lower-carbon technologies where commercially viable.

Hydrogen-based steelmaking is likely to play a role in the long-term, but commercial deployment remains constrained (Opens in new window) by the cost of green hydrogen and the need for new infrastructure. For the coming decade, hydrogen DRI is more likely to complement than replace existing production routes.

Recent policy developments reinforce this more gradual approach. China’s revised steel capacity replacement rules (Opens in new window) place greater emphasis on replacing outdated capacity and encourage higher-quality, lower-emissions production, including through EAFs. Rather than signalling an immediate technological leap, the reforms suggest policymakers are focused on improving the quality and efficiency of the existing steel sector and accelerating electrification, while addressing persistent overcapacity.

EAF expansion has also proved slower than expected. China’s target of producing 15% of steel through scrap-based EAFs by 2025 was missed (Opens in new window), with the share remaining around 10%. The barrier is not technological unavailability, but economics, as low profitability, weak demand, overcapacity and limited scrap availability continue to favour blast furnace production.

Demand itself will also shape the transition. In 2025, China’s crude steel production fell (Opens in new window) below one billion tonnes for the first time since 2020 and lower output, not technological change, was the largest driver of emissions reductions in the sector. As demand continues to decline with China’s maturing property sector, structural change will become just as important as new technologies. Combined, faster EAF deployment and a phase-down of blast furnaces, the sector’s emissions could fall to nearly 37% (Opens in new window) below their 2020 peak by 2035.

None of this means that green iron has no future in China. But it does suggest that demand is likely to emerge more gradually than many expect, alongside multiple decarbonisation pathways rather than through a wholesale shift to hydrogen-based steelmaking.

For Australia, three implications follow.

First, expectations about the timing and scale of Chinese demand should be tempered. While green iron remains a long-term opportunity, Australia should prepare for a transition in which green iron develops alongside more efficient blast furnaces, greater scrap use, expanding EAF production, and other decarbonisation pathways.

Second, Australia needs a diversified and adaptive green iron strategy. Understanding China’s evolving steel strategy will be just as important as investing in domestic production and finding other markets. Rather than betting on a single vision centred on China, Australia should prepare for multiple transition pathways.

Third, Australia should help build the rules for future green iron and steel trade. Compatible standards, robust lifecycle carbon accounting, and joint demonstration projects could reduce future trade barriers regardless of how quickly demand develops. Australia can lead on more global coordination and help build lead markets for green steel.

Australia’s iron ore exports helped fuel China’s industrialisation over the past three decades. The next phase of that relationship will not be defined simply by exporting a greener version of the same commodity. It needs to be grounded in the realities of China’s steel transition, while also exploring opportunities for Australia to help shape the future of low-emissions steel through cooperation on standards, carbon accounting, innovation, and green iron supply chains.