The South Australian state government has disbanded its Office of Hydrogen Power, signaling a shift toward longer reliance on gas for iron and steel production. However, this approach carries significant risks due to the growing challenges in the state’s gas market.
Direct Reduced Iron (DRI) plants, which use large amounts of gas, have been a focus of the state’s steelmaking plans. Australian steelmaker BlueScope highlighted the problem, noting that running a DRI facility like Port Kembla Steelworks would require up to 40 petajoules of natural gas annually, a figure that is 40 times higher than the current gas use at the steelworks. Due to high export demand and limited domestic supply, securing such quantities of gas at competitive prices is becoming increasingly difficult.
South Australia’s connection to the east coast gas market, which is already facing high prices and future supply shortfalls, adds to the risk. The Australian Energy Market Operator (AEMO) forecasts that by 2028, southern Australia may experience significant gas supply gaps. These concerns are further amplified by increasing industrial demand, especially if DRI production shifts from coal to gas-based processes, which would significantly raise gas consumption.
AEMO’s recent Gas Statement of Opportunities also indicates that industrial gas use could spike in the early 2030s due to gas-based ironmaking, putting more pressure on a gas market already under strain. However, this scenario assumes no large-scale iron production growth, and South Australia’s Green Iron and Steel Strategy aims to increase iron exports, which could be impossible with reliance on gas-based DRI.
In addition to supply risks, the high cost of gas in Australia further complicates the situation. Gas prices in southern states are projected to reach A$15.58 per gigajoule in 2025, a significant increase from prices before LNG exports began. With the prospect of future LNG imports, gas prices could continue to rise, placing additional pressure on industries.
Australia is also competing on a global stage to become a leader in low-carbon iron production. Countries like the Middle East, where gas-based DRI is already well-established, have a competitive advantage due to lower gas prices, making it challenging for South Australia to compete in the gas-based market.
Though gas-based DRI produces fewer emissions than coal-based blast furnaces, it still remains emissions-intensive. The South Australian government should reconsider using carbon capture and storage (CCS) to mitigate emissions, as global efforts have seen limited success, particularly in the steel sector.
Instead, South Australia should prioritize green hydrogen for DRI-based ironmaking. Although green hydrogen production costs are not falling as quickly as expected, it remains a viable option for decarbonizing steel production. Global projects, such as those in Sweden, are already advancing the use of green hydrogen for iron and steel, and South Australia has the potential to lead in this area, especially with its abundant clean energy resources.
By embracing green hydrogen, South Australia could meet its Green Iron and Steel Strategy goals and position itself as a pioneer in the growing market for low-carbon steel, offering a more sustainable alternative to gas-based production.
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