European steel mills waver on decarbonization despite promise of public funding/ Rystad Energy

As the energy transition continues at pace, reducing the carbon footprint of traditionally high-emitting industries is increasingly crucial to limiting global emissions. Of these hard-to-abate sectors, steel manufacturing is one of the most challenging. Despite incentives and tax breaks designed to promote the production of green steel – produced using zero-carbon electricity – European steel mills are facing an up-hill struggle.

The long-term economic viability of green steel versus grey steel – produced using fossil fuels – is in serious jeopardy, with the environmentally-friendly material costing up to €1,000 ($1,072) per tonne more than the alternative. To close the gap, taxes on grey steel would need to be around €500 per ton of carbon dioxide (CO₂), a sharp increase from the current €60 per tonne tax, or governments would need to offer substantial incentives to produce green steel.

Rystad Energy has observed that importing direct reduction green iron (DRI) – iron ore produced by green hydrogen – from countries with better renewable energy resources, such as Australia or Oman, could help lower costs in Europe. However, DRI's history of maritime trade indicates that it could be a risky option for some regions. Trade volumes have declined in recent years for several reasons, including the nationalization of production facilities in Venezuela. The ongoing conflict in the Middle East is another risk factor.

While European steelmakers might want to be self-sufficient, investments in such facilities within the EU appear to have temporarily stalled, according to regional plant manufacturers. European steelmakers seem to be completely dependent on pending election results and taxpayers' money to move forward, an amount that differs from project to project. For instance, in Duisburg, Germany, ThyssenKrupp will receive €500 million to construct a new set of facilities, which will cost €1,800 million. Additionally, the company has been allotted €1,450 million to subsidize its energy costs with the condition it opts for green hydrogen over natural gas. However, to qualify for the subsidy, ThyssenKrupp must provide independent verification that it has purchased green hydrogen instead of grey.

Despite economic uncertainty, the industry is taking concrete steps to replace shot blasting, a carbon-heavy surface treatment process that removes rust, contaminants and general debris from scrap metal. Mills are replacing this practice with more sustainable alternatives like DRI facilities and electric arc furnaces (EAFs), even though these are more expensive. DRI involves the direct reduction of iron ore in a solid-state using carbon monoxide and hydrogen derived from natural gas or coal, while EAFs use electrical energy to melt iron and scrap.

DRI is a raw material used in the production of steel, alongside scrap metal and pig iron. When DRI is manufactured in countries with lower energy costs, by using natural gas or green hydrogen, for example, it can be transported to Europe at a reduced rate over domestic production. This DRI can be melted down in an EAF to produce steel or transported in molten liquid form to a Basic Oxygen Furnace (BOF). By doing so, the steelmaker can achieve a more cost-effective solution than producing its own DRI in Europe.

According to the World Steel Association, integrated works, comprising blast furnaces and basic oxygen steelmaking plants, release an average of 2.33 tons of CO₂ per tonne of crude steel, while DRI and EAF plants emit only 1.37 tons of CO₂ per ton of crude steel. Only 7% of current global steel production comes from these cleaner forms of manufacturing.

“The steel industry is at a pivotal moment in the energy transition, battling a drive to decarbonize with economic uncertainty. Importing DRI from countries with better renewable energy resources could reduce the cost of green steel production, but only if transportation costs do not outweigh the benefits. For instance, German steelmakers could import DRI as hot briquetted iron (HBI) produced through green hydrogen from Oman or Australia, if lower hydrogen costs offset high shipping costs when compared to production in Germany," says Alistair Ramsay, vice president of supply chain at Rystad Energy.

Rystad Energy's analysis shows that it is currently more cost-effective to import DRI from Oman than to produce it internally in Germany, with savings of around $25 to $30 per tonne. Australia currently has lower green hydrogen production costs, but due to shipping costs, the cost of delivering DRI to Germany is comparable to other H2-DRI (use of hydrogen to produce direct reduced iron) cases.

While using natural gas (NG-DRI) to produce DRI is the cheapest option, it only reduces emissions by about 50%. By contrast, green hydrogen reduces emissions by more than 90%, but is still 50% more expensive than NG-DRI, despite the expected cost decrease by the end of the decade.

EAFs running on green electricity could eliminate the need for DRI, but as the supply of scrap is limited and the low residual requirements of steel consumers reject the high copper content of obsolete scrap, it is essential that there are other raw materials. As a result, DRI (or pig iron) is an essential part of the mix, accounting for up to 100% of the raw material used in some cases. A commonly used mix includes 20% DRI, which adds value to the 80% collected from scrap metal.

The interest in investments in DRI and EAF has slowed down and, as mentioned, European steelmakers rely on public funding and the outcome of pending elections. However, the integrated sector, which has received criticism in the past, is making a comeback by identifying another way to reduce emissions in traditional plants, which involves using hydrogen.

Cleveland Cliffs, the largest flatbed rolled steel mill in the United States, has completed a second test on hydrogen injection at its Indiana Harbor IH7 plant. This test is a breakthrough that challenges the traditional way of thinking, as it suggests that hydrogen could become a solution for reducing emissions in the integrated steel sector. Companies like ThyssenKrupp and Tata Steel are also exploring the potential of hydrogen injection to reduce their emissions.