Green steel is distant and expensive, but teal steel is coming

There is a conundrum in plans to decarbonise the steel sector: it's feasible with current technologies, but also unlikely because of the huge cost of deploying them.

The steel chain, from iron ore mining to finished products, accounts for about 8% of global carbon emissions and reducing this impact is often viewed as vital to combating climate change.

If there was consensus at the gathering of the iron ore and steel industry this week at Singapore International Ferrous Week, it's that cutting emissions from steelmaking is possible. But what was also obvious is that while miners and steelmakers are in the early stages of transitioning, the process will be slow and hugely expensive.

The problem with this is nobody is sure who is going to pay.

Australia's iron ore miners, who supply about two-thirds of China's imports, are capable of building a green iron supply chain, which would use solar and wind energy to create green hydrogen, which would then be used to beneficiate iron ore into direct reduced iron (DRI) and hot-briquetted iron (HBI).

Using HBI cuts out about 80% of the emissions created in the steelmaking process by eliminating the practice of using coal to turn iron ore into pig, or crude, iron by removing oxygen and other impurities.

But the iron ore miners won't invest the billions of dollars needed to build green iron plants unless China, which makes about half of the world's steel, and other major producers such as South Korea, Japan and India, commit to using the cleaner product.

At the heart of the problem is cost. Using hydrogen to make green iron and an electric arc furnace to turn that into steel can reduce the emissions from about 1.8 tonnes of carbon to 200kg per tonne of steel.

While estimates of the cost vary, the consensus is even a green steel supply chain built at scale would result in a near doubling of the cost of making a tonne of steel compared with the coal-intensive method of using a blast furnace and a basic oxygen furnace (BF-BOF).

It's likely that steel mills will be unwilling to see their costs rise so dramatically, as it would be challenging to pass the higher prices fully on to consumers.

The iron ore and steel market dynamics illustrate the scale of the challenge.

Chinese steel mills are struggling for profitability and one way they try to cut costs is to increase the share of low-grade, and cheaper, iron ore in their production. This lowers the cost of the steel produced, but also raises the carbon intensity to about 2.2 tonnes per tonne of steel produced, up from about 1.8 tonnes if high-grade iron ore is used in the BF-BOF process.

In other words, green steel ambition is likely to be sacrificed on the altar of economics.

It is possible to lower the carbon intensity of steel by going somewhat greener. Using natural gas to reduce the iron ore instead of coal could trim the amount of carbon to about 1.1 tonnes per tonne of steel and if the gas can be secured at a cheap enough price this becomes a viable and economic option.

Producing hydrogen using natural gas is often referred to as blue hydrogen and using this fuel to beneficiate the iron ore means steel could be considered teal, one of the shades between blue and green.

Brazil's Vale is building what it calls mega-hubs in three Middle East countries with the aim of using cheap natural gas to produce DRI and HBI for export to steel mills in China. This product would also help steel producers comply with the EU's planned carbon border adjustment mechanism, which is slated to be introduced next year, though it may be delayed.

There are several points to note, first that while the 80-million tonnes of iron ore a year that Vale is believed to be planning on processing in the Middle East sounds substantial, it's not even one month's worth of imports by China, which buys about three-quarters of global seaborne iron ore.

Natural gas isn't a viable option for Australia's iron ore sector, as it is too expensive and the available supply in Western Australia, home to most iron ore mines, is already spoken for by the domestic sector and the liquefied natural gas producers. This means teal steel will make a bit of a difference but not the step-change needed to decarbonise steel.

That will require government legislation and regulation to incentivise or punish steelmakers through measures such as subsidies or carbon taxes to the point where green steel becomes viable.

Teal steel is an example of the cliché to not let perfect be the enemy of good.

The views expressed here are those of the author, a columnist for Reuters.

Reuters