For steel sector, China’s decarbonization is a costly quest

China's lofty ambitions to hit peak carbon emission by 2030 and achieve carbon neutrality by 2060 have pushed major Chinese steelmakers to chart a greener route to production as they increasingly become interested in developing direct reduced iron, or DRI, plants using hydrogen and natural gas.

But rising decarbonization costs and the expected dominance of traditional blast furnace-converter route in the Chinese steel industry for the foreseeable future is set to slow the sector's transition to utilizing low-carbon DRI-electric arc furnace production route until at least 2030.

Reducing emissions at blast furnace-converter route would also be costly and challenging.

A quest for hydrogen-based zero-carbon steel

Over 2021-2025, China is likely to have at least 8.2 million mt/year of low- or zero-carbon DRI capacity coming on stream, calculations by S&P Global Commodity Insights showed, with Baosteel and Hebei Iron & Steel Group as the two major trailblazers.Baosteel is part of the Baowu Group, the world's largest steelmaker, while Hebei Iron & Steel ranks third in global steel production.

Despite the efforts, hydrogen-run DRI plants remain at a relatively smaller production scale.

According to Baosteel, the technology of using pure hydrogen as reducing gas at DRI plant is still on trial or experimental stage in China. The company aims to boost the hydrogen ratio at its DRI plant to 80%-90% in 2030.

Reducing gases at the first DRI plants at both Baosteel and Hebei Iron & Steel will be a combination of hydrogen, natural gas and coke oven gas.

Baosteel aims to reduce its carbon emissions by 30% from 2020 levels in 2027, while Baowu is targeting the same in 2035. Baosteel further amps up its carbon goals by targeting to produce total carbon-free auto sheet covering the entire process — right from raw material processing to finished steel — in 2030.

While the carbon-free auto sheet will be coming from the DRI-EAF route, to reduce carbon emissions effectively, market sources expect Baosteel and its parent company Baowu Group will have to mainly depend on using decarbonizing blast furnace-converter route as well as the carbon capture, use and storage (CCUS) technology.

Steel production through the traditional blast furnace-converter route at Baowu Group accounted for about 93.5% of its total crude steel output of 115 million mt in 2020, while EAF steel output was only 6.5%.

It's not just the Baowu Group. This is true for the entire Chinese steel industry as well.

China's crude steel capacity of blast furnace-converter route is currently at over 1 billion mt/year, while EAF steelmaking capacity is just close to 200 million mt/year, according to S&P Global calculations.

Costly decarbonization

Carbon-free steel refers to the production of one metric ton of steel that emits less than 0.5 mt of CO2, which means steelmaking in blast furnace-converter route will need to cut its carbon emissions by over 80% to meet carbon-free steel standards.

Currently, producing 1 mt of crude steel in blast furnace-converter route emits about 2 mt of CO2, while consuming pure scrap in EAFs emits 0.8 mt of CO2. Steelmaking in conventional DRI and EAF route produces 1.4-1.95 mt of CO2, depending on types of reducing materials.

Blast furnaces using biomass, zero-carbon electricity and CCUS technology could reduce emissions in pig iron production by close to 80%.

But there's a catch.Production costs will soar, requiring more than $150/mt extra to produce iron, compared to iron that comes from conventional blast furnaces, according to Baosteel data.

Bring in hydrogen and even seemingly costlier low-carbon production prices pale in comparison.

Hot metal production at DRI plants using green hydrogen as reducing gas could cut CO2 emission by almost 100%, but the costs will be $425/mt higher than conventional iron-making process.

DRI plants, using coal, zero-carbon electricity and CCUS, will also be able to reduce the CO2 emission by close to 100%, but the cost will still be over $400/mt higher.Given high decarbonization cost and still immature technologies – either via DRI-EAF or blast-converter route – low- or zero-carbon steel products are unlikely to dominate the market at least before 2030, some sources said.

Controlling steel output

Upgrading of China's manufacturing sector will require more high-end and deep-processed steel products, which are more complex to produce and generate higher carbon emissions than ordinary steel products, a market source said.

China last year came out with mandatory output cut measures, a short-term but effective solution to control emissions.

Steel output cuts will prevent the steel industry's carbon emissions from rebounding while developing high-end steel products.

Meanwhile, China's urbanization is seen almost reaching saturation levels, and steel demand has plateaued. This could assist China's efforts to reduce its steel production, some market participants said. They expected China's crude steel output to hover from 900 million mt/year to 1 billion mt/year for the next few years, before production starts coming down.

Before any decarbonization technology reaches a scale at which costs could drive costs down, China's steel output controls could be the only cost-effective way to rein in carbon emissions.