Decarbonizing the iron & steel industry under the New Energy Order
An essential part of our daily lives and economic progress, steel is a key component in sectors such as transportation, construction, aviation, automotive, infrastructure, electronics, energy, and energy storage, and does not have easy substitutes. Regrettably, the industry that produces it is also one of the largest global emitters of CO2 and is considered ‘hard-to-abate’, which makes the topic of decarbonizing steel both extremely urgent and difficult to tackle. The global steel industry is currently caught between a rock and a hard place in its efforts to decarbonize: the sector is grappling with seemingly counterintuitive policy initiatives that look set to widen the divide between producers in the West and emerging nations. It is under pressure to feed burgeoning demand, with no easy path out for companies seeking to strike a balance between growing output, containing costs and keeping a tight lid on emissions. In this article, we look at the latest technologies available to reduce steel’s carbon footprint and offer our opinions on which policies are more likely to achieve ambitious decarbonization goals. Spoiler alert: it requires countries to cooperate.
Average steel use per capita has steadily increased from 150 kilograms in 2001 to 230 kg in 2020 on a worldwide annual basis. Industrialized countries already consume on average more than 300 kg per person and - given the increase of world population to 9 billion people in the next 15 years - steel consumption will continue to climb. In its 2022 report, the World Steel Association calculated that total consumption reached 1.95 billion tons in 2021 and is projected to rise to 2.3 billion by 2050. So, the iron and steel industry remains the backbone of our society, but the environmental consequences of its energy intensity are of great concern to governments and society now that decarbonization has become a decisive factor in the political discourse.
This industry is a major contributor of carbon dioxide production, responsible for about 7% of global CO2 anthropogenic emissions. What makes it so threatening to the climate is its dependence on carbon: 70% of production still uses coal as the primary energy source. However, from a technology standpoint, steelmaking emissions are not hard-to-abate. Industrial processes based on natural gas and electricity – more than compliant with the targets set by the Paris Accord – have been adopted by many steel companies in North America and Europe, some of them since decades. Yet, what makes this industry a complex case for decarbonization is the availability of those resources on a worldwide basis, as well as access to capital for the massive investments required and a well-tuned international regulatory framework.
Steel production is divided in two main categories: ’integrated steelmaking’ using virgin iron ore reduced by coal in blast furnaces (BF), and ’electric steelmaking’ using recycled scrap melted in electric arc furnaces (EAF). The 2020 Steel Technology Roadmap of the International Energy Agency (IEA) calculated the EAF route produces on average about 340 kg of direct and indirect emissions of CO2 per ton of crude steel. The more the electricity used in the EAF is carbon-free, the more steelmaking becomes a truly sustainable example of circular economy. Coal-based steelmaking instead has carbon intensity levels reaching 2,200 kg of CO2 per ton of crude steel, so over six times worse. Unfortunately, it is not possible to quickly abandon the integrated route since availability of scrap is limited. The global market for scrap, which amid the Covid-19 crisis was about 574.5 million tons in 2020, is projected to reach 748.2 million tons by 2026, but that remains a mere third of what would be needed to meet the 2050 steel demand.
The US is one of the largest producers of scrap, with over 75 million tons processed annually, the majority of which comes from end-of-life vehicles. Thanks to its massive use in the EAFs, which cover 70% of steelmaking production in North America, this area of the world is the least carbon intensive on the planet, with less than 1,000 kg of CO2 per ton of crude steel. Europe as well has a significant production of scrap – over 100 million tons – but higher electricity costs in conjunction with older plants using older technology result in direct and indirect steelmaking emissions of about 1,250 kg of CO2 per ton of crude steel. In some European countries, like for instance in Italy, old integrated steelmaking crushed through repeated economic crises, helped reduce steel related emissions down to 60% of the EU average. But the majority of other EU members - in particular the economic engines of Germany and France - are still massively reliant on coal to produce steel.
The US and Europe though only account for 12% of world steel production -so for much that industry’s decarbonization advances there, the bulk of emissions are produced elsewhere. Radical and massive decarbonization efforts are required across all the other steelmaking giants like China, India, Japan, South Korea, Russia, Brazil and Ukraine, who produce three quarters of the global total and where reliance on iron ore and coal is predominant. In these countries, steel production via blast furnaces exceeds on average 80% of total production resulting in a collective carbon intensity of almost 2,000 kg of CO2 per ton of crude steel - double than the US and 40% more than the EU.
Although efforts on CCS and CCU are promising, large-scale projects aimed at storage and use of carbon dioxide are not going to help in the short term. Tackling global steelmaking emissions means then abandoning as fast as possible the blast-furnace route, counting on all the available alternatives to coal. The process of direct reduction (DR) of iron ore reduces emissions of about 60% versus the blast furnace route even using a fossil fuel resource as natural gas as the reduction agent, but there are other advantages. State-of-the-art DR technology selectively recovers the residual process CO2, so that net emissions to the atmosphere can be cut by up to 90%.
The most recent investment in that regard has been made by the giant ArcelorMittal, the second-biggest steelmaker worldwide with 79.3 million tons produced in 2021. With the support of C$400 million from the Trudeau government, its N. 1 Coke Plant will start to be demolished this month, with a brand-new DR unit beginning construction in its flagship plant of Hamilton, Ontario. By 2028, integrated production will be replaced by direct reduction and, according to a company statement, 3 million tons of CO2 emissions per year will be avoided.
More than a 100 large DR plants are in operation, but only 20 have enhanced CO2 reduction capabilities, like the plants of Nucor in Louisiana, Ternium in Mexico, Emirates Steel in Abu Dhabi. The EU does not yet have industrial-scale DR plants installed, but companies like Tata Steel in the Netherlands, or Salzgitter in Germany are already executing new projects. ThyssenKrupp in Germany, VoestAlpine in Austria, and others have announced more plants. Yet, the expected production of 50 million tons per year of DR-based capacity in the EU will not materialize before 2030.
Good news for the environment is that hydrogen can replace natural gas in the latest design of DR plants. A Swedish consortium HYBRIT – created by steelmaker SSAB, utility company Vattenfall and miner LKAB – has recently built a large-scale hydrogen-based pilot plant in Luleå, Sweden, demonstrating that steel production can be entirely fossil fuel free. .. Volvo has already used HYBRIT’s steel, proving that vehicles can also be produced with such fossil fuel free steel, becoming completely sustainable if also powered by electric motors. HYBRIT is a milestone for this industry, as it shows how modern steelmaking technology is ahead of the curve in the fight to address climate change. Two Chinese steelmakers, Baosteel and HBIS, have also recently started to build hydrogen-based DR plants, showing that H2 can be a solution where natural gas is not used, as long as it is produced with fossil fuel free energy.
So, the technological platform made of electric arc furnaces melting scrap and direct reduction plants processing iron ore can address the concerns of decarbonization. It has been adopted in North America, with the EU closely following suit. Nevertheless, given the current energy scenario, with power prices in Germany exceeding $400 per barrel of oil equivalent in 2022 on average, green steel comes at a premium, and the majority of consumers are not likely to pay any green premium, especially under current inflationary circumstances. Political intervention is hence needed to support more green steel production and to ensure that the sector remains competitive against the cheaper and dirtier conventional methods.
US President Joe Biden’s programs like the Buy Clean Initiative or the incentive-based IRA, and similar European measures contained in the EU recovery plan, are strong signals for a green economy, but at a trade level the situation is complex. The World Trade Organization (WTO) eventually ruled on 9 December that the former U.S. administration violated trade rules in 2018 when it invoked national security concerns to justify tariffs on steel. Biden condemned the decision, but the scenario will be even more complicated soon. The EU carbon border adjustment mechanism (CBAM), the American equivalent, or a harmonized system of two legislative efforts, all good theoretical solutions, will show how free trade and globalization can no longer cope with sustainability and climate.
Measures like the CBAM are practically a tariff on imports, but counterintuitively they are not protectionist measures and as such they should be considered in line with the WTO mandate. These systems would introduce a levy on products imported from countries where the costs of emissions are much lower or nonexistent. In essence, the only thing that the CBAM does is to increase the cost of producing a negative externality – CO2 emissions – which in turns allows for market solutions to become more efficient. In that sense, the CBAM would be pro-market and not against it. In other words, by introducing a tax on carbon at the border, virtuous countries decrease the risk of ’carbon leakage’, which is an incentive for companies to relocate their operations to more carbon-intensive countries in search of lower costs. By doing so, they attain a common good, which would be otherwise unattainable and is represented by lower global CO2 emissions.
Yet, the devil is always in the details. The EU is equipped with a carbon trading system – the cap & trade or Emission Trading System (ETS) – from which a tariff could be calculated, starting from the price of carbon generated by the ETS and the estimated quantity of emissions embedded in imported steel. The US does not have an ETS at a country level, but only at state and regional level (e.g., California cap & trade and the Regional Greenhouse Gas Initiative in the Northeast), which implies that the tariff would need to be calculated based on some assumed carbon price. It is not going to be an easy job agreeing on a carbon price that could be considered fair and non-predatory by US trading partners. But even if the US were to introduce a country wide ETS, which does not appear imminent, the task of calculating the carbon embedded in the steel would still be fiendishly complicated. To begin, the starting point in the production process should be the most upstream possible, which means iron ore mining or scrap sourcing, but a precise account of the energy sources used in the end-to-end production, and their related emissions, is definitely difficult. For instance, a country which produces 80% of its power from fossil fuels and 20% from renewables may legitimately claim that they have used only the 20% from renewables to produce the steel they are exporting. It is evident that auditing these claims would be close to impossible.
But even if we were able to eventually design a system that precisely tags the carbon embedded in steel, we would most likely be unable to claim victory anyways. In fact, at COP27, the BASIC group - comprising India, China, Brazil and South Africa - said in a statement that “unilateral measures and discriminatory practices, such as carbon border taxes, that could result in market distortion and aggravate the trust deficit amongst Parties, must be avoided”. This group claims that a carbon border tax puts the burden of climate compliance on developing countries, when historically, they have done much less to pollute the environment and yet are often more vulnerable to effects of climate change.
So, what are the key takeaways here? First, steel will remain the backbone of a steadily expanding global economy over the next three decades due to a lack of viable alternatives. This means that decarbonizing its high carbon-footprint production will be essential to reaching the Paris agreement targets. Yet, while decarbonization is already technologically achievable, it is also commercially complex. Indeed, most of the current steel production sits in emerging markets, which rely on cheap and high-carbon technologies mostly fed by iron ore and powered by coal, while western countries have already switched to higher cost and lower-carbon processes mostly fed by recycled scrap and powered by electricity. A proposed solution to rebalance production costs in the two regions and induce a reduction in emerging markets’ carbon footprint has been put forward: the Carbon Border Adjustment Mechanism. Yet, besides the complications of determining a fair and consistent tariff, we also noticed that this solution is politically unsustainable, as it would pitch the West – historically a major source of CO2 emissions – against emerging markets, whose aggregate past emissions have been in order of magnitude lower on a per-capita basis. It then appears that we are advancing towards an epochal clash between climate sustainability and free trade, with no obvious winners but surely clear-cut losers - the planet and the global economy. That would be a tragedy and a disaster.
Unfortunately, we don’t see an easy way out of this deadlock for the steel industry, at least based on the current proposals on the table, save for a call to a renewed global cooperation aimed at eliminating the use of blast furnaces and incentivizing the uptick of recycled steel everywhere in the world. The Montreal protocol for the elimination of chlorofluorocarbons could perhaps be used as a blueprint to start a global cooperation process in steel markets and become the tool that breaks this game of chicken that is pitching the western steel industry against the emerging market. The benefits of such a cooperation will be for all to see as the steel industry, one of the highest emitting industries in the world and considered hard to abate, will begin its steady march towards a net-zero future.
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Senior Vice President of Oil Markets, Head of Americas Research, Rystad Energy
President & CEO, Tenova Inc.
(The data and forecasts contained in this column are Rystad Energy’s and the opinions are of the authors.)