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Sunday Brunch: Does Europe want cheaper green steel?
Sustainability, Strategy & Finance

Sunday Brunch: Does Europe want cheaper green steel?

What if green steel could be produced cheaply outside of Europe? If that meant putting domestic industry jobs at risk, would governments be keen?

The bad news is that even a relatively modest premium likely makes green steel unviable for much of the market, where costs are a major factor - Clyde Russell Asia Commodities and Energy Columnist at Reuters

Steel is one of the building blocks of our modern economy. But it's also a major emitter of GHG's. It is estimated that the steel industry is responsible for about 7-8% of all man made global carbon emissions, most of it from the blast furnace-basic oxygen furnaces (BF-BOF) production processes. So this is a challenge that we should want to fix, in the most cost effective way. Or do we ?

Green steel is clearly a good thing. But it's going to need a lot of government support to get from where we are now, producing it using a lot of coal, to where we want to be, producing it mainly using renewables.

And this could be problematic. Government support for industries transitioning to using renewables is often about protecting domestic industry, and the jobs they create. And that is leading to material financial support to the industry. But what if green steel could be produced cheaply outside of a domestic region? If that meant putting domestic industry jobs at risk, would governments be as keen?

That is where we are with green steel. And to an extent with mass market EV's. There will be compromises. As we frequently say, the sustainability transitions are complicated. Even the easy changes have negative implications for someone. But ignoring them is not the answer.


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What if the non financial costs of green steel were material?

Let's start at the beginning. As we highlighted in a blog back in Jan 2023 steel is currently produced via two main routes: blast furnace-basic oxygen furnaces (BF-BOF) & electric arc furnaces (EAF).

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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. It's often called virgin steel, because its made from mined iron ore, with no scrap steel required.

There is some good news. There are alternatives. We can build more EAF plants, but we would need a lot more scrap steel to feed them. So a partial answer.

And we could develop new technologies. For now we want you to take on trust that new (ish) technological solutions to the green steel challenges exist - probably involving variations on what is known as Direct Reduced Iron (DRI) plus Electric Arc Furnaces (EAF).

But this blog is not about the technology, it's about cost and jobs.

The cost issue is being openly debated.

On one side we have Rystad Energy. In a recent article they argued that “the long-term economic viability of green steel versus grey steel — produced using fossil fuels — is in serious jeopardy, with the environmentally-friendly material costing up to €1,000 ($1,072) per tonne more than the alternative.”. That is a big gap.

‘Europe would need to tax steelmakers €500 per tonne of CO2 to drive switch to green hydrogen’: analyst
Rystad Energy calculates that imports of direct reduced iron to Germany from Australia or Oman would be cheaper than domestic production

Others have smaller gaps. A recent Reuters article, covering the latest Global Iron Ore and Steel Forecast Conference, says the consensus in the industry is that the gap is more like $150 per tonne. They quote figures from Monash University, which estimates that green steel could be made in Australia for around $570 per tonne using a mixture of wind, solar, battery storage and green hydrogen.

And as we highlighted in a blog back in Aug 2023, RMI argues that 'the time for green steel has arrived'. They point to the impact of the US IRA and growing demand from customers.

Is green steel coming of age?
Green steel reaching a tipping point, accelerating demand. A lesson for other hard to abate sectors? What is the combination of factors that have got us to this point?

So lot's of different numbers being tossed about. And so it's hard to know if the required carbon price in Europe to make green steel is E500 per tonne of CO2, or something a lot less. Remember that the Rystad numbers are for Europe, and costs vary by region, often by large amounts. The chart below for rebar (reinforcing bar for concrete) prices is from a recent OECD report.

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