Steel Industry Prepares to Transition to Green Hydrogen

Steel Industry Preparing to Shift to Green Hydrogen with USD 278 Billion Investment

Hydrogen and recycling will likely play a central role in reducing emissions from steel production. Steel accounts for approximately 7% of annual human-caused greenhouse gas emissions and is one of the world's most polluting industries. Government and corporate net-zero commitments are forcing the steel industry to eliminate emissions by 2050. Efforts to decarbonize steel production are central to the net-zero targets of China, Japan, Korea and the European Union. A report titled Decarbonising Steel: A Net-Zero Pathway, launched in time for the virtual BNEF Summit Shanghai, outlines a path to profitable, low-emissions steel production. The report shows that with declining hydrogen costs, cheap clean energy and increased recycling, emissions can reach net-zero even as total output rises. By 2050, green hydrogen could be the lowest-cost production method for steel and capture 31% of the market. The remaining 45% can come from recycled material and the rest from traditional coal-fired facilities equipped with carbon capture systems and innovative processes using electricity to convert iron ore into iron and steel. Today, a small amount of steel is produced using a process called "direct reduction" and the technology has matured. A synthesis gas made from methane (natural gas) consisting of hydrogen and carbon monoxide is burned in a large chamber to extract or "reduce" iron ore into metal. This will represent a dramatic shift in the furnace types and fuel sources used to produce steel. Today, approximately 70% of steel is produced in coal-fired blast furnaces, 25% in electric furnaces from scrap, and 5% using a newer process known as DRI, typically powered by natural gas, or direct reduced iron. Converting a significant portion of the fleet to hydrogen will require more DRI facilities and more electric furnaces. In this scenario, blast furnace production would decline to 18% of capacity. Julia Attwood, Head of Bloomberg NEF's Sustainable Materials division and lead author of the report, states, "The steel industry cannot afford to wait until the 2040s for its transition to begin." The coming decade will see a major expansion in steel capacity to meet demand in growing economies such as India. Today's new plants are tomorrow's retrofits. Commissioning natural gas-fired facilities can position producers to retrofit them to burn hydrogen in the 2030s and 2040s, giving them the lowest-cost capacity. However, continuing to build new coal-fired plants will leave producers with only poor options for achieving a net-zero future by 2050. There are five key actions the sector must consider to realize this transition: increase recycled steel volumes, particularly in China; secure clean energy for electric furnaces; design all new capacity to be hydrogen or carbon-capture ready; begin blending hydrogen at existing coal and gas-based facilities to reduce green hydrogen costs; and renovate or fully shut down coal-powered capacity by 2050. Producing green steel from hydrogen and electric furnaces will require large quantities of clean energy and high-grade iron ore. This could shift where steel is produced or fundamentally shake the mining industry. Both Russia and Brazil have access to high-quality iron ore reserves and abundant clean power. Additionally, according to BloombergNEF research, Brazil is expected to have among the lowest costs for hydrogen production by 2030. South Africa and India have good iron ore reserves and significant potential for low-cost clean energy production. However, the world's largest iron ore producer, Australia, currently produces lower-grade ore and risks losing its number-one position in the supply chain if it does not invest in equipment to improve its product. China will continue to play a significant role. Currently hosting 57% of the world's steel production capacity, this country will determine the direction of the industry as a whole on the path to lower emissions. China's steel industry plans to focus on increasing recycling and energy efficiency before adopting early-stage technologies such as hydrogen and carbon capture. Kobad Bhavnagri, head of BloombergNEF's industrial decarbonization division, states, "The global steel industry is preparing to make a massive shift from coal to hydrogen. Green hydrogen is both the cheapest and most practical way to make green steel as recycling levels increase. This transition will create both major disruptions and major opportunities. Companies and investors have yet to grasp the scale of the changes ahead." Policy support provided by policymakers to industrial decarbonization could also be a determining factor for steel producers. Tax credits for hydrogen and carbon capture in the U.S. pending Build Back Better Bill, public sector green steel procurement requirements such as those announced in the Industrial Deep Decarbonization Initiative at COP26, subsidies for key enabling technologies, or rising carbon prices such as those in the EU's Emissions Trading Scheme could help green steel compete with fossil fuel-based production. BloombergNEF estimates that new clean capacity and improvements for lower emissions will cost the steel industry USD 278 billion (GBP 208 billion) compared to typical capacity increases. This is a relatively modest figure compared to the USD 172 trillion (GBP 130 trillion) BloombergNEF estimates will be needed to decarbonize the global energy sector. Most of the costs of producing green steel come from operations rather than capital costs. Reducing green hydrogen costs is therefore critical, and BloombergNEF estimates these will fall below USD 1/kg in many parts of the world by 2050, a decline of more than 80%. Green recycling is also an affordable and rapid solution. Steel recycled using 100% clean electricity requires only a 5% premium to meet today's recycled material costs. By 2050, with lower clean energy costs, this premium could fall below 1%. Source