Posted on 19 Jul 2024
Introduction
Since the days when carbon tax was first introduced (Finland 1990) and when the European Union’s Emissions Trading System was introduced in 2005, there was no major shift into green steel investments.
However, of late, many green steel investments are taking place in many parts of the world, especially in Europe with some projects in China, US, Australia, Japan and others. With all these, green steel plants will come into operations from 2024/25 onwards.
The ultimate question what drives all these investments today? Why only in recent times?
Where are the Green Steel Projects?
The Green Steel Tracker listed a total of 81 projects of which 42 are full scale projects, which are of interest in this study. Most of them are in Europe (32), followed by Asia (5), North America (2) and South America (1).
In addition to these, we found a few more projects around the world and have added these to our study.
What are Green Steel Projects?
20 projects were further scrutinised to understand the technology that is being implemented, which are:
Most of these projects will start with using Natural Gas and eventually migrating to use Hydrogen. A few of these greenfield projects include hydrogen production or sourcing.
While these investments are in line with decarbonisation efforts, this first batch of pioneers investing into new technologies, only represents less than 2% of global production.
What Drives these Investments?
Based on our study, 6 key factors are driving green steel investments today:
1. Market Demand
Customers must want to buy green products and be willing to pay. One of the main reasons that European steel producers are setting up plants is because they have managed to sign long term offtake agreements with their customers.
In Europe, the automakers are leading the way in the willingness to commit to buy from H2 Green Steel, Saltgitter, thyssenkrupp Steel.
H2 Green Steel highlighted that they have offtake agreements up to 40% of their total new capacity for about 5-7 years from their various customers, mainly the automakers, machinery producers and others.
They were able to achieve a green premium of about 20-30% above a price index, which was based on an ETS price of €80-112/tonne then.
However, based on a survey in China by Shanghai Metal Market, the “downstream companies in China are willing to pay a premium to steel mills that is typically less than 10% of the price of finished steel products…” unlike the level of premium achieved in Europe.
2. Infrastructure
The ultimate goal of achieving a low carbon future is to have green steel. The hope of producing green steel lies on the use of hydrogen, either as an energy source or as a reductant and renewable energy.
For hydrogen and renewable energy to be affordable, these infrastructure projects must be made available in such a large scale that the cost of production is at a minimum. Only then, it will become viable to be used, not only for the steel industry but for all industries requiring clean energy.
Many new green steel projects are starting also because hydrogen hubs are also being set up in Europe, US and Australia. Most of the projects do not include their own hydrogen plants, preferring to buy hydrogen from other sources.
In a similar fashion, access to renewable energy is often cited as another critical reason to invest in the various green steel projects today.
In addition to that, carbon capture and storage (CCS) infrastructure can help the transition to green steel, before hydrogen and renewable energy become more economically viable and available.
3. Technology
The current trend is a shift to DRI-EAF or DRI-Smelter systems starting with using natural gas and progressively changing to hydrogen when hydrogen becomes more economically viable. This is mainly because natural gas is more readily available and is cheaper today, and the available technology allows the transition to use hydrogen at minimum capital costs.
Does it mean all the BF BOF systems are going to disappear? Currently, more than 70% of the world’s production is based on BF BOF systems, which produce the cleanest steel befitting the highest quality requirements of the steel consuming sectors.
It is actually doubtful that the BF BOF systems are going to disappear altogether for the following reasons.
However, due to its high emissions, governments may stop any new investments in BF BOF technologies in the meantime, until the emissions can be minimised.
4. Funding
The biggest pull factor for these investments is funding. In Europe, the funding to abandon the BF BOF systems and convert to DRI EAF or DRI Smelter systems are huge.
Salgitter’s green project in Wilhelmshaven costs ~€ 2.0 billion but half of that is funded by the Federal and State governments. Thyssenkrupp’s € 3.0 billion project in Duisburg received € 2.0 billion funding. Arcelor Mittal’s projects in Europe cost about ~€ 6.4 billion of which ~€ 3.3 billion is publicly financed. Even H2 Green Steel has received ~€ 250 million grant from the Swedish government.
In the US, SSAB will be commercializing its HYBRIT technology with a new plant and is expected to receive up to USD 500 million in funding from the US Department of Energy (US DOE). Cleveland Cliffs in their new DRI Smelter investments is also expecting to receive up to USD 575 million from the US DOE.
Without these massive funding, investments in green steel projects in Europe and US, are unlikely to happen so quickly.
5. Raw Materials
With the shift towards using more ferrous scrap, a few critical phenomena are emerging, of which some have been mentioned earlier.
First, there will be less scrap available. In anticipation of that many countries that are net importer of scrap are looking at restricting scrap exports either via quota control, export tax or a total ban. Scrap exporting countries such as Japan may not be an exporter in the future.
Second, the quality of scrap in the future will be lower as higher value add finished steel products tend to include coatings as aesthetics in facades or more alloy elements. It will require more effort to remove these coatings and alloy elements to produce steel for specific end use.
Third, insufficient quantities of high-quality iron ore as mentioned before, which will lead to the need to beneficiate the iron ore for the DRI process.
Fourth, the ASEAN market for iron ore is small, fragmented and scattered all over the region. As such, iron ore suppliers cannot use large cape size or Chinamax vessels to deliver iron ore to ASEAN steel producers. They either use smaller vessels (lower economies of scale) or set up re-distribution centres (e.g. Vale in Malaysia).
These and other concerns about raw material supply points at the critical need to ensure the sustainable supply of potential green raw materials for steel production. As such, it makes sense for ASEAN to encourage the investment into iron ore beneficiation and distribution hub somewhere in ASEAN as well as to step up mineral exploration for better quality metal ores in the region.
6. Policy
Without effective policies, decarbonisation will not happen. Major producers in the study group highlighted the importance of the European Carbon Border Adjustment Mechanism (CBAM) to their decisions.
With CBAM in place, there will be no more carbon leakage from cheap imported steel that are not subject to carbon pricing. With a level playing field at the right carbon price of about € 80/tCO2e, then it makes sense to invest in green projects.
The implementation of CBAM also means all the allowances given to the European steel industry will eventually be fully removed by 2034, thus add as a push for the industry to decarbonise.
But CBAM alone is only the latest initiative by the European Union. Before CBAM can be implemented, there must be carbon tax and emissions trading system (ETS). Before carbon tax and ETS, there must be a measurement, reporting and validation system for emissions.
But it is not just about a policy on CBAM and carbon tax and ETS. For the effective decarbonisation of the steel industry, policies must encourage the development of green market and acceptance of green products, relevant infrastructure, development of technology or access to them, funding mechanisms for transition financing and securing raw material supplies to the industry, as highlighted in the previous sections (Market Demand, Infrastructure, Technology, Funding and Raw Materials).
Foundation policies should include the need to establish standards (carbon accounting, green steel, MRV processes), taxonomy for green projects, technology research and development, upskilling the workforce for the future and many others.
Learnings for ASEAN
ASEAN can learn from the various efforts to decarbonise the industry. Lessons from policy interventions in Europe, US and other countries and to build an eco-system that drives national decarbonisation efforts for all industries.
For the steel industry, the journey towards decarbonisation cannot be alone. It is the effort of all stakeholders, whether they are in governments, financial industry, raw material suppliers, steel consuming sectors, technology suppliers and all related stakeholders.
Among the broad initiatives needed for decarbonisation, the initiatives needed included but not limited to these:
The road towards decarbonisation maybe messy right now, but with all stakeholders working hand in hand in alignment, the achievement of a sustainable low carbon future will be a reality in no time.
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Source:SEAISI
