Green steel on the backburner, Fitch warns

Federal and state governments are counting on new technologies to use Australian iron ore to make steel without coal.

But a slowing global economy with high levels of inflation and already squeezed profits is expected to hold up the development of green steel in the next two to three years, a leading research house has warned.

Green steel, made using hydrogen rather than coal, will take time to develop despite commitments by governments to decarbonise, according to a Fitch Solutions report released on Monday.

Despite emissions-busting intentions, demand remains muted because green steel requires a premium price, and supply is limited, Fitch warned.

World steel production makes up about 8 per cent of global carbon emissions, and will be one of the hardest sectors to overhaul.

Risks to green steel production and demand remain "elevated" in the medium term, according to the report.

Australia's Fortescue Metals Group is one of only a handful aiming for carbon neutral steel production before 2050, and is the only large mining and metallurgical firm that has set a zero emissions target for 2030, Fitch said.

Steel is traditionally made in a blast furnace using iron ore and coal, which is an emissions-intensive process.

New methods using liquid hydrogen and renewable energy are yet to be scaled up for industrial use and remain at the early testing and development stage.

"In the short term, slowing global growth and high energy costs means firms would be less willing to spend more on costly raw materials, and much less so on premium-priced green steel," Fitch said.

Should this trend continue, existing margins that are already difficult for sustainable profits will prevent new investments into lower carbon methods of production, Fitch warns.

Longer-term, the success of green steel depends on how quickly supplies and production scale up, and on government-subsidised partnerships aimed at developing the new industry.