A mockup of H2 Green Steel's project. The low-carbon steel producer plans to open the world's largest green hydrogen-based steel facility in Sweden. Source: H2 Green Steel.

Mining companies hoping to reach carbon neutrality will need buyers to pay more for low-carbon products, and governments may need to pitch in, industry analysts and participants told S&P Global Commodity Insights.

The metals and mining sector is responsible for about 15% of the world's annual global emissions, according to an October 2023 report by Wood Mackenzie. As countries work to meet commitments linked to the Paris Agreement on climate change, miners have been facing pressure to take action.

Miners investing in low-carbon production processes will require large investments and often face higher operating costs compared to what is on the market, analysts said. To cover capital and operating costs, miners will have to charge a higher price for sustainable products, often called a "green premium" or sometimes a "greenium."

Producers of green steel and nickel, in particular, face headwinds as the price of conventionally produced, high-carbon alternatives has fallen.

"The cost of decarbonization is so massive that it needs to be funded in some way and it can't come from the resource companies that, even without decarbonization, barely reach cost of capital. Somebody has to fund it," Karthik Valluru, global lead of materials and process industries at Boston Consulting Group, said in an interview.

Out of the world's 30 largest mining companies by market capitalization, 20 have set net-zero or carbon neutrality goals, and 2050 is the most common target year for decreased emissions.

EXPLORE FURTHER: See the top 30 mining companies' net-zero and related emissions reduction goals. Click here for the downloadable file.

The 'greenium'

Premiums only work if the market is willing to pay them, analysts noted.

"Ultimately, it's about the perceived value for the end customer," Alex Kazaglis, a partner focusing on materials strategy at consultancy McKinsey & Co., said in an interview.

A global survey conducted by Boston Consulting Group in the third quarter of 2023 showed that 57% of participating consumers said they would "definitely" or "probably" consider net-zero production when purchasing their next new passenger vehicle or home appliance.

"The signal isn't super clear in terms of whether [consumers] are willing to pay with a premium or not," Valluru said. "If we do collect the premium, how does that get distributed across the value chain?"

Kazaglis expects mass market demand to follow behind policy support, especially in Europe. "Around 2030, we could see premiums from customers driven by a shortage in green products — that's a trigger for investment," Kazaglis said.

As the mass market lags behind, first movers are already securing supply, such as the automotive industry and luxury brands in segments including technology.

First movers see green products "as a business opportunity" and are often able to pass the premium to their consumer base, either because the additional cost is manageable or "there is a brand and reputational element" in being seen as "doing the right thing," said Chathurika Gamage, a principal on RMI's climate-aligned industries program.

Green steel

Steel production was directly responsible for around 7% of global emissions in 2020, according to a report by RMI. Several steel consumers have shown interest in green steel, analysts said.

Microsoft Corp., Volvo Car AB (publ.), Trammell Crow Co. and several other companies formed a green steel buyers' club for North America in September 2023. And General Motors Co., Ford Motor Co. and other members of the First Movers Coalition, which formed in November 2021, have committed to purchasing net-zero steel for at least 10% of their annual procurement volumes by 2030.

"The question now is, how do we convert these commitments or pledges into actual offtake" so that steelmakers can secure financing, Gamage said.

Agglomerations of companies such as the First Movers Coalition and the Sustainable Steel Buyers Platform work to bundle green steel demand to ensure orders large enough to stimulate investment.

Steel produced with "green" hydrogen, meaning hydrogen made using renewable energy, is expected to hold a premium of more than 30% in 2026 compared to steel produced using traditional blast furnace methods due to production costs alone, according to RMI data.

Platts assessed carbon-accounted hot-rolled coil steel in Europe commanded a premium of $100.08 per metric ton as of Sept. 17, according to Commodity Insights data.

"Currently we have a green premium of about 25% on top of the price of brown steel," a H2 Green Steel AB spokesperson said. H2 Green Steel's hydrogen-based integrated steel mill in Sweden is expected to produce 5 million metric tons of green steel annually by 2030.

The industry is being widely supported by first movers in the automotive industry, analysts said. The premium "has a minimal effect on the final product cost, and end consumers are generally willing to absorb a roughly 1% price increase," Soroush Basirat, global steel financial analyst at the Institute for Energy Economics and Financial Analysis, said in an email.

H2 Green Steel has pre-sold around 50% of its initial volumes and signed offtake agreements with automakers Mercedes-Benz Group AG, BMW Group and Porsche Automobil Holding SE. The company is holding back on its remaining volumes with expectations that "the price will develop favorably, as it has over the past two to three years," a spokesperson said.

Clean or dirty nickel

The push for a "green" nickel premium developed after Indonesia began increasing output of high-carbon, low-cost nickel made using lower quality ore in energy-intensive processes often connected to the country's coal-based grid.

Indonesian production has generated market oversupply, triggering a price collapse that pushed some miners outside of Indonesia out of production. The London Metal Exchange nickel cash price was $15,935.56/t on Sept. 17, down 48.5% compared to the 2023 high of $30,958/t on Jan. 3, according to S&P Global Market Intelligence data.

The current price downturn "has only cemented the slow pace of movement" in the development of supply, including low-carbon supply, outside Indonesia and China, Will Talbot, principal analyst of nickel and cobalt at Benchmark, said in an email.

Several high-cost producers with higher environmental, social and governance standards have stopped output, Luca Giacovazzi, CEO of nickel producer Wyloo Pty. Ltd., told Commodity Insights. Wyloo put its South Kambalda and North Kambalda nickel facilities on care and maintenance in late May.

Wyloo and other producers including BHP Group Ltd. have welcomed the idea of a separate futures contract for green nickel on the LME, yet the exchange responded in May stating there isn't enough demand to segment the market.

Aside from exchanges, several pricing agencies such as Benchmark and Fastmarkets have indexes to support price discovery for green nickel.

"The development of sustainable nickel premia is still in its infancy and we do not currently see strong evidence for these factors being considered as a distinct premia in market transactions," Benchmark's Talbot said. Demand may rise in the later part of the decade as ESG will be a differentiator when the market goes into a deficit, Talbot added.

Offtakes will be increasingly important since buyers then "put in some capital and purchase production on a cost-plus basis rather than at the whim of the nickel price," said Andrew Mitchell, director of nickel research at Wood Mackenzie.

Government intervention

The market cannot grow on buyer interest alone and government assistance will be required to develop and standardize low-carbon products, analysts said.

"It's quite difficult to imagine that a widespread premium would emerge from industry players voluntarily and above the market price unless policy incentivized it," Bryan Bille, principal policy analyst at Benchmark, said in an interview.

Governments have a host of policy and financial tools at their disposal.

"The challenge is for each jurisdiction to design the instruments that make the most sense with their energy profile, existing infrastructure, and industrial strategy," Canadian graphite producer Nouveau Monde Graphite Inc. said in a statement.

The EU's Carbon Border Adjustment Mechanism will comprise a tariff on imports of carbon-intensive products starting in 2026, which is expected to add to the pressure for change.

"By insuring that the polluters pay a relevant price on carbon emissions, this will drive the demand for green tech," H2 Green Steel said.

Other countries have provided policy support to the cost of green inputs. Canada created the Clean Fuel Regulation and the US passed tax credits for clean hydrogen. The US Inflation Reduction Act is also supporting the adoption of renewable energy through tax credits, and grants and loans to projects.

"If the mechanisms help reduce the gap between the cost of adopting or operating cleaner technologies, it facilitates the business case," Nouveau Monde Graphite said in its statement.

The Inflation Reduction Act also created a network of support for miners in countries with US free trade agreements seeking to provide low-carbon metals to the US electric vehicle industry.

"This is all about using public dollars and levers to get that cost down upstream and actually complement that with the voluntary green premium that some folks are also willing to pay to get to that leveling out," RMI's Gamage said.