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The Hydrogen Economy: Steel Producers Have A Long Way To Go

(Editor's Note: This article is part of a series following "How Hydrogen Can Fuel The Energy Transition," published Nov. 19, 2020.)

The steel industry represents almost 10% of total energy-related emissions globally, and more than 20% in some countries, whether starting from iron ore and coke (consumed in blast furnaces) or scrap metal (using EAFs). S&P Global Ratings believes steelmakers first need to plan raw-material and process efficiencies, alongside technologies such as gas-fired EAFs. But few can foot the bill for very large investments because of years of low profitability.

A change to EAFs fueled with scrap or direct reduced iron (DRI) from the traditional high-emission blast furnaces is the most obvious way to reduce emissions in steel production. China, the world's largest steel producer, is targeting to raise its share of EAFs from a low 10% to 20% by 2025. The U.S. is well ahead, with 67% of steel produced through EAFs, versus 41.5% for the EU.

Hydrogen can be part of a future solution, but the huge cost for a fully decarbonized process may put it out of the steelmakers reach during this decade. The hydrogen pilot projects, European steel producers SSAB, ThyssenKrupp, and ArcelorMittal have embarked on will provide more insights, but in our view, the likelihood of a large scale roll-out remains low.

Europe's Steel Industry Needs To Evolve More Rapidly

European steel producers are at a disadvantage versus U.S. global peers because of stricter regulations and older, more polluting blast-furnace technology, with basic oxygen furnaces (BOFs) accounting for a significant 59% of the fleet. EU initiatives to cut carbon-dioxide (CO2) emissions by 50% by 2030 compared with 1990 levels, and achieve net-zero emissions across Europe by 2050, will test local players.

We expect changes will include consolidation of small companies, along with the closure of old and less competitive facilities. Another question is whether Europe will see an increase in lower-emission EAFs, which currently make up about 41% of steel production in Europe, compared with about 67% in Turkey and the U.S. On the face of it, a sensible move could be a shift toward EAFs, especially mini mills, which generally have a lighter environmental impact. For example, a typical BOF requires close to 2,000 kilowatt hours (kWh) of energy per ton, while EAFs use about 450kWh.

China Is Far Behind Europe In The Emissions Reduction Race

China has one of the highest proportions of blast furnaces globally, at around 90%, and EAFs account for only around 10% of crude steel production. The steel industry makes up about 15% of the country's CO2 emissions after power generation, which is the largest contributor at 40%. Consequently, having a cleaner steel industry is essential for China to achieve its goals of peak carbon emission by 2030 and net-zero emissions by 2060. The government's targets include EAFs accounting for up to 20% of crude steel production by 2025.

The expansion of EAF use in China has been constrained by the availability of scrap, power costs, and the cost of purchasing equipment, typically via imports. Domestic scrap supply totaled 240 million tons in 2019 and this will rise to 300 million tons by 2025 or about 30% of the raw materials supply by 2025, according to government's plan. China is also exploring the role of hydrogen in the steel industry but this is still at an early stage. Some recent developments include Hebei Iron & Steel Group Co. Ltd. partnering with BHP Group to study technologies that reduce greenhouse gas emissions, including hydrogen-based direct reduction technology.

More Efficient Furnaces Are A Prerequisite To Hydrogen Solutions

In our view, the use of hydrogen as a power source for steel production can address only part of the emissions issue.   We assume that hydrogen technology would contribute to, at most, just 10% of the sector's total CO2 emission reduction by 2050. Steel companies are trying to reduce their carbon footprint by executing ongoing efficiency programs, shutting down some capacity, and increasing the use of sustainable energy (solar photovoltaic, wind, and batteries). They are also improving their raw materials mix, for example through using higher quality ore; or injecting more oxygen into the process.

Chart 1

image

However, these steps are not a game changer, and their full accumulative effect will be visible only in the distant future.   According to the IEA, raw material efficiency will reduce CO2 emissions by slightly less than 1 gigaton (Gt) between 2020 and 2030, and by less than 8 Gt through to 2050. We believe another part of the solution will come from gradually mothballing BOFs and replacing them with EAFs. The problem, in our view, is that most of the BOFs, notably the ones in China, are fairly new (less than 20 years old) so replacing them may not be an attractive option.

Moreover, low availability of scrap metal in certain countries, such as China and India, could slow down the transition to the more efficient EAFs.   Another route would be to fuel EAFs with direct reduced iron (DRI). This would allow companies to make steel without coal. In this process, natural gas replaces coal, producing pig iron (with 90%-94% iron content) that can be used as feedstock for EAFs. The use of DRI could reduce the steel industry's total energy consumption by 40%-50%. However, despite this method being a cheaper alternative, it is still very costly for the majority of steelmakers. This solution is mainly applicable in regions with low natural gas prices, notably the Middle East and North America.

The next technological leap will come from replacing fossil-fuel powered units with hydrogen produced with renewable energy.   The hydrogen will subsequently be used, instead of gas, in the DRI process. All major European players are currently testing the technology, but full adoption will take years, due to the extremely high cost (see chart 2 and Box).

Chart 2

image

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After more than a decade of low returns, the steel industry has no deep pockets to keep up with changes needed to meet new environmental regulations. According to ArcelorMittal, Europe's top steelmaker, the decarbonization of the European industry will come with a price tag of up to €40 billion. Based on the company's analysis, for ArcelorMittal to achieve its initial target of a 30% emissions reduction by 2030, production costs will increase by 30%-80% depending on the facility. The company has started a few pilot projects (for example, one in Dunkirk France; and a feasibility study for a facility in Hamburg). But moving from pilots to large-scale facilities would take several years. A similar pilot is currently being tested by SSAB AB, which estimates that its hydrogen-based route will initially be at least 20%-30% more expensive.

What's more, the steel industry's performance since the global economic crisis in 2018 has been weak, excluding short periods of healthy operating conditions. This handicaps companies' ability to upgrade or invest in more efficient technologies. We think that, inevitably, a solution will involve the raising of carbon taxes or import tariffs, which would pass costs through to end consumers. In our view, costs transferred in this way would not be a significant proportion of the final product price. For example, the cost of steel manufactured using renewable energy would increase car prices by only up to 5%, assuming sustainable steel is twice as expensive as steel produced the conventional way; an average car needs about 900 kilograms of steel.

Editor: Bernadette Stroeder

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Elad Jelasko, CPA, London + 44 20 7176 7013;
elad.jelasko@spglobal.com
Secondary Contacts:Karl Nietvelt, Paris + 33 14 420 6751;
karl.nietvelt@spglobal.com
Massimo Schiavo, Paris + 33 14 420 6718;
Massimo.Schiavo@spglobal.com

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