Analysis: Swedish steelmaker Ovako converts to carbon-neutral offering, eyes zero emissions

Sweden's Ovako's move, officially announced Sept. 28, to offer carbon-neutral steel will allow it to capitalize on existing emissions cuts, and planned green hydrogen use in efforts to achieve zero-emissions steel.

The decision to update its business model from 2022 follows investment accords by several larger blast-furnace based steel producers to develop new direct reduction iron modules and make environmental upgrades. This comes on top of a broader aim to increase scrap-based steelmaking and lower carbon emissions from the sector, which is the world's second-largest industrial emitter of carbon dioxide.

Ovako is charging a specific "climate" premium from January, to reflect its steel's already low emissions and Eur100 million ($117 million) in investments planned in electrolyzers and hydrogen infrastructure by 2030, or earlier. The projects will help the company get closer to achieving zero emissions, the company said in a Sept. 27 briefing.

"To finance these crucial investments, from Jan. 1, 2022, Ovako is implementing a climate surcharge, as a new component of the scrap and alloy surcharges already in use today," the company said on its website. "This will enable us to maintain our momentum in implementing the technical solutions as soon as possible, with a completion target of 2030. The size of the surcharge is set at a level that makes it possible to make the investments."

The premium, which Ovako did not disclose in further detail, will also track rising carbon credit prices, and charges for steel mills under the EU's Emissions Trading System.

EU Allowances have exceeded Eur60/mt since Sept. 20, and on Sept. 27 hit Eur64.37/mt, for December 2021 futures.

Steel premiums from Tata Steel Europe and based on certificates packaged with steel supplied by ArcelorMittal have so far largely tracked EU Allowance pricing. European steel mills seek to be compensated for charges under the ETS which are paid over their free allocations, and the cost of making direct emissions cuts at facilities.

Scrap basis

Ovako's steel production is fully ferrous scrap-based, with over 97% of all iron and alloys used as input material being recycled.

The electric arc furnace, or EAF, steel producer is benchmarking around emissions from its operations in procuring carbon offsets to offer carbon-neutral steel.

Ovako plans to buy 180,000 mt/year of carbon credits for the initial period of its circa 1 million mt/year steel production, or 180 kg per ton of finished steel product, and expects annual volumes to fall to 80,000 mt in 2030 and 40,000 mt in 2040. Ovako plans to buy no more than 100 kg CO2 offsets per ton of finished steel product produced by 2030.

All CO2 emissions will be verified on a regular basis by a third party, with calculations and collection of data done according to ISO14064-1 and the Greenhouse Gas Protocol, Ovako said.

The carbon offsets will be chosen according to Gold Standard principles, as part of the United Nations Clean Development Mechanism, it said.

Ovako continues to report on overall Scope 3 product emissions including upstream from suppliers, and is actively working to procure scrap, ferroalloys and other raw materials with low carbon footprints.

Ovako has cut its emissions by 55% since 2015 using renewable power and operational enhancements.

Its Scope 1, 2 emissions are 124 kg per mt of crude steel at its Hofors mill, compared with 1,700 kg as the global average, including blast furnaces and EAF mills. This metric is expected to fall further, as hydrogen replacements cuts 50% of "core emissions," reducing carbon credits needed from the market to offer carbon-neutral steel.

Ovako's all-in Scope 1, 2, 3, emissions are 467 kg per mt of hot-rolled steel product at Hofors, compared with 2,600 kg per mt of steel product, as the global average, including yield adjustments between crude steel and product.

As an EAF producer, the company compares itself favorably with blast furnace-based long steel producers, which have an intrinsically higher carbon footprint from use of iron ore and met coke.

Ovako plans to use green hydrogen at rolling mills for heating the steel, which requires far less energy than the hydrogen needed to turn iron oxide into metallic iron at DRI plants, which are fed into EAFs.

Ovako believes the climate topic is well understood in its markets, and many steel customers globally have taken its plans in their stride.