How much does Europe want cheaper green steel?

Steel is one of the building blocks of our modern economy. But it's also a major emitter of GHG's. It is estimated that the steel industry is responsible for about 7-8% of all man made global carbon emissions, most of it from the blast furnace-basic oxygen furnaces (BF-BOF) production processes.

So this is a challenge that we should want to fix, in the most cost effective way. Or do we ?

Green steel is clearly a good thing. But it's going to need a lot of government support to get from where we are now, producing much of it using a lot of coal, to where we want to be, producing it mainly using renewables.

And this could be problematic. Government support for industries transitioning to using renewables is often about protecting domestic industry, and the jobs they create. And that is leading to material financial support to the industry.

But what if green steel could be produced cheaply outside of a domestic region? If that meant putting domestic industry jobs at risk, would governments be as keen?

That is where we are with green steel. And to an extent with mass market EV's. There will be compromises. As we frequently say, the sustainability transitions are complicated. Even the easy changes have negative implications for someone. But ignoring them is not the answer.

Green steel is more expensive

Green steel is going to be more expensive to the buyer than traditional steel. Yes, there are all sorts of benefits to our wider society from shifting to green steel, but that is often not going to be top of mind for the steel buyer.

The bad news is that even a relatively modest premium likely makes green steel unviable for much of the market, where costs are a major factor - Clyde Russell Asia Commodities and Energy Columnist at Reuters

It's not clear exactly how much more expensive it will be.

A recent Reuters article, covering the latest Global Iron Ore and Steel Forecast Conference, says the consensus in the industry is that the gap is roughly $150 per tonne. They quote figures from Monash University, which estimates that green steel could be made in Australia for around $570 per tonne using a mixture of wind, solar, battery storage and green hydrogen.

One the other side we have Rystad Energy. In a recent article they argued that “the long-term economic viability of green steel versus grey steel — produced using fossil fuels — is in serious jeopardy, with the environmentally-friendly material costing up to €1,000 ($1,072) per tonne more than the alternative.”. That is a big gap.

Regardless of which number is right, and we have to remember it will be different in different regions, green steel is more expensive. It might get cheaper over time, but it's not easy to get visibility of this.

And so, if we want consumers to shift to green steel, we want to get the cost difference down as low as we can. Maybe so low that companies will pay the premium, if it will enable them to sell more of their end product. After all, some consumers are prepared to pay a green premium, so long as it's not too big.

There may be some good news on cost

One solution is to replace the blast furnace-basic oxygen furnaces (BF-BOF) production process with something that emits lower levels of GHG's. Part of this will be about using all of our scrap to turn it back into useful steel, using an Electric Arc Furnace (EAF).

But, we don't have enough scrap to replace all of the new (virgin) steel we need. So we need a lower GHG emitting process that can produce new steel.

The good news is that such a process exists - Direct Reduced Iron (DRI) plus Electric Arc Furnaces (EAF). We wrote about this in a recent blog, plus we discussed progress on green steel here.

The bad news is that the economics of DRI + EAF work best in specific regions of the world. Not in Europe.

Rystad Energy's analysis (see link above) shows that it is currently more cost-effective to import DRI from Oman than to produce it internally in Germany, with savings of around $25 to $30 per tonne.

Why Oman ? We talked about DRI back in Sept 2022, when we highlighted a report, from the Institute for Energy Economics and Financial Analysis.?This identified the opportunity for the Middle East & North Africa (MENA) region to become, over time, a powerhouse in green steel production.?All based on DRI.

While the MENA region produced just 3% of global crude steel in 2021, it accounted for nearly 46% (55 Mt) of the world’s DRI production. Furthermore, some of the largest iron ore pelletising plants (where DR grade pellets are produced) in the world are in MENA.

Not great for jobs in Europe, but not a total disaster.

But why stop there?

The MENA region could end up with a lot of cheap solar electricity, which with battery storage (again getting cheaper) could power cheaper EAF green steel production. Making green steel entirely outside of Europe.

But, with many fewer jobs in Europe.

How big a deal are lost jobs?

A very big deal. Maybe not as big as automotive, but still material.

According to Eurofer data, the sector directly employs c. 325,000 people across Europe, with the biggest country being Germany (just over 83,000). If you add in indirect employment, the total number of jobs is claimed to be as much as 2.6m, with c. 500,000 of these being in Germany.

And these are often well paid jobs.

This could be a deal breaker politically.

We could have a solution to cheaper green steel, but at the cost of jobs. Hands up those people who think that European politicians might choose green steel over jobs? Or will they go for the more expensive option, that saves jobs? I think they have already answered that question - just look where the subsidies are going.

And it's not just a challenge in steel

We are seeing something similar in EV's. In a recent blog we asked "can a $25,000 'cheaper' European EV really compete with the mass market offer coming out of China, where local carmakers already market nearly 50 small, affordable electric car models, many of which are priced under $15,000."

One political response is tariff barriers for cheap Chinese EV's. But without a cheaper mass market EV product, will EV fail to bridge the S curve chasm?

Before I finish - those who read my posts regularly will have spotted I haven't written for a while. I have been helping a relative who has some serious health issues. Which seem to be heading toward a positive ending. I am back now but with some catching up to do.

One last thought

We often talk about sustainability transitions in terms of technologies and cost reduction. But politics and people is perhaps even more important, at least in the short and medium term. We wrote about this recently in the context of agriculture. We all want greener farming, but we seem to want farmers to bear most of the cost, and many of them cannot afford the investment.

We need to find a way to break this logjam. We say we want change, but politicians are reluctant to hit jobs and increase costs. Because they believe that we as voters are unwilling to take the short term pain for the longer term gain.

Are they right ? What do you think and what are you willing to pay?

The challenges of green steel was the subject of a recent Sunday Brunch for The Sustainable Investor. You can read the full blog for free on the website, just signup.