Green steel - a template for other hard to abate sectors?

Green steel - do you care? You might think - I don't work in the industry, and I don't invest in or lend to it (and probably never will), and its very technical, so no, not really. Its a "nice to know about" sector, but it's not that important. If you are deeply into the challenges involved in decarbonising our society, you might care, but you may think, its a tough challenge to get involved with.

We think you are wrong. Not only is it an important sector from a GHG emissions perspective, it could be the trail blazer for a number of other important transitions. Why not read on ...

The last few years have seen a dramatic change in the outlook for green steel, especially in Europe (see chart below). Less than five years ago the consensus on green steel was that “investments in zero-carbon alternatives still come at prohibitive commercial risk”. Now, nearly all European steelmakers have announced plans to replace their old, high carbon emitting blast furnaces with direct reduction iron and electric arc furnaces. And we have realistic plans for production at scale by the end of this decade. You can track the current state of play of proposals for green steel mills through the green steel tracker from Leadit.

We have now got to the stage where we can say that there is a high probability that green steel is actually going to happen. It will be slow, with some production this decade, gradually scaling up as existing steel mills reach their end of life, or need a major refurbishment and upgrade. And we need to be realistic. China, the world's largest steel maker by a large margin, might move more slowly than other regions.

Perhaps more importantly, progress on green steel also suggests ways that similar progress might be possible in other hard to abate sectors such as cement and chemicals. This is particularly true for those activities where fossil fuels are not used as an energy source (ie creating heat) but instead are feed-stocks or a part of the chemical process.

That is the good news.

However, as with nearly all sustainability transitions, this shift will bring challenges. After all, these are not called hard to abate sectors for nothing. An obvious one is cost, quickly followed by a likely requirement to massively scale up the production of green hydrogen, which in turn will need vast quantities of green electricity.

Plus, the steel making process, like many heavy industries, is incredibly complex. Its not just a case of throwing some iron ore, coking coal, and limestone into a furnace. Companies have invested a lot in accumulated knowledge and infrastructure. Changing processes from what they know to something new is a material "step into the dark". Learning how to create green steel in a cost effective way will involve hundreds if not thousands of small improvements - fine tuning production processes, inputs and operating practices. This is an important factor to bear in mind - its going to take time.

The challenges are however solvable. Some of the solutions require financial and other assistance from governments, as they seek to create benefits for the wider society that they represent. Some need action by customers, specifying green steel for products such as buildings, cars, consumer products and of course renewable infrastructure. The other important action that is needed is ... to start early.

This is a capital intensive industry with relatively low margins and returns on capital employed. Developing new processes to create green steel, even if they might look broadly similar to processes used now, is a material risk for the companies involved. The sensible way to manage this risk is to start early, to trial the processes in pilots, to work with raw material suppliers, and to lobby governments and customers. Ignoring the challenge, and then having to play rapid catch up will likely be a recipe for future financial losses.

On the flip side, we think its important that transition advocates do not over promise. We need to be clear about the risks, challenges, trade-offs and of course the time scales, plus we need to be honest about the financial implications. There seems to be little point in heading down a decarbonisation route that leaves the relevant industries in financial distress. Steel is an industry with a massive installed base of generally not very old steel making plants, which somewhat limits our wriggle room.

In this blog, the first in a series on the hard to abate transitions, we discuss the progress that has been made on green steel, where the industry is likely to be in c. 5 to 10 years time, and expand on some of the expected obstacles. The focus is largely on Europe, as this is where the fastest progress is being made.

In the next blog in this series we will begin to examine what the progress being made on green steel can potentially tell us about other transitions. We think there is a lot we can learn from the shift to green steel that we can take into a whole range of other hard to abate sectors.

Unlike many other blogs on the topic, we will avoid, as much as possible, detailed technical discussions about the different steel making processes and options. For this reason the technical discussions are at the end, rather than the beginning of the blog (which is why this is a longer blog than normal). We think you need to have some background knowledge, but you don't need to become an industrial process expert to understand why this is an important issue for everyone involved in the steel value chain - from suppliers, through steel producers themselves, their investors & lenders, end customers, and of course employees and local communities.

“ We choose to go to the moon not because it’s easy, but because it’s hard; because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win. ” JF Kennedy 1961

What is the big theme?

Steel is a fundamental building block of our modern economy. It is currently produced via two main routes: blast furnace-basic oxygen furnaces (BF-BOF) & electric arc furnaces (EAF). Put simply, the EAF technology, which uses mainly recycled scrap steel, is seen as better for the environment as it produces materially fewer GHG emissions. But, there is not enough recycled steel to meet growing demand using the EAF steel making method alone. As a result some 70 -75% of current global steel production comes from the BF-BOF method, and its looking unlikely that this percentage will fall materially any time soon.

This is problematic, as the steel industry is responsible for about 7% of all man made global carbon emissions, most of it from the BF-BOF processes.

Let's take a look at why this is important...

Let's start at the end.

This might seem odd, but we want to start where most reports and articles on green steel normally end - what does it all mean? For now, we are going to skip all of the technical explanation and charts about how steel is made, and why its a material GHG generator, and what the alternatives are (don't worry they are here, just later on).

Remember, our focus is on where sustainability meets finance.

So, some key questions for us are why should governments care enough to pump money and political capital into green steel, what might its emergence mean for the business cases of companies in the steel value chain, and how should they respond. Plus, what might the green steel journey tell us about how we could address other hard to abate sectors.

For now we want you to take on trust that technical solutions to the green steel challenges exist - probably involving variations on what is known as Direct Reduced Iron (DRI) plus Electric Arc Furnaces (EAF). Both of these exist at scale now, they just don't operate in a manner that is consistent with truly green steel. Plus we want you to also take on trust that green steel could become financially viable in the future (yes, we know that is a tougher ask).‌ ‌

We start our "what might this mean" journey with perhaps the most important element - governments.