The shift toward green steelmaking, or reducing carbon dioxide (CO2) emissions, is coming. Fastmarkets’ latest analysis looks at this trend, which stands to overhaul the entire steelmaking process and supply base. The question for steel market participants is whether they can survive the green revolution, and whether the financial risks of decarbonization, which is an expensive undertaking affecting margins, raw material and production costs as well as trade opportunities, might outweigh the potential gains.

Decarbonization complicates an already complex mix of market dynamics. In recent months, steel markets have been dominated by high prices and supply restrictions. A correction is due. Steel industry leaders must consider how demand for green steel will interact with future market conditions.

The topic of green steel and decarbonization will be a crucial part of Steel Success Strategies 2021, to be hosted in Miami on Nov 7-9.

This report features insights from:

Real-time, spot metal spreads for HRC

The promise of up to 5 million tons of additional steelmaking capacity flooding the US market could drastically change the outlook by the end of the year, placing high margins at risk, as could an additional 58.2 million tonnes of gross global capacity by 2022.

Some of the world’s biggest economies are investing heavily in infrastructure – and these green-tinged investments create demand for low-carbon steel.

EAF has reached a tipping point

The global ratio of electric arc furnace to blast furnace and basic oxygen furnace steelmaking had been declining until recently. After hitting a low point in 2015, the switch to EAFs regained momentum. Although the lower-carbon benefits of the EAF steelmaking process are well known – the use of coal is not actually required, even if it is still used widely for the generation of electricity – the moves to EAF steelmaking were driven by demand, especially from the construction sector, rather than by supply concerns.

EAF steelmaking now accounts for roughly as much production as BF/BOF steelmaking outside of China but is still a tiny though growing share of the Chinese market. And while only one-tenth of steel made in China is EAF-based, greener government policy and increased appetite for scrap could see this figure rise in years to come – dramatically changing the total CO2 emissions from global steelmaking.

The shift toward and away from EAF steel production is traditionally related to the rising demand for construction steel long products rather than manufacturing steel flat products, although in some markets – such as the US and the Middle East – EAFs are overtaking BOFs even in flat products supply. In the future, however, we believe the trend toward EAFs will be more consistent, driven by the green revolution rather than any market agenda. It is certainly the case that China’s 14th Five-Year Plan is designed to accelerate China’s progress through the four stages of decarbonization, and because of China’s increasingly dominant share of the global market – it has been producing more than half of global steel since 2017 – that progress is significant.

EAFs' share of global steelmaking capacity

Those regions without robust domestic scrap markets or buying power will be disadvantaged. Even the biggest scrap market, China – which last year used over 200 million tonnes of scrap, about twice as much as the EU in second place – may struggle to find the 300 million tonnes it needs over the next decade. China recently reopened its borders to scrap imports in a clear sign that local collections will struggle to meet demand in the short term.

Like the US, the EU is already considering imposing duties on scrap exports to help protect regional supply.

“The EU has now realized waste is a resource. The reason behind this circular economy notion is to keep our waste, which is a resource, within our area. That is an open secret; the rationale for the EU to accomplish [a circular economy] is to have more resources on hand,” Julia Blees, senior policy officer at European Recycling Industries Confederation (EURIC), explained during a panel discussion at the Bureau of International Recycling (BIR) Convention in late May.

The possibility of US and EU border taxes coupled with heightened demand could make sourcing this limited commodity challenging even for the likes of Turkey, the world’s leading importer, and India, where local scrap generation is yet to fulfill its potential. Though Indian and Turkish steel producers typically sit in a better position than US or European mills on our global cost curve, at least in international markets, the scrap-rich regions of the West may become more competitive in future.

Although decarbonization is inevitable, the road forward is uncertain. The uncertainty is driven by the underlying financial challenge: likely margin pressure combined with expected decarbonization costs of $1 trillion. ESG-centric investors and shareholders will provide additional financial valuation pressure.

The cost of green steel will rise as well, but it is not clear if the market will bear the associated price increases, especially given inflation pressures. And ironically, while interest in creating jobs is at the heart of the very infrastructure bills that will drive up demand for low-carbon steel, the greener EAF-based steelmaking, and margin pressures to keep costs low could advance the growing trend toward automation, potentially affecting steelworker jobs.

Until a green premium emerges, we expect price dynamics to be volatile and difficult to interpret because of the complex factors – including hyper-competition for green steelmaking materials – affecting this market. Demand forecasts are reassuringly positive, driven by growth in automotive, manufacturing, construction, and government infrastructure investments.

With those threats and opportunities in mind, the question for the steel industry is which market participants will survive the turbulent transition to zero-carbon steel, and which will find a way to thrive after the green revolution.  

Join us at Steel Success in Miami this November and find out what steel companies are doing to survive the green revolution. 

Surviving the green revolution

The true price of green steel

How decarbonization will squeeze steel margins and

create intense competition for raw materials and scrap

The recovery from the Covid-19 pandemic and pent-up demand caused steel prices to soar at a faster rate than those of raw materials – leading to massive margins for steelmakers. 

The gap between Fastmarkets’ steel hot-rolled coil index, fob mill US and steel scrap No1 busheling, index, delivered Midwest mill has widened significantly in 2021. As of mid- June, that margin has averaged $936.18 per tonne for the year to date; in 2020, the gap averaged $354.32 per tonne, and in 2015 the margin stood at just $257.39 per tonne.

US steel producers have struggled to keep up with demand since the imposition of the Section 232 tariffs and quotas in 2018 made seaborne suppliers uncompetitive. At the same time, the green agenda has come into focus, creating demand for low-carbon steels and in turn for ore-based metallics and, increasingly, scrap. The combination of those factors has enabled local mills to dictate prices, especially for flat-rolled steels used in manufacturing applications. 

The gap between steel prices and raw materials won’t last forever. Rising production costs coupled with a looming correction for finished steel means margins are on course to contract by the end of this year.

In a recent Fastmarkets study, we estimated that the steelmaking industry would have to invest more than $1 trillion – and the iron ore industry a further $239 billion – to cut carbon dioxide emissions by 61% by 2050.

The steel investment alone equates to $35 billion per year, raising production costs by approximately $50 per tonne, squeezing margins further.

Can the market support a flood of new steel products?

  • In the United States, President Joe Biden’s American Jobs Plan, which is expected to pass with the physical infrastructure investments largely intact, could create significant demand for steel throughout the life of the plan. 
  • The European Union’s recovery instrument – known as NextGenerationEU – will invest €750 billion to repair the economic and social damage of Covid-19, prioritizing projects that align with the EU’s long-term climate objectives. 
  • The Asian Infrastructure Investment Bank allocated $13 billion to Covid-19 relief initiatives, prioritizing green infrastructure and offering special funding packages for companies pursuing sustainability.

Still, the marginal risk of policy being undone by future administrations and changing government priorities increases uncertainty and the perception of financial risk with regard to these green initiatives.

3. Replace BF iron produced from coke with direct-reduced iron (DRI) and/or increase the ratio of higher-grade iron ore products used in the steelmaking process. 

1. Maximize use of scrap and minimize use of hot metal in blast furnace/basic oxygen furnace (BF/BOF) steelmaking, currently the dominant technology for steel producers.

2. Replace blast furnaces and basic oxygen furnaces with electric-arc furnace (EAF) technology.

4. Replace the natural gas used to produce DRI and the coal used to generate electricity with renewable energy sources.

The average lifecycle for running an integrated mill before relining is approximately 15-20 years.

At that stage, companies must decide whether to invest in new EAF technology and leverage supply chains toward scrap, DRI and high-grade metallics; reline the existing facility and continue down the BF/BOF route; or bow out gracefully.

Each of these scenarios comes with financial risks and potential opportunities, further complicating the route forward.

The four steps of steel decarbonization

Source: Fastmarkets.

Source: WSA 2000-2019 and  Fastmarkets 2019-2020.

Can a 700-million-tonne scrap market support demand from a 2-billion-tonne steel industry?

The next 10 years are critical for steel production. Government policy and demand for green steel will continue to tip the balance in favor of EAFs. That will bring a hyper-focus on scrap and a specific range of high-grade materials – such as DRI and BF pellets. Steel producers will compete for expensive raw materials, potentially causing inflation or squeezing margins.

EAF use in global steelmaking: China vs the rest of the world

Source: WSA 2000-2019 and  Fastmarkets 2019-2020.

In the US, the world’s largest scrap exporter, approximately 70% of steel is produced by EAFs.

Growing global interest in scrap could see the US steel scrap market heat up. Now, there’s talk among market participants of a scrap supercycle, and the US government may consider scrap export tariffs to protect domestic supply. 

Steelmakers will be competing to gain access to the estimated $1.3 billion of funding needed for decarbonization initiatives. Green government policies and the possibility of a green steel premium will incentivize green steel investments by lessening the financial burden of decarbonization for steelmakers and helping to stabilize their margins, though end users could well remain reluctant to pick up the tab.

Environmental, social and governance (ESG) concerns are re-emerging as a focus for decision-makers and investors after being overshadowed by Covid-19 pandemic-related economic issues this past year.

ESG returns to the top of the corporate agenda

US scrap prices are often more competitive than other sources, but will that last?

Source: Fastmarkets.

Alistair Ramsay, Head of Research

Ross Yeo, 
EMEA Steel Editor

Paul Lim, 
Asia Steel Editor

Andrew Wells, Global Steel Editor and Steel Pricing Director

Thorsten Schier, North America Steel and Ferrous Scrap Editor

Under pressure! Steel margins on course to contract by 2022

The true price of green steel

Scrap markets are set to heat up