Decarbonisation of the Steel Industry

The steel industry is commonly considered one of the most hard-to-abate sectors with high levels of CO2 emission

The steel industry is the main industrial contributor to global CO2 emission, accounting for approximately 7% of world total energy-related direct CO2 emissions (see Figure 1). 

Alongside cement and petrochemicals, the steel sector is generally perceived as one of the most hard-to-abate industries, since 1) steel is commonly used in many applications (building and construction, automotive, etc.) with limited alternatives, and 2) current steel-manufacturing technologies structurally emit high levels of CO2.

• ‘Hard-to-abate industries’ refers to sectors for which the net-zero transition would be particularly difficult to achieve, either due to no cost-effective alternative technology for the daily operations or to an excessive cost of transition that drives stakeholders away.

However, steel industry stakeholders are highly active in seeking to decarbonise the industry, with the European Union as the most advanced region in terms of steel decarbonisation

Regulatory pressure is a key driver of decarbonisation, with policymakers setting up clear targets in terms of CO2 emissions reduction along with an overall commitment to fight global warming. The most developed countries currently show the highest commitment to new policies, with the European Union leading the dynamics (Green Deal targets a decrease of CO2 emission by 55% and by 80%-95% by 2050 vs. 1990 level) while regulatory environment in North America has so far been less stringent, especially in the US. 

However, the 2022 Inflation Reduction Act came up with new incentives reinforcing both the consumption of US steel (through the domestic content bonus) and the decarbonisation of the industry, through reinforced support to renewables, carbon capture and green hydrogen with both production tax credit and investment tax credit (see Figure 2).

Other countries such as China and India have placed limited regulatory pressure on steelmakers, but are expected to become more rigid in the coming years. The Chinese government has announced in its 2030-2060 program carbon emission reduction targets for the steel industry overall and for the top 10 largest steelmakers. This plan presents an emissions reduction target of 30% by 2030 compared to 2025 levels, reaching net-zero emissions in 2060. India has also shared an objective of carbon neutrality for its steel industry by 2070. 

In parallel, the largest steelmaking companies have announced ambitious net-zero targets, reflecting encouraging signs of steel industry commitment to decarbonisation.

• China Baowu, ArcelorMittal, HBIS Group, Nippon Steel Corp., POSCO, U.S. Steel Corp., Thyssengrupp Steel Europe and Tata Steel Europe have announced their determination to achieve carbon neutrality by 2050. Steel decarbonisation projects are led by major industrial manufacturers all around the globe, although mainly concentrated in Europe (45 projects out of 73). 

• Among these projects, ArcelorMittal is one of the most active corporate players with 15 decarbonisation projects, such as development of H2-based direct reduced iron in the electric arc furnace (DRI-EAF) in Canada and Germany, deployment of CCU in Belgium, and replacement of blast furnaces and basic oxygen furnaces (BF-BOF) by scrap-based EAF in France.

Global demand for steel will keep increasing in the next decades, emphasising the need to produce steel with low levels of carbon emission

According to International Energy Agency scenarios, the demand for steel will continue to increase and could reach 2.1-2.5Gt in 2050 (see Figure 3). This will mainly be driven by the development of infrastructure in developing countries to support their increasing demography and economic development, and despite steel demand mitigation measures, such as extension of building lifetime or reduction of steel use though innovative design and manufacturing process.

As of now, primary steelmaking still accounts for c.80% of world steel production, emitting c.1.9T of CO2 per T of steel produced, mainly driven by Chinese BF-BOF production capacity, accounting for c.50% of global capacity

Most of the world’s steel production relies on primary steelmaking, which represents c.80% of the world steel production capacity and includes both BF-BOF and DRI-EAF routes (see Figure 4). As it is more cost-competitive, BF-BOF is the most used technology. Relying mainly on coal, it emits 1.8-2.6T of CO2 per ton of steel produced. Currently, China is leading the world in production, with more than 50% of the global production capacity, mainly based on the BF-BOF production route, leveraging its large coal stock. DRI-EAF emits about 0.8-1.0T of CO2 per ton of steel produced, being fuelled with natural gas. However, the DRI-EAF production cost is higher overall than BF-BOF, and it relies on the large availability of natural gas. Therefore, it is mainly focused on countries and regions with large gas resources, such as the US, India and in the Middle East.

As currently the most efficient route to produce steel with low levels of carbon emission, the secondary steelmaking production capacity may increase in the future, driven by higher utilisation in China; however, its development remains capped by scrap availability

The secondary steelmaking (mainly scrap-based EAF) production route relies on the reuse of steel, which makes it the most efficient way to decarbonise steel production considering today’s available technologies. This production route accounts for roughly 20% of current steel production and emits around 0.2T of CO2 per ton of steel produced (see Figure 5).

In mature economies, such as the EU, the US, Canada, Japan and South Korea, the availability of scrap is expected to increase in line with the regional demand for steel. However, as China has experienced a strong development of its economy over the past decades, the availability of scrap is expected to surge in that region, creating important opportunities to develop the secondary steelmaking production.

The availability of scrap depends on the in-use steel stocks, which may differ by region. In developing countries with increasing demand to develop infrastructures, the availability of scrap is likely to be limited. Overall, the available scrap stock may limit the development of secondary steelmaking to about 35% of world steel production by 2050.

Green H2 and CCUS are commonly considered as the most advanced technologies to decarbonise primary steelmaking

Promising new-generation low-carbon technologies for steel production are emerging, among which CCUS and hydrogen are the most mentioned. These technologies should be the pillars for steel production decarbonisation. 

CCUS technologies could be used on existing BF-BOF or DRI-EAF plants to capture the emitted CO2, then reuse or store it (see Figure 6). The captured CO2 can be converted for different uses such as the production of ammonia and methanol for petrochemical industries. The captured CO2 can also be stored/sequestered in offshore sites. This technology is already deployed in the oil and gas sector at an industrial scale. 

The use of green H2 is also an alternative in steel production with low levels of carbon emission. Green H2 is defined as hydrogen produced by splitting water into hydrogen and oxygen using renewable electricity. Hydrogen would replace the natural gas in the direct iron reduction process. As of now, DRI technology can be partly fuelled with hydrogen combined with natural gas. 

Both technologies are already at advanced technology readiness levels and industry experts consider that these technologies could be commercialised at industrial scale by 2025-2030 for the steel industry. 

To deploy the most adequate solution, the choice of technology requires the consideration of multiple factors, such as costs, the technology readiness date, the availability of green electricity, H2 infrastructure or possibility of CO2 storage or reuse, and the existing plants’ technology

Costs for the technologies outlined above are higher than the production cost of currently used technologies, especially for green H2, as the current hydrogen production cost remains high. Neither technology mentioned above is 100% commercially ready at a large industrial scale:

• CCUS is at TRL9 for direct reduction furnaces, but still at TRL5 for high rates of CO2 capture from a blast furnace. 

• One hundred percent green H2-based DRI at industrial scale is at TRL6, as only large prototypes have been deployed until now, with only a few industrial projects currently announced by Swedish H2 Green Steel, ArcelorMittal and Tenova.

The deployment of these technologies also faces several constraints:

• Development of green H2 steel production will require the setup of an H2 generation, distribution and storage infrastructure, if the steel plant is in a region without adequate hydrogen infrastructure. The alternative would be the construction of a small green hydrogen production plant close to a steelmaking plant and connected to the green electricity grid.

• Implementation of CCUS requires either large CO2 storage capacity or CO2 reuse opportunity, such as petrochemical applications with industrial facilities located close to the steelmaking plants. Moreover, there is a significant public reluctance to install CO2 storage infrastructure near homes and cities. 

Iron ore electrolysis can also play an important role, and represents an alternative to CCUS and green H2 technologies

The pool of new-generation low-carbon technologies for steelmaking should, however, not be restricted to CCUS and green H2. Indeed, other technologies show great potential and should contribute to steel industry decarbonisation.

Iron ore electrolysis technology produces pure iron through electrolysis with iron ore as an alternative to the blast furnace or the direct reduction iron in the iron production process. This process is 100% fuelled by electricity, limiting the emission of CO2. Combined with EAF, it provides a low-carbon alternative steelmaking technology besides CCUS and green H2.

Compared to those technologies, iron ore electrolysis presents several advantages. It has proven to be more energy efficient compared to green H2, as the electrolysis process can directly produce the iron ore in one step, and it can be done at very low temperatures (under 200°C). In comparison, iron ore production through green H2-based DRI requires two industrial processes: electrolysis to produce H2, then direct reduction to produce iron, resulting in lower energy efficiency. 

Compared to CCUS, iron ore electrolysis can be easily implemented at any location connected to green electricity. It drastically reduces the carbon footprint of the production process, as green electricity is increasingly available in both developed and developing countries. Moreover, iron ore electrolysis does not require any CO2 storage capacity or any reuse facility to be located nearby, as opposed to the CCUS process.

Steelmakers need to carefully assess the different technologies and solutions to define their strategy going forward

Innovation around new technologies for low-carbon steel manufacturing is led by steel majors, but also by new entrants/small innovative companies. Boston Metal, a US-based company, ended its Series B funding campaign of $50 million (with around $70 million raised in total) in 2021, aiming at developing its new decarbonisation technology based on molten oxide electrolysis. Electra raised $85 million in October 2022 to produce low-temperature iron (LTI) from commercial and low-grade ores using zero-carbon intermittent electricity.

We believe that the steel industry is greatly committed to decarbonisation and that the innovations spurred around decarbonisation will generate growth and development opportunities. Additionally, not following the path of decarbonisation could be detrimental to players. L.E.K. helps steel companies, innovative start-ups and investors navigate this fast-changing environment. 

For more information, please contact strategy@lek.com.

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