FERROUS SERIES: High-grade iron ore seeks out its place in steel decarbonization journey

As the steel industry seeks to lower its carbon footprint, the use of transitional fuels with green hydrogen as an end-goal in the direct-reduction iron process has emerged as one of the preferred routes, putting the limelight on high-grade iron ore and its scarcity.

This has given rise to capital expenditures in various new projects in Latin America, Africa and the Middle East touting high-grade products and facilities to pelletize and reduce them – even as mandatory use of low-carbon steel has all yet to be secured through regulatory regimes in most parts of the world.

But as China carves out its own path toward steel decarbonization, its iron ore buying habits over the past two years – a time when its steel industry has come under strain from a slowdown in its property sector and weakened steel demand – raise important questions as to whether high-grade iron ore will get to live out its vaunted purpose of turning the industry greener – or whether the flight by steelmakers to lower-grade material as a cost-saving measure would leave it in a constant search for a longer-term home.

Expansion of high-grade iron ore projects

With the notable drive towards decarbonization, the market saw significant investments in multiple projects across the globe, with fresh high-grade iron ore supply expected to come online during 2025, mostly originating from Brazil, Canada and West Africa. Considering the nameplate capacities of these projects, the market may see a new supply of high-grade iron ore fines and pellet feed totaling around 120 million mt injected into the market by 2027-28, with most projects to commence production in 2025.

In the Middle East and North Africa (MENA) region, there is a burgeoning trend toward steel decarbonization, bolstered by significant investments from both local and global players notably including the ME region, Japan, and Brazil at the forefront. The region's abundant natural gas resources and low energy costs position it uniquely for these initiatives. Ongoing projects in pelletization, DRI, and HBI production are expected to boost production capacity by over 40 million mt in the coming years. The new production capacities are expected for captive usage along with exports, mostly to the European region, as they might be a more competitive option for European consumers, given cheaper energy resources in MENA.

Total DRI production in the MENA region stood at approximately 10.1 million mt during Q1 2025, compared to approximately 10.5 million mt during the same period a year ago, according to the WorldSteel Association data.

However, amid concerns over natural gas resources to fulfil all the announced projects, the market expected some delays in the projects' completion. Amid the upcoming high-grade iron ore projects and China's shift towards cost-effective procurement strategies, industry participants are left questioning whether oversupply will pressure prices for high-grade iron ore products before consumption aligns.

Platts assessed 67% Fe pellet feed at $116.80/dmt CFR Middle East on May 22, down $4.6/dmt since the year started.

Chinese decarbonization path

The Chinese steel industry is no stranger to implementing change concerning environmental protection, especially when it comes at the state's behest. Being a major contributor of particulate matter blamed for the lingering smog of the 2010s, the Chinese steel and other heavy industries have since had to clean up their act.

China's journey toward decarbonization is slowly but surely being plot on its own terms. Although 90% of its crude steel is made via the basic-oxygen furnace route, until it finds economical ways to make DRI, or HBI (hot-briquetted iron), it would likely still be reliant on the high-carbon emitting processes of sintering and cokemaking to keep its relatively young fleet of blast furnaces humming.

While Beijing has extended its compliance emissions trading scheme to its steel, aluminum and cement sectors in 2025, it appears that they have been given a free pass equivalent to emission allowances in 2024, although mill sources have said they saw the ETS as a mechanism to force the shutdown of less efficient steelmaking capacity from 2027.

With the use of low-carbon steel currently not mandated in China, demand has been limited to companies that use such steel for renewal energy projects or voluntarily meet targets they have set, which might not be substantive enough to affect a shift toward using high-grade ores on a large scale.

Until Chinese steel output is reduced to reflect lower demand from its property sector, narrowing margins might continue to push steelmakers to maintain blast furnace output and retain their market share, but reduce costs by buying lower-grade and non-mainstream fines, as was the case in 2024.

With Chinese steel mill margins coming under significant pressure since 2025 started, the market saw the spread between Platts IODEX CFR China and Platts IO fines Fe 65% assessment narrow to $8.4/dmt on May 22 from $14.1/dmt since the start of 2025.

Prices for other high-grade products also came under pressure. Platts' spot blast furnace pellet premium over the 62% Fe Iron Ore Index narrowed to $11.80 /dry mt CFR North China on May 22, after adjusting on a 65% Fe basis, from $6.05/dmt since the start of 2025. Meanwhile, lump premiums rose to 15.6 cents/dmtu on May 21 from 14.9 cents/dmtu due to recent buying interest.

Alternative homes for high-grade fines elusive

With iron and steel industries expected to be the biggest sectors targeted, according to an analysis by S&P Global Commodity Insights, the European Union's Carbon Border Adjustment Mechanism is expected to be fully in place on Jan. 1, 2026.

However, the policy that drove the global wave towards steel decarbonization has encountered some challenges lately. With the economic downturn in Europe, the EU moved towards simplifying the CBAM policies. The European Commission promised to move to a mass-based threshold, while the timeline to purchase CBAM certificates was moved from Jan. 1, 2026, to February 2027.

In addition, some delays were seen in the deployment of the green hydrogen economy in Europe as the region struggled with the lack of necessary infrastructure and higher-than-expected costs.

Meanwhile, India positioned as the largest global DRI-producer, is also pursuing decarbonization initiatives while focusing on expanding steel production capacity. According to WorldSteel data, India produced around 14.2 million mt of DRI during the first quarter, compared to 13.35 million mt produced during the first quarter of 2024.

In late 2024, the Ministry of Steel in India unveiled several strategic measures, including the development of beneficiation plants and incentives for maximum pellet utilization in DRI units and blast furnaces.

As over 80% of DRI produced in India is coking-coal based, the major challenge could be to move towards greener energy sources. As the country aims to boost steel production to over 330 million mt/year by 2030 from 200 million mt, the critical question is the extent of efforts dedicated to decarbonizing production processes. According to the roadmap, the ministry hopes to consolidate natural gas demand from the steel sector to secure favorable long-term contracts, thus enhancing the industry's sustainability.

Decarbonization - a long term effort

While decarbonization of the steel industry is a long-term effort that will need more high-grade iron ore, medium-term prospects of its finding more permanent homes would depend on how it is positioned in terms of the demand centers.

With China and India having priorities in maintaining margins and expanding crude steel output and European mills facing anemic demand, regulation mandating the use of low-carbon steel may need to be implemented before high-grade ore realizes its true value.