Steel scrap to play key role in decarbonizing South Korean shipping sector

Ferrous scrap could serve as a linchpin in decarbonizing both the steel and shipping sectors in South Korea, particularly in the short term, while waiting for emerging technologies such as hydrogen-based direct-reduced iron to be commercialized, Fastmarkets heard at a seminar on green steel and circularity

The seminar brought together stakeholders from the steel, shipbuilding and shipping sectors to discuss challenges and opportunities for cross-sectoral collaboration. The event took place on January 26 and was jointly organized by Solutions for Our Climate (SFOC) and the Sustainable Shipping Initiative (SSI).

South Korea operates the world’s sixth-largest steel industry and has one of the largest shipbuilding industries worldwide by tonnage. As both a major consumer of steel and a major producer of ships, South Korea could leverage its expertise across industries to enhance their domestic and global competitiveness while responding to the climate crisis, Joojin Kim, chief executive officer of SFOC, said.

Below are the four key takeaways from the seminar.

Scrap to plug emissions gap until 2040

Shipbuilders are increasingly directing their efforts toward emissions reductions, with a growing emphasis on Scope 3 emissions, or emissions for which a company is indirectly responsible up and down its value chain.

Fuel emissions have received significant attention thus far, since they constitute the bulk of a ship’s lifecycle greenhouse gas (GHG) emissions, Se-Jun Kim, new construction product manager at the maritime classification society Lloyd’s Register, said at the event.

But there is a growing awareness of the need to address emissions from the ship construction process as well, particularly from steel plate manufacturing, he added.

The steel industry accounts for the largest GHG emissions in South Korea, totaling around 100 million tonnes per year, SFOC’s senior researcher Haebin Gahng said.

Hydrogen-based direct-reduced iron (DRI) could reduce emission rates by around 97.4%, but full commercialization is not expected until 2040-2050, according to a 2023 report from South Korea’s Ministry of Science, Information and Communication Technology.

In the meantime, securing scrap remains the prerequisite for reducing carbon emissions with existing steel producing technologies, Gahng added.

Green steel is usually called as such either because renewable energy and/or recycled material is used in its production, Hemy Bae, sustainability strategy consultant at Schneider Electric Korea, said at the seminar.

“In the context of South Korea, it is not easy to gain access to clean energy at the moment, therefore the easier or more feasible path forward could be through the use of scrap,” she added.

From an economic standpoint, environmental competitiveness could give Korean shipbuilders an edge over Chinese shipbuilders, who have typically capitalized on their price and quality competitiveness, Se-Jun Kim said.

Fastmarkets’ latest price assessment of its green steel import, differential to HRC index, cfr Vietnam – which calculates the price difference of flat-rolled green steel to the CFR Vietnam hot-rolled coil index, Japan/South Korea/Taiwan – was $204-340 per tonne on February 23, unchanged since its first assessment in September 2023.

Meanwhile, Fastmarkets’ price assessment of its green steel base price, hot-rolled coil cfr Vietnam, weekly inferred – which is calculated by adding new spreads to Fastmarkets’ Japan, Korea and Taiwan-origin HRC prices – averaged $836.50-978.75 per tonne in January, up by $38.75-42.50 per tonne from $794.00-940 per tonne in September, when Fastmarkets first launched the price.

Discover how our suite of green steel prices can support your ‘green’ investment decisions while bringing transparency to the industry. Learn more.

Security of supplies

Domestic scrap currently accounts for about 80% of South Korea’s steel scrap needs, Fastmarkets understands.

But SFOC anticipates a surge in scrap demand because more local steel companies are expected to transition to electric-arc furnaces (EAFs). SFOC projects an additional scrap demand of at least 7.1 million tonnes over the next three years, or about 25% of South Korea’s domestic consumption in 2021.

“Looking at global trends, current demand for steel scrap is somewhere around 600-650 million tonnes and is expected to grow to 10 billion tonnes by 2050, about 1.6 times larger than today,” Gahng said at the event.

The importance of buying scrap has grown in recent years, with countries instituting various policies that restrict scrap exports and requiring higher-quality imports.

The EU’s Carbon Border Adjustment Mechanism (CBAM) seems of most pressing concern – it has left Asian steelmakers, including in India and China, scrambling for low-carbon production alternatives.

This is where the shipping industry might come in.

“The steel sector is both a buyer of shipping services as well as a supplier of steel for shipbuilding. The opportunity for emissions reductions in shipping and steelworks is huge, with recent research estimating that shipping could save nearly 800 million tonnes of cumulative CO2 emissions by 2050 by progressively adopting green steel,” Andreea Miu, head of decarbonization at SSI, said at the seminar.

Ship recycling is a vital source of scrap steel, with volumes expected to grow in the coming years along with a transition in the global fleet, in line with the decarbonization in the shipping sector, according to SSI’s 2023 Green Steel and Shipping report.

In addition, shipping steel is often of higher quality, being of high tensile strength and yield strength, which can be recycled into products with high-quality applications, according to the report.

Greater government support needed

South Korea’s Ministry of Trade, Industry and Energy first announced in February 2023 that it would set up a 150 billion Won ($116 million) fund to support low-carbon steel development. The plan primarily involved a gradual replacement of blast furnaces (BFs) with hydrogen direct-reduction reactors, also known as HyREX, by 2050.

And steel scrap was reclassified from waste material to strategic resource in June 2023, as part of Korea’s circular economy strategy, also known as the CE9 projects.

“[But greater] government support is [still] needed to increase scrap collection rates and utilization,” Kyungsik Kim, head of the Steel Scrap Research Center, said at the seminar.

SSI suggests that governmental collaboration through Green Public Procurement policies could stimulate demand for steel products with low to zero embodied emissions and facilitate a more efficient flow of materials globally.

Another area overlooked could be smaller market participants, Gahng said.

Due to difficulties in collecting data from smaller operators, current statistics on steel production and scrap collection might be unreliable. “Since accurate data is the basis for not only calculating carbon reductions, but also for coming up with measures to improve the recovery rate of resources along the lifecycle, we think that we need to have a better tracking and data managing system,” Gahng added.

Steelmakers also face a knowledge gap that prevents them from fully coming on board with steel scrap and EAFs, including fears that scrap will compromise quality, a lack of internal standards for the use of scrap, or customer perceptions about quality, Bae said.

Cost remains major hurdle for steelmakers

Cost is one of the major hurdles in decarbonizing the steelmaking sector, market participants told Fastmarkets last year. This includes capital needed to transition from BFs to EAFs and rising energy costs.

In addition, the post-pandemic economic slowdown and sluggish demand in downstream sectors, such as construction, have pushed import volumes down to a 31-year low.

Fastmarkets’ price assessment for steel scrap H2 Japan origin import, cfr main port South Korea averaged at a midpoint of ¥52,782.69 ($374) per tonne in 2023, down by ¥3,677.89 per tonne from the 2022 average midpoint of ¥56,460.58 per tonne.

And Fastmarkets’ corresponding weekly price assessment for steel scrap HMS 1&2 (80:20) deep-sea origin import, cfr South Korea averaged at a midpoint of $401.80 per tonne in 2023, down by $63.38 per tonne from the 2022 average midpoint of $465.18 per tonne.

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