Article
22 Nov 2021

Pricing Steel Decarbonisation

Global Insights
Decarbonization is an acknowledged imperative for the steel industry. A new report by Citi Research’s Ephrem Ravi seeks to analyse the potential cost of the transition and how it might come about.

Steel is the most important metal in the modern world--a key driver in civilization’s transformation over the last three millennia.

But steel production is a highly energy intensive process. With a high CO2 emission intensity and huge volumes, steel production accounts for about 7% of total global greenhouse gas (GHG) emissions. As the power sector decarbonises, steelmaking is expected to become the single largest source of industrial emissions. The majority of production is in China, and their emissions reflect this.

Steel production ~7% of global GHG emissions

Source: Citi Research, Energy Transitions Commission

Steel production CO2 emissions by region

Source: Citi Research, Worldsteel 

 

Almost 2/3 of the steel production globally occurs in a blast furnace (BF), with the remainder produced in electric arc furnaces (EAFs).

Hydrogen Direct Reduction (H-DR) – the silver bullet?

The most promising technology for green steel is H‑DR; the direct reduction of iron ore using hydrogen as a reductant (rather than carbon monoxide/coke). In H-DR, water is produced as a by-product instead of CO2, and this can then be used to create more hydrogen. However, the CO2 reduction potential is only possible if such use of hydrogen is ‘green’-- produced using an electrolyser powered by renewable energy.

The primary challenge, therefore, in using hydrogen-based processes is the availability and cost of green hydrogen, which looks to be several years away from being commercialised on a large scale.

The costs

H-DR is viable at current steel prices, but would require $80-100/t support in case steel prices revert to historic averages

Citi analysts estimate a Capex of $750 per tonne of steelmaking capacity for the plant-wide infrastructure replacement required (including the adjacent hydrogen electrolyser setup at €600/kW). In the base case, Citi estimates that steel produced using green hydrogen will have a production cost (in OPEX terms) of $655/t, but this varies significantly with the electricity price and electrolyser cost - sensitivities are discussed in detail in the full note. When the sizeable Capex requirement is taken into account, production cost increases by approx. $50/t.

The economics of producing green steel through hydrogen route are favourable in today’s steel price environment. But there is limited visibility on steel prices remaining as high as current spot, so the BF route would work out cheaper. However, as electricity prices and electrolyser costs drop over the next 10 years, the implied H-DR price falls to $620/t HRC (vs $860/t currently), much less than the $835/t HRC for BF steel as a result of our view for higher carbon prices at €100/tCO2.

Plant CAPEX $70bn for H-DR, $30bn for CCS

Citi estimates a total cost of ~$50bn to convert all steel production plants currently using the BF-BOF method to H‑DRI‑EAF plants. A further ~$20bn investment would be needed for electrolysers, but this would require ~30GW of the 80GW capacity proposed by the EU by 2030.

Clean electricity generation and transport infrastructure likely to be greater than $500bn

The additional amount of renewable electricity required due to a change to H-DR would be on the order of 300TWh (~11% of total EU electricity consumption), the majority of which would arise from the electrolysis to produce the hydrogen itself. The EU would need to increase the capacity of its current wind and solar program by 60% to support H-DR.

The commitments

Steel companies across the world (including in emerging markets) have been committing to CO2 reduction targets over the last 2-3 years. European companies were the first to do this and arguably have the most aggressive targets.

But the listed steel company universe is only around 40% of global steel production. The vast majority of Chinese steel companies (China produces over half of the world's steel) is in unlisted companies (mostly state-owned) and close to half of Indian steel production is as well. Consequently, there are limits to what financial markets can do to force unlisted companies to get to carbon neutrality. Top-down state-control measures like carbon taxes (in the case of Europe) and 'administrative closures' (in the case of China) play a part in controlling emissions from the steel industry.

Entirely scrap-based production not feasible with current supply

While a transition to an entirely scrap-based production process would be ideal to reduce emissions, only around 650 Mt of steel is recycled per year, less than one third of the ~2bn tonnes that would be required. Impurities in steel scrap also constrain the end uses of recycled steel, meaning that for applications where the quality of the steel is paramount, current scrap-based processes are unsuitable.

The main cost of decarbonisation is overhauling the electricity system

A large proportion of the responsibility for the future of zero-carbon steel could be out of steel producers’ hands. The biggest bottlenecks for green steel production not being investments into the steel production facilities themselves, but instead the required investments into renewable power generation and the associated energy and hydrogen grid infrastructure.

With the boom in steel prices seen recently, steel producers have the required cash to invest in green plants, but are generally hesitant, as there is little visibility on how the supply chain is going to evolve for the massive amount of electricity required.

For more information on this subject, please see Global Steel - Decarbonization - at what cost? Quantifying the micro-economics in addition to the macro first published on November 2nd.

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

 

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