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FORWARD THINKING | ARTICLE – 4 Min

How can we decarbonise the steel sector?

In this article:

    If we are to avoid dangerous climate change, we need to tackle emissions from the steel industry, writes Julien Bouyssou.

    In 2020, the world produced 1 864 million tonnes of steel. This, combined with an energy-intensive production process, means the steel industry is responsible for a great deal of greenhouse gas emissions, more so than for example producing chemicals or cement.

    According to the International Energy Agency, steel accounts for 8% of global final energy use and 7% of global energy-related CO2 emissions. Thus, it’s particularly important to address the issues in this sector if we are to reach net-zero emissions globally and avoid dangerous climate change.

    Most of the steel produced today, around 52%, is used in infrastructure or building applications that have a relatively long lifetime – up to 50 years. Of the rest, most is used in medium service life applications, including in the car industry (12%) and in mechanical equipment (16%).

    Need to cut carbon

    One key reason to make headway in decarbonising the sector is that it will play a key role in the shift to a low-carbon energy system. So the energy transition, alongside other pressures, means demand for steel is set to increase.

    According to the IEA, global demand for steel will rise by more than a third to 2050. Just fulfilling existing demand with current, polluting steel production infrastructure would exhaust the sector’s carbon budget and leave no room for this growth, reinforcing the need to take carbon out of production processes.

    Steel is a key ingredient in wind turbines, solar panels and electric vehicles and in reinforcing concrete hydropower dams. Wind turbines rely heavily on the material in towers, foundations, casings and gears. Large offshore machines, which require more extensive foundations than those onshore, can include over 1 000 tonnes of steel.

    Electric vehicles use steel for battery casings and some EV manufacturers are looking to lightweight steel options for car bodies. Electrical motors can contain up to 100 kilograms of electrical steel. As electrification will play a large role in the energy transition, steel is also needed to expand the number of electricity pylons, generators and transformers. 

    Alongside this, from an investment point of view, there is the risk of stranded assets due to regulation, customer requirements and stakeholder pressure. Some studies have indicated that around 14% of steel firms’ value is at risk if they do not address their emissions footprint.

    Decarbonisation through more recycling

    Steel already has a good recycling rate (around 30% comes from recycled scrap metal) and using electric arc furnaces (EAFs) to make steel from scrap is significantly less carbon intensive than blast furnaces processing iron ore (0.4 tonnes of CO2 per tonne of steel compared to 1.85 tonnes of CO2 per tonne, respectively).

    However, the benefits of this approach are limited as there is insufficient scrap to meet the rising demand. Furthermore, without local renewables, the carbon intensity of the process depends on the local grid electricity mix.

    Making processes more efficient or less carbon intensive

    Energy-intensive and coal-dependent blast furnace/basic oxygen furnace processes can be made either more efficient or replaced with a lower-carbon alternative. Fuels and reductants can be replaced with biomass, provided the sustainability of the sourcing is not compromised; carbon capture can be deployed to re-use CO2 produced during the process or store it.

    In the IEA’s Sustainable Development Scenario, a quarter of the total CO2 directly generated by iron and steelmaking in 2050 is captured that year. As is the case with pilot projects in Europe – some of which have begun delivering initial batches – green hydrogen can be used to create direct reduced iron. This can be used as an input into EAFs. Molten oxide electrolysis is also being explored as a production method.

    Reducing the need for steel

    Being more efficient with steel products downstream can make a difference. Studies indicate that in Europe effective coordination could result in a reduction in material needs from 800 kg per person per year to 550-600 kg. This and wider resource efficiencies could play a substantial role in reducing emissions.

    To support this, and emissions upstream, effective policy and regulation is key. In the EU, carbon pricing via the emissions trading scheme and upcoming carbon border adjustment mechanism can help make investments viable and avoid production shifting to more carbon-intensive areas – although the industry in Europe is calling for a more gradual reduction in emissions permits to enable it to stay competitive with producers elsewhere.

    What does this mean for metallurgical coal?

    Steel is the largest industrial consumer of coal, well ahead of cement or chemicals production. Coal is used to create both heat and coke for blast furnaces.

    How will demand for coal be affected as the production alternatives outlined above become increasingly viable?

    With around 85% of steel production capacity today in emerging economies, many conventional blast furnaces are still relatively young. The global fleet has an average age of 13 years – a third of a typical blast furnace lifetime. In the absence of stringent regulation in these locations, it may be some time before metallurgical coal becomes a stranded asset.

    In summary, there are exciting and challenging routes to explore and opportunities for investors to support cutting carbon from an industry that will be essential to meeting the world’s emissions targets.

    Also read What technologies do we need to get to net zero?


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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