About 70% of US steel is now made via this method, and even long-standing blast furnace producers such as US Steel have bought into the EAF and mini-mill trend. EAFs utilize primarily scrap - in addition to metallics such as direct-reduced iron (DRI) and hot-briquetted iron (HBI) - to produce steel.
Other countries are rapidly follow suit. In China, EAF steelmaking is growing, albeit from a low base. But given the country's massive industry, it could lead to significant shifts in raw material flows, especially for the US, the world's largest scrap exporter.
A fight for scrap is brewing, according to some analysts, especially for cleaner varieties such as busheling. There are no tariffs on the inflow and outflow of scrap from and to the US and Europe; could these become a reality if the raw material war really heats up?
The auto industry seems to be the loudest end user calling for greener steel. It makes sense, since the push toward electric vehicles is also all about sustainability. But is the industry willing to pay a premium for such steel? The answer seems to be not quite yet.
“There is a lot of pressure from original equipment manufacturers to reduce carbon emissions,” Dean Kanelos, market development and product applications manager for Nucor’s automotive group, said earlier this year during a panel discussion at Fastmarkets’ virtual Scrap, DRI and Mini-Mills 2021 conference.
While the conversation surrounding the reduction of steel’s carbon footprint is intensifying, it has not resulted in auto consumers paying higher prices for green steel. “Our [auto] customers are saying, 'we expect you to improve your products from a carbon dioxide [CO2] emissions standpoint,’ ” Kanelos said.
“But our customers are cost-competitive, so they are not saying they will pay more - yet,” he said in response to a question from the audience. “However, they are committing to buy increasingly from sheet mills [with better environmental credits].”
How would it look?
What, then, could a green steel price or premium in the US look like? Some suggest there is no need for it, since US-made steel on the whole represents good environmental stewardship.
With US EAF production and stringent environmental standards compared with other countries, the relatively high price of US steel is simply the cost of doing business. In this scenario, tariffs can be looked at as a kind of environmental tax; they keep out steel made in less sustainable ways elsewhere and allow US producers to raise prices and recoup investments.
Another option could be a border tax for carbon to offset emissions from steel made less cleanly elsewhere. This was discussed at another recent Fastmarkets conference.
“One of the biggest things to look out for in the future is a border-adjustment tax for carbon emissions,” Luke Meisner, a partner at Schagrin Associates, said at Fastmarkets’ Steel Tube & Pipe 2021 conference last month. “The basic idea behind a border-adjustment tax is that if a country taxes carbon emissions domestically, it should be able to impose a tax on imports of carbon-intensive goods. Otherwise, you are just going to have imports coming in and undercutting domestic prices from foreign producers that don’t have the same carbon tax or carbon regulation burden, resulting in what many people call ‘carbon leakage.’ "
And what about price? Sustainably produced steel is more expensive, since it requires either a more technologically advanced manufacturing process or cleaner raw materials - or both.
Those cleaner raw materials - industrial scrap and, further upstream, pig iron, DRI and HBI - are going to be in increasingly tight supply. Pig iron has already become a scarcer commodity because China has developed a taste for it to clean up its steel industry.
US producers were traditionally the biggest buyers. Now, some see a shortage in raw materials looming and are preparing for the worst. China has put clean raw materials at the top of the list of key elements of its recently released Five-Year Plan.
In the meantime, green steel is becoming more of a marketing call for US producers. Nucor recently highlighted its green credentials in a deal with solar manufacturer Array Technologies.
“As the largest recycler of steel in the US, Nucor is an ideal partner for Array,” the latter's chief executive officer, Jim Fusaro, said in a statement at the time. “Nucor’s longstanding commitment to recycling, as well as their efforts to source a portion of the power they use in their production process from renewable generation, is consistent with Array’s corporate mission and values.”
Following aluminium's lead?
In the aluminium industry, a green premium is already a reality. Fastmarkets publishes a premium to denote any extra cost imposed on greener products. This can sometimes be zero, especially in a time of already high prices.
Whether the steel industry goes in a similar direction remains to be seen. Surcharges have been a popular mechanism to pass on to raw material costs, and a carbon tax could be considered one of those surcharges.
Surcharges already exist for scrap, nickel and a host of other commodities used in carbon and specialty steelmaking. Is a part of the green steel premium baked into the current US price for, say, hot-rolled coil?
Prices are at an all-time high, and they continue to set records day after day. The premium for US steel to European and Chinese steel is in the multiple-hundred-dollar range again after moving almost to parity last year. Are US consumers already paying a green premium?
A study commissioned by Fastmarkets in 2020 found the following with regard to green steel and raw materials' cost and investment:
- Increased use of DRI for EAF and basic oxygen furnace production will require a massive expansion of the supply of iron ore of the required quality. Existing iron ore capacity must be further processed and turned into pellets.
- Increased EAF steelmaking and the use of hydrogen for the production of DRI will require a large increase in the consumption of electricity in the steel industry. If this electricity cannot be generated from renewable sources, much of the environmental gain from the changes in the steel industry will be lost.
- By 2050, under the "possible case," the industry would need to invest more than $1 trillion, with a further $239 billion investment in the iron ore industry. This $35 billion per year, but it is less than 4% of the steel industry’s annual revenue.
- The depreciation, interest and normal profit on that investment would add $50 per tonne to the cost of production.
- Given the expected emissions, if any carbon tax is less than about $33 per tonne of CO2, it may be financially more attractive for steel producers to pay the charge and not make the huge investment to reduce CO2.
- Under the "possible case," the changes to processes and raw materials could add $49 per tonne in real terms to operating costs by 2050.
- Starting from a very low point in late 2019 that was below the costs of production, restoring viability and paying for the changes to reduce CO2 would require an increase of the price of the average steel product by 30% in real terms by 2050.