Decarbonizing Steel
How the demand for greener steel will upend the supply chain
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When automaker BMW invested in US clean steel startup Boston Metal and Mercedes Benz bought a stake in Swedish startup H2 Green Steel, the investments represented more than the greening of an industrial portfolio. They marked the first steps in the decarbonization of steel — a process that will require the reinvention of not only how steel is made but essentially a reimagining of the entire steel supply chain.

Because steel is a basic building block of the global economy, it factors into the production and operations of most industries from auto production to aviation to construction to household appliances. And that means it contributes to all of their carbon footprints. Although steel is one of the most recycled materials on the planet, its initial production and energy demands make it the largest industrial consumer of coal and one of the most carbon-intensive industries on Earth. The sector accounts for 2.6 gigatons of carbon dioxide emissions annually. Its emissions make up roughly 10 percent of the global total.[1]

According to the International Energy Association (IEA), “to meet global energy and climate goals, emissions from the steel industry must fall by at least 50% by 2050, with continuing declines towards zero emissions thereafter.” To accomplish this, producers need a new energy source for production as well as new raw materials, requirements that will upend a large portion of the mining industry in particular.

To realize larger emission reductions will require significant investment in new technology like molten electrolysis.

 Steel will have no choice as its largest consumers — companies like Mercedes and BMW — increasingly demand “green steel” in their quest to meet their own climate targets. But steel producers will also not have to do it on their own as upstream and downstream on the supply chain begin to work together.

There is no cheap, easy solution to the challenge. Instead, it will require a whole spectrum of technology changes and individual efforts to increase efficiencies to move the industry forward.

In the immediate future. steel producers can make headway on lowering emissions by applying best available technologies, higher quality iron ores, and optimizing fuel mix at blast furnace (BF) and blast oxygen furnace (BOF) operations at which 10% to 30% reductions in emissions can be realized. Efforts like these are particularly important in places like China and India where there is preponderance of these older facilities and newer techniques and feedstocks can end up having a material impact on the entire industry’s emissions.

But to realize larger emission reductions will require significant investment in new technology: This might include hydrogen-based reduction to produce DRI/HBI[2] with low/no emissions, carbon capture, storage and use technologies, or even newer alternatives, such as molten electrolysis.[3] Also pivotal to forward progress will be an increased emphasis on the circular economy and the recycling of scrap steel to replace primary steel production.

Oliver Wyman modeled a range of global and key steel-producing regional scenarios, assuming ambitious combinations of technologies and emission-abatement measures. We also assumed changing market shares of BF-BOF and EAF based production. While exact timelines are hard to predict, certain trends emerged for the industry:

Ultimately, this overhaul of steel production will lead to substantially reduced metallurgical coal intake over time. Demand will drop by up to 50% by 2050 from average levels in 2019 and 2020. While the decline will depend on how fast the largest consumers deploy their efficiency measures, we think it is possible to see significant decreases already in this decade.

Met coal demand down by 50%
In million metric tons

— For iron ore, the outlook is more stable, but the composition of what’s supplied will continue to change, as demand for higher-quality ores increases. These higher grades play a key role in the realization of the first 10% to 30% emission reduction in BF-BOF routes, as well as for DRI/HBI production. Already today, they are fetching significant price premiums.

Iron ore demand changes
In million metric tons

— DRI/HBI based steel will play an important role in the new steel industry. Even with supply limits on higher-grade iron ores, we forecast a significant demand increase for DRI/HBI, through 2050 — maybe as much as 200% higher.  This would also indicate a marked increase in the trading volume of HBI, suggesting the formation of a new commodity market.

Increased use of DRI/HBI in turn will drive demand for hydrogen, not all of which will be green, especially in the beginning. We expect to see a significant increase in electrolysis capacity beginning in the next decade. By 2050, an additional 100 GW may be required where today there is very little dedicated capacity.

More opportunities for DRI/HBI as EAF share rises
In million metric tons

Both, the increasing share of EAF and H2 electrolysis will significantly drive electricity demand, and in particular for renewable energy.

Finally, scrap supply will have to increase significantly. This is especially true for China, where supply would have to double to as much as 400 million metric tons to accommodate a significant increase in EAF-based production. That would envision a jump from 10% of Chinese production being EAF to at least 40% or more.  

As a result, the supply chains that today move large amounts of met coal and iron ore to steel producers will now need to switch to providing equally voluminous amounts of electricity and hydrogen, scrap, and DRI/HBI. While eventually the aim will be for these new inputs to be “green,” initially there is unlikely to be enough production to achieve that.

Hydrogen is key for green steel’s future
H2 electrolysis capacity for DRI/HBI, in gigawatts

What does this mean for various regional economies? Here are some examples:

  1. Australia has several resources it could leverage, including renewable energy and natural gas, to become a leader in hydrogen production. It additionally has vast iron ore deposits that could be used to produce HBI for export or green steel products or semi-finished products.   Admittedly, Australia had a bad initial experience at Port Hedland, but that DRI project was clearly ahead of its time.
  2. Similarly, Sweden already has ambitious plans to build green steel production leveraging its resources, including carbon-free electricity and iron ore to support domestic car production and other activities.
  3. Russia is aiming to use its gas for hydrogen and DRI production.
  4. Chinese steel producers want to start producing high-grade iron ores in places like Africa, in an effort to become more independent from Australian ore producers and make its own steel production more efficient.

The importance of renewable power, hydrogen, and scrap in these new value chains make it vital and inevitable for energy, technology, engineering, and recycling players to become active in the transformation of the steel supply chain. That new competition will put pressure on incumbents from mining and steel. Expect some jostling as players try to seize an early advantage in what will be a $1 trillion-plus transition over the next 30 years.

The bevy of newcomers and the dramatically increased need to cooperate across industries to reduce carbon footprints will lead to a re-evaluation of production locations and new contractual arrangements. It will encourage the formation of new partnerships and symbiotic ecosystems that will share the cost of the transition and develop new markets. One example is a memorandum of understanding signed between Rio Tinto and Nippon Steel to jointly explore and develop low-carbon steel value chains. But many others exist.

Pivotal to forward progress will be an increased emphasis on the circular economy and recycling.

The eventual greening of steel is inevitable, and it’s obvious that the met coal business looks to be one of the biggest losers, with other technologies and commodities, such as renewable electricity and hydrogen, clear winners. Which will come out on top among regions and corporate players remains far less apparent.  But given the amount of investment required and the length of time needed to bring product to market, the advantage will go to those willing to move quickly and take calculated and shared risks through partnerships to help create new industrial ecosystems and position themselves along steel’s value chains.   

Examples of how the supply chain will evolve and new steel ecosystems will develop
  1. German steel-producing group SHS and engineering firm Paul Wurth are exploring HBI production in Canada, combining Canadian high grade iron ores and renewable electricity from hydro power.
  2. BHP is collaborating with Chinese steel producer Baowu to support technology and other methods to reduce emissions. BHP also recently invested in startup Boston Metal, which aims to industrialize the molten electrolysis process.
  3. The Mining & Metals Blockchain Initiative is testing whether distributed ledger technology can be used to track embedded greenhouse gas emissions in supply chains. Members of the initiative include Anglo American, Glencore, Klöckner & Co, Tata Steel, and the World Economic Forum, among others. 
  4. Brazilian Vale is collaborating with Kobe Steel and Mitsui to deliver low CO2 metallics to global markets.
  5. Swedish LKAB is collaborating with steel producer SSAB and Swedish energy firm Vattenfall to develop renewables and hydrogen capacity to replace coking coal by investing between $1 billion and $2 billion per year for up to 20 years. The first deliveries of the green steel will be going to car maker Volvo.
  6. Kawasaki Heavy Industries, J-Power, and Shell Japan are working with Australia’s AGL Energy & international partners to produce, liquify and ship hydrogen to Japan.
  7. Australian miner Fortescue plans to build Australia’s first green steel pilot plant and also aims to enter the renewable energy business at a large scale. It has announced several partnerships, including one with South Korean steelmaker Posco and South Korea’s Hyundai Motor Co, to collaborate on green hydrogen

[1] IEA Iron and Steel Technology Roadmap

[2] DRI: Direct Reduced Iron has a high iron content and can serve as feedstock, e.g., to electric arc furnaces (EAF), to produce steel without a coke fired blast furnace. HBI: Hot briquetted iron is a compacted form of DRI that can be transported or stored.

[3] A process producing metals from ores directly in an electrolysis process without the need of an additional reductant