Forging pathways: insights for the green steel transformation

Executive Summary

The steel industry is the backbone of the construction, manufacturing, energy and infrastructure sectors. It is also extremely carbon intensive, and one of the largest contributors to global carbon emissions, accounting for approximately 11% of global greenhouse gas emissions.^[1]

As part of the worldwide effort to reduce carbon emissions and reach net zero targets, a shift towards green steel is underway, with progress in technology, innovation and policy settings suggesting the steel sector no longer deserves the reputation of ‘hard-to-abate’.

However, a critical time window exists: decisions made over the next six years by investors, companies and policy makers will determine whether emissions from steel drop significantly, or stay stubbornly high.

Between now and 2030, 71% of the world's steelmaking assets will reach the end of their operating lives, necessitating significant investment in the relining of coal-dependent blast furnaces.^[2] The reallocation of capital to genuine green steel processes is urgently required to prevent the lock-in of coal based methods for another 20 years – the typical lifespan of a blast furnace.

Companies and investors wanting to harness the opportunities of the green steel transition, and avoid the risks of falling behind, must act now, or miss a critical window to pivot away from carbon-intensive practices.

This report offers insights for investors and companies at the forefront of the green steel transformation who are seeking both decarbonisation and long-term shareholder value. It provides:

• a summary of iron and steelmaking technologies and their decarbonisation potential, allowing investors to distinguish genuine ‘green’ investments from those with less potential
• an overview of major global trends, opportunities and challenges across the steel value chain
• analysis of how 20 major companies, including 16 steelmakers collectively responsible for 27% of global steel production and four iron ore companies responsible for 41% of global iron ore production, are positioning the green steel transformation
• a set of concrete, actionable recommendations to support investors to drive emissions reductions and value-accretive capital allocation, and advocate for policy and regulatory settings that support investment.

Key Findings

• Investors and companies need to reallocate capital towards genuine green steel processes in the next six years to prevent the lock-in of carbon intensive steelmaking methods.

• Steel does not have a ‘climate problem’, it has a coal problem. Around 90% of emissions from steel production are due to the use of metallurgical coal in conventional blast furnaces to produce iron, the primary component of steel. Eliminating coal-dependent processes from ironmaking is key to steel decarbonisation.

• Capital allocation towards innovative green iron technologies in regions with abundant renewable energy potential is imperative. One possible solution sees ironmaking decoupled from steelmaking, with iron production occurring in areas with significant renewable energy production, delivering a reliable supply of high-value green iron.

• Not all processes labelled as ‘green’ have the same decarbonisation potential. Across every stage of the value chain, companies are exploring advancements in technology and production innovation to enable less carbon intensive steelmaking However, the emissions reduction potential of each process differs significantly:

  • Green hydrogen-based processes, supported by renewable energy, are the most promising for emissions reductions.
  • Gas-based direct reduced iron and other lower-emission technologies offer some emissions reductions in the near term, yet to avoid reinforcing fossil fuel reliance, these should not be adopted as permanent solutions.
  • Carbon capture utilisation and storage or offsets appear one of the least cost-effective solutions, with significant uncertainty around viability and effectiveness.

• The shift towards green steel production is a major commercial opportunity for companies and their investors. Market size and demand for green steel is forecast to increase.

• Green steel offtake agreements, where consumers commit to purchasing material that is not yet produced, have become crucial mechanisms for locking in green steel demand, ensuring a stable supply chain and providing easier access to financing. The prevalence of green steel offtake agreements within European companies highlights the region's proactive stance on decarbonisation, which is supported by robust financial structures and policy settings.

• While Europe is at the forefront of technological and product innovation, a significant portion of steelmaking capacity development occurs in Asia, particularly in China. Despite a noticeable shift towards Electric Arc Furnace (EAF) production in China, the overall pace of decarbonisation in Asia is inconsistent with global decarbonisation goals.

• Of the 16 steelmaking companies ACCR reviewed:

  • 50% of the projects steelmakers have invested in have significant emissions reduction potential, while 40% of the projects still focus on solutions with limited potential to reduce emissions.
  • 94% of companies have ambitious net zero by 2050 targets, alongside quantifiable medium-term reduction goals, but short-term commitments are scarce. This suggests the steel sector has a challenging path ahead to deliver the rapid and substantial emissions reductions their targets require.
  • less than 20% of companies have net zero emissions targets that explicitly encompass Scope 3 emissions, raising concerns about the industry’s alignment with the Paris Agreement and global decarbonisation goals.
  • none currently verify whether their decarbonisation targets are in alignment with the Science Based Target Initiative’s (SBTi) Steel Science-Based Target-Setting Guidance, and only two have planned to do so in the future.

• Of the four iron ore companies ACCR reviewed:

  • scope 3 emissions, predominantly from steelmaking, account for more than 95% of their total emissions footprint. The companies are beginning to make strategic investments and form partnerships aimed at reducing their Scope 3 emissions, but the ambition and clarity of targets vary, leading to a mixed outlook on commitment and potential impact.
  • all are directing substantial capital expenditure towards operational decarbonisation by 2030. However, all need to improve disclosure of their expenditure, which should include detailed breakdowns of capital allocations toward steel decarbonisation projects, including forward-looking allocations for the next three years.
  • all are diversifying their decarbonisation investment strategies, collectively pursuing 64 steel decarbonisation projects that span an array of technologies with varying degrees of emissions reduction potential.
  • three mine iron ore in the Australian Pilbara region, where the vast majority of iron ores are not currently suitable for commercial Direct Reduced Iron (DRI) or Hot Briquetted Iron (HBI) production. Each company is tackling this challenge, acknowledging the significant business risk and initiating efforts to address it, with outcomes still to be determined.

• Coordinated, global advocacy by investors and companies for the right policy and regulatory frameworks is critical for creating favourable investment environments. In particular:

  • policies supporting investment in renewable energy are essential for ensuring a reliable energy supply for green steel production
  • strategies to support green public procurement (GPP) by nation-states, leveraging their substantial purchasing power, will continue to play a significant role in creating market demand for green steel production
  • aligning policy frameworks with the geographical strengths of regions across the steel value chain is pivotal for efficient investments towards zero emissions.

• Financial risks associated with failing to decarbonise are already apparent and will increase. For example, The EU’s Carbon Border Adjustment Mechanism (CBAM) imposes a carbon price on steel imports based on their intensity emissions.

• Wealthier nations, including those with strong economies and industrial capabilities, have a substantial role in leading global decarbonisation efforts through technology innovation and policy development. International cooperation and technology transfer are also essential for the global decarbonisation of the steel sector. Policies that encourage collaboration and support technology sharing will be important in achieving widespread adoption of green steel practices.

• Implementing robust systems for emissions monitoring and reporting is key to enhancing transparency and accountability in the steel sector.

Key Recommendations for Investors

Investors have five key levers available to them now that can help ensure a decarbonised steel sector is a reality by 2050.

Reallocate capital away from coal-dependent blast furnaces and towards processes with high decarbonisation potential.

• Engage with companies, using escalation where necessary, to ask for disclosures of transition pathways to low-emissions iron/steelmaking, along with a detailed outline of the capital allocation for the transition.
• Direct investments towards regions lagging in green steel production capability, specifically to accelerate decarbonisation efforts.
• Engage with policymakers directly and indirectly to encourage positive policy settings for steel decarbonisation.

Increase renewable energy capacity to enable the green electricity and green hydrogen required for low-emissions steelmaking.

• Fund renewable energy projects, particularly in developing countries with steelmaking operations.

Work towards standardised, comprehensive and robust emissions disclosure across the industry.

• Engage with companies to ask for transparent disclosures.
• Integrate emissions data and trends into investment analysis, so shareholders can invest in companies that demonstrate transparency, lower carbon intensities and a strong commitment to reducing absolute emissions.
• Update financial risk assessment models to accurately incorporate the physical impacts of climate change, ensuring investment strategies adequately address climate risk.

Catalyse immediate action towards decarbonisation with short-term climate commitments that are ambitious and science-based.

• Engage with companies, using escalation where necessary, to ask for the disclosure of short-term climate targets and alignment with the Science-Based Targets initiative (SBTi).

Ensure that the transition of iron and steelmaking to green processes is just and equitable, supporting communities and workers.

• Hold companies to account on providing a just transition timeline, clear framework and outcomes for impacted workers.
• Incorporate just transition metrics and information into investment analysis and decision-making.
• Advocate for policies promoting a just transition.

Alongside the report, ACCR has launched a new steel decarbonisation tracker. With the uptake of technology and new commitments and collaborations by key players moving at pace, we’ve created an online database where investors can stay on top of the most recent steel partnerships and announcements from major companies, as they occur.

View Forging pathways: insights for the green steel transformation | 03/2024

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