Each industry is different, but they're all dealing with climate change. What’s happening in steel? Erik van Doezum, ING’s steel lead, gives his perspective.
How important is steel to society, and how carbon-heavy is it?
We say steel is inevitable – it’s everywhere. It’s in the white goods we use, the cars we drive, in our windmills, the houses being built. No one actually wants steel per se, but there’s no alternative – it’s essential for modern life. Demand for steel will continue to grow from now till 2050 and until the end of the century.
Unfortunately, at the moment producing steel is relatively carbon intensive. The average emissions are 1.83 tons of C02 per ton of crude steel. It accounts for an estimated 7% to 9% of global emissions.
What are the options to decarbonise steel?
It’s good to start with how it’s made because that will explain why it’s carbon intensive.
If you use iron ore to make steel, you have reduce the oxygen that is tied to the iron. This is done by smelting at very high temperatures. That’s currently done mainly using coking coal. This creates an intermediate product called pig iron, which is melted and refined into crude steel, often while adding scrap (i.e. recycled steel) and alloys. You can also use only or mostly scrap, which is then molten into new steel.
Steelmaking is a bit like cooking. You have a big pot of liquid metal and add things to get what you need. No steel is made the same. Steel for a house has to be strong but it doesn’t have to be pretty. But if you produce steel for a car, it needs to be as light and thin as possible, anti-corrosive and paintable. So every type of steel has different characteristics. It’s in the second melting/cooking phase where you add the different ingredients.
So how can it be decarbonised?
The simplest option is to use more scrap – recycle more. This is already happening because it’s also good from an economic perspective. However, a very high proportion of used steel is already recycled.
In Europe, we are seeing a couple of front-running steel plants moving to new production technology, but in most of the world they’ll move from ‘average’ to ‘best-available’ technology during the 2020s. This will already significantly reduce emissions. It’s not enough to decarbonise the sector but it’s a step in the right direction.
What kind of new technology is there?
A way to reduce emissions is by changing the way iron ore is reduced. Companies are increasingly using natural gas, which can save roughly one ton of CO2 per one ton of steel. This process can be tweaked to replace the natural gas by hydrogen. And if that is made from green electricity, then you can actually create green steel.
Is that attainable?
Opinions differ. Some people say it’s pie in the sky. It’s clear that it will be a large challenge. The investment required to decarbonise the European steel industries alone exceeds three times the book value of their current assets. But there are some positive signs: in Europe there are four plants that are scheduled to be operational in the mid-2020s planning to use that technology.
We’ve committed to aligning our steel portfolio with the net-zero by 2050 pathway. How are we doing that?
We’re doing quite a bit of work on sustainability improvement loans, supporting companies to improve their target setting, to start using science-based targets and improve their ambition levels. At the same time, we’re talking to them about their transition strategy. From a steelmaker’s perspective, the question is how am I going to do it? And how can I do it while remaining financially responsible, keeping shareholders and lenders happy, and generating sufficient cashflow in a business that is extremely cyclical? We’re there to have these discussions and help them find the best solutions.
How do these discussions usually go?
A couple of years ago sustainability wasn’t at the top of the agenda for steelmakers . Now they're proactively asking for our advice. I’ve just got off the phone with a CFO who three years ago had no sustainability targets. Now his company has a net zero target by 2050, they’ve done a couple of sustainability improvement loans and are preparing a large investment into a relatively green steel production site. It’s going very fast and clients appreciate banks that have knowledge to advise and support them through this process.
How is the Net-Zero Steel Initiative helping? What’s our role?
The initiative is working to help decarbonise the steel sector. We’re leading the workstream on climate-aligned finance with four other banks to come up with a standard for steel companies to report CO2 emissions; a standard for banks to report on the carbon intensity of their steel lending portfolios; and the roadmap by which to measure that. It falls perfectly under our Terra approach.
We’re currently starting the consultation phase for our proposed roadmap, which is an absolutely critical part of that methodology and hardest to get right.
Banks would be obliging steel clients to report to that standard, gaining insights into where they are in their decarbonisation journeys, and then have the conversation of how to help them get there.
Where does change have to come from – governments, banks, companies? Which should play the biggest role?
Everybody has distinct roles. We strongly believe there’s a clear interest from the industry to decarbonise. As lenders we try to help, like with the climate-aligned finance working group. But the industry needs to be able to make business cases for going green. Without a clear regulatory framework this will not succeed. This could be for things like carbon pricing, protection from less green imports, guarantees for the large investments needed, and government grants or subsidies. As a bank, we can want be very green, but at the end of the day banks can’t lend to business cases that aren’t viable. Regulation needs to enable proper business cases.
What about risks in the steel sector?
Steel is a cyclical business with high fixed costs. So we perceive it typically as risky. On the other hand, as I said, steel is everywhere and used in so much we rely on every day, so its an essential part of our economy.
Obviously, decarbonisation will bring additional risks, as large investments will need to be made. Secondly there’s the risk that clients won’t decarbonise fast enough, that they’ll be overtaken by new market entrants, or simply be too late and their assets will be stranded.
We’re very selective in who we bank. We look at steel companies with clear competitive advantages, whether on cost, product quality, or geographical location. And we always try to make sure we have a clear view on what our clients are doing, especially around the energy transition. We understand they don't have a solution today, but they need to start thinking about one.
Any parting thoughts?
Steel isn’t sexy, it’s utilitarian, the visualisation of an old industry. It’s a large industry, and it will be a very big challenge to decarbonise it, but it’s an industry where we can make a real difference. It has the potential to move to something completely different. I think that’s exciting. It's an opportunity for the industry to reinvent itself. For new technologies, for innovation. That offers opportunities for us as banks to really team up with our clients and, I mean it sounds a bit dreamy, but to imagine the future together and realise it together.
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