Middle East steel: a stepping-stone to net zero
The growing importance of Middle Eastern steel production and the region’s natural resources to the global decarbonization challenge
Is the Middle East steel market approaching a turning point? Global pressure is rising for energy-intensive industries like steel to step up and play a much bigger role in our journey to net zero. In this report, we’ll discuss the untapped potential of green steel production in the Middle East and North Africa (MENA) – and look at how this region could contribute to the decarbonization of the steel industry.
Is steel already greener in the Middle East?
Carbon neutrality has become more of an ambition for MENA and the Gulf Cooperation Council (GCC) over recent years. Top oil exporter Saudi Arabia pledged to reach net-zero emissions by 2060. The Saudi Green Initiative (SCI) plans to invest over 700 billion riyals ($190 billion) to cut 278 million tonnes of CO2 emissions per year by 2030. And Turkey recently became the final G20 country to ratify the Paris Agreement earlier this year.
Although the Middle East has been slow to implement strict climate targets in line with the Paris Agreement, steel production in this region emits far less CO2 than the global average. Clean steel production in the Middle East is possible because it’s generally produced using natural gas rather than coal-fire as the predominant energy source. Coal-less steel production in the Middle East is a by-product of the region’s significant natural gas reserves.
Over 38% of all global natural gas reserves are in the Middle East. These naturally occurring hydrocarbons are said to be the cleanest non-renewable energy source, with lower greenhouse gas (GHG) emissions than other fossil fuels.
According to the US Energy Information Administration, natural gas emits 50% less CO2 than coal while offering greater fuel efficiency and more cost-effectiveness. Although substituting coal with natural gas is far from perfect, it could act as a transitional fuel helping steel companies to reduce CO2 emissions and save costs in the short- to mid-term.
Capital investment and strategic planning are critical to building the renewable energy infrastructures to encourage more steel producers to leave coal – and eventually gas – behind for good.
Phasing out fossil fuels
The ripple effect of COP26 has compelled global leaders to speed up their plans to phase out fossil fuels and reduce coal to achieve the 1.5 degrees climate targets. 70% of global steel is produced via the blast furnace route. For every tonne of new steel produced approximately 0.77 tonnes of metallurgical coal is required. Meaning that the global steel industry currently uses just over 1 billion tonnes of coal every year.
In 2018, the Intergovernmental Panel on Climate Change linked 89% of global CO2 emissions to burning fossil fuels – making it the dominant cause of global warming. And, although there are cleaner energy sources that can replace coal, the additional costs could act as a deterrent to some steel producers.
Energy use accounts for 20-40% of steel production costs. Our over-dependence on coal is because this tried and tested energy source is far cheaper than renewable alternatives, except in the Middle East, where steel production mostly occurs without burning any coal.
Demand for green steel to hit new heights
The demand for green steel is rising daily, especially in Europe which has pledged to be the first climate-neutral continent by 2050. Low-carbon steel production in Europe is supported by policy and funding designed to help producers meet green steel targets, which include carbon neutrality and fossil-free steel.
Protectionist measures from importing regions are beginning to incorporate carbon emissions as a metric for import duties, such as the EU’s carbon border adjustment mechanism (CBAM). These measures were designed to levy a cost on the carbon emissions linked to steel imported into the EU, and by doing so to level the playing field for European steel producers who face high costs for their own carbon emissions while competing with non-EU producers not facing such costs. CBAM would therefore offer a competitive advantage to lower-carbon producing regions such as the Middle East, if it were to reposition itself as a net-exporter, versus many traditional exporting regions.
Traditionally seen as a trading hub, the Middle East produces less than 3% of global crude steel. With a renewed focus on achieving climate targets in the Middle East, this region has vast potential to strengthen its position and become a significant global net exporter and hub for competitively priced clean steel over the next 30 years.
Is Middle Eastern steel competitively advantaged?
Although the Middle East currently produces a small percentage of global steel, steel is one of the most traded products in the MENA region. China on the other hand produces nearly 57% of all global steel but has planned cuts to its crude steel output in a bid to reduce the country’s energy usage and GHG emissions. A reduction of this magnitude of cheap, available Chinese steel in conjunction with climbing energy costs could further pressurize soaring steel prices.
Global steel demand is not going down, so if positioned correctly, rival markets, like the Middle East, could step in to take Chinese market share. If the Middle East were able to reach its current potential and replace more carbon-intensive production overseas, there would be a net reduction in over 48Mt of CO2 per year.
Emerging markets building up momentum
The cost of producing steel in the Middle East is moderately positioned on the global cost curve although utilization rates are currently low. Steelmaking capacity in the Middle East is growing. Rapid growth will continue in this region in line with increasing demand from growing infrastructure, tourism, and general market growth.
Some of the projects increasing steel demand in this region include:
- The new international terminal at Bahrain International Airport (BIA) costs $1.1bn and spans 220,000-sq-metre. The Gulf Development Fund is funding this project and plans to channel $10bn into Bahrain over the coming years.
- The regeneration of Saudi Arabia’s AIUIa includes three phases of development leading up to 2035. The planned phases include a $2 billion expansion of AlUla International Airport, $15 billion investment in AlUla’s core 20km historical area focussing on infrastructure, hospitality, arts & culture, and social and community development. AIUIa’s regeneration plays heavily into the region’s carbon-neutral strategy and ambitious targets for renewable energy to supply 50% of demand by 2035.
- The development of the Residences Dorchester Collection, Dubai, costs $680mn. This luxury architectural collection boasts two interconnected towers, including a 32-story residential tower at 17,700 sq ft.
The GCC spends around 6.9% of its GDP on developing infrastructure due to its accelerated industrialization. Growing demand in this region could provide a fantastic opportunity for large steel producers to relocate their operations to the Middle East and take advantage of its low-cost, natural gas-fuelled production capacity.
Scaling up green steel production
Renewable energy is currently the costliest energy source for steel producers, but that cost is falling daily. On the other hand, the price outlook for coal is rising while the cost of natural gases and renewable energies fall, further incentivizing the switch to greener fuel sources.
Placing renewable energy on the map
Numerous projects have emerged in the Middle East championing carbon capture and the switch to renewable energy. Green hydrogen shows the most promise as a clean substitute for natural gas in steel production.
- TAQA, one of the Middle East’s largest energy companies, has partnered with Emirates Steel, the leading integrated steel plant, to develop a large-scale green hydrogen project allowing the region to produce its first-ever green steel. This agreement provides room for expansion to meet the anticipated international demand for low carbon steel.
- Green hydrogen is crucial to TAQA’s 2030 strategy, which includes growing its gross power capacity from 18 GW to 30 GW in the UAE and 15 GW globally. Also, the adoption of solar power will account for over 30% of TAQA’s renewable energy portfolio by 2030.
- Saudi Arabia recently announced plans to establish a fund to improve carbon capture in the Middle East. This investment includes two initiatives costing 39 billion riyals ($10.4 billion) to develop facilities that capture and store carbon emissions. The carbon capture technology will help the region produce blue hydrogen; a fuel made by converting natural gas. This process eliminates the release of carbon emissions into the atmosphere.
Hydrogen is currently the most expensive renewable energy source, although costs are falling as investment grows. Developing economies with low production costs, like the MENA region, have an excellent opportunity to strengthen their green energy grid. The Middle East could quickly become a large-scale global hydrogen producer and exporter during this decade. Creating a sustainable renewable energy infrastructure and optimizing carbon capture opportunities in the Middle East will attract more heavy industries to its shores and elevate this region to a prosperous hub for zero-carbon industries.
There is so much opportunity for steel producers willing to relocate and invest in the Middle East. Not only can the Middle East’s existing natural gas reserves help steel producers eliminate coal from production, but this region also has the potential to pave the way to a net-zero future by fully supporting the transition to renewable energy.
The future of steel could be the Middle East
Heavy carbon-intensive industries, including steel production, are reaching a boiling point. The global shortage of clean, quality steel and the energy crisis loom. The decarbonization challenge is discussed in every boardroom.
The Middle East has an opportunity to reposition itself as a competitive global exporter of green steel while attracting greater investment from global steel producers in the future.
We cannot reduce the massive demand for steel globally, but perhaps the Middle East can help clean up the world’s dirty steel problem and lead us to a future where carbon-free steel is a reality.