MELBOURNE (Reuters) -Major miner BHP has said it is too costly for Australia to build a "green iron" industry after the country and China agreed this week to jointly work to decarbonise the steel supply chain, responsible for nearly a tenth of global emissions.

BHP Australia chief Geraldine Slattery, who attended business round tables with Australian and Chinese industry leaders in China this week, said that costs to produce the low carbon steel product "simply do not stack up".

"Even with generous policy support, the cost of production (in Australia) would be double that of the Middle East and China - and customers many thousands of kilometres away," Slattery said in a social media post late on Tuesday.

Slattery and other CEOs of mining companies accompanied Australian Prime Minister Anthony Albanese on a visit to China this week, where he said the two countries should cooperate more closely on green steel.

The lack of enthusiasm from the world's biggest miner, which said its strategy was "not to produce green iron ore or steel ourselves", in the wake of the talks came as a reality check for Australia's ambitions.

Australia supplies about 60% of China's iron ore needs but its supply is too low-grade to be directly processed into steel with renewable energy, so it needs an additional processing step.

When this step is undertaken with hydrogen made from renewable energy or with biomass instead of coal, the resulting product is called green iron, a low-carbon base for making green steel. Such processes are not expected to become widely commercial until next decade.

Australia has been striving to develop a minerals processing industry to diversify from its raw material exports that bring in around A$370 billion ($242 billion) a year, but it has been hamstrung by high power prices and labour costs.

In February the government allocated A$1 billion to support the manufacture of green iron and its supply chains.

BHP, Rio Tinto and Bluescope Steel agreed in December to work on developing a pilot plant to produce low-carbon iron using renewable power and direct reduced iron technology in an electric smelting furnace (ESF), with a potential start date of 2028.

Fortescue also has a green iron project underway, and is set to produce green iron from a pilot plant this year.

($1 = 1.5319 Australian dollars)