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Opinion

China must kickstart the green steel revolution

But are China’s consumers ready to pay a premium?

4 minute read

No list of ‘hard to decarbonise’ sectors is complete without steel. From the mining of iron ore through to the blast furnaces that produce the steel itself, the industry is highly carbon intensive. Even with rising investment in steel recycling, the sector today accounts for 7% of global carbon emissions.

Tackling this is a huge challenge. To align with the goals of the Paris Agreement, Wood Mackenzie expects emissions from the iron and steel sectors must fall more than 90% from current levels by 2050.

Much will depend upon China. With the country accounting for over 60% of global steel production and related emissions, it is stating the obvious that Chinese steel producers, policy makers and consumers have a defining role to play in how the industry decarbonises.  

In our latest Horizons report, Pedal to the Metal: Iron and steel’s US$1.4 trillion shot at decarbonisation, Wood Mackenzie’s steel team sets out a pathway for the sector to reach net zero. I spoke to Isha Choudhary and Mihir Vora from our Steel and Raw Materials Markets research team about how China can kickstart the green steel revolution.

How big is the scale of the emissions challenge facing the steel industry?

Colossal. Given that our base-case steel emissions scenario assumes a decline of just one-third from current levels by 2050, it is not difficult to understand how tough getting to net zero is going to be.

And with a colossal challenge comes a colossal price tag. In Wood Mackenzie’s 1.5 degree Accelerated Energy Transition scenario (AET-1.5), a successful decarbonisation pathway for the iron and steel sectors requires around US$1.4 trillion of investment.

What are the pathways to decarbonise steel?

Getting there is going to take nothing less than a revolution at every stage of the value chain. To achieve net zero by 2050, three-quarters of steel production will have to switch to low-carbon technologies. Sectors including renewable power, low-carbon hydrogen and carbon capture utilisation and storage (CCUS) must all play a part.

This is unachievable without the faster commercialisation of new technologies, green policy support – including far higher carbon prices - and huge capital outlay.  

How much of this is dependent on China?

A lot. We expect Chinese steel emissions must fall by over 95% from current levels by 2050 to reach its climate target. This is a massive ask given that virtually all its steel production comes out of highly polluting blast furnaces. And with much of China’s fleet of blast furnaces still relatively young, investing in new, greener steelmaking technologies is a harder sell.

Unfortunately, time is not on China’s side. In our analysis, it is essential that Chinese steel producers align with those in mature economies such as the EU, the US and Japan to front-load decarbonisation investments during the first half of the forecast period. The longer this takes, the harder it gets for the industry to achieve net zero by 2050.

But most Chinese steel producers have yet to get out of the starting blocks. While some of the world’s largest iron and steel producers have begun to set out a green pathway for their businesses, that list currently contains very few Chinese companies.

What role can carbon pricing play?

China has taken bold steps to set up a nationwide carbon emissions trading scheme but both carbon prices and policy support for green steel remain insufficient to deliver the levels of investment required. With carbon prices above US$100/tonne needed ensure sufficient investment in the clean technologies required to decarbonise steel, Beijing must be far more ambitious given current carbon prices are only around US$7/tonne.

Others can help. The EU’s carbon border adjustment mechanism (CBAM) could support green steel in China, though European imports of Chinese steel are low. More optimal would be CBAM influencing Chinese manufacturers exporting finished goods to the EU made from carbon intensive domestic steel, alongside policy support in China such as recent production cuts on heavy emitting steel plants.

Are Chinese consumer ready to pay a green steel premium?

Massive levels of capital investment and rising carbon prices will inevitably lead to a green steel premium. We estimate costs for steelmakers will rise by up to US$100 per tonne, or about 15-20% of their total production cost, to align with a 1.5 °C goal by 2050.

Ultimately it will be the consumer that pays, and it is uncertainty around the willingness of consumers to fork out for green steel that is posing another challenge to decarbonising the sector. Western investor pressure on large multi-national consumers (automakers, heavy machinery manufacturers) is already having some impact on these sectors in mature economies. But the willingness of China’s consumers to pay a green steel premium is untested. Given the sheer scale of the Chinese market, it is the nation’s homeowners and car buyers who could define the future of Chinese green steel.

Is Chinese green steel already a lost cause?

Not at all. While the challenges are huge, China has already demonstrated in industries such as renewables and electric vehicles that it can bring the capital, the technical resource, and the market to establish world-leading sectors in record time.

And China is already addressing its steel emissions, with ongoing efforts to tackle its domestic oversupply situation, shutting inefficient induction furnaces, and introducing winter production curbs across key provinces. Looking forwards, we are confident China’s carbon prices will rise, its steel producers will adapt, and policy goals can be further enhanced to support green steel. Watch this space.

Read more: Pedal to the Metal: Iron and steel’s US$1.4 trillion shot at decarbonisation

APAC Energy Buzz is a weekly blog by Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.