Brazil at steel decarbonization crossroads; charcoal, gas short-term options

Brazil, a country that already emits less greenhouse gases (GHG) per tonne of crude steel produced than the global average, seeks in charcoal and natural gas a way to take short-term steps on its lengthy decarbonization road, but its legacy integrated steelmaking capacity could be a hurdle

That’s because local steelmakers have traditionally gone for scale and cost efficiency via large blast furnaces. So ferrous scrap, usually the quickest, readily available path to reduce mills’ emissions, is still out of the picture for broader adoption due to insufficient supply.

On top of that, larger furnaces can present a challenge for charcoal use, for example, making that solution only a palliative. And there are no plans yet for a comprehensive change in output methods amid idled capacity in the country.

Carbon neutrality with charcoal

Nevertheless, a local steelmaker has already become carbon neutral. According to Aço Verde do Brasil (AVB), which makes steel billet, rebar and wire rod at its plant in the northeastern state of Maranhão, they were the first in the world to be awarded that title.

Certification company SGS accredited AVB as such under the GHG Protocol in February 2021, after analyzing its carbon inventories for 2018, which amounted to 0.10 tonne of carbon dioxide per tonne of steel produced, and 2019, when they were 0.06 tonne per tonne of steel. It achieved those levels using charcoal.

“Grupo Ferroeste [AVB’s parent company] has more than 60 non-stop years working with eucalyptus forests, producing, transporting and consuming own charcoal,” the steelmaker’s industrial director, Sandro Raposo, told Fastmarkets. “[Therefore], it was a natural and logical choice for us.”

Not all mills can take that route, however. Cristina Yuan, institutional affairs director at steel industry group Instituto Aço Brasil, said charcoal is certainly an advantage Brazil has over other producing countries, but only a minority currently uses it for technical reasons.

“Economy of scale is the main issue,” she told Fastmarkets. “Larger mills like Usiminas, CSN [Companhia Siderúrgica Nacional] and ArcelorMittal all have massive blast furnaces and charcoal is friable, easily pulverizing…, [which] creates a risk of obstructions.”

AVB is, in fact, a smaller mill compared with CSN, for example. AVB has capacity to produce 600,000 tonnes per year (tpy), compared to CSN’s 5.6-million-tpy.

Aço Brasil’s data shows only 11% of Brazil’s crude steel output in 2020 – 31.42 million tonnes – came from integrated mills using charcoal, with 72% still utilizing coking coal. Semi-integrated plants, or mini-mills, made up for 17% of production.

The institute also says 1.72 tonnes of CO2 were generated, on average, from each tonne of steel made in Brazil in 2020, compared to the World Steel Association’s 1.89-tonne global average – putting Brazil in a good position among global peers.

Another problem with using charcoal is a shortage of available lands for economic purposes. Companies that do not yet have forest assets find it difficult to secure eucalyptus needed to generate this bio-reductor, Yuan added. Raposo agrees.

“Land scarcity and low productivity in charcoal production is a limiting factor in some regions,” the AVB director said. “That is why AVB has developed a new industrial furnace technology to double its firewood and charcoal yield compared to traditional processes.”

Brazil-based Vale, the world’s largest iron ore producer, is another company looking into bio-reduction products. It has successfully tested using biochar – charcoal generated by carbonizing biomass – for pellet output on an industrial scale.

Direct reduction as alternative

Ferrous products marketing director at Vale Rogério Nogueira told Fastmarkets not only biochar, but biomass itself could be used for reduction in blast furnaces. This was classified by him as an asset-light solution towards decarbonization.

“We could also mention low-grade HBI [hot-briquetted iron]; Tecnored, a green, low-cost pig iron product that can substitute coal; as well as biomass,” he said. “Vale is well positioned to contribute with our clients’ needs for emissions reduction.”

One of the crown jewels for the company, however, is green briquettes, in development over the past 18 years. They can replace sinter, pellets and lump in blast furnaces, and even direct-reduction iron (DRI). According to the miner, using it could cut GHG emissions by up to 10% in steelmaking.

Vale is already building three briquette plants in Brazil, with five more under study. It has signed a memorandum of understanding (MoU) with Ternium to explore its usage – part of a series of MoUs between the company and steel mills – at the partner’s steel slab mill in Brazil.

The Brazilian iron ore producer has also signed preliminary deals with China’s Jiangsu Shagang, Baowu and Hunan Valin.

Vale targets 15% less scope 3 GHG emissions by 2035, meaning those gases generated throughout the value chain in which it participates. It believes 75-85% of that reduction will come from partnerships with clients and suppliers, with Vale’s own initiatives accounting for 15-25%. About 94% of those scope 3 emissions come from the steel industry, hence the MoUs.

Among its own actions, Nogueira cited mining output via dry processing, a waterless technology to produce high-grade iron ore that needs lower quantities of coal. Products can get to 68% iron content with run-of-mine ore taken from the ground of at least 43% iron, the director said.

“We believe DRI feeding electric arc furnaces (EAF) will be the path chosen by many steelmakers [and we see] many projects including that route in Europe until 2030… with 25 million tonnes per year in capacity [being added],” Nogueira said.

“In other regions, with less aggressive climate targets, such migration to DRI tends to be slower in the short and medium terms,” he added. “We also see in some [regions], like China and Southeast Asia, that their installed capacity is newer, [delaying changes].”

Natural gas yet to catch on

If charcoal is not intended for the whole industry and DRI is more pronouncedly adopted by Europe, Brazil can start cutting more emissions via natural gas, Aço Brasil’s Yuan said.

Congress passed a bill in 2021 to regulate that market and allow for more competition in a field that had been nearly dominated by state-owned producer Petrobras. But this has yet to become a reality.

“We wish it wouldn’t take this long to make natural gas viable. It needs new infrastructure, and companies need to come in and make fees more competitive,” Yuan said.

In the United States, not only do EAFs account for more total installed steel capacity, but natural gas use is higher too, Vale’s Nogueira said.

The Brazilian aluminium association, Abal, is also eagerly awaiting developments for natural gas and is one of the biggest sponsors of the new law. Energy represents one of the highest input costs in aluminium production.

It says one of the main issues has been the vast differences between regulation on state and federal levels. “Gas is a good short-term idea [towards steelmaking decarbonization] because it has lower emissions compared to coking coal,” Yuan said.

Local scrap seen as insufficient

Another energy transition option for the meantime – while no new disruptive technology becomes feasible on an industrial scale – is steel scrap.

But while blast furnaces do use scrap to balance chemistry, its share in the broader raw material basket is much lower. EAFs are the ones which use larger volumes.

Brazil recycled close to 8 million tonnes of scrap in 2020, a figure that shies in order of magnitude when compared with the country’s 31.42-million-tonne production volumes.

“There is no way to stop making steel with iron ore starting next year,” the president of Brazilian ferrous scrap association Inesfa, Clineu Alvarenga, told Fastmarkets. “We could start by taking scrap out of landfills, making it more financially interesting.”

Alvarenga criticizes the federal government and the Supreme Court for not having backpedaled yet on a decision by Justices that allowed for a federal scrap tax last year. That 9.25% tax has not been applied yet, but could be in the near future if Congress does not intervene, he added.

However, even in the case Brazil were to switch all its capacity to EAFs, there would not be enough steel scrap, according to Aço Brasil’s Yuan. And there could be a shortage if imports were needed, because of some countries limiting exports.

“Brazil has, since 1980, been consuming 100-120 kg of steel per capital each year. Back then, China was consuming much less, but its output and demand skyrocketed and now that number is much higher,” Yuan said. “We still do not have that scrap.”

For Vale, DRI can complement scrap. Marketing director Nogueira said the closing gap on China’s infrastructure deficit will probably mean flat-rolled steel will be more demanded than longs in the coming years. It would mean more challenges to reach desired quality with just scrap.

“Changing to EAFs that exclusively use scrap will also substantially increase demand [for the material], boosting even more already-high prices currently,” Nogueira added.

Fastmarkets does not assess domestic scrap prices in Brazil, but Bangladesh, its largest export destination, is usually a good proxy. The latest assessment for steel scrap HMS 1&2 (80:20), containerized import, cfr Bangladesh was $620-625 per tonne on March 17, higher than $595-615 per tonne a week before and than $560-565 per tonne on a fortnightly comparison.

Future of energy transition, green premiums

In all interviews, Fastmarkets heard hydrogen is not yet feasible. That technology is still expensive, and there is no definition on the best path, in economic terms, to make it from gas or renewable sources, and how much “green” hydrogen can be produced.

“It all boils down to competitive prices. Hydrogen is still expensive and isn’t consolidated at all,” Yuan said.

“There is still no clear definition on a method or technology that steelmakers must use to reduce carbon emissions,” AVB’s Raposo said. “There is no sole solution. We need to do what is better suited to local circumstances and policies.”

The unclear future is why Brazil’s Gerdau did not set a firm target to become carbon neutral by 2050, rather saying that was its “ambition.” The company is already well positioned among peers, with 0.93 tonnes of CO2 emissions per tonne of steel made in 2020, recycling 73% of output in 2020 while also being the world’s largest charcoal producer.

Until then, market participants believe high-grade and low-carbon material will start being priced at premiums over traditional products. One example was the aforementioned scrap price spike in the case of a larger transition to EAFs, and another would be iron ore with higher iron content.

“We expect to obtain healthy premiums with high-grade iron ore,” Vale’s Nogueira said. “Clients, in turn, will save in fuel spending and increase productivity at their mills, reducing costs related to emissions and making marketing of low-carbon products a reality.”

The world’s largest iron ore maker is already enjoying part of those premiums. The 65% iron premium over 62% iron fines went to $28.05 per tonne from $18.75 per tonne at the end of last year.

Fastmarkets’ index for iron ore 62% Fe fines, cfr Qingdao was calculated at $150.05 per tonne on March 18, a 24.27% year-to-date increase from $120.75 on December 31, 2021.

And Fastmarkets calculated its index for iron ore 65% Fe Brazil-origin fines, cfr Qingdao at $178.10 per tonne on March 18, up by 27.67% in the same comparison from $139.50 per tonne on the last day of 2021.

“Companies that become pro-active in the sustainability area will have their value appreciate in the market, by both investors and customers,” Aço Brasil’s Yuan said. “But that’s something for the medium and long terms.”

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