Article 30 June, 2022

The path to green steel

William Lough looks at how the steel industry is innovating, via the use of electric arc furnaces (EAF), to lower the carbon footprint of one of our most useful commodities.

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Steel is inherently useful as an engineering and construction material because it is strong, durable, flexible and reusable. Recycling rates are higher for the steel industry today than the plastic industry has committed to for 20 years’ time.[1] However, every ton of steel produced in 2018 emitted on average 1.85 tons of carbon dioxide, making the industry responsible for approximately 8% of global CO2 emissions.[2]

Reducing these emissions requires a change in the way steel is produced. The dominant integrated route with blast furnace (BF) still accounts for 71% of global steel production and is highly polluting, at up to 2,000kg of CO2 per tonne of steel [3]). A second method, electric arc furnace (EAF), can reduce CO2 emissions by over 60% versus BF. Over the longer term, there is a path to net zero steel via the use of hydrogen within the process.

Figure 1 below illustrates how by the use of EAF, CO2 emissions can be drastically reduced:
Source: Danieli, Kepler Cheuvreux

Combining mature technology with innovation

A small quantity of steel is made today using what is called the direct reduced iron (DRI) process and the technology is mature. A synthesis gas (hydrogen and carbon monoxide) made from methane (natural gas) is burnt in a large chamber to extract or ‘reduce’ the iron ore to metal. Quoting ArcelorMittal’s 2021 Climate Report: “Historically there has been limited use of the DRI-EAF route except in regions with a very low natural gas price. However, given the increasing cost of carbon and the requirement to reduce emissions, transitioning to natural-gas based DRI-EAF can be a first step with a proven technology that has the potential to further innovate and decarbonise using green hydrogen.”

The first experiments in large scale direct reduction using pure hydrogen are now being carried out at the SSAB steel works in Sweden. These experiments will give us more accurate data on the amount of hydrogen needed. Direct reduction using hydrogen will almost certainly be more energy efficient than using coal. Based on our reading around the subject, we estimate that a tonne of finished ‘new’ steel will require about 3 MWh of hydrogen, considerably less than the 6 MWh needed for coal-based processes.[4] However, the process of making the hydrogen will incur some additional energy losses in the electrolyser, taking the amount of electrical energy required up to between 4 and 4.5 MWh per tonne of steel. Using cost assumptions from an EU paper (‘The potential of hydrogen for decarbonising steel production’[5]) and factoring in the costs of carbon abatement (i.e., ‘carbon tax’) we draw the conclusion that green steel is virtually at parity today on an all-in cost basis. In this sense, the decision for steel producers in the EU to ‘go big or go home’ on green steel capex becomes a bet not just on the environment, but on the differential between the hydrogen price (likely to fall as capacity is added) and the carbon price (likely to rise or be stable because of the way that the EU’s Emissions Trading System is designed).

Danieli - leading the global development of EAF technology

One of the companies at the forefront of this path is Danieli - an Italian family business and the global leader in EAF, and a company with which we have engaged for some time. Danieli has always invested extensively in R&D and, as a result, is now is well placed to address the decarbonisation needs of the steel industry thanks to its technological expertise, notably in EAF and DRI. In iron- and steelmaking, Danieli’s positioning is highly skewed to EAF and DRI, and scrap processing. (A contributory factor for the preponderance of high carbon steel is the lack of availability of scrap.)  To substitute scrap as the feed material in the EAF process, Danieli teamed up in a joint venture with Tenova (an Italian provider of sustainable solutions for the metals and mining industry) to develop the Energiron DRI technology, which is an alternative to the still dominant Midrex[6] technology. Energiron is well positioned to grab some market share from Midrex, thanks to higher flexibility in its use of alternating levels of hydrogen versus natural gas (i.e., it is agnostic to the reducing agent).[7]

Conclusion - transformation of the steel industry

This path to net zero steel is critical for the planet but it’s also big business for key enablers such as Danieli. Each direct reduction plant (DRP) project is worth €350-400m revenues – of which Danieli receives two-thirds from the JV – with capacity to execute 3-4 projects simultaneously, creating a ~€0.9bn per annum revenue opportunity for a company currently doing €3.3bn. Demand looks unlikely to be the issue – ArcelorMittal alone has a pipeline of 8 of these plants. In their own words, “In the course of the coming decades the steel industry will undergo a transformation of the assets used to make steel on a scale not seen for over 100 years.”

[1] Source: ArcelorMittal.
[2] Climate Action Summit 2019, Report of the Secretary-General on the 2019 Climate Action Summit and the Way Forward in 2020,
[3] Danieli’s Corus technology can reduce blast furnace CO2 emissions between -14% and -35% (source: Danieli)
[4] River and Mercantile Asset Management LLP calculations.
[6] MIDREX is another, process which demands less fuel, accepts scrap and is environment friendly.  It is the dominant provider at present.
[7] Other key, coke-free, environmentally friendly solutions developed by Danieli include the digital melter, which replaces the traditional EAF, and the hybrid MI.DA. (Danieli Minimill), both of which are designed to use renewable energy.


This information has been prepared and issued by River and Mercantile Asset Management LLP (trading as “River and Mercantile” and “River and Mercantile Asset Management”). River and Mercantile Asset Management LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 453087).
The value of investments and any income generated may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. Past performance is not a reliable guide to future results. Changes in exchange rates may have an adverse effect on the value, price or income of investments.
Please note that individual securities named in this report may be held by the Portfolio Manager or persons closely associated with them and/or other members of the Investment Team personally for their own accounts. The interests of clients are protected by operation of a conflicts of interest policy and associated systems and controls which prevent personal dealing in situations which would lead to any detriment to a client.

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