"GCC’s Steel Gamble: Can DRI Survive the Shift to Green Energy?"

The global steel industry is undergoing significant transformation, and the Gulf Cooperation Council (GCC) countries are no exception. The region has embraced Direct Reduced Iron (DRI) technology as a pathway toward more sustainable steel production, driven by its abundant natural gas resources. However, key challenges such as the availability of iron ore, the economic feasibility of natural gas supply, and the pressure to further reduce emissions require careful consideration. In this article, we will explore the feasibility of continuing investments in DRI steel mills in the GCC, focusing on natural gas, iron ore supply, technological advancements, and future market dynamics.

The Role of DRI in GCC Steel Production

Direct Reduced Iron (DRI) technology is central to the GCC’s steel sector, allowing for the production of steel with lower carbon emissions compared to traditional blast furnace methods. DRI involves reducing iron ore using natural gas as a reductant, instead of coal, which significantly lowers CO2 emissions. Saudi Arabia, the UAE, and Qatar are among the largest producers of DRI globally, leveraging their access to inexpensive natural gas. For instance, Saudi Arabia’s Hadeed and the UAE’s Emirates Steel have large DRI capacities that place them at the forefront of low-emission steel production.

Economic Feasibility: Natural Gas and Energy Prices

The availability of cheap natural gas has historically been the backbone of the GCC’s steel industry. The production of DRI relies heavily on natural gas, and the GCC’s abundant reserves give it a significant advantage. Saudi Arabia has the world’s sixth-largest natural gas reserves, estimated at 208 trillion cubic feet, while Qatar has the third-largest reserves globally, at 871 trillion cubic feet. These reserves have supported the expansion of DRI facilities in the region, allowing producers to maintain competitive operating costs.

However, the landscape is shifting. The global demand for liquefied natural gas (LNG) is growing, and some GCC countries, particularly Qatar, are focusing on expanding LNG exports, which could increase domestic gas prices. While the current cost of natural gas in the GCC remains relatively low (around $1.50–$3.00 per million BTU), any significant upward shift in prices would challenge the economic feasibility of DRI operations. Additionally, with increased global focus on renewable energy, the long-term availability of natural gas for domestic industries may come under pressure as governments balance between domestic consumption and export revenues.

The Challenge of Iron Ore Availability and Import Dependencies

While natural gas is abundant in the GCC, iron ore—the key raw material for DRI production—is not. The region relies almost entirely on imported iron ore, making it vulnerable to fluctuations in global supply and prices. In 2022, global iron ore production was approximately 2.5 billion tons, with Australia (36.5%) and Brazil (18.6%) dominating the export market. The GCC imports the majority of its iron ore from these two countries, with a growing reliance on suppliers from Africa, particularly from South Africa and Mauritania.

The price volatility of iron ore has been a persistent challenge. In 2021, iron ore prices surged to $220 per ton due to supply disruptions and strong demand from China. Although prices stabilized around $115–$120 per ton in 2023, the long-term outlook for stable prices remains uncertain. Global factors such as supply chain disruptions, geopolitical tensions, and shifting demand in key markets like China could affect iron ore availability for the GCC. With no significant domestic iron ore reserves, GCC steel producers remain highly exposed to these external risks.

To mitigate this, some GCC countries are exploring investments in upstream iron ore assets. For example, in 2022, Emirates Steel considered investing in African iron ore mines to secure long-term supply, ensuring more control over pricing and reducing the risks associated with market volatility. However, large-scale investments in iron ore mining may require substantial capital outlays and present geopolitical and operational risks, particularly in regions with political instability.

Technological and Environmental Pressures

While DRI technology offers lower emissions compared to traditional blast furnace methods, it is still dependent on natural gas, which produces CO2 when used as a reducing agent. As global climate policies tighten, the GCC’s steel producers face growing pressure to decarbonize further. The International Energy Agency (IEA) estimates that the steel industry accounts for about 7-9% of global CO2 emissions. In response, the global steel industry is turning toward hydrogen-based DRI as a potential solution to achieve near-zero emissions.

Green hydrogen, produced using renewable energy, can replace natural gas in the DRI process, eliminating direct CO2 emissions. The GCC, with its abundant solar and wind resources, has the potential to become a leader in green hydrogen production. In 2023, Saudi Arabia launched its $5 billion NEOM green hydrogen project, which is set to produce 650 tons of green hydrogen daily by 2026. While this presents an exciting future pathway for steel production in the region, green hydrogen technology is still in its infancy, and its high costs remain a barrier. The cost of producing green hydrogen is currently between $4–$6 per kilogram, far higher than natural gas. Until these costs decrease significantly, the widespread adoption of hydrogen-based DRI in the GCC remains a long-term prospect rather than an immediate solution.

Steel Demand and Market Considerations in the GCC

The demand for steel in the GCC is largely driven by massive infrastructure projects. Saudi Arabia’s Vision 2030 and Qatar’s National Vision 2030 outline ambitious plans to modernize their economies, with megaprojects like Saudi Arabia’s NEOM, the Red Sea Project requiring large quantities of steel. In 2022, GCC steel demand was estimated at around 24 million tons, with Saudi Arabia accounting for approximately 60% of the total demand.

However, global steel markets are becoming increasingly competitive. Emerging steel producers in Southeast Asia, particularly in Vietnam and Indonesia, are rapidly increasing their production capacities. In 2022, Southeast Asia produced over 100 million tons of steel, driven by cheaper labor costs and proximity to key markets such as China and Japan. For the GCC’s DRI-based producers to remain competitive, they will need to continue leveraging their natural gas advantage and move toward greener steel production to meet global sustainability standards.

Policy and Regulatory Landscape

The GCC governments are highly supportive of industrial development, and the steel industry is seen as a crucial component of their economic diversification strategies. Saudi Arabia, in particular, is seeking to expand its domestic steel production capacity to reduce reliance on imports and support its infrastructure development needs. By 2024, the Kingdom’s steel production capacity is expected to exceed 15 million tons, driven primarily by DRI technology.

However, as global trade evolves, the GCC will need to consider the impact of emerging carbon regulations on its steel exports. The European Union’s Carbon Border Adjustment Mechanism (CBAM), set to be fully implemented by 2026, will impose carbon tariffs on imported steel based on its carbon content. To remain competitive in export markets, GCC producers must continue investing in low-carbon technologies such as green hydrogen and carbon capture and storage (CCS).

Conclusion: A Strategic but Conditional Path Forward

The feasibility of continuing to invest in DRI steel mills in the GCC hinges on several factors, particularly the availability of natural gas, the secure and affordable import of iron ore, and the region’s ability to adapt to global environmental pressures.

• The GCC’s abundant natural gas reserves provide a short-to-medium-term advantage, allowing for cost-effective DRI production. However, natural gas price volatility and rising export demand could challenge this advantage.
• The region’s heavy reliance on imported iron ore presents a significant vulnerability, and securing long-term supply agreements or investing in upstream assets will be crucial.
• The transition to green hydrogen represents the future of DRI steel production, but high costs and technical challenges must be addressed before it becomes commercially viable.

In conclusion, while DRI technology remains a feasible and strategically important investment for the GCC in the short to medium term, long-term sustainability will require significant investments in green hydrogen, CCS, and iron ore security. If these challenges are successfully navigated, the GCC can continue to play a leading role in the global steel market while advancing its economic diversification and sustainability goals.