Bulk Buys: WoodMac thinks scrap steel will rival iron ore by 2050 in bid to curb steel emissions
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Numerous pathways have been proposed for the steel industry’s decarbonisation.
It is widely regarded as one of the hardest sectors to remove carbon emissions from and one of the toughest challenges for the world’s efforts to hit net zero targets.
Steel production currently generates around 7-8% of the world’s CO2 emissions. While a solution may be to curb steel production, that falls down on a few fronts.
One, the economic damage of doing that would be severe. Steel production growth and the aligned growth of the property and infrastructure sectors in Asia have been key pillars of economic growth across the world over the past 20 years.
Australia’s Pilbara iron ore industry, still the key supply link for China’s steelmakers, has propped up our nation economically since the last mining boom and recently powered the WA State Government to a second successive surplus over $5.7 billion.
Secondly, steel will be critical for the construction of renewable energy infrastructure and electric vehicles to green up the power and consumer transport sectors.
Around 60-70% of global steel production, which almost hit 2Bt for the first time last year, is done through the conventional blast furnace, in which coke derived from coal is used to reduce iron ore into steel.
It’s the main production method in China, the world’s biggest steel market accounting for ~60% of global output, and India, the fastest growing market. And the world’s biggest miner BHP (ASX:BHP) says this will be the dominant technology for at least the next couple decades.
Given steel’s centrality to decarbonisation in other fields, just how can the industry solve this Catch-22?
There are two major alternative technologies.
One is direct reduced iron, in which iron ore pellets are reduced to iron using natural gas to power the process.
While it still involves the use of fossil fuels, DRI is around 2.5 times less polluting than blast furnace steelmaking.
Theoretically green hydrogen could be introduced over time to make DRI an even cleaner solution, but there could be some roadblocks.
Despite ongoing trials, some in the industry are suspicious of hydrogen’s potential to replace gas in DRI or substitute pulverised coal in a blast furnace on large commercial scales.
Secondly, the process requires super high grades of iron ore with low impurities to work – DRI pellet grades are typically 66% and draw a hefty premium over the benchmark 62% fines product sold by miners like Rio Tinto (ASX:RIO).
Iron ore at grades like that are rare and will require billions of dollars of investment to develop at larger scale. In fact, grades from the Pilbara majors have declined over time and none ship at an overall product grade matching the traditional 62% benchmark.
Another solution is electric arc furnace, common in Europe and a technology China is keen to expand to increase its self-sufficiency (i.e. reduce the steel sector’s reliance on its trade frenemy Australia).
EAF is energy intensive (and mill utilisation often reduces in times like these when energy costs are high) but emits far less CO2 than blast furnace steelmaking. It relies primarily on high quality scrap steel rather than iron ore as its feedstock.
EAF growth has been limited in China by the young life of both its blast furnace fleet and its steel in circulation. But analysts from resources consultancy Wood Mackenzie say EAF could challenge blast furnaces for market share by 2050 as the steel industry reduces emissions by 30% globally.
“The global share of electric arc furnace (EAF) in steelmaking is rising with policy shifts and increasing focus on scrap use,” WoodMac research director Malan Wu said.
“Basic oxygen furnace (BOF) output will decline 0.5% annually until 2050, whereas EAF output could increase 2.3% yearly in the same period.
“By 2050, EAF will account for 48% of the technology share used in steelmaking, up from 30% last year, making it almost on par with the traditional BOF method.”
Wu says the 30% reduction can be met with the expansion of green hydrogen based DRI, scrap use and adoption of carbon capture and storage.
WoodMac estimates that in 2021 steelmakers produced 3.34Bt of CO2 emissions (compared to a record 1.95Bt of steel). By 2050 it says that would fall to 2.33Bt, with 178Mt removed by CCS methods.
WoodMac expects hydrogen use in the steel industry to begin from 2027, starting in the EU where trials are already under way, but despite the hype don’t expect it to dominate low emissions technologies.
It says hydrogen-based steel production will account for 232Mt of output by 2050 (around 10% of global production), with 40% of DRI by mid-century to be hydrogen based.
But WoodMac thinks scrap-EAF is the least polluting option among available technologies, with blast furnace operators also likely to increase scrap blending by retrofitting converters.
The biggest reductions will have to come from ‘mature economies’ like Japan, Korea, Taiwan, the EU, UK and US, who will need to reduce their emissions by 50% from current levels while maintaining or increasing their steel output.
China meanwhile plans to keep steel output below 2021 levels this year and may have already seen production peak after falling last year from a record 1.065Bt in 2020 to 1.035Bt on government enforced restrictions.
Emerging economies in India and Southeast Asia on the other hand will pump more CO2 into the atmosphere as their crude steel production increases via the blast furnace route.
Production in these areas will triple, with carbon emissions expected to double from current levels and decarbonisation initiatives only expected to begin in earnest from the mid-2030s.
“The onus will be on mature economies to decarbonise quickly. These economies will look to pare down emissions by switching to EAF, which is three-quarters less emission-intensive than the blast furnace route,” Wu said.
“India and Southeast Asia, the key demand drivers, will buck this trend as most capacity additions are via the BF-BOF route.
“However, nearly two-thirds of incremental supply between 2021 and 2050 will materialise from India and Southeast Asia – cushioning the negative impact on hot metal.”
Iron ore prices lifted on Monday by US$2.08 to US$129.05/t, clipping an emerging bear market brought on by China’s Covid restrictions and a fall in downstream metal demand.
They were aided by better than expected crude steel production numbers for April, which were up 9% month on month and just 5.2% below last year’s historic high at 92.78Mt.
While steel production is down 10.3% year to date in China at 336Mt, it is currently 8% above the five-year average for the year to April.
Chinese #steel production in April slightly stronger than I expected. Sure April was down -5%yy and -7.5%ytd versus 2021. However, 2022 ytd is up 8% versus average over the last 5 years with April circa 1std above 5yr average. Infrastructure story bubbling along in background? pic.twitter.com/RfwJstmTY6
— Robert Rennie (@Robert__Rennie) May 16, 2022
Commbank metals and mining analyst Vivek Dhar said the output suggested infrastructure spending was having a positive impact on the steel sector.
China could release as much as 4.85tn RMB ($1.02t Aussie) in local government special bonds to fund infrastructure projects in 2022, expected to intensify as lockdowns are unwound, a 98% increase to the bond quota.
But Dhar said China’s policy to keep steel output below 2021 levels would be a headwind for iron ore prices.
“For China’s steel output to match production levels from last year, daily steel output will need to average 2.83Mt/day from May to December,” he said.
“That’s below April levels and suggests that steel output may have to be restrained later this year, especially if China’s daily steel output remains close to April levels over the next few months.
“We’re now more comfortable with our forecast for iron ore prices to fall to $US100/t by Q4 2022.”
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Hard rain is again falling in Queensland, where the Sunshine State’s residents must think their home’s nickname is actually a cruel and ironic joke.
That is bringing up new supply concerns from buyers in Asia already fretting about Russia and the chronic undersupply emerging in metallurgical and thermal markets.
Prices for premium hard coking coal out of Dalrymple Bay on Friday rose by US$15.50 to US$515.43/t Fastmarkets MB said.
A bid of June-laycan cargo of Peak Downs coal (one of the high quality Bowen Basin mines in BHP’s JV with Mitsubishi) was heard at $520 per tonne FOB Australia, according to Fastmarkets.
Newcastle thermal coal is going for US$402.50/t, with the coal boom showing few signs of slowing just yet.
Several coal miners powered to new levels on Tuesday.
Yancoal (ASX:YAL) closed up 3.05% at $5.74, an all time high.
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