Asian steel decarbonization growth uneven despite ambitious carbon neutral goals

Aligning with carbon neutrality targets set by governments in the region, major Asian steelmakers have set their own goals to become carbon neutral, with timelines ranging from 2045 to 2060.

With the absence of formal regulations, progress has been uneven. Several Asian steelmakers(opens in a new tab) have made bold investments into research and development, with more advanced plans taking the form of setting up pilot plants.

But within Asia, progress and commitment have been uneven, with Japan and South Korea (opens in a new tab)leading the pack, whereas Southeast Asia appears to lag, given that many blast furnaces have been set up recently with more to come, some purportedly to take advantage of less stringent regulations there.

Current efforts in emission reduction

Most of Asia's steelmaking capacity is blast furnace-based, with the BF-basic oxygen furnace route accounting for 91% of output in China in 2022, according to the World Steel Association.

The proportions were 73% in Japan, 69% in South Korea and 46% in India, the data showed.

With many of the region's blast furnaces at a young age in their life cycles, it is unlikely that they would be phased out soon, and so many of the decarbonization efforts were basing on continued use of this production route.

Two routes toward reducing emissions feature commonly among regional steelmakers' initiatives: The first involves the injection of a gaseous fuel into the blast furnace -- be it hydrogen, oxygen, methane derived commercially -- or byproducts that contain such gases with others, like hot syngas and coke oven gas.

The second is achieved through the use of more hot-briquetted iron or ferrous scrap into basic oxygen furnace, which helps reduce the use of iron ore and coke needed to turn iron ore into pig iron.

However, keeping blast furnaces would mean the magnitude of these measures would be moderate in terms of emission reduction.

Through the injection of up to 40% of hydrogen gas into the blast furnace, Tata Steel India, for example, has reported achieving reduced carbon emissions of 7%-10% at its Jamshedpur operations.

Meanwhile, Japan's Kobe Steel(opens in a new tab) has verified a 25% carbon emission reduction by charging HBI.

Besides these, some steelmakers also came up with general measures, including enhancing operational efficiencies, ramping up usage of renewable energy, as well as CCUS.

South Korea's Posco, for example, seeks to reduce direct operational carbon emissions by 13% by 2035, with similar measures mentioned above.

Direct-reduced iron with hydrogen

To meet the more ambitious goal of net-zero carbon emissions, steelmakers in Asia and globally have so far gravitated toward a path of direct-reduction steelmaking with green hydrogen.

This route comes with the advantage that it can first utilize natural gas, and later transition to green hydrogen when it becomes commercially economical and readily available.

Currently, hydrogen-based DRI steelmaking is still in the research phase, with several pilot plants being put into use. The biggest barrier to it being put into commercial use now is the lack of availability of hydrogen at scale and economy.

Baosteel Zhanjiang Iron & Steel (opens in a new tab)Co. began DRI production in January using natural gas and coke oven gas.

It expects hydrogen to be used at scale after 2035, which would enable a 90% reduction in carbon emissions.

EAF-based steelmaking

EAF-with-scrap-based steelmaking is much less carbon intensive, emitting only 0.3 mt of CO2 per ton of crude steel produced, compared with the BF-BOF route of 2.2 mt for the same amount of crude steel, according to the International Energy Agency.

While it is tempting to point to the EAF as the way forward, given its low carbon emissions and potential transition through the use of renewable electricity, the main barriers to its wider adoption are limited availability of scrap, which has a supply growth rate that is far short of that for demand, and the inherently smaller scale of output as compared with the BF-BOF route.

Also, with more realizing the strategic importance of scrap, many countries are trying to retain it domestically by restricting exports.

This has been seen in Japan, the world's third-largest scrap exporter, where EAF-based Tokyo Steel has been willing to pay competitive price levels to secure domestic scrap, often matching or even higher than export price levels.

With DRI seen as something that can be produced at scale, it could serve as a viable alternative to scrap that can be further processed in the EAF.

Obstacles abound; regulation as key driver of green steel

Given the ambitious goals, realizing them within the timelines set will no doubt be fraught with challenges, usually with billions of dollars in investments needed.

On the demand side, the lack of regulation in Asia mandating the use of green steel and the fact that the region is home to several major developing economies make it unattractive for governments to implement rules that could stymie their own development.

So far, several automakers and construction projects have sought out green steel for testing. But most end-users tend to be price sensitive, making it difficult for them to swallow the higher costs associated with making green steel, market participants said.

Due to economic concerns and market readiness, mills cannot be too aggressive in expanding.

In Southeast Asia, where only a few countries are committed to carbon neutral, steel capacity expansion is mostly BF-BOF route based, which reverses the current decarbonization trend.

Projections from the South East Asia Iron & Steel Institute, or SEAISI, showed that steelmaking in the Association of Southeast Asian Nations will swing from predominantly EAF to BF-BOF processes.

As of 2022, about 48 million mt/year of steel production is EAF-based in ASEAN, while about 22 million mt/year uses the BF-BOF route. By 2026, EAF capacities will reach 51 million mt/year, while BF-BOF output could spike more than 3.6 times to 80 million mt/year.

Some market participants believed that regulations would be the only way to enforce development of green steelmaking, as willingness to buy won't be there before a market is fostered with regulations.

"It's a matter of chicken or egg. Mills need to see enough demand before investing in making green steel, whereas users need to make sense of what is green steel before purchasing," said a South Korea-based researcher.

"Without regulations, it will be hard to build a market [for green steel]. The value of green steel will also depend on the prices of carbon credit," said an Indian mill source.

But some also expect potential delays to the employment of carbon taxes for Carbon Border Adjustment Mechanism in the EU.

"The current safeguard measure will be ending by June 30, 2024, but likely to be extended till June 2026. So if a carbon tax were to be effective in 2026, there will be six months of overlap for both measures in place, which means a hard situation for importers," said a Japan-based trader.