Emerging technologies are poised to reduce the steel industry’s environmental impact, creating compelling investment opportunities, write Mark Duffy and Charlie Donovan at Impax Asset Management.
Steel is the backbone of our built environment, from buildings to vehicles. Global demand has roughly trebled since 1970 and is forecast to rise by 50% again by 2050.
Today, the production of steel accounts for an estimated 6% of global greenhouse gas emissions and 8% of CO2 emissions. The intense heat required to forge new steel in traditional blast furnaces (and associated fossil fuel combustion) makes it one of the more difficult industries to decarbonise and achieve national and global net-zero goals.
Under a business-as-usual scenario, sustained demand growth would drive global steel emissions up by more than one-third by 2050, according to estimates by The Mission Possible Partnership (MPP), an initiative designed to catalyse the decarbonisation of the world’s highest-emitting industries.
Steel will be core to the infrastructure needed for the clean energy transition; each megawatt of offshore wind capacity demands 250 tonnes of steel.
The adoption of new technologies – and the expansion of existing ones – is essential in the industry’s pathway to net zero. In its long-term projections for the sector, the International Energy Agency estimates that just over half of 2050 steel production will come from production using emerging hydrogen-based processes or carbon capture, while scrap-based production will account for 40%.
Decarbonising primary steel production
Most global steel demand will continue to be met by the production of steel from iron ore.
A process called direct reduction could hold the key to making this more sustainable. Using a blend of hydrogen and carbon monoxide gas (syngas), iron ore can be reduced without melting it – thereby saving energy. The solid byproduct of this process, direct reduced iron, is then used as a feedstock into an electric arc furnace to roll steel. Using syngas is an improvement on current methods.
Substituting natural gas with hydrogen derived using renewable electricity could reduce the sector’s 2050 emissions by more than one-third. Hydrogen-based DRI, with its potential for 95% GHG reduction, is nearing commercialisation. Additionally, direct reduction with biomass offers a 60% reduction and can be integrated into existing plants.
Other innovative green technologies are emerging. The Molten Oxide Electrolysis process uses renewable electricity to convert iron ore to high-quality liquid metal; the SuSteel pilot project is exploring the use of hydrogen plasma in a carbon-neutral steelmaking process.
There could be an important role for carbon capture, utilisation and storage technologies in decarbonising the industry. Under the MPP’s net-zero scenario, up to one-fifth of prospective 2050 emissions could be avoided through CCUS.
Making more use of scrap metal
A bigger role for scrap steel should help reduce emissions intensity in the medium term.
Electric arc furnace technology uses electricity to melt down and re-use scrap steel. Emissions from EAF depend on how electricity is generated locally, but increased scrap use could reduce the industry’s prospective 2050 emissions by up to one-fifth under the MPP net-zero scenario.
The US currently leads in secondary steelmaking. Other major steel producers are also looking to make more use of scrap steel: China is aiming for 15-20%. It is important to note that feedstocks in developing economies can sometimes include carbon-intensive pig iron (not only scrap) and coal is often used to generate electricity.
Illustrating the opportunities
We believe the investment opportunities that will be created by technological and market drivers in the transition to a greener steel industry are well illustrated by the improving financial health of US EAF producers including lower leverage and higher profit margins. This is lifting credit ratings.
Source: Impax analysis based on company filings, April 2024.
Beyond low-carbon technologies, corporate commitments and supportive government policy are also accelerating changes.
Steelmakers are increasingly setting ambitious emissions targets: more than 20 companies have validated near-term science-based targets, with 19 committing to net-zero emissions. Initiatives from non-governmental organisations are accelerating the industry’s transition towards net-zero goals.
Policy support is emerging in the form of incentives, regulations and tariffs. For example, Germany’s current EUR 23 billion ‘net zero’ budget includes ‘climate protection contracts’ that subsidise companies adopting cleaner steelmaking.
Tightening caps on GHG emissions under the EU Emissions Trading System should improve the competitiveness of less polluting technologies by raising the relative long-term cost of blast furnace steel. To help ensure a level playing field with steel produced elsewhere, the EU’s Carbon Border Adjustment Mechanism puts a price on carbon-intensive imports.
Forging new markets
The rate of change will also be informed by end-user appetite. Encouragingly, strong market demand for sustainably produced primary steel has recently been evidenced by the premium pricing commanded for steel using a green hydrogen-fuelled process.
Under the First Movers Coalition, some of the world’s largest companies are using their purchasing power to create early markets for innovative technologies in hard-to-abate sectors, including steel.
We see the convergence of promising technologies, ambitious industry goals and supportive policy creating fertile ground for long-term investment in companies enabling the transition to a greener steel sector.
This is an abbreviated version of an article that was previously published by Impax Asset Management
