Warning signs flash for steel’s traditional business model

Welcome back. So far, pressure on banks over their fossil fuel exposure has focused primarily on oil, gas and the thermal coal used in power plants.

Metallurgical coal, and the blast furnaces that burn it as part of the steelmaking process, has been less in the spotlight — despite its large contribution to climate change. But as low-carbon technology progresses, some financial institutions are turning their back on traditional steelmaking. Read on for more.

Decarbonisation

Are we on the right path to meet green steel goals?

At first glance, last week’s announcement by Tata Steel on its UK operations might look like a reflection of the inexorable green transformation of heavy industry. The Indian company is to close its coal-burning blast furnaces in the Welsh town of Port Talbot — which will come with the loss of 2,800 jobs — and replace them with far less carbon-intensive electric arc furnaces.

More warning signs for steel’s traditional business model have been coming from the financial sector. Last month, Dutch bank ING said it would no longer finance new mines producing the metallurgical coal used in blast furnaces, following similar announcements from European peers including HSBC and Lloyds Banking Group.

Yet at the global level, the outlook for steel’s green transition looks decidedly mixed. Data published last year by Global Energy Monitor showed that 138 metallurgical coal mines were being planned worldwide, along with 160 new blast furnaces to add to the 1,023 already operating.

Steelmaking accounts for about 7 per cent of global greenhouse gas emissions. With global steel demand set to keep growing — by more than a third from 2020 levels by 2050, according to the International Energy Agency — this industry needs to accelerate a green shift. And if that shift is to happen, the financial sector will need to play a big role.

In 2015, ING became one of the first banks to announce a policy against financing mines producing thermal coal used in power plants. In 2022, it said it would no longer support the development of new oil and gas production fields.

It had held back from making a similar announcement on metallurgical coal because of concern about whether there was a realistic alternative pathway for the industry, said Arnaud Cohen Stuart, ING’s head of business ethics. The new restriction announced last month, he said, was in response to some “really, really interesting” developments in low-carbon steel technology.

One of the most important of those is the Hybrit green steel project in northern Sweden, which I visited last year for our Moral Money film on the hydrogen economy. A joint venture between steelmaker SSAB, iron ore producer LKAB and energy company Vattenfall, it uses hydrogen, instead of coal, to pull the oxygen out of iron ore — giving off water vapour in place of carbon dioxide. The hydrogen is produced through electrolysis, using Sweden’s abundant hydroelectric and wind power.

Even with this cheap renewable energy, SSAB says the production cost of its green steel is about 30 per cent more than the conventional equivalent. So as Europe tries to build a leading role in green steel production, governments are deploying generous subsidies to get things moving.

Thyssenkrupp has been awarded €2bn by the German government to support its hydrogen-based investment plans, while ArcelorMittal in 2023 was promised a total of €1.2bn by various European governments for its decarbonisation plans.

Ephrem Ravi, an analyst at Citi, told me that a much higher price for EU carbon permits would be needed to close the cost gap on green steel production and eliminate the need for subsidies. Even then, he noted, to convert all Europe’s primary (meaning non-recycled) steel production to the green hydrogen-based process would require a vast amount of new renewable energy: roughly the same as the UK’s total electricity capacity from all sources.

To protect its heavy industry against carbon-intensive foreign rivals, the EU is introducing an effective carbon tax on imports of steel and other products. EU officials are hoping that this could accelerate decarbonisation in other countries, as companies seek to protect sales in Europe. But Ravi warned that the impact would be limited by the relatively modest demand for steel in the EU’s mature economy. “Europe, frankly, shouldn’t overestimate its importance in the global steel market,” Ravi said.

The EU and UK together used 152mn tonnes of finished steel products in 2022, according to the World Steel Association. Meanwhile, China used 921mn tonnes — more than the rest of the world combined.

But while China’s government has not matched the eye-catching European subsidy announcements for hydrogen-based green steel, its state-owned steelmakers have been investing growing sums in decarbonisation — especially by transitioning to electric arc furnaces, which mostly use recycled scrap steel.

The supply of used steel is set to rise strongly in the next couple of decades, with the scrapping of buildings and infrastructure from China’s early 21st century investment surge. Coupled with slowing demand growth, that will feed a steady trend in the industry towards recycled steel, say Chathu Gamage and Thomas Koch Blank, analysts at the Rocky Mountain Institute.

Primary steel production from iron ore will increasingly happen without the use of coal, Gamage and Blank add, as green steel technology advances and tougher carbon pricing regimes kick in. In particular, they note, iron ore miners in sun-soaked Western Australia have huge opportunities to process their output near the point of extraction using green hydrogen.

All this, they argue, means that it looks borderline reckless — even leaving aside climate concerns — to make long-term financial commitments to blast furnaces or metallurgical coal mines. Informed investors should now be considering, Blank says, whether such assets could be left “stranded” without customers in the years ahead.

Smart read

Susannah Savage’s Big Read, which published yesterday, is an essential read about a fraught topic: decarbonisation efforts in agriculture. Big food companies are touting regenerative agriculture as a way to cut greenhouse gas emissions, but in practice there are significant hurdles.