Here’s how new technology could remove a major road block for green steel
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BHP proudly states the 70Mt of met coal it produces each year generates enough steel to build the Burj Khalifa in Dubai 1600 times over.
But as steelmakers turn their attention to the difficult task of decarbonising the global steel sector — responsible for 8% of the world’s CO2 emissions — is it an industry with a finite life ahead it it?
There are a host of barriers to taking carbon emissions out of the steelmaking process not seen in other areas of the global economy like transport and power.
Notably, most steel worldwide is produced via the dominant blast furnace/basic oxygen furnace route.
Even if energy for the process were to come from renewable electricity, blast furnaces use hard coking coal as a reducing agent to strip oxygen from iron ore to make crude steel.
This process, responsible for 90% of output in the world’s largest and only billion-tonne-a-year steel market China, generates around 2t of CO2 for every tonne of steel.
Cleaner processes like direct reduced iron and electric arc furnace, the latter of which primarily uses scrap steel, burn far less fossil fuel, generating around 1.4 and 0.4t of CO2 per tonne of steel currently.
DRI, which is powered by gas, could become even greener in the future with the introduction of ‘green hydrogen’ as a replacement for natural gas. But both have limitations.
DRI in particular requires a high grade, low impurity iron ore above 66% (4% above the benchmark index and 5-6% above the grades of major Pilbara iron ore producers) to function.
And that is in incredibly short supply, with only 4-5% of the iron ore sold worldwide making the grade, much of that out of politically risky Ukraine and Russia.
But analysts at the Institute for Energy Economics and Financial Analysis say studies currently under way by some of the world’s best known steel companies could alter that dynamic.
According to energy finance analysts Simon Nicholas and Soroush Basirat, the absence of high grade iron ore supply will be one of the major challenges to decarbonise the steel industry.
With current technology, it would likely be insurmountable.
“As it stands, some of the forecasts for the steel industry to reach net zero emissions globally by 2015, needs something approaching 50-60% of all primary steel production to be from DRI processes,” Nicholas told Stockhead.
“And that requires something in the region of 1.2 to 1.4 billion tonnes of DR grade iron ore, which we’re nowhere near.
“So if these alternative technology combinations can mean that DRI can use far more plentiful blast furnace grade iron ore that hopefully will alleviate that pressure.”
One reason DRI is being looked at so closely is that trials are under way to use renewable green hydrogen to power the process instead of gas, which could give the industry a theoretical pathway towards net zero targets.
But that undersupply of high grade iron ore is a key issue.
Nicholas and Basirat say European and Australian steelmakers including Thyssenkrupp, ArcelorMittal, BlueScope and Tenova are looking at processes, mostly including an additional melting stage, that would allow blast furnace grade iron ore to be used in the DRI steelmaking process.
“In terms of iron ore supply, these new technology developments which allow the use of lower grade iron ore are likely to be key,” Nicholas said.
“In such early days, it would be dangerous to put all your chips on that and say that’s definitely the solution.
“You’re probably also going to need to see more DR grade iron ore supply, so probably more magnetite mines developed, more beneficiation to existing supply where that’s possible. In places like the Pilbara that’s difficult.
“So it’s probably going to be a combination of things.”
The likely leader in this space appears at the moment to be Thyssenkrupp.
It is planning to replace four of its blast furnaces with DRI-SAF plants by 2045, starting with the first two in 2025 and 2030.
Key to its plans will be proving up a process that will include a melting stage to use 65% Fe or less blast furnace grade pellets in the DRI process.
Its aim is to reduce its CO2 emissions by 30% by 2030, producing 400,000t of green steel by 2025 and 3Mt by 2030.
Its first 1.2Mt DRI plant will start on natural gas before shifting to hydrogen if and when that becomes commercially viable. An FID on the first plant is expected this year.
“I think it’s fair to say that these new DRI technology developments that allow them to use low grade iron ore, they’re fairly new and Thyssenkrupp seems to be progressing fairly seriously with the plan,” Nicholas said.
“But if we see start to see final investment decisions from the likes of them and then ArcelorMittal, which is obviously a huge steelmaker and has a similar plan, then BHP might start to see that this is actually quite a serious option to get around that hurdle of limited DR Grade iron ore supply.”
Other companies, like South Korea’s POSCO, are looking at alternative DRI processes that utilise iron ore fines, the main iron ore product available on the market, due to a shortage in not just high grade iron ore, but also global pelletisation capacity.
With all these technological issues to navigate to deliver low emissions steel, BHP remains bullish on met coal demand, having declined to include the asset division in its sell-off of fossil fuel assets over the past two years.
Nicholas notes it is now an outlier among the world’s four biggest iron ore companies (Rio Tinto (ASX:RIO), Brazil’s Vale and Fortescue Metals Group (ASX:FMG) are the others), as the only coal producer among the majors after Vale and Rio sold their assets in 2018 and 2021 respectively.
That confidence in future demand for met coal along with record high prices driven by recovering steel demand out of the pandemic has inspired BHP to invest further in its Queensland operations.
Most notably, it last year started the State approval process for the Blackwater South mine, a proposed 10Mtpa operation adjacent to the operating Blackwater mine which could deliver coal for steelmakers for 90 years.
BHP has also been comfortable with the idea of trading its met coal assets to other companies as part of its rebalance to increase the share of its earnings driven by “future facing commodities” like nickel and copper.
The world’s biggest miner sold its majority stake in the South Walker Creek and Poitrel mines for US$1.2 billion to Stanmore Coal (ASX:SMR) earlier this year.
It decided not to sell the Mt Arthur coal mine, instead opting to run the thermal coal operation in the Hunter Valley down by 2030.
But that seems to be as much about its inability to find a buyer who wanted to pay an economic price for the asset as conviction. Rather BHP will benefit from record high energy coal prices before the mine’s closure.
The application to develop a new mine at Blackwater has been understandably controversial among groups who have pushed for BHP to run down its coal operations, notably the Australasian Centre for Corporate Responsibility.
BHP’s latest analysis from market analysis and economics VP Huw McKay reinforced its confidence in the role of met coal in a world dominated by green investment.
“On the topic of technological disruption, our analysis suggests that blast furnace (BF) iron making, which depends on coke made from metallurgical coal, is unlikely to be displaced at scale by emergent technologies this half century.”
It is worth pointing out that most of the growth in the steel sector in the past two decades has come from China, while the next emerging market is likely to be India.
These are big concerns for efforts to decarbonise the steel sector given the high penetration of blast furnaces in each country and the relatively young age of their fleets.
“The argument (for met coal) hinges partly on the sheer scale of the existing stock of long–lived BF–BOF capacity (70 per cent of global capacity today, average fleet age of just 10–12 years in China and around 18 years in India),” McKay says.
“It also highlights the lack of cost competitiveness, technological readiness (or both) that will inhibit a wide adoption of theoretically promising alternative iron and steel making routes, or high–cost abatement levels such as hydrogen iron making and carbon capture and storage, for a couple of decades at least.
“Steelmaking is a low margin industry where every cent on the cost line counts.”
Economies like China and India also have relatively low scrap supply. BHP’s McKay think EAFs powered by renewables and fed by scrap steel will be the sternest competitor to conventional blast furnaces in the long run.
“Our base case has the BF–BOF25 share of global steel–making capacity drifting down from 70 per cent today to between 55 per cent and 60 per cent in 2050, with EAF mills gaining that share.”
That view was largely echoed by Tata Steel CEO T.V. Narendran on a recent trip to Queensland. Despite the Indian steelmaking giant’s commitment to a 2045 net zero target, he called on the Queensland Government to back an expansion in met coal supply with India seeking to more than double steel production to 300Mtpa by 2030.
“When it comes to global steel sector decarbonisation, the technology path taken by India is going to be key,” Nicholas said.
“China looks like it’s probably reached peak steel emissions already in 2020. That was the highest level of steel output that we’ve seen in China – 2021 was lower, and I expect 2022 to be lower still.”
Nicholas thinks BHP’s commitment to and support for met coal is unsurprising given it is such a large producer. Its BMA JV with Mitsubishi in Queensland is the largest exporter of premium coking coal in the world.
But he said the rapid rise in the take-up of wind and solar around the world showed technological change could move fast.
“We’ve seen how quickly the transition is now happening in power and you know, then the current energy crisis is probably only going to accelerate that,” Nicholas said.
“So it’s just another example from history as to how quickly these technology transitions happen. And so I think there is the risk for companies like BHP, which is still backing its high quality coking coal, is that they will find that this transition happens faster than they expect it to.”