Steel is one of the core pillars of modern society, as one of the most important engineering and construction materials, it exists in many aspects of our lives. However, the steel industry now needs to cope with the pressure to reduce its carbon footprint, both from an environmental and economic perspective. Currently, the steel industry is one of the top three carbon dioxide emitters in the world (only behind energy power and construction), emitting an average of 1.85 tons of carbon dioxide per ton of steel produced, accounting for about 8% of global carbon dioxide emissions.

Summary

• The World Steel Association predicts that global steel demand will grow by 2.2% in 2023, reaching 1.88 billion tons; but there is still high uncertainty due to factors such as the Russo-Ukrainian war and energy prices.
• In the process of decarboniing steel production, different regions and companies may adopt different strategies and steps, depending on their resources, markets and policy environment, where European steel companies are facing more urgent challenges for decarbonization.
• To achieve decarbonization of steel production, there are multiple technological options to consider, including hydrogen injection, solid biomass substitution, zero-carbon power substitution, carbon capture and storage (CCS) retrofitting, and combinations of these decarbonization methods.
• European companies may lead this transformation under policy pressure, while the U.S. currently has the corresponding technology and relative cost advantages. China and India, hoping to balance economic growth and climate goals, faster decarbonization targets are not realistic for their own development status.

Decarbonization Technology Trend

To achieve decarbonization of steel production, there are multiple technological options to consider, including hydrogen injection, solid biomass substitution, zero-carbon power substitution, carbon capture and storage (CCS) retrofitting, and combinations of these decarbonization methods.

BF-BOF

Blast Furnace-Basic Oxygen Furnace (BF-BOF) dominates production (71%) and is difficult to decarbonize, its production process mainly consists of two steps:

1. The first step is to reduce iron ore to liquid iron in a blast furnace using coking coal as a heat source and reducing agent.
2. The second step is to blow oxygen into the liquid iron in a basic oxygen furnace to burn off the unwanted elements and turn the liquid iron into steel.

The difficulty of decarbonizing the production process of BF-BOF is mainly due to the fact that BF-BOF requires a large amount of coke as a heat source and reducing agent, which produces a large amount of carbon dioxide emissions, accounting for more than 70% of the emissions from the steel industry; in addition BF-BOF is the most mature steelmaking method at present, suitable for large-scale production, but also means that the cost and risk of transformation or replacement are very high.

DRI-EAF

Direct Reduced Iron-Electric Arc Furnace (DRI-EAF) can develop towards net zero, which mainly uses scrap steel in electric arc furnace (EAF-scrap) for secondary steel production, accounting for about a quarter of global production, but its market share is limited by the capacity of recycled steel: the supply of recycled steel is affected by the service life and recovery rate of steel products: the quality and composition of recycled steel will vary with the number of recycling and sources, affecting the performance and quality of steel products.

• Hydrogen injection: By using low-carbon or carbon-free hydrogen to reduce iron ore, thereby reducing or eliminating the use of coke and coal powder. Hydrogen injection can reduce carbon dioxide emissions by up to 95%, but requires a large amount of low-carbon or carbon-free hydrogen supply, as well as related infrastructure and safety measures. In addition, hydrogen injection also increases production costs, depending on the price of hydrogen and carbon dioxide: as the production cost of hydrogen is affected by electricity prices (power generation mode).
• Solid biomass substitution: By using renewable or carbon-neutral solid biomass (such as wood chips, rice husks, straw etc.) to replace part or all of coke and coal powder, thereby reducing the use of fossil fuels. Solid biomass substitution can reduce carbon dioxide emissions by up to 50%, but requires ensuring the sustainability and carbon neutrality of biomass, as well as solving issues such as supply chain, storage and quality.
• Zero-carbon power substitution: By using zero-carbon power from renewable energy or nuclear energy to replace part or all of fossil fuels, thereby reducing carbon dioxide emissions. Zero-carbon power substitution can reduce carbon dioxide emissions by up to 100%, but requires a large amount of zero-carbon power supply, as well as related infrastructure and conversion equipment.
• Carbon capture and storage (CCS) retrofitting: By installing carbon capture equipment in existing steel plants, separating the generated carbon dioxide from the exhaust gas, then compressing, transporting and storing it underground or elsewhere, thereby reducing carbon dioxide emissions. CCS retrofitting can reduce carbon dioxide emissions by up to 90%, but requires a large amount of capital investment, as well as solving issues such as storage capacity, safety and monitoring.

Decarbonization challenges for steelmakers

In the process of decarbonizing steel production, different regions and companies may adopt different strategies and steps, depending on their resources, markets and policy environment, where European steel companies are facing more urgent challenges for decarbonization. This challenge is driven by three key factors:

• ESG investment philosophy for the demand of supply chain products: such as the automotive industry, where some manufacturers such as Volkswagen or Toyota have the goal of eliminating carbon emissions from their entire value chain (including their suppliers) and adopting a life cycle perspective.
• Tightening of legal regulations: reflected in the carbon dioxide emission reduction targets, as well as the increase in carbon dioxide emission carbon price outlined in the European Green Deal.
• Moderate growth in global steel demand, thereby allowing new entrants in other steelmaking systems to benefit from a transformation pattern that is not based on production volume, and research and development focus may also shift to peripheral technology industries.

Momentum to tackle climate change

Some progress has been made globally in addressing climate change, with 190 countries passing the Paris Agreement in 2015. In 2019, the United Nations announced that more than 60 countries have committed to achieving carbon neutrality by 2050, including the UK and the EU (except Poland), but not including the three largest emitters: China, India and the United States. In addition, some Nordic countries have committed to trying to achieve this goal earlier.

According to the April 2023 Short Term Outlook (SRO) released by the World Steel Association (worldsteel), global steel demand is expected to grow by 2.2% in 2023, reaching 1.88 billion tons. The project outlook assumes that the Ukrainian war has ended by 2023 and that steel production will resume growth. However, this assumption is highly uncertain, as the war situation remains unstable and energy prices and production costs remain high. Therefore, achieving decarbonization of steel production still faces huge challenges and pressures.

Investment Ideas and Advice

There is no single method to achieve deep decarbonization of the steel industry, and all methods will result in a significant increase in production costs. There is no unified ideal solution, different geographical locations, infrastructure and economic conditions will determine the feasibility and cost of local optimal solutions. Policy measures will need to provide financial incentives for decarbonization and avoid adverse outcomes such as emission leakage or job losses.

We believe that under the overall environment of improving carbon emissions, the trend of decarbonization of steel production will gradually achieve steady progress, and the decarbonization of the steel industry will reshape the entire supply chain, including hydrogen, renewable energy, high-quality iron ore and equipment providers. Future competitive advantages will depend on: access to low-cost renewable energy, as well as achieving integration to overcome possible supply bottlenecks.

This transformation is expected to increase the capital intensity of steel producers, which will require a “green premium” steel price to cover their investment costs. European companies may lead this transformation under policy pressure, while the U.S. currently has the corresponding technology and relative cost advantages. China and India, hoping to balance economic growth and climate goals, faster decarbonization targets are not realistic for their own development status.