Steel producers such as Thyssenkrupp and Salzgitter are working on defossilising their steel production. Two key questions remain unanswered, though, as Bastian Frien and Boris Karkowski from Deutsche Bank results write in the following opinion piece: Is there a market for green steel? And if there is: does Central Europe hold the right cards?
Despite the energy crisis and falling demand, Germany’s major steel companies are no less determined to transform their production and make it climate-neutral. Steel production still generates 1.5 to 1.9 tonnes of CO2 per tonne of steel, which makes steel production one of the world’s largest CO2 emitters. The costlier emission certificates become in Europe, the more urgent the call becomes to switch to production processes that are gentler on the climate.
Basically, there are three ways to do this: electric arc furnaces that are powered by electricity from renewable sources; a switch to H2-DRI, which is direct reduction using hydrogen; and carbon capture and storage (CCS). Whether CCS-based processes really are recognised as green is disputable – what is more, they have rarely been on hand to date. A fourth method, direct iron electrolysis without the use of reducing agents, is still being researched. Today, around 30 per cent of steel is already being produced using electric arc furnaces – but scrap steel is required for that. Small US steelworks, in particular, use this technology. Conventional blast furnaces, however, are used in Germany and especially in China, which accounts for around 50 per cent of global steel production.
The green price gap
Traditional blast furnaces usually use gas or – especially in China – coal to heat the iron ore. The H2-DRI process uses green hydrogen to reduce iron ore to sponge iron (direct reduced iron, DRI), which can then be melted into steel in an electric arc furnace. The advantage of H2-DRI, apart from the improved carbon footprint, is that contamination of the steel by phosphorus and sulphur (from the coal) would be eliminated.
The major drawbacks: Production is significantly more expensive – and there is still far too little green hydrogen available. It is estimated that converting the global steel industry would require three times as much electricity as before – and that electricity would have to come from renewable energy sources. That is why only a few tonnes of green steel have been produced so far; and its market share is close to zero, given annual steel production of around 1.8 billion tonnes worldwide. Also, depending on estimates, investments in new technologies and increased energy requirements make green steel more expensive by between 100 and 500 US dollars per tonne: only a handful of customers will be prepared to pay a premium of 20 to 50 per cent.
In China, a premium of just 140 US dollars is expected, partly due to lower energy costs. Nevertheless, buyers there are not willing to pay more than USD 20 per tonne of green steel. Demand is greater in Europe; this is also due to the anticipated major rise in fees for CO2 certificates that are becoming increasingly scarce. Demand from car manufacturers is already high, with steel behind around a quarter of a car’s emissions during the production phase – though premium manufacturers should find it easier to pass on the added cost to their customers. Volvo was the buyer of the world’s first batch of green steel in 2021. In Sweden, Vattenfall, the mining company LKAB and the steel manufacturer SSAB launched the H2-DRI project HYBRIT back in 2017. BMW has entered into a partnership with Salzgitter, while Daimler Truck and Scania are also planning to use green steel.
New supply chains
In certain projects, the construction industry – the largest consumer of steel – is also likely to increase its demand for green steel. This would offer public property developers and other sustainability-focused building owners a further means of reducing their buildings’ CO2 emissions. Wind turbine manufacturers, particularly in the offshore sector, could be in a position to deflate criticism of this renewable energy’s high initial CO2 emissions. One offshore wind turbine alone contains several hundred tonnes of steel in its foundation, tower and turbine. Turbine manufacturer Vestas has announced that it will equip two North Sea wind farms owned by Vattenfall and BASF with “low-emission steel” turbines, which would reduce the wind farms’ overall carbon footprint by 16 per cent.
Driven by the pressure for sustainable supply chains, mechanical and plant engineering could also increase demand for green steel. However, that sector shows considerably less willingness to pay surcharges. ##But it is far from certain that manufacturers will be able to satisfy demand at all. That assumption begins with green hydrogen, which is very expensive to produce in this country. For that reason, Germany has signed a large number of import agreements with other nations: except that their quantities are also very modest for the time being, as expansion of the necessary import, distribution and processing infrastructure is still in its infancy. In addition, the high-quality iron ore with an Fe content of at least 67 per cent which is required for the H2-DRI process is only available in pellet form to a limited extent. The high-purity pellets – lower qualities are inefficient – mostly come from Brazil, Canada and Scandinavia. Most steel manufacturers would have to switch their supply chains from the previously sinterable ore, with around 62 per cent Fe content, to the high-quality DRI pellets. Supply contracts, mining capacities and logistics chains are not yet in place for that purpose. One alternative would be to utilise steel scrap; but even here, there is not enough scrap.
Who will win the race?
The second problem: economic weakness, high energy prices and geopolitical uncertainties have hit the energy-intensive steel industry hard. For some manufacturers, it is a question of safeguarding their livelihoods, which leaves little room for investing billions of euros in new technologies. Even if these are subsidised (see box), this transformation is a feat of strength that has to be undertaken while operations are ongoing. ##To finish, there is another question. Even if all this succeeds; if sufficient green energy and green hydrogen are available and enough customers are willing to pay the surcharge; and if the investments in new technologies, still untested in full operation, can be made: are there no other markets that have much better basic conditions for the production of green steel?
It is quite possible that this is exactly what it will come down to in the end: Australia, Canada, Sweden and the Middle East, with their abundant new energy, are at least producing sponge iron. This sponge iron is shipped to Europe and processed here using the electric arc process run on green electricity. Germany’s industry still fears this scenario, saying that some of the added value would be lost; but it would still be something. Except: early this year, the Georgsmarienhütte metallurgical plant significantly cut operations at its electric furnace. Electricity prices are too high to keep it running profitably.
Source: Deutsche Bank results
