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Nerves of Steel

Technological innovation has made the road to net zero marginally easier, but many hurdles remain. 

As the net-zero-by-2050 deadline edges closer, companies across carbon-intensive industries are under pressure to lower emissions and meet growing demand for sustainable products. 

This is certainly the case for the steel sector. Yet, according to the International Energy Agency (IEA), it is currently not on track to meet net zero commitments by mid-century, with global emissions still rising and less than one metric tonne (Mt) of near-zero emission steel being produced globally. 

To meet climate targets, the steel sector would need to reduce its CO2 emissions by around 25%, or 3% a year, between now and 2030, the IEA said. 

Investors commonly hold steel producers and users in their portfolios, meaning that the realisation of their own net zero commitments in part depends on the sector transitioning.

In this context, UK-based Tata Steel’s recent decision to install electric arc furnaces (EAFs) in a bid to transition away from coal-consuming blast furnaces is a welcome one – albeit clouded by concerns as to the social implications of potential job losses. 

The UK uses roughly 12 million tonnes of steel each year, and steel producers like Tata collectively contributed around 2.4% of its greenhouse gas emissions in 2022. The company’s plans to shut down blast furnaces in the Welsh town of Port Talbot could reduce its CO2 emissions by as much as 85% a year. 

Although most sectors have a clear idea of what their low-carbon solutions to reach net zero emissions could look like, that isn’t necessarily the case in the steel sector 

“There is no clear and obvious material that can replace steel, which makes it more difficult for the sector to decarbonise,” says Ali Amin, Research Project Manager at the Transition Pathway Initiative Centre (TPI Centre). 

Given that approximately 70% of the world’s total steel production depends on coal and iron ore inputs through blast furnaces, the solution lies in decarbonising the production process – such as through EAFs. While blast furnaces use coking coal to supply the energy needed to heat up the iron ore or recycled metal, EAFs use electricity to melt scrap metal – a far less carbon-intensive method. 

According to US-based think tank Global Energy Monitor, 43% of global steelmaking capacity in 2023 depended on EAFs – an increase from 33% the previous year. If the sector is to align with the 1.5°C temperature pathway, EAFs should account for 53% of global steelmaking capacity by 2050, the report mentioned. 

Leaving coal behind  

A healthy supply of steel scrap is available in the UK – more than 8.2 million tonnes were exported from the country in 2021 – but not all of it can be made into steel.  

“Scrap metals can have impurities and chemicals mixed in, so the sorting and filtering process can be very expensive,” says Sangeeth Selvaraju, Policy Analyst on Sustainable Finance at the London School of Economics’ Grantham Research Institute (LSE GRI). 

Questions over the quality of steel made from recycled scraps mean sectors such as aviation and construction will likely continue to need higher quality steel generated from iron ores.  

This suggests there will be ongoing dependence on blast furnaces until high-quality steel can be sustainably produced or until EAFs are further refined.  

“The performance, size and energy efficiency of wind turbines, electric vehicle batteries and solar panels dramatically increased once commercialisation happened,” says Amin. 

There are upsides to the new process, however. Greg Falzon, Partner at Danish investment manager AIP Management, says modern EAFs are already far more flexible than blast furnaces, as they can run batch processes that are easier to switch on and off. 

“This is a feature that could be explored further through commercialisation to help better manage renewable energy demand on the grid,” he adds. “It could allow EAFs to put load onto the grid when there is a good level of renewable energy generation and reduce – or even potentially switch off – demand on a cold and overcast winter day with low wind levels.” 

Beyond finetuning EAF processes and energy efficiency, companies like Tata Steel will need to consider the social implications of a rapid process overhaul. 

“When it comes to industries like mining and steelmaking, which for generations have supplied jobs to local communities globally, there’s an identity piece that needs to be considered,” says Brendan Curran, Senior Policy Fellow on Sustainable Finance at LSE GRI.  

With Tata Steel’s planned closures threatening 3,000 jobs in Port Talbot, trade unions are urging the company to protect its workers and invest in reskilling.  

“We cannot stay in the same place and avoid progress, as we need to deal with emissions and we would become increasingly uncompetitive by international standards compared to countries that are going ahead with this new industrial revolution,” says Falzon. “Equally, sudden transitions that leave communities that have been built up around a legacy industry with no future prospects for retraining and redeployment would be unjust.” 

Unearthing potential 

Although EAFs are a huge leap along the path to net zero for the steel sector, it may not be enough to help it meet its commitments in full. 

Green hydrogen is now being explored as an alternative that could complement EAFs. Generated through renewable energy, it requires a lower temperature and less energy than coking coal.  

As it produces steam, green hydrogen massively reduces CO2 emissions from de-oxidising iron ore, which can then be fed into an EAF alongside scrap metals, Falzon explains. Crucially, the use of green hydrogen in this way may allay concerns that the transition to more sustainable practices means sacrificing high quality steel. 

Europe, in particular, is focused on the possibilities of steel production based on green hydrogen and approved 38 projects as of 2023. 

Although the technology has been tested, challenges will likely emerge when it comes to scaling this type of production, due to issues surrounding location, capacity and cost.  

Research conducted by the European Parliament shows that replacing coal with green hydrogen would drive up the price of a tonne of steel by a third, although it is anticipated this will be temporary.  

In addition, growing demand for green hydrogen will likely put a strain on existing renewable electricity supplies. The full decarbonisation of the steel industry would require a 20% increase in electricity production, the research suggests.   

“Steelmaking plants looking to switch to green hydrogen also need to consider their proximity to renewable energy sources,” says Curran. “The cost of having to transport green hydrogen over long distances would become prohibitive.” 

Regardless of these potential hurdles, investors seem prepared to support the scaling of green hydrogen steelmaking.  

Earlier this month, Sweden’s H2 Green Steel decarbonisation project announced it has raised a total €6.5 billion (US$7 billion) in funding for its green steel plant project. This includes €4.2 billion in signed debt, €300 million in equity, and a €250 million grant from the European Innovation Fund. In addition, a €600 million junior debt consortium was led by AIP Management and comprised investment banks and funds.  

H2 Green Steel’s production is expected to generate 95% less CO2 emissions compared to coke-fired blast furnaces.  

“We are seeking investments that achieve material decarbonisation but also provide a good and resilient return for our investors – the majority of whom are pension funds,” AIP’s Falzon tells ESG Investor. “Our recent investment in H2 Green Steel comes off the back of a two-year period of engagement with the company.” 

Such projects require a considerable amount of work and collaboration between different stakeholders, Falzon insists. 

Sky is the limit 

Due to the long lifespan and cost of steel production assets, steel has long been considered a sector in which carbon emissions are hard to abate. But with a seemingly clearer path to net zero, this could all change. 

“If you compare steel to the oil and gas sector, it’s not having to change an entire business model,” says Amin. “The demand for steel is likely to remain [for decades to come].” 

He adds that changes in technology and processes to streamline services is a natural step for any business to take – irrespective of pressures to mitigate climate change. 

Others, however, maintain that the transition may not be that straightforward.  

For Selvaraju, the premium for green steel remains a significant barrier, as it weakens the business case for steel companies to transition without offsetting those costs to governments, customers and investors.  

“Steel is essential for modern society – in our buildings, products, railways, vehicles and wind farms,” says Falzon. “Although there is innovation around alternatives in some use cases, the use of steel will remain significant.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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