The material that powered the Industrial Revolution is undergoing a sustainability transformation as steelmaking moves from carbon-based production to a process fueled by hydrogen.
Currently, traditional steelmaking emits approximately 3.6 billion metric tons of carbon dioxide a year and accounts for as much as 9% of world emissions, according to the World Steel Association.
With many countries aiming to reduce carbon emissions to net zero over the coming decades, industry leaders are looking to decarbonize the steelmaking process: either eliminating carbon from production or capturing and reusing the CO2 that is created.
That means the entire steelmaking supply chain will need an overhaul, including the industry’s use of renewable energy, the integration of hydrogen in the process, the ways in which iron ore is mined and processed, and the offerings of capital equipment providers. It’s expected to be an extremely expensive and time-consuming undertaking—but businesses that don’t modernize could be left behind.
“The investments required to decarbonize are likely to exceed $1,200 per metric ton of capacity. For the average steel company producing, say, 5 million tons of steel per year, that would equal approximately $6 billion in capital expenditures,” says Alain Gabriel, Morgan Stanley’s Head of Europe Metals and Mining Research. “The companies that have the best access to low-cost renewable energy, as well as those that can achieve integration through the supply chain, will gain competitive advantage.”
Global Moves to Decarbonize
As companies determine the best way forward, a key consideration will be the availability of hydrogen to replace coal in the production process. “Eliminating carbon emissions completely will require the zero-emission option known as ‘hydrogen-based direct reduced iron with electric arc furnace,’ which relies on renewable electricity,” says Gabriel.
Ultimately, the type of hydrogen used will determine the carbon footprint of the steel produced. “Green” hydrogen is created through electrolysis, a renewable process, which makes it the most eco-friendly. It’s also the most limited in supply today because of the significant amount of renewable energy it takes to produce, as well as the small size of the electrolyzer industry. “Blue” hydrogen comes from captured carbon and will be in high demand as the industry works to eliminate its use of “gray” hydrogen, a natural-gas byproduct.
The U.S. is ahead globally in terms of more environmentally friendly steel technology, having already adopted electric arc furnaces—a less carbon-intensive method than the traditional furnaces that account for 71% of global production. The U.S. still has work to do, but U.S. steel producers could see benefits from potential subsidies for green hydrogen under the Inflation Reduction Act and, in general, better access to cheaper clean energy. This should give U.S. producers the benefit of time to assess the best tech investments to bring them closer to net zero over the next decade.
In contrast, for steelmakers in Europe, the transition to hydrogen steel would require approximately $130 billion of investment (before grants), an 8% increase in the region’s power generation and more than five million metric tons of green hydrogen capacity. Europe is not only lagging the U.S. in its technology but is also under greater regulatory pressure, as policies and net-zero goals force a shift to more eco-friendly processes. This includes the continent’s December 2022 agreement aiming to eliminate free carbon allowances by 2034, which would go hand-in-hand with a carbon border tax on imports based on the amount of carbon emitted in their production.
Meanwhile, China and India, together responsible for two-thirds of global steel emissions, are still highly dependent on coal. The two mega-economies have sharpened their decarbonization plans, but the pace is expected to be determined by their need to balance economic growth with climate commitments.
“China and India’s current access to low-cost renewables would only cover a small proportion of output,” says Gabriel. “This may result in a two-tiered market that increasingly places a higher value on green steel.”
As steelmakers progress towards greener production methods, Gabriel expects that the use of steel scrap in place of iron in electric arc furnaces will be another avenue to reduce emissions. While this process may face supply constraints of high-quality scrap, it produces significantly less carbon than what traditional furnaces give off.