Will automobile firms drive the shift to ‘green steel’?

The decarbonisation of the steel industry, though essential to global carbon emissions reduction, has proved elusive. However, recently, development has accelerated with ArcelorMittal Europe completing the first sale of green steel, which is steel produced with no carbon emissions, in late 2020. This indicates the start of a widely anticipated shift towards decarbonisation for an industry which contributes 8% of total global carbon dioxide emissions, according to the World Steel Association (WSA). The speed of this transition, towards hydrogen-based green steel technologies, appears to be dependent upon consumers’ willingness to pay a premium and firms’ ability to raise capital.

 

Steel has traditionally been produced by one of two methods: Blast Furnace-Basic Oxygen Furnaces (BF-BOF) or Electric Arc Furnaces (EAF). BF-BOF use coal or coke to reduce iron ore in a Blast Furnace, before the iron is converted to steel in a Basic Oxygen Furnace. In this process, carbon dioxide is produced as a by-product of the reduction reaction. EAFs, an alternative method, can use recycled steel or direct reduction of iron (DRI) – by fossil fuels or other means – as their feedstock. On current methods, WSA data suggests 1.85 tonnes of carbon dioxide is emitted for every tonne of steel produced.

 

However, in order to produce green steel, research has concentrated on green hydrogen-based DRI, in place of the fossil fuel carbon, as the feedstock for EAFs. Green hydrogen is hydrogen produced using renewable energy and can be contrasted to grey hydrogen which is produced with natural gas. Using green hydrogen as the reductant can potentially eliminate carbon emissions, as only water is produced as a by-product. This technology has been in test production in Luleå, Sweden by Hybrit SSAB since August 2020 and is proving successful. Della Vigne of Goldman Sachs echoed industry sentiment about the prospects of hydrogen, saying, “we believe hydrogen is most likely to be the solution to get to zero emissions”.

 

However, green steel, produced by green hydrogen-based DRI, is likely to be more expensive than traditionally produced steel. Daniela Kinch, writing for S&P Global Platts in 2021, estimates that green steel will have 50-80% higher production costs. These costs translate into an increase of 57 EUR per tonne of steel, in a sector with historically low margins. The increased production costs are likely to be a result of current high costs for green hydrogen. The Hydrogen Council data suggests green hydrogen costs almost 4 EUR/kg H2 compared to under 1.75 EUR/kg H2 for grey hydrogen in 2020. Given the low margins prevalent in the industry, the customer is likely to bear the burden of these increased costs.

 

A further challenge to the widespread adoption of hydrogen DRI in the production of steel is financing the capital expenditure required. The existing BF-BOF plants would need to be phased out and replaced by new EAFs. This would be required up-front and is estimated to amount to 30-40 billion EUR by 2050, for ArcelorMittal alone. This is particularly significant when one considers the market value of ArcelorMittal is just 10 billion EUR.

 

For a paradigmatic shift towards decarbonisation of the industry to take place, consumers of green steel must be willing to pay the price premium. Within the automotive industry, there are trends indicating they will. Mercedes-Benz has recently announced plans, as part of their Ambition 2039 campaign, for a carbon neutral fleet of cars in the next 20 years. This applies across their whole value-added supply chain, which would include the steel components. Volkswagen AG have similar ambitions, seeking to be carbon neutral by 2050. It seems plausible that the automotive industry will be at the forefront of demand for green steel as it will allow them to meet their own emissions targets. Moreover, an increase in steel price, due to the use of Green Steel, will only translate to a 1% cost increase in a 15,000 USD car. This cost could feasibly be absorbed by many car manufacturers. Alternatively, in the case of car firms with a strong brand reputation for quality, such as Mercedes-Benz, the demand for their cars can be said to be price inelastic. This may allow them to pass on the cost increase to consumers, without a significant reduction in demand.

 

Looking to the future, the speed of the eventual decarbonisation of steel looks dependent on two factors. Firstly, the willingness of consumers to pay the increased price of green steel. It looks probable that automotive firms, given their own carbon neutrality targets, will lead a transition and be willing to pay the premium. However, given that the automobile industry only makes up 13% of steel demand, given data from Worldsteel, this is reliant on other sectors, namely construction, following suit. Secondly, it is dependent on financing the capital expenditure required for new technology, which may prove more problematic. Given the size of the capital expenditure required, innovative solutions – such as green bonds, which can reduce the cost of capital – may prove key to enable steel companies, and the industry as a whole, to decarbonise.

 

Ultimately, technological developments in steel production have created a clear pathway for a transition to green steel. Given steel’s wide range of applications, the speed of this transition will have a key role in the meeting of global emissions targets, both for firms and nations. If these targets are to be met, an acceleration in uptake and support for green steel is crucial.

 

By Angus Lovatt

Sector Head: Daniel Aliwell

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