ArcelorMittal’s Gijón steel plant in north west Spain

ArcelorMittal is the second largest steel-maker in the world, trailing only Baowu, the huge Chinese producer. It produces about 80 million tonnes of the metal a year, or about 4% of the global total. Making steel is a process that uses coal and generates large amounts of CO2, meaning the company is alone responsible for about 0.3% of world emissions. So its actions matter. Recent company news suggests a new willingness to invest in the full transformation of its business away from coal and towards hydrogen.[1] The significance of the move appears to have been missed by the world’s media.

Earlier in July, ArcelorMittal announced a plan to build what will be its first zero-carbon steel-making facility. If the target opening date of 2025 is achieved, the 2.6 million tonne plant at Gijón in north west Spain promises to be the first full scale low carbon steel works in the world. It will beat the current leader, Sweden’s SSAB, by a year. SSAB is already producing trial quantities of metal without using coal but only promises commercial quantities in 2026.

At Gijón, green hydrogen, made from solar electricity, will be used to reduce iron ores (oxides of the metal) to sponge iron, from which steel can be made. Up until this point ArcelorMittal had begun several experiments of varying size and financial cost that attempt to reduce the greenhouse gas intensity of steel-making. None promised full carbon neutrality. Some involved the reuse of waste gases or their conversion to ethanol.

This month’s announcement is important because it seems to commit ArcelorMittal for the first time to a large scale investment at an existing steel plant that will produce zero-carbon metal. Until now, the company sometimes appeared to be toying with the carbon problem, making unclear promises to ‘eventually’ move to green hydrogen use in some of its German plants or to recycle waste gases containing CO2 in other European steel works.

The proposed process at Gijón – ‘direct reduction’ or DRI – is already extensively used around the world although it conventionally employs natural gas to create synthesis gas (carbon monoxide and hydrogen, usually called ‘syngas’), rather than using hydrogen directly. DRI plants are less expensive to build than conventional blast furnaces and can be economically operated at a smaller scale. ArcelorMittal, perhaps aided by the US company Midrex that dominates DRI manufacturing technology, appears to be committing to using pure hydrogen at Gijón at a much greater scale than ever before planned in the world steel industry.[2]

Why now?

After dragging its feet during recent years, and making very few specific promises on decarbonisation, the company seems to finally made a full scale plan for greening part of its production. Why now? Probably the most important reasons will have been -

· The willingness of the Spanish government to help ArcelorMittal with the capital costs of the new plant, and probably its operating expenditures as well. The ArcelorMittal announcement of the Gijón plan came after the signing of a memorandum of understanding with the Spanish government which indicated that Spain will provide financial help but without being specific as to the amount.

· As the weeks pass, the chance of the EU imposing carbon taxes on steel are rising. Not only is it increasingly likely that steel makers will have to pay for their ETS allowance but the probability of a carbon price at the borders of the EU within ten years has grown. This will make steel made from coal substantially more expensive. A tonne of steel typically requires about 0.75 tonnes of coal, and is therefore responsible for about 1.9 tonnes of CO2emissions. At an ETS price of around $60 a tonne, carbon taxation might add over $110 to the price of steel made with coal. (Steel usually trades for around $600 a tonne, so the carbon price could make a real difference).

· The cost of green hydrogen is falling fast, largely because of the fall in price of renewable electricity. Spanish solar parks could probably now produce electricity for less than $25 per MWH (around €20). I have estimated elsewhere that a tonne of low carbon steel will probably require about 4.25 MWh of electricity, costing therefore about $107. At today’s metallurgical coal prices of around $135 a tonne, steelmaking costs around the same whether using electricity or coal. And this is before taking carbon taxation into account.

· After a long period of lukewarm interest in solar PV - Spain has less photovoltaic capacity than the UK - the Spanish government has allowed substantial expansion of production capacity in the past year. The Gijón plant will need very large amounts of electricity to make hydrogen; I calculate it will probably require about 6 gigawatts, or about 50% of current national installed PV capacity. The national administration is making clear that it will encourage the development of the new solar fields in the local area that will be needed to deliver the 4% extra national electricity production that Gijón alone will require.

What are the wider implications?

· It seems to me that the Spanish support for ArcelorMittal must inevitably produce similar offers from governments in the other main steel-producing countries in Europe. If ArcelorMittal goes ahead at Gijón I guess it is likely that no new steel furnaces will be built on mainland Europe that don’t use hydrogen. (Germany’s finance minister has already made a commitment to the local steel industry that promised whatever support is needed for a transition to hydrogen). Many steel furnaces inside the EU are reaching the end of their lives and it makes increasing sense to convert to hydrogen DRI instead of the costly rebuilding of ageing steel furnaces.

· We are beginning to get a sense of what the transition to hydrogen in the steel industry will cost. ArcelorMittal has previously said that it thought its transition to zero carbon using hydrogen would require investment of around $40bn for its own plants. The limited financial figures released for the Gijón project are consistent with this estimate. Grossed up to the global industry, we can expect an investment of around $1trn, or slightly more than 1% of global GDP. The benefit will be a reduction of about 8% in world CO2 emissions. The will be spread over perhaps 25 years, implying annual investment requirements of less than 2% of world steel industry turnover. Even in an industry that goes through frequent financial crises, this is manageable.

ArcelorMittal invested about $3.5bn in new fixed assets in 2019. (The unusual 2020 figure was much lower than this.) The new Spanish DRI plant is therefore a large fraction of the company’s typical annual capital expenditure. But the output of the new Gijón plant represents over 3% of ArcelorMittal’s total steel production, meaning that a full conversion to DRI over the thirty years to 2050 should be fully financeable within the company’s existing capital budget

· The investment world may come to recognise that steel making will almost inevitably shift to areas of the lowest electricity prices. Spanish PV can compete but it is less certain that German offshore wind can provide the cost-competitive electricity prices that the local industry needs. Australia, with good supplies of accessible iron ore and ultra-low potential renewable energy prices is very strongly positioned to regenerate its steel-making industry, possibly in the Pilbara region in the north west of the country.

· It is far too early to be certain but other steel makers that have been experimenting with partial use of hydrogen in existing coal furnaces, such as VoestAlpine in Austria, may soon conclude that it is better to shift to 100% low carbon rather than take intermediate steps that might result in perhaps half the CO2 saving. This is analogous to the car industry; why continue to invest in designing and making hybrids when the world is swinging so fast to fully electric autos?

After five years of small experimentation and promises to spend tens millions of dollars on carbon reduction, ArcelorMittal now says it will invest in a 2.6m tonne DRI plant costing a billion Euros, with the help of the Spanish government. This has worldwide significance.

[1] https://corporate.arcelormittal.com/media/press-releases/arcelormittal-signs-mou-with-the-spanish-government-supporting-1-billion-investment-in-decarbonisation-technologies

[2] I say ‘appears to be committed’ because Arcelor Mittal’s corporate material is usually particularly cleverly worded to avoid any absolute promise to take any particular route.