Steel sector emissions must fall by 75 per cent from today’s levels to limit global warming to within 2 degrees Celsius (°C), says Wood Mackenzie.
This means reducing global steel emissions from over 3,000 million tonnes of carbon dioxide equivalent (Mt CO2) in 2020 to just 780 Mt CO2 by 2050. Wood Mackenzie senior analyst, Mihir Vora, said it is an extremely challenging target to meet.
“The steel industry would need to find the right balance between managing rising demand and pressure to decarbonise. The pathway to a 2°C world is filled with obstacles compared to our base case view,” Vora said.
Steel demand is expected to rise by 23 per cent to 2,300 Mt between 2020 and 2050. Developing economies such as India, Southeast Asia and South America are expected to drive demand growth, while China and Europe will pare down their consumption.
“Currently, steel is responsible for 7 per cent of global CO2 emissions. The industry needs to prioritise decarbonisation if the world is going to achieve a 2°C warming pathway aligned to the goals of the Paris climate agreement,” he said.
“Advanced economies will need to do more to curb emissions via innovative new steelmaking pathways such as hydrogen use, while developing nations will be slow adopters and small contributors to emissions reduction.”
Wood Mackenzie has outlined five main outcomes that need to be achieved for the steel sector to achieve a 2°C warming pathway:
- Doubling scrap use in steelmaking;
- Tripling direct reduced iron (DRI) production and use;
- Reducing global average electric arc furnace (EAF) emissions intensity by 70 per cent;
- Reducing blast furnace – basic oxygen furnace (BF-BOF) emissions intensity by 30 per cent, close to its theoretical minimum; and
- Capturing and storing 45 per cent of the residual carbon emissions (around 500 Mt per annum).
Aligning to a challenging 2°C warming pathway in the steel industry would mean disruption to the iron ore and metallurgical coal markets. It would, however, be a boon for hydrogen demand in steelmaking as well as carbon capture and storage.
“Steel’s potential extreme decarbonisation in a 2°C scenario would mean tripling DRI production. This presents a huge opportunity for suppliers of premium iron ore,” said Rohan Kendall, head of iron ore research at Wood Mackenzie.
“Although the rise in scrap consumption would lead to total iron ore demand falling by 24 per cent below our base case, the market for pellet products would expand by 35 per cent.”
Wood Mackenzie states that the decarbonisation of the steel sector in this scenario would boost DRI trade and notes that Australia and Brazil could be well-positioned to produce H-DRI for export.
The company says DRI using green hydrogen as the reductant can produce steel with almost zero CO2 emissions and adds that China and Europe would be key DRI importers.
To achieve scrap use growth, scrap recycling rates would have to increase from 80-85 per cent to 95 per cent.
India and China scrap supply chains would require substantial development which would contribute to displacement of iron ore demand, notably taking effect post-2030.
Metallurgical coal principal analyst at Wood Mackenzie, Anthony Knutson, said: “Under a 2°C scenario, hot metal consumption is expected to decrease 667 Mtpa below our base case by 2050 to 795 Mt. This, in turn, leads to an almost halving of the total annual metallurgical coal demand to 622 Mt from our base case by 2050.”
Seaborne metallurgical coal trade would fall in this scenario, although domestic coal in China would bear the brunt of declines.
Knutson said: “In a 2°C world, seaborne imports would be all but eliminated during the 2040s in China, leaving only a nominal volume of the highest-quality coking coals imported to coastal mills. India, on the other hand, would double its import requirement to 123 Mtpa, as its steel demand outpaces its ability to decarbonise.”
“PCI demand comes under great pressure in a 2°C scenario falling by 50 per cent or 37 Mt as hydrogen injection rates increase.”
A successful rollout of carbon capture and storage – which under this scenario could reach 500 Mt of emissions captured in 2050 – would provide an opportunity for continued use of metallurgical coal in steelmaking as emissions captured via this pathway is from BF/BOF steelmaking.
Background:
The Base Case – The Wood Mackenzie base case represents the company’s judgement of the most likely outcomes for the energy and natural resources industries, taking into account the expected evolution of policy and technology over the coming decades.
The Scenarios – Wood Mackenzie’s Accelerated Energy Transition 2 scenario shows the company’s view of a possible state of the world and of the energy industry that is consistent with limiting the rise in global temperatures since pre-industrial times to 2 degrees Celsius.
There could be a multitude of potential pathways for meeting that condition, and the AET-2 scenario represents Wood Mackenzie’s interpretation of the likeliest route, given the policy drivers and technological innovation required. The company does not assign a probability to the likelihood of any scenario being realised.