Gas Supply Constraints Threaten Industrial Expansion

South Australia's reconsideration of its green hydrogen strategy in favor of gas-based direct reduced iron production comes at a precarious time for Australia's east coast gas market. According to the Australian Energy Market Operator's 2025 Gas Statement f Opportunities, the region faces "risks of peak day shortfalls from 2028, and structural supply gaps emerging from 2029 in southern Australia." This timing directly conflicts with any major industrial expansion dependent on natural gas. BlueScope Steel has highlighted this challenge, noting that a single DRI facility with output comparable to its Port Kembla operations would require 30 to 40 petajoules of natural gas annually, equivalent to 7% of current east coast demand and 40 times Port Kembla's existing gas consumption. Such massive additional demand would exacerbate already forecast supply shortfalls, creating a fundamental contradiction between South Australia's industrial ambitions and the practical realities of gas availability in the region.

Price Competitiveness Remains Elusive

Beyond supply constraints, the economics of gas-based DRI production in South Australia face severe headwinds due to persistently high domestic gas prices. In the southern states, average prices under gas supply agreements for 2025 delivery reached A$15.58 per gigajoule in late 2024, reflecting a tripling of domestic gas prices since Queensland LNG exports began in 2015. The Commonwealth Bank of Australia estimates that future LNG imports into southern states would cost A$14-20/GJ delivered to Melbourne, with risks "skewed toward the upside." These price levels make it "challenging to see how east-coast gas prices can shift materially lower over the next five years," according to the bank's analysis. Such high input costs would render South Australian DRI production fundamentally uncompetitive against international producers, particularly those in the Middle East where gas-based DRI is already well-established and benefits from significantly lower gas prices. This cost disadvantage undermines any realistic prospect of South Australia becoming a competitive player in the emerging international low-carbon iron trade if it remains dependent on natural gas.

Emissions Intensity Remains Problematic

While gas-based DRI produces lower emissions than traditional coal-based blast furnaces, it remains significantly emissions-intensive at approximately 1.4 tonnes of CO₂ for every tonne of crude steel produced. This emissions profile presents a fundamental obstacle to South Australia's stated green iron and steel ambitions. Any suggestion that carbon capture and storage (CCS) could mitigate these emissions ignores the technology's poor track record globally, particularly in the steel sector. The only commercial-scale CCS plant for steelmaking, the Al Reyadah project in the UAE, captures just 25% of total operational emissions, which are then used for enhanced oil recovery, effectively enabling more emissions elsewhere. Despite this project becoming operational nine years ago, no other commercial-scale CCS facility for steelmaking has entered operation anywhere since, highlighting the persistent technical and economic challenges facing the technology. This reality means gas-based DRI would lock South Australia into a production method that cannot deliver genuinely low-carbon iron and steel products.

Global Competition Accelerates

As South Australia reconsiders its hydrogen strategy, international competitors are rapidly advancing in the race to pioneer truly green iron and steel production. In northern Sweden, Stegra aims to begin commercial-scale production of green hydrogen-based DRI next year, moving beyond theoretical or pilot stage operations. Other regions with high-grade iron ore reserves and electricity grids already dominated by clean power sources, including Canada and Brazil, are similarly positioned to establish early leadership in this emerging market. The Middle East has already secured a head start in gas-based DRI and has plans to supply Japan and other Asian markets. This accelerating global competition means South Australia risks falling behind in establishing a position in the international low-carbon iron trade if it pivots away from green hydrogen toward gas-based production. The state cannot compete with the Middle East in gas-based DRI due to fundamental cost disadvantages, but it could compete effectively using green hydrogen as demand for truly green iron and steel products grows globally.

AEMO Forecasts Heightened Market Pressure

AEMO's modeling reveals the significant impact that gas-based DRI would have on Australia's already constrained east coast gas market. In its 2024 Gas Statement of Opportunities, AEMO included a sensitivity analysis examining the scenario where Australian ironmaking switches from coal-based blast furnaces to gas-based DRI. This analysis projected that industrial gas usage would peak approximately 80 petajoules higher in the early 2030s, intensifying pressure on a market already facing substantial supply concerns. Importantly, this scenario only considered shifting current Australian ironmaking capacity to gas-based DRI, not the expanded production envisioned in South Australia's Green Iron and Steel Strategy. The strategy correctly identifies Australia's long-term opportunity to produce significantly more iron for export to overseas steelmakers, but the east coast gas market's limited supply makes this expansion virtually impossible if dependent on gas-based DRI. This fundamental mismatch between ambition and resource availability underscores the strategic error in pivoting away from green hydrogen.

Industrial Gas Demand Trends Reversed

AEMO currently forecasts slowly declining industrial gas consumption resulting from production changes, fuel switching, and electrification under its central Step Change scenario. A shift toward gas-based DRI would dramatically reverse this trend, creating significant additional demand precisely when the market faces its most severe supply constraints. This runs counter to one of the key strategies for avoiding future gas shortages: reducing household and industrial demand. The Commonwealth Bank has already highlighted that high east coast gas prices are forcing commercial and industrial users to consider exiting the market, with these consumers expected to feel the pressure of elevated prices "for at least the next 5 years and potentially even longer." Adding major new industrial gas demand through DRI production would exacerbate this situation, potentially triggering broader industrial dislocation as businesses compete for limited gas supplies at increasingly uncompetitive prices.

Green Hydrogen Remains the Viable Path

While recent assessments indicate that green hydrogen production costs are not falling as rapidly as previously forecast, this actually clarifies its most appropriate applications rather than undermining its viability for steelmaking. As less suitable uses for green hydrogen are reconsidered, iron and steel production remains among the sectors where it can be most effective. South Australia's competitive advantage lies not in attempting to match the Pilbara's iron ore scale or the Middle East's gas prices, but in leveraging its world-class renewable resources to pioneer green hydrogen-based iron production. As demand for truly green iron and steel grows globally, along with buyers willing to pay premium prices for verifiably low-carbon products, South Australia could establish a leadership position that gas-based production cannot deliver. Prioritizing the earliest possible adoption of green hydrogen for the state's iron and steel industry remains the only path to fulfilling the South Australian government's Green Iron and Steel Strategy, as the fundamental reality remains unchanged: genuinely green iron and steel cannot be produced using natural gas.

Key Takeaways:

• A single DRI facility would require 30-40 petajoules of natural gas annually (7% of current east coast demand), exacerbating forecast supply shortfalls beginning in 2028 and making expansion virtually impossible

• Gas prices in southern Australia have tripled since 2015 to A$15.58 per gigajoule, making gas-based DRI fundamentally uncompetitive against Middle Eastern producers and undermining export potential

• While reducing emissions compared to coal, gas-based DRI still produces approximately 1.4 tonnes of CO₂ per tonne of steel, with carbon capture technology capturing only 25% of emissions in the sector's sole commercial application