Business as usual a road to nowhere

THE obstacles affecting Western Australia’s resources sector are growing by the day, with alumina and gas joining iron ore as industries being challenged by new environmental protection laws.

The immediate problem for iron ore – the need to comply with the federal government’s safeguard mechanism designed to cut emissions of carbon dioxide – was explored in the previous edition of Business News (‘Safeguard puts pressure on iron ore’, April 21).

But the carbon safeguard, which has particularly annoyed the Chinese owners of the energy-intensive Sino Steel project, could prove to be trivial compared to the potential for makers of ‘green steel’ to stop buying WA iron ore and for Woodside Energy to reduce its WA exposure.

Investment bank Morgan Stanley has picked up the iron ore theme in a Green Steel research report, which contained the bluntest warning so far that WA’s iron ore industry must adapt or slip into decline.

“A shift away from the Pilbara?” is the incisive question asked by the bank, because most iron ore suitable for making low carbon (or green) steel comes from Brazil, Canada, and West Africa.

“Australia’s typical Pilbara direct-shipping orebodies are mostly hematite and likely to be unsuitable for upgrading due to complex mineralogy and higher clay content,” Morgan Stanley said.

That warning came just before the WA government announced record resources sector revenue of $246 billion in 2022, with iron ore accounting for almost half ($126 billion), a measure of the prize at risk.

WA’s alumina industry, a major employer in the South West, is also attracting unwelcome international attention as local environmental regulators tighten the screws with go-slow mining approvals.

Big US aluminium maker Alcoa singled out the WA problems in its March quarter profit report.

What started as a gas shortage, which forced the closure of a digestor (it dissolves bauxite ore in caustic soda) has continued because of a dispute with the Environmental Protection Authority.

The ore processing unit remains mothballed while the EPA considers the next five-year plan for Alcoa’s Huntley mine, forcing the company to mine lower-grade ore.

“Although the gas supply situation has largely been resolved, the digestor remains offline due to the bauxite grade issue,” Alcoa said.

Forecast annual alumina output from the joint venture operated by Alcoa has been cut from up to 10.7 million tonnes to 10.3mt.

Gas projects, including Woodside’s new Scarborough LNG development, have been under the most direct environmental pressure because fossil fuels are a prime cause of carbon dioxide emissions.

Demands from environmental activists that gas production be limited, and material earmarked for export be redirected into the local market, have been greeted with dismay in Japan, which relies on Australia for 60 per cent of its gas.

Outgoing Japanese ambassador Shingo Yamagami has warned Australia risked becoming an unreliable gas supplier.

“Probably for the first time, sovereign risk is coming from the lips of Japanese business leaders [when discussing Australia] and this is something we have to address,” Mr Yamagami said.

Woodside, however, might be working on a long-term plan to relieve the pressure on its operations by expanding its exposure to international assets.

Though not discussed openly by the company, there are increasing references in research reports pointing to what might be called an Australian escape plan.

Macquarie Bank referred to Woodside’s preference for international exploration over what’s available in Australia in its latest research note, which focused on the company’s search for new oil and gas deposits.

Singled out for special mention was the Sangomar oilfield off the coast of the West African country of Senegal, which is expected to become a significant profit generator for Woodside next year.

But the key to the Macquarie thesis that Woodside is more likely to grow overseas than in Australia was contained in an examination of the company’s overall exploration profile, which is being heavily influenced by last year’s merger with the oil and gas division of BHP.

“Post the BHP [merger] we now see a noticeable shift to buy or farm-in to blocks in promising areas with large scale potential and some signs of success already,” the bank said.

Examples of the growing ‘internationalisation’ of Woodside include a new interest in 12 exploration tenements in the Gulf of Mexico, an interest in oil exploration off the coast of Namibia with the French oil giant TotalEnergies, and an interest in an oil search in the eastern Mediterranean.

However, it was the next comment from Macquarie that should be ringing alarm bells in government, if there is any interest in Australia continuing to produce its own liquid fuels.

“Given the lack of exploration in Australia, we expected this may naturally drive an overseas pivot [by Woodside] over time,” the bank said.

‘Buy Woodside’, a standard stockbroker recommendation for years, could soon become bye-bye Woodside.

Green shift

OF the problems developing for WA’s resources sector, those confronting iron ore have the greatest potential to disrupt the local economy, especially state government finances.

The Morgan Stanley report threw fresh light on a topic kicked into play by Business News in that April 21 article, which pointed out the preference being shown by Rio Tinto for the high-grade ore it will soon be mining at Simandou in Guinea.

The first signs of iron ore buyers specifying ore capable of feeding a green steel project have emerged in Europe, with the best example being a $10 billion investment in H2 Green Steel, which has the backing of major European companies and super-rich families.

Mercedes and Scania have lined up for a slice of H2GS, which takes its name from the proposed use of hydrogen as a fuel source.

The corporate investors are being joined by the Agnelli family (Fiat and Ferrari), the Wallenbergs (Atlas Copco, Electrolux and AstraZeneca), and the Maersk family (shipping, oil and banking).

H2GS and a rival green steel project called Hybrit, which is backed by the Swedish government, aim to produce steel with virtually no carbon emissions.

A key ingredient in their process will be high-grade, direct-reduced iron (DRI).

This is most easily produced from magnetite ore, which is easier to crush than Pilbara hematite and easier to separate due to its magnetitic properties.

In time, the leading Pilbara producers, BHP, Rio Tinto and Hancock Mining are likely to be forced to invest in magnetite mining and the production of high-grade (low pollution) iron pellets or concentrate, which is what Fortescue Metals Group is about to start doing at its Iron Bridge project.