NEWS

What is driving the steel sector decarbonization?

Engage
July 2021

Public policies and demand signals as some of the main drivers

NEWS

As a permanent material which can be recycled over and over again without losing its properties, steel is fundamental to our current and future society. Its production has substantially grown since the 1990s, from 0.77 bn tonne in 1990 to 1.88 bn tonne in 2020, mostly due to China’s post-millennium surge in output [1]. Steel production is heavily reliant on coal, so that the sector currently accounts for around 7-9% of global CO2 emissions, with every tonne of steel produced leding to the emission of 1.85 tCO2 [2].

Amid the growing recognition of the climate crisis and the need to transition to a low carbon economy, production and emissions need to be decoupled. The IEA estimates that, while steel production shall marginally increase up to 2050 in a net zero scenario (+12% versus 2020 levels), steel emissions need to fall by 25% in 2030 and 92% by 2050 [3].

In this context, two main levers are driving steel decarbonization: more stringent climate policies and value chain commitments that can foment demand for lower carbon steel. There is an increasing number of national net zero targets, already encompassing 70% of global CO2 emissions and of the global GDP [4]. The EU steel industry is under pressure due to rising EU ETS price (US$55/tonCO2e as of May), with a carbon border adjustment mechanism under discussion. China, responsible for almost 60% of global steel production, is evaluating a target for steel emissions to peak by 2025, with a subsequent 30% reduction by 2030.

At the same time, the real estate, infrastructure and mechanical & electrical equipment sectors, responsible for more than 70% of global steel products demand, have been committing to purchasing 100% net zero steel at least by 2050, with interim targets of lower carbon steel content by 2030, amid the SteelZero initiative [5]. In the automotive sector, climate targets including scope 3 emissions – and therefore steel production emissions – are on the rise, as well as new partnership models. Volvo and SSAB, for example, announced a deal for developing the first green steel-based car.

In this scenario, the steel sector is responding to growing pressure, with industry leaders gradually committing to net zero. Five of the six largest steel companies already set net zero targets, including the largest Chinese, European and Japanese steelmakers.

Regardless of growing ambition, the challenges for steel decarbonization are massive. Almost 2/3 of the technologies needed for steel decarbonization by 2050 are not yet mature [6], while these initiatives deployment can lead to substantial cost increases. The IEA estimates that the additional production cost could be between 10% and 50% compared to 2020-levels in a lower emission scenario. These would incur due to three main factors:

– Increased operational expenses – Use of more expensive low carbon resources such as green hydrogen or low-carbon electricity, CCS equipment and higher carbon prices;

– Increased capital expenses and R&D – Replacement of coal-based blast furnace units and basic oxygen furnaces; conversion of equipment to use hydrogen; retrofitting CCUS infrastructure; and disruptive technologies development;

– Differences in commercial viability across regions – government incentives, regulation and carbon pricing shall impact low carbon technologies competitiveness and implementation pace in different geographies.

Although the scenario is challenging, a paradigm shift can – and should – support steel decarbonization. Public policy support is needed in order to reduce first mover disadvantage, by fomenting the demand for lower carbon steel, enabling financing for the transition and supporting technological development. At the same time, societal demand and customer signals are crucial to drive decarbonization throughout value chains, while also guaranteeing steel sectors’ license to operate. Finally, the ESG boom in the financial sector should be seen as an opportunity to support hard to abate sectors decarbonization, since the bigger the challenge, the greater the return and impact.

 

These insights were presented by Clarissa Lins, Catavento’s founding partner, at the CRU Steel Decarbonisation Strategies 2021 Conference, where she moderated a panel discussion with iron ore and steel industry leaders  Stephen Potter (Vale), Stefan Savonen (LKAB), and Annemarie Manger (Tata Steel Europe).

 

[1] World Steel Association – “World Steel in Figures 2020”. 2021

[2] World Steel Association – “Climate change and the production of iron and steel”. 2021

[3] IEA –“Net Zero by 2050: a roadmap for the global energy system”. 2021

[4] IEA –“Net Zero by 2050: a roadmap for the global energy system”. 2021

[5] The Climate Group – “Steel Zero”. 2021

[6] IEA – “Iron and Steel Technology Roadmap: Towards more sustainable steelmaking”. 2020

Photo by yasin hm on Unsplash

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