The steel industry is one of the world’s heaviest emitters. It accounts for up to 9 per cent of global carbon dioxide (CO2) equivalent emissions, according to Industry Tracker, a climate research non-profit organisation, or 10 per cent if you include the sector’s power use. This is not a surprise: steel manufacturing is a key component of the global economy, while the miners at the beginning of the supply chain are some of the world’s biggest companies.
But as the world looks for massive emissions reductions within a few decades to slow climate change, the steelmaking industry is only at the start of its green journey. There are shifts taking place, with hydrogen looking like a possible replacement for the metallurgical, or coking, coal used to turn pig iron into steel, but this is still largely in the pilot phase.
A straight technology swap would cost trillions, using current estimates, and many steelmakers’ assets have decades of economic life left unless there are major regulatory changes that make them too expensive to operate. One hydrogen steel project alone in Sweden will cost an estimated $47bn (£34.5bn) and produce only a small amount of steel compared with the 1bn tonnes a year produced by China.
This is the context for Fortescue Metals Group’s (Aus:FMG) announcement earlier this month that it would help steelmakers hit net-zero carbon emissions by 2040. The miner is also in the hydrogen business itself, so is keen to develop a market it can sell its ‘green hydrogen’ into. Green hydrogen is produced using renewable energy, unlike ‘blue’ or ‘brown’ hydrogen which is produced using fossil fuels, although blue needs carbon capture – a technology that climate change activists say is only being built to prolong the use of fossil fuels, with little evidence of cost-effectiveness.
Fortescue chairman Andrew Forrest was his usual bullish self when talking about the Fortescue plan earlier this month at the FT mining summit, calling hydrogen gas (H2) a “miracle molecule” that could decarbonise sectors that couldn’t just be plugged into renewable energy.
Industry Tracker managing director Carole Ferguson told Investors’ Chronicle “transformative” technology was needed to knock the vast majority of emissions out of the steelmaking industry, which come from primary production, which is when iron ore and coal are turned into steel. Secondary production involves melting down scrap.
She said Fortescue was being "very clever, going into hydrogen", therefore aiding both supply and demand in the space. Ferguson believes potential trade rule changes such as the Carbon Border Adjustment Mechanism currently being designed by the European Commission could drive demand for lower-carbon steel, as it would add tariffs to steel produced using heavy-emitting technology. This will arrive fully in 2026. In the short term, this might only mean steel made using lower-grade iron ore and coking coal, which emits more CO2, attracts higher tariffs, making higher-grade options more attractive.
Fortescue's goal is to produce 15m tonnes of green hydrogen by 2030 and then ramp that up to supply green hydrogen to steelmakers by 2040 and hit net-zero scope 3 emissions. To get to even the 2030 goal, it will have to build vast amounts of new renewable energy capacity. The company has signed very early-stage agreements with governments around the world to get this started.
What about the rest?
The boss of fellow iron ore giant BHP (BHP), Mike Henry, was less sanguine about hydrogen as a solution to steelmakers’ emissions. Speaking at the same event, he said the current economics around green hydrogen and steelmaking were “not attractive”.
BHP also sells coking coal to steelmakers, and Henry said more efficient blast furnaces would deliver incremental improvements in emissions. “[We have a] great business in higher-quality hard-coking coal,” he said, and also raised the issue of steelmakers replacing blast furnaces, where molten ore is mixed with coal and air to make steel, saying it would be akin to throwing away money.
McKinsey estimates each tonne of steel produced releases 1.85 tonnes of carbon dioxide, the equivalent of one person flying between London and Melbourne, where BHP is headquartered, five times. Global steel production was 1.86bn tonnes in 2020, according to the World Steel Association.
BHP’s estimated scope 3 emissions for the financial year ending 30 June were 403m tonnes of CO2 equivalent, compared with 15.9m tonnes for its operational emissions, with the processing of iron ore and coking coal in steel plants representing three-quarters of this total. The miner has a plan to “support” its customers to develop ways to cut their own emissions intensity, with “widespread adoption expected post 2030”.
Given the massive challenge, there needs to be a huge shift in thinking for change to happen.
Industry Tracker released a report on European steelmakers this week and their readiness to hit net-zero carbon emissions. Top of the table by some margin was SSAB (Swe:SSAB-A), thanks to its massive investment in what it calls “fossil-free” steel that will be produced from 2026.
But for this hydrogen-based technology to work it will need the equivalent of a third of Sweden’s current electricity supply, and it is reliant on a state-owned partner in LKAB to help pay for the $47bn project. The technology sees solid iron ore, called sponge iron, produced using hydrogen and then turned into steel using a renewable-energy-powered electric arc furnace. SSAB said this would be 20-30 per cent more expensive than non-green steel, based on 2017 electricity, coal and carbon permit prices.
This is not just about building new steel plants. London-listed Russian major steelmaker Evraz (EVR) will this month turn an existing arc furnace in the US, which melts down scrap steel, into a low-carbon operation by hooking it up to a solar power plant, in partnership with BP's (BP) Lightsource joint venture. As well as shifting away from coal power, Evraz also gets a consistent power price.
The big question is what is happening in China, however. Ferguson at Industry Tracker said Chinese steelmakers had shown interest in hydrogen, while Forrest said they would undoubtedly "go where the money is", so a regulatory environment that pushed green steel would bring them onside.
Fortescue may prove to be a Tesla-like (TSLA) figure in this race, where huge ambitions aren't always achieved but the sheer scale of the plan prods the rest of the industry into action.
