Steelmaking — that elusive Western Australian dream — is back in play. Two major steel projects with a combined estimated capital cost of nearly $7 billion are now touting for finance, as WA once again pursues its long-held vision of adding value to iron ore.

The vision looked like a shattered dream 12 months ago amid an Asian steel downturn and serious commissioning problems at BHP's $2.4 billion HBI plant in the Pilbara.

But, according to WA's Resources and Energy Minister, Colin Barnett, a steelmaking industry is now back on track as Asia resumes its upward growth path.

"I think we are poised for a period of exciting development in the state's iron ore and, dare I say it, steel industry this decade," he told a recent conference in Perth. "We'll see WA continue to grow its iron ore production, but also change quite sharply into being also a significant steel producer in the Asian region."

Barnett has voiced his steel dreams often in the past, and there are a few signs this time around that the political optimism might be well-founded.

For one, analysts are predicting strong industrial growth in Asia this year as the world economy motors along. This means the outlook for steel products looks bright. Moreover, WA natural gas prices are set to fall further, making the state more attractive as a steelmaking location.

"The trend will be for continuing falls in gas prices," Barnett said. "The reality is we'll see gas prices for major projects getting very close to that glittering prize of $US1 per gigajoule. That is cheap compared to Asia, North America and Europe. We still have a little way to go (our current prices are $A1.70-1.80/GJ), but at that price ($US1/GJ) I think you will see a host of new investment in the state."

Gas producers such as Woodside Petroleum, Apache Energy and WAPET are eager to foster the development of a local steel industry, in view of the limited upside for LNG exports into Asia at the moment.

The Australian Gas Association, stung by the fuel's failure to achieve the year 2000 penetration target of 20% of Australian primary energy usage (it reached only 17.9%), has identified steelmaking and other mineral processing as a key growth strategy.

"The gas industry is keen to see the emergence of WA as a regional base for gas-based minerals processing and metal production, given the large reserves of the North West Shelf fields and well-established gas transportation and distribution infrastructure," said AGA industry development manager, David Parker.

The lobby group contends the timing is right for iron ore processing, though insists governments and agencies have to start doing the hard sell. "We need to get the message out to potential investors that this is the right time," Parker said. "We've had a number of positive signs that Asia has turned the corner. It is no use waiting for the cycle to peak and then start building capacity — you need to get in on the ground level and get things moving now."

The AGA wants more backing for value-added industries from Canberra. Unfortunately, the sparsely populated north west "doesn't have a lot of electoral clout", it concedes.

"So the gas industry has to pedal that little bit harder to convince people to accept the vision of gas-based metals and mineral processing in the state's north."

Parker said Federal Government "incentives" were required to encourage the state's emerging steel industry, otherwise capital would flow elsewhere.

"Trinidad and Tobago and other emerging nations are putting in the hard pitch to get these gas-based heavy industries located in their states," he said. "They tend to have more of a hunger for those projects over there; their governments are prepared to be more supportive."

In WA, minister Barnett is pinning his initial hopes on Kingstream Steel's on-again, off-again Mid-West steel project. "It has certainly had its ups and down, with a misadventure in Taiwan and a few other things," Barnett said. "But I now believe the project will proceed this year."

Kingstream's chances of success improved dramatically earlier this year when it finalised an engineering procurement and construction contract for the proposed $1.6 billion venture near Geraldton. German groups Demag and Ferrostaal were awarded the EPC contract, and Kingstream said this would pave the way for a bond issue to fund the planned development.

The company claimed it could secure finance as early as April, enabling construction of a 2.6 million tonnes per annum slab steel plant and associated iron ore mine to begin later this year.

Also re-entering the race is Clive Palmer's Austeel Pty Ltd consortium, which manufactured a big media splash last December with a reworked proposal for a $5 billion integrated iron and steel project south of Dampier.

Palmer has been promoting the project, based around the Fortescue magnetite deposits, for many years. However, in December, he was able to roll out some big-name backers, including the Industrial Bank of Japan (IBJ), European steel group Corus, construction group Danieli, Lurgi AG of Germany, Marubeni Corp of Japan, South Africa's Macsteel International BV, and port manager Andhika Ship Management of Singapore. Local groups Thiess Contractors and Clough have also pledged major roles.

Critics noted that funding of the proposed 3.85Mtpa steel facility remained a major hurdle, particularly in light of Kingstream's struggles and BHP's cost blowouts with its HBI plant.

Even the bullish Barnett played down Austeel's prospects of near-term success, describing the project as "far less advanced" than Kingstream. "They (Austeel) are continuing to negotiate details on a state agreement," he said.

Nevertheless Barnett applauded the plan by both proponents to produce finished steel, rather than the intermediate direct reduced iron (DRI) product.

"While DRI is growing in importance, about 90% of DRI production in Asia is captive in that it is part of an integrated steel process," he said. "Therefore, the traded, or virgin, DRI market is only about 10%. It is a fairly shallow market, so the newer projects are focusing more on producing steel and trading that. The obvious advantage against DRI is that steel by definition is a wider market."

The investment community agrees. "We've looked at the economics of all of the iron ore processing projects, and just making HBI like BHP doesn't make a great deal of sense for a lot of people," said one steel analyst. "The real value-adding is going that next stage to slab or, in fact, hot rolled coil steel. Because those are the two stages that add real value."