Date: 02.06.2023
The European Union has decided to revise the Emissions Trading Scheme and the emergency capping of gas prices at European level. According to some experts, while decarbonisation is a priority for steel companies, implementing it too quickly will mean a loss of competitiveness due to rising costs. What is your view on the whole issue and will the higher price of allowances affect the functioning of VMT?
The decarbonisation of the steel industry is a big topic. On the one hand, we all want to breathe cleaner air, but on the other hand, we can't do without steel yet. The world produces 1.7 billion tonnes of steel a year, of which 0.4 billion tonnes is made from scrap in electric furnaces. Most of it (1.3 billion tonnes) is therefore produced from iron produced in the conventional way from iron ore in blast furnaces. However, this process generates CO2 in chemical reactions that exploit the properties of coke. The production of one tonne of steel produces about 2 tonnes of CO2. In the Czech Republic, CO2 emissions from steel production account for about 5% of greenhouse gas emissions, the highest of any manufacturing industry. To that extent, efforts to reduce them are understandable. What is worse is the speed that the EU expects.
The target is to reduce greenhouse gas emissions by at least 55% by 2030. The question is how to do it?
An alternative to blast furnace steelmaking is direct reduction of iron ore (DRI) with natural gas or hydrogen. However, their consumption in this process is enormous. It costs around CZK 10 billion to build a DRI plant with a capacity of 1 million tonnes of iron. If you embark on such an investment, despite the infinite returns, you have to factor depreciation into the price of steel. Let's say 200 €/t. Then there are the emission allowances, in the order of €70/t, which, if two tonnes of CO2 are actually generated from one tonne of steel, results in a price impact of €140/t. That's already a €340/t increase in the price of steel. Moreover, there is not even a cheap source of natural gas in Europe, and to produce the necessary amount of hydrogen, again, a large amount of electricity is needed, but also natural gas. To give you an idea, if for example the Czech steel industry (5 million t/y) were to switch completely to hydrogen reduction, it would need about 10 times more energy than today, i.e. about 20 TWh, which is a quarter of the total consumption in the Czech Republic. You will have to reflect that overproduction of energy in the price again. Either it will be from nuclear or green energy, which will again be much more expensive. Let's say another €100/t. That's 440 €/t. Logistics costs will most likely increase, I would not be afraid to estimate at least 100 €/t. That's already somewhere in the region of €540/t extra to the price.
Well, when you consider that longer lasting higher quality steel is coming back into circulation later, and scrap is therefore also generally becoming scarcer, the route of producing steel in electric arc furnaces from scrap is not the only possible solution either. It is only one way. Similarly to so-called hybrid furnaces, where the scrap input can be flexibly controlled from 40 to 100 %. A mix of production technologies is therefore likely to emerge. Given that there is around 4.5 million tonnes of scrap in the country, I think that we will go down the route of arc and hybrid furnaces in our country. Liberty Ostrava is already investing in them.
More than competitiveness, in my opinion, it will be a question of how each country approaches the promotion of emission reduction projects and sets reasonable milestones for moving away from fossil fuels. Steel will one day be green, but it won't be cheaper, we will all have to pay for cleanliness. So the message to all customers is "Buy now!"