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Green is the new efficiency

market insights

February 18, 2020

The Handelsblatt annual conference ´Steel Future´ (Green Steel is the new efficiency), addressed the future of the steel industry in Europe and took place in Düsseldorf from February 4th to 5th. Being a top-notch event, it included CEOs of Germany´s largest steel producers, such as ThyssenKrupp, Salzgitter, Dillinger and Saarstahl, ArcelorMittal Hamburg as well as the heads of voestalpine and Tata Steel Europe. The Federal Environmental Minister, Svenja Schulze, also joined the debate.

The EU Commission has decided on a ´European Green Deal´ to make Europe the first climate-neutral continent by 2050. As a side note, the German steel industry released around 58 million tons of CO2 in 2018, which accounts for around 30% of the CO2 emissions of the entire German industry. From a global perspective, the steel industry is responsible for 6% of worldwide CO2 emissions. The European steel industry is committed to the Paris Agreement to produce steel in the EU in a CO2-neutral manner by 2050 and the next decades will be marked by decarbonisation.

Structural change to CO2-free steel production

European leaders in the steel industry commonly agree on how this immense task is to be accomplished technically. By 2050, there will be no more blast furnaces in Europe running on iron ore fines and coke. CO2-free steel will be produced by producing iron sponge from iron ore pellets and lumpy iron ore in direct reduction (DRI) plants. Instead of natural gas, hydrogen should be used as a reduction agent. A prerequisite for this is, of course, that 'green hydrogen', produced with renewable energy is used. The sponge iron should then be mixed with scrap and alloying elements in an electric arc furnace. The Linz-Donawitz process, in which the carbon is removed from the iron by blowing oxygen in a converter, will be phased out by then.

The biggest challenges are the economics and the availability of green hydrogen.

Hubert Zajicek, CEO of voestalpine, explained the three problems with abandoning blast furnace steel production: the availability of green hydrogen, its costs and the high investment requirement into new plants. He estimates that the capacity of renewable energy in Austria would have to be doubled in order to make enough hydrogen available for green steel production for voestalpine. 'There is still a long way to go before the use of hydrogen is economical,' explained Zajicek.

The CEO of ArcelorMittal Hamburg Uwe Braun toots the same horn: 'Natural gas is used in traditional sponge iron production. Hydrogen is far too expensive in comparison. Hydrogen may cost a maximum of 1 €/kg, but the price of green hydrogen in Germany is currently 6-8 €/kg. Perhaps you can lower the hydrogen price by 3-4 €/kg through economies of scale but the remaining difference needs to be subsidized. If you consider that the ArcelorMittal site in Hamburg requires 60,000 tons of green hydrogen per year alone, there would be a huge economic gap without subsidies.'

Steelwork conversions will require billions in investments: Hubert Zajicek predicts that two electric arc furnaces will cost € 1 billion, but still, the variable costs of steel production will be significantly higher.

The fundamental question arises as to whether politicians want sponge iron production in the EU and, if so, in what form - each company on its own or in a joint venture. Since a lot of renewable energy is produced at the coast from wind power, this region has a decisive location advantage.

Customers do not pay a premium for green steel

How to finance investments into new plants and the higher production costs for green steel remain difficult questions. Initial talks with large steel customers such as the automotive industry have shown that although decarbonization is encouraged, they are not prepared to pay a premium for green steel. After all, they are exposed to international competition and green steels appear to be the same on the outside.

The higher costs would not be a problem for the European steel industry if other countries such as China, Korea or the United States followed suit. However, since these countries are not forced to invest in technologies and equipment for CO2-free steel production, there is a competitive disadvantage for the European steel industry. Steel imports into the EU have increased steadily over the past decade. Dr. Hartmann, CEO of Dillinger and Saarstahl, put it in exaggerated terms: 'Cheap but dirty steel is increasingly replacing clean steel.'

The CO2 balance of imported raw materials has not been taken into account yet

The import of raw materials has so far not been taken into account in the EU's ´Green Deal´. A truly CO2-neutral steel production can only exist if the raw materials used are also produced in a CO2-neutral way. Decarbonization must be implemented along the entire value chain. After all, the planet doesn't care where CO2 is released. Ferrochrome, an alloying element for many types of steel, can be a good example here. The production of ferrochrome in Finland produces only 2 kg of CO2 per ton of ferrochrome. A lion share of the energy in Finland comes from hydropower. While ferrochrome produced in South Africa produces three times as high CO2 emissions, at 6 kg CO2. Metalshub, the digital platform for raw material purchasing has made it its goal to make these differences more visible. By offering better tracability all the way back to a producer´s CO2 emissions, transparency is increased along the entire supply chain.

A clear political course must now be set

If the European Union wants its own steel industry in the EU, a clear political course must now be set. Since the world is not moving towards decarbonization in unison, the European steel industry needs political and social support. Professor Fuhrmann, CEO of Salzgitter AG, describes the switch from carbon-based to a hydrogen-based economy as the greatest social challenge since German unification. Federal Environmental Minister Schulze compares the ´giant tasks´ of digitization and decarbonization to the German economic miracle and wishes more optimism in this respect.

All CEOs of the steel industry agree: political support is needed if the steel industry is to remain a systemic key industry supporting hundreds of thousands of jobs in Europe. This makes for three core demands to the political sector:

  • The EU must subsidize necessary investments in the production of ´green steel´. EU funding must be allocated according to priorities.
  • There must be fair competition between EU steel producers and non-EU steel producers who can continue to produce with high CO2 emissions without economic disadvantage.
  • Renewable energy needs to be promoted and competitively priced.

Dr. Hartmann thinks, ´Now is the time to get louder´, and the steel workers should take an example from the farmers who recently paralyzed the streets in Berlin.

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