Decarbonising Steel – Industry’s Biggest Pollutant on the Slow Road to Carbon Neutrality

BHP Group and Baowu Steel Corporation have committed to taking an important, albeit small, step towards curtailing the steel industry’s gigantic carbon dioxide output. This week, the two natural resources giants announced that they had signed a landmark MOU or “memorandum of understanding” to reduce their carbon emissions by sharing technologies and co-investing 35 million USD into developing more sustainable production pathways.

Both firms are major global players in the steel industry. Anglo-Australian miner BHP is the world’s third-largest producer of iron ore, the primary raw material in steel production, and the Chinese, state-owned Baowu group is the second-largest producer of steel itself – as well as one of BHP’s main customers.

Steel is omnipresent in modern life, owing to the alloy’s strength and affordability. It’s simple usage in tedious mass manufacturing processes (70% of demand for steel in EU member states last year was accounted for by construction, automobiles and engineering) perhaps explains why the metal has been less conspicuous to the climate-conscious consumer than private jets and palm oil. However, steel accounts for approximately 10% of net global emissions. As governments internationally strive to achieve stricter emissions targets, (with China announcing in October their goal of carbon neutrality by 2060) companies like Baowu must find more sustainable ways of producing steel, or risk losing clients to less-polluting alternatives, rapidly being developed.

The emissions figures for steel are explained by a greenhouse gas spewing production process that has remained largely unchanged for 150 years. 70% of steel output today is produced using a blast furnace or basic oxygen furnace, wherein raw ferrous oxides are reduced into metallic iron by burning a pure form of carbon. At very high temperatures, the oxygen in the ferrous oxides reacts with the burning carbon to produce carbon dioxide, released straight into the atmosphere. The main alternative to the blast furnace is the electric arc furnace (EAF), which feeds already-reduced iron into an electric arc to be melted into steel. This is a more environmentally friendly method of production since the iron fed into the furnace has already been reduced – i.e. no reaction with burning carbon is required. However, the current availability of readily reduced iron in the form of scrap iron is insufficient to meet global steel demand, and the main methods of producing more are both carbon and cost-intensive. Methods of reducing iron using hydrogen instead of carbon are being explored yet are currently hindered by the affordability of sustainably produced hydrogen and are not expected to become viable options until 2050.

With this in mind, it is understandable that in their press release outlining the MOU with Baowu, BHP outlined a greater focus on R&D in new technologies, as well as curbing scope 3 emissions (indirect emissions involved in transportation, waste disposal, etc). This includes switching carrier ships to LNG (liquified natural gas) fuel and installing a carbon capture facility at a Baowu plant in China. This is all part of a bigger 400 million USD climate investment programme launched by BHP in June 2019 to fund the decarbonisation of the firm’s operations, although climate activists have been quick to point out that this is a pittance compared to BHP’s yearly profits of 9 billion USD.

Ultimately, as publicly owned entities, BHP and Baowu have no obligation to save the planet. In fact, their corporate function is to maximise profits for their investors. It is remarkable that consumer demand and government policy is changing sufficiently that BHP and Baowu even consider a climate investment fund as a commercial necessity. Management evidently recognise that if they fail to provide lower carbon steel, they will eventually be out of business after the sweeping global ESG movement, catalysed by COVID-19. Stricter government policies, such as an upcoming EU ‘carbon tariff’ on imported steel, serve to place additional pressure, forcing change. Additionally, the London Metal Exchange has been exploring creating separate platforms for ‘green’ commodities, starting with aluminium. A separate tradeable device would make it easier for environmentally conscious customers to purchase green steel, if they are willing to pay the higher price. New-era producers are starting to meet this demand, like Swedish steel manufacturer SSAB, which plans to open the world’s first carbon-neutral steel production plant later this year using the country’s natural abundance of hydrogen. There is justified optimism for a future of decarbonised steel, so long as there is continually improved co-operation between international governments and firms to implement equitable regulations that drive innovation towards low carbon alternatives.


By Stan Clark

Sector Head: Edouard Nelson



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