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    RESEARCH | 3 POINT PERSPECTIVE | SOLVING SUSTAINABLE

    How the global steel industry can go green

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    Contributors: Maggie O'Neal, Tom Zhang

    25 Apr 2022

    Steel is a vital industrial metal, widely used in energy, construction, transportation, infrastructure, packaging and machinery. But producers need to get a lot greener if the world is to deliver on its ambitious net zero targets. Here our Research team explains why – and how.

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    Contributors: Maggie O'Neal, Tom Zhang

    25 Apr 2022
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    Bent steel bars painted seafoam green

    Barclays Corporate and Investment Bank clients can access the full report, entitled Green Steel: From rhetoric to reality. Sign in

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    1. The steel industry is heavily polluting

    The World Steel Association estimates that the industry accounts for 7-9% of total global carbon emissions – second only to power generation as a source of CO2.1 Most of that CO2 comes from coal-powered production methods.

    Manufacturers recognise that they need to produce more cleanly. Their customers, too, are applying pressure, as they try to hit their own targets linked to indirect emissions. Steel accounts for about one-third of supply-chain emissions for cars and buildings, and around half for white goods and renewable energy equipment.

    But decarbonising the sector is far from easy, given the lack of commercially viable alternatives to coal. Just two of the 17 companies in our Research analysts’ coverage have emissions below the 2050 steel industry target, per tonne of steel produced. Both of them are based in the US, which accounted for less than 5% of the world’s crude steel production last year.

    2. Greater use of the Electric Arc Furnace method would help

    The vast majority of the world’s steel is produced either via the Blast Furnace/Basic Oxygen Furnace (BOF) method or the Electric Arc Furnace (EAF) method. The former involves using coal to reduce iron ore and create new “primary” steel. The latter uses electricity to melt old scrap steel and produce recycled, “secondary” steel.

    Use of the BOF process is widespread, accounting for about 70% of global production. Yet it is much less clean. Producing one tonne of steel in this way generates 2.3 tonnes of CO2 – almost six times as much as from an EAF using scrap.

    The dominant BOF production method has a large carbon footprint, but there are cleaner alternatives

    • Inputs and outputs of blast furnace and basic oxygen furnace steelmaking method

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    • Inputs and outputs of electric arc furnace (EAF) using direct reduced iron (DRI) steelmaking method

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    • Inputs and outputs of electric arc furnace (EAF) using scrap steelmaking method

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    • Inputs and outputs of blast furnace and basic oxygen furnace steelmaking method
    • Inputs and outputs of electric arc furnace (EAF) using direct reduced iron (DRI) steelmaking method
    • Inputs and outputs of electric arc furnace (EAF) using scrap steelmaking method

    Source: Company reports, Barclays Research

    Scrap supplies are limited, however, and EAFs cannot always produce the quality required for certain applications.

    That puts a premium on the development of alternatives, such as EAFs using Direct Reduced Iron (DRI): a scrap substitute, produced using iron ore pellets and natural gas. An EAF using DRI emits around 1.5 tonnes of CO2, making it dirtier than EAF using scrap but significantly cleaner than the BOF process.

    Production could get cleaner still if hydrogen were to replace natural gas within the DRI process. That way, low-emission primary steel – “green steel” – would be possible to manufacture.

    3. Government support is key to making green steel a reality

    At the moment, the costs to produce green steel are formidable. Our Research analysts estimate that a DRI/EAF process using hydrogen would add about $100 to operating costs per tonne of steel produced. That would drive most producers out of business.

    If, however, the cost of hydrogen were to tumble – to below $1/kg in Europe and 70 cents/kg in the US – then the technique could be viable. That makes it imperative for producers to invest in the development of hydrogen-related infrastructure.

    Indicative operating cost breakdown for steel production technologies ($/t)

    Bar chart showing Indicative operating cost breakdown for steel production technologies ($/tonne)

    Source: Barclays Research
    Note: Key long-term assumptions are LT green hydrogen at $4/kg and carbon credits at $80/t.

    Government grants and subsidies will be needed to encourage investment, especially in China, which produced more than half of the world’s steel in 2021. In more mature markets, returns to shareholders are likely to fall, as producers fund projects from their cash flows.

    But there is a real urgency to act, given the industry’s long lead times for development. Blast furnaces tend to have an average life of around 40 years, but need significant upgrades after 25.

    Decisions need to be taken now if companies want to meet their 2050 emissions targets.

    1. Climate change and the production of iron and steel, World Steel Association, 2021.

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    About the analysts

    Maggie O’Neal

    Credit Research

    Maggie O’Neal is a Managing Director in Credit Research at Barclays. Based in London, Maggie has senior coverage responsibility for the Basic Industries and Industrials sectors. She has been named in the Institutional Investor European Fixed Income Research team for her coverage of Basic Materials and Industrials since 2016, including most recently #1 in High Yield Basic Materials in 2021. Prior to joining Barclays in 2015, she was at Deutsche Bank for ten years, where she held a similar role covering High Yield Basic Industries and Industrials, following a short time in Emerging Markets Credit Risk.

    Tom Zhang

    Equity Research

    Tom Zhang is an VP analyst covering European steelmakers. He joined Barclays in 2021, having previously spent five years at Credit Suisse. Tom graduated with a first class degree in Economics from Cambridge University and is a CFA charterholder.

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