ESG Focus: Green Steel Rolling In

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FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
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ESG Focus: Green Steel Rolling In

Green steel is shaping up as one of the big innovation impact plays for 2023, as Australia eyes off steel exports.

-Green steel the big impact area in 2023
-Fortescue Metals announces major innovation
-Gupta urges Australia to export green steel
-US$258bn carbon savings a year at stake in US$1trn industry
-Green steel to attract 30% to 50% premiums
-Sweden leading the charge 

By Sarah Mills

As FNArena wrote in a previous article, impact was to be the defining theme for 2023 – and it hasn’t disappointed.

Innovations in green steel this year, if successful, threaten to turn the world on its head, heralding global disruption, geopolitical shuffles, and a reshaping of centuries-old manufacturing practices.

Steelmaking is responsible for 7% of the world’s emissions and is considered to be among the hard-to-abate sectors.

Steel producers in manufacturing nations hold considerable power and political clout in their home countries, but there’s more than privilege and power at stake.

Most sources estimate that the global market value of the steel industry in 2022 was roughly US$1trn.

Up until now, the industry has been confident that its position in its home countries is unassailable. Sure, things might change a bit with the green transition, but nothing that might rock the boat.

Fortescue Future Industries Announces Win

So it is not surprising that Fortescue Metals Group’s ((FMG)) chair Andrew Forrest announced with considerable glee in March that the company’s green subsidiary Fortescue Future Industries (FFI), had invented a technology to turn hematite into green iron (more on that and its implications below).

FFI’s news was swiftly followed by exhortations from Whyalla Steel Works operator, GFG Alliance’s Sanjeev Gupta, in April for Australia to pivot to steel exports (more on that below).

Gupta claimed a compelling case existed for the world’s manufacturers to source steel from countries that produce magnetite (Gupta is sitting on large magnetite reserves in South Australia, but magnetite is not as freely available as hematite).

And if Fortescue's green-iron pilot works, we could add processed green iron into Gupta's magnetite theory, making the prospect that little more conceivable, given Australia's access to cheap renewable energy.

Gupta's logic would suggest the same is possible for other magnetite or processed green-iron producing nations with abundant renewable reserves.

We concede Gupta’s proposal also makes a fine pitch for government steel subsidies, but the prospect is very interesting, so we thought we’d check it out.

But first we examine the main casualty – metallurgical coal.

Australia Will Have To Eat Its Own Lunch

At the very least, FFI’s Forrest will have set the cat amongst the pigeons, particularly in the coal industry. 

Even if steel-production does not shift to green iron ore producing countries, the metallurgical coal market is a sitting duck.

The main thrust of the FFI technology is to upgrade hematite to green iron, capable of being fed into furnaces that bypass traditional and expensive blast furnaces that use metallurgical coal.

Forest Future Industries was unable to respond to our request for information on grades, which furnaces would be used for green iron, and the timeline of the pilot, an indication of the secrecy surrounding the project.

But reports in the Australian Financial Review that Fortescue's green iron could be produced without hydrogen or gas suggests the metal will bypass a hydrogen or gas-fuelled DR (direct reduction) plant. It is understood the Fortescue green-iron grades are high, but whether they are high enough to be fed into an electric arc furnace, FNArena has been unable to ascertain. But it is likely that it will need to be smelted after treatment to remove slag and other impurities before being milled, or fed into an EAF.

Regardless, at a minimum, a successful pilot would allow the continued export of Australia’s abundant lower-grade iron ore to green steel mills globally and support the continued use of steel, as a range of decarbonised materials hit the market.

Dow Jones estimates the post-covid metallurgical coal market to be valued at US$173.58bn in 2022 and is expected to rise by US$192.62bn by 2028.

According to the Minerals Council of Australia, Australia exported A$112.8bn of met coal in 2022.

For metallurgical coal, it’s not a matter of if but when it will decline, and that timeframe is closing rapidly.

Readers will remember FNArena was one of the first news services to canvass Sweden’s nascent HYBRIT technology in 2019. Back then, few had heard of Hybrit or H2 Green Steel (now green steel industry leaders). Commercial production was not expected until 2030. That has been brought forward to 2026.

Direct Reduced Iron Plants Rolling Out

Other DRI electric arc furnace technologies are also rolling onto the market. Sweden is leading the world with its HYBRIT and H2 technologies.

In April, Gupta’s GFG Alliance announced the purchase of a 160-tonne low carbon emissions electric arc furnace from equipment manufacturer Danieli, which uses the latter’s patented Q-One technology allowing a direct renewables feed.

The furnace is expected to be used in conjunction with a DR plant that can process upgraded magnetite.

As is typical of direct reduction plants, it will operate on gas (replacing met coal) and green hydrogen before moving totally to green hydrogen once supply kicks in. (Sweden's steel plants are already operating totally on hydrogen).

The move follows successful trials for upgrading Whyalla’s magnetite pellets to direct reduction grade.

Also in April, BHP Group ((BHP)) and global engineering services firm Hatch signed an agreement to design an electric smelting furnace pilot (ESF), which is also used in conjunction with a DR plant. 

The time lag between BHP and its rivals in this respect is evident.

But BHP Ventures also has a stake in Boston Metal/Electra, a molten-oxide electrolysis project jointly held with Bill Gate's Breakthrough Energy Ventures, and Amazon, among others.

Meanwhile, BlueScope Steel ((BSL)) and Rio Tinto ((RIO)) appear to have made little progress on their hydrogen DRI project in Port Kembla and Bluescope's chief executive Mark Vassella told Argus Media the company may have to revisit the project.

BlueScope is now also said to be seeking new investors for its planned 10MW pilot electrolyser plant after Shell withdrew in August.

Meanwhile, BlueScope is expected to undertake an expensive reline of its Port Kembla blast furnace in the absence of near to medium-term alternatives.

$258bn Carbon Savings A Year At Stake

According to the International Energy Agency, the steelmaking industry’s global CO2 emissions stood at 36.8bn tonnes in 2022.

Making some very rough calculations, 7% of 36.8bn tonnes equals 2.576bn tonnes.

Multiply that figure by a nominal carbon price of US$100, and you are looking at an annual figure of US$257.6bn in decarbonisation value.

This is just an indicative figure and while reality could differ vastly, it’s a starting point.

That’s a lot of money flowing to those who unlock the key to decarbonising the steel industry.

Boston Consulting Group estimates that green premiums for steel and aluminium are expected to be 30% to 50% higher than traditionally produced metals.

Add this premium to the extremely generous global subsidies for green capital expenditure, and the incentives are proving sufficient to get the ball rolling.

Downstream Emissions Pressure Growing

Andrew Garey, partner for BlueScopeX which explores decarbonisation technologies, confirms that downstream pressure for green steel products is rising.

In an interview late last year, he observed that customers were approaching BlueScope Steel saying they were prepared to pay 30% to 40% more for green steel.

Bluescope has also established BluescopeX to invest in prospective decarbonising technologies but it has yet to be seen whether this will impress investors.

Bluescope is quieter than Gupta's GFG Alliance and its upfront green capital expenditure appears to be lagging, but given the extended timeframes for commercialisation of decarbonisation, it is unlikely to be a major contributor to demand in the near term, residential construction demand being the main factor.

Meanwhile, Garey also indicated BlueScope would be more than happy to license decarbonising technologies (and one assumes purchase green iron) – and that includes FFI’s green iron, if all the technology clicks in.

At the time Garey doubted hydrogen-based green steel (or other catalytic alternatives such as BluescopeX’s HYSATA or FFI's green iron) would be commercially available prior to the 2030s.

But a lot has happened in six months.

Timing Of Green Iron The Key Question

In typical “little red hen” style, after doing all the heavy lifting, Andrew Forrest advised those who wanted a piece of the green-iron action to “call him”.

Such cockiness, while not unusual for Forrest, suggests a considerable degree of confidence. This time he was almost crowing.

To fail after such an announcement would undermine Forrest’s credibility.

So the big question, apart from commercial viability, appears to be timing. 

The timeline for FFI’s pilot project is still unclear and FFI was unable to respond to this relatively simple question when asked by FNArena.

The plant was switched on in March with an initial processing target of 150kg of iron ore.

Industry sources say that based on other pilot molten-oxide electrolysis projects, commercialisation could take 10 to 15 years. If less, then it's a gamechanger.

A striking feature of the technology is that it operates at much lower temperatures (about 100 degrees celsius). This compares with BHP Venture's molten-oxide electrolysis pilot, which operate at about 60 degrees Celsius, and HYBRIT technology (800 degrees Celsius), and even higher for blast furnaces, potentially sharply derisking steelmaking and one assumes, reducing the industry's capital expenditure and operational expenditure requirements. Temperature typically correlates to energy demand.

However, at 100 degrees Celsius, using a traditional understanding of steel production, a second step of smelting to remove impurities is required.

Fortescue's Forrest suggested the grades from its process were very high. Perhaps in time, they could be high enough to be fed directly into an EAF, which creates a completely different visual image for the industry.

Even a process that bypasses blast furnaces, and includes a smelter, makes a considerable difference to steelmaking's footprint and visage.

But why FFI's secrecy about grades and furnace destinations, given other electrolysis technologies are quite open about the need to remove impurities through smelting? The only thing that FFI did say was that it involved a membrane and that the whole process was bespoke, with even the electrolysers being patented.

Fortescue's green iron uses electrolysis to remove the oxygen from iron ore (which is largely iron-oxide) rather than the intense heat of coke-fuelled blast furnaces.

What is striking is that the plant (only a pilot) is only the size of three shipping containers, suggesting it is highly efficient. Traditional blast furnaces and basic oxygen furnaces are massive and extremely expensive.

This suggests that Fortescue's green iron pilot compares with production-scale hydrogen-based direct-reduced iron pilot complexes in Sweden such as HYBRIT that are seven-stories high and 100 cubic metres in size. It is estimated the Swedish operations will likely require another 100,000 to 120,000 cubic metres for pressurised hydrogen gas storage, something Fortescue's process appears likely to avoid, although the addition of a smelter would considerably expand the footprint.

It will be interesting to see the size of Gupta’s DRI plants.

While Sweden has plenty of magnetite, the prospect of obtaining green iron opens the field considerably to other major steel producers, and may undermine Gupta's magnetite theory. (Although one assumes green iron would still favour countries with strong renewables resources.)

Can Australia Export Steel To The World?

Gupta’s call to steelmaking arms was, in part, to be expected. Gupta is sitting on magnetite (natural green iron) in his Middleback Ranges resource, which he plans to use in his Whyalla steel plant.

It takes about 1.6 tonnes of iron ore to produce one tonne of steel, which means that steel is lighter to ship than iron ore, cutting further emissions in the shipping process.

But it is cheaper to ship iron ore by the tonne (and steel exports require greater handling), and it is generally better to have steel production located close to manufacturing centres.

There are many other production, shipping and market variables to contend with, that would make reliance on such a figure appear disingenuous, although some factors support Gupta's position.

The geography of many countries is unsuitable for hydrogen-fed blast furnaces. Japan for example, sits on the ring of fire, making both carbon-capture and hydrogen storage appear untenable.

Also, many countries do not have abundant renewable energy sources.

In particular, solar is the cheapest form of renewable energy in the world, and not all countries have access to abundant sun.

Even those utilising more expensive wind power, such as Sweden, will be seeking to direct every available electron to electrification of power sources in the medium term.

Much would depend on a universal carbon tax (which seems unlikely in the near future) or the with widespread adoption of carbon adjustment mechanisms.

But steel-producing nations are unlikely to relinquish production to iron-ore producing nations without a fight. 

There’s US$1trn up for grabs and some careful weighing of the scales will be required.

Unless the world’s steel producers can go one better on the innovation front, a reckoning may be required once a universal carbon price and carbon border adjustment mechanisms are introduced. 

But it is too early for Gupta to count his chickens given there are plenty of new technologies in the wings. A breakthrough in fusion, for example, would upend the thesis, allowing companies to produce emissions-free steel onshore. There are also some nifty carbon capture technologies on the distant horizon.

Our second article on green steel takes a peek behind the innovation curtain to see what’s waiting in the wings.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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