Decarbonizing the steel market

Today's steel industry produces more carbon than it does steel. National governments are under pressure to reduce emissions through enforced legislation and regulations, with more than 100 countries worldwide committed to reaching carbon neutrality by 2050. 

To reduce CO2 emissions, the steel industry must consume more raw materials with low carbon profiles such as higher grades of iron ore, ferrous scrap and metallics.

The iron ore market faces an uncertain future as different tailwinds and headwinds collide. Global steel prices are rising. Production is expected to grow 4.1% in 2021, according to the World Steel Association. This growth in production is driven by three primary forces:

  • Pent-up Covid-19 demand, 
  • An increase in Chinese production – particularly scrap-EAF (electric arc furnace) production, 
  • And steel investment nested in infrastructure bills and programs rolling through national governments.

But it is not all tailwinds. Steel investments are designed to grow the respective national steel industries and, maybe more importantly, to protect and grow jobs. This has the potential to create trade friction and complicate global supply chain efficiency. 

Decarbonization also looms. Traditional iron ore-based, blast furnace/basic oxygen furnace (BF/BOF) steelmaking method accounts for approximately 5% of all global carbon emissions, according to the International Energy Agency. 

The iron ore market is in a type of squeeze: greater demand buoys the steel market but decarbonization and the focus on EAF and high-grade materials may negatively impact the iron ore market. 

These dynamics bring a degree of risk. Keeping an eye on developments across the entire iron ore supply chain can help to manage this risk.

Decision-makers face a conflict of interest: How to optimize for a low-carbon future and maximize profits by meeting today's demand? 

Recent price performance

Infrastructure spending impact on steel demand

China remains the world's largest iron ore consumer and the biggest producer of steel. In China's 14th Five-year Plan, the government pledged to reduce crude steel production in 2021 as a mammoth step toward reaching its 2030 climate goals.  

Scrap prices are expected to be volatile as the market responds to China’s actions. As a response, Fastmarkets has launched a new daily price assessment to track this trade flow. The China import ferrous scrap assessment, launched on February 8, will reflect spot import prices of heavy scrap compliant with China’s standard quality on a cfr eastern seaports basis.  

The run-on scrap and the substitutive effect

The future of iron ore

The iron ore market is at a crossroads. Prices are up, supplies are under pressure, infrastructure bills and investment programs suggest increasing demand, and governments and the steel industry are pursuing decarbonization strategies that will affect the futures of different materials and grades.  

All told, the questions center on how to optimize:  optimize to the current market and integrated, coal-fired processing; or optimize to the future market.  And the iron ore market is heavily affected by those decisions. Bias to maximizing today’s margins increases overall interest and the relevance of iron ore 62%.  A shift to decarbonization strategies and EAF production may lessen overall interest in iron ore but still increases the relevance of iron ore 65%.   

This uncertain future compels market participants to keep a close watch on industry news and any movement in price.

During our virtual Global Iron Ore event in March 2021, our experts looked more into these dynamics.  

Trade tensions 

Growing trade tensions and uncertainty over import policies will also play a big part in the availability of traditional steelmaking feedstock and the ferrous scrap market. We expect the unofficial ban on Australian coal imports to China to remain and cause more swings in trade flows globally. China's move to reduce its reliance on Australian iron ore and coal imports will offer an opportunity to smaller, more price-attractive exporters, including South Africa and Canada. Chinese ports have started to receive hundreds of thousands of tonnes of coal from South Africa -- China’s first coal imports from that country in more than five years - and shiploads of iron ore from Sierra Leone, strengthening China's relationships with developing nations rich in natural resources.

At the same time, we expect the rest of Asia's big importers to take advantage of the China-Australia row. For example, an Australia-based trader source spoke of a large Canadian miner planning to reduce the amount of coking coal allocated for its Indian buyers in 2021 in order to send more volumes to China. This shift in trade relations is a win-win situation: the Canadian miner can make a bigger profit from Chinese mills paying higher prices, and Indian mills can buy Australian coking coal at lower prices.  

As the rest of Asia seeks to increase its flexibility in sourcing steelmaking raw materials, we expect ferrous scrap demand to increase. Accelerating the transition to greener production methods such as the EAF.

Global steel prices have more than rebounded from Covid-19, seeing some record highs. But three issues may impact today’s performance: 

  • The current business climate can motivate some to defer decarbonization efforts and maximize the margin performance of current steelmaking processes. 
  • And any investment in capacity points to the cautionary tale of 2008 where a “hot” market drove capacity investments – only to be met with a market slowdown.
  • Prices are sufficiently high that there are concerns for a future downward correction. 

Current pricing may also reflect national infrastructure bills, which are increasingly supportive of decarbonization efforts. As part of the European Union’s €750 billion ($910 billion) Next Generation EU recovery program, investment of €1.6 billion ($1.9 billion) is planned on 55 rail infrastructure projects, which could push demand for long steel products up by hundreds of thousands of tonnes across the union.   

In response, steel producers ArcelorMittal Europe and Ovako have started offering the first certified "green steel" on flat steel products, which includes an independently audited environmental footprint and a certificate reporting companies’ reduced Scope 3 emissions profile. The producers anticipate offering 600,000 tonnes by 2022.

Activity across Asia and overall infrastructure growth will continue to expand due to wide-scale economic growth and the continued expansion of the middle class. For instance, in July 2020, the Philippines' government allocated $20.8 billion for public infrastructure. This is expected to support the completion of major projects under the country's “Build, Build, Build” program over the next two years. 

And in North America, as the Biden administration settles into power, we might finally see a big infrastructure bill with the potential to place further pressure on mills to ramp up capacity to meet demand. 

It is worth noting that these investments, although focusing on steel products typically associated with BF production, have sustainability undertones.  

Sustainability vs. productivity

The issue surrounding scrap-based EAF production is the challenge of producing sufficiently high-quality steels. But most EAF production can now match the high quality made by BOFs through advanced technology. By careful management and control of raw materials -- such as blending direct-reduced Iron (DRI) or hot-briquetted iron (HBI) with prime scrap -- premium steel can be sustainable.  

As greener methods such as hydrogen-based DRI and EAF production gain higher shares of steel production worldwide, could this mark the decline of steelmakers' dependency on some types of iron ore? To answer that, we must first recognize how much of the iron ore supply base needs to change to meet the DRI sector's demand.  

High-grade iron ore supplies will need to be sourced in vast quantities to replace existing lower-grade production and reduce CO2 emissions meaningfully. Although this will come at a high premium, more forward-thinking investment is needed to get away from the big polluters.   

The reopening of the Chinese scrap import markets pressure scrap supplies and may compel other nations to pursue different materials. This substitutive effect, shown here for Asia, will almost certainly alter trade flows and place further demand on iron ore – at a time when countries still seek decarbonization strategies. 

Iron ore enters an age of change

Market growth and decarbonization collide to create an unclear future for steelmaking

                Decarbonizing the steel market                  China's evolving steel industry                  Iron ores uncertain future               

China's evolving steel industry

Iron ore's uncertain future

Revisit this two-day virtual event, and hear our expert speakers analyze some of the key themes impacting the iron ore market, including:  

  • Developments in Chinese steelmaking, detailed market analysis, and an outlook of the iron ore market   
  • Iron ore pricing mechanisms and high-grade iron ore pricing trends: the switch to 65% grade premiums   
  • Global and regional iron ore market dynamics, trade flows, and procurement trends.