Green steel: an investor’s view

Industrialized countries are trying to maintain primary steelmaking as a strategic sector under their regional control, whilst decarbonizing the enormous energy it consumes. Promising concepts to alleviate the resulting renewable energy shortage in the global north for this purpose is to establish efficient supply chains from the global south through either ammonia as an efficient hydrogen carrier molecule, or to relocate iron production and import HBI (hot briquetted iron). 

The transition towards green steel requires massive investment in new infrastructure. Green electricity generation, hydrogen production, and storage system investments often exceed the market capitalization of steel makers, as upstream energy-related investments have an order of magnitude that is greater than that of the steel plant itself.

For example, the following investment volumes would be required for a green steel plant with a capacity of 2.5 million t/year and corresponding green energy supply:

When it comes to future energy supply chain investments, it is clear that energy companies and green investment funds will be in the driver’s seat, and not steel producers. The former have much better credit ratings (typically A or AA), giving them access to capital and at much lower interest rates than for steelmakers. This difference in financial leveraging power is only further increased when interest rates remain high. The resulting high treasury bond yields make lenders even more wary of non-investment grade bonds from steelmakers. Additionally, the energy sector offers much more stable returns and free cash flow due to the nature of their business model and generally present bigger market capitalization, allowing them easier access to equity for large investments on top of higher borrowing capacity at better rates.

In short, decarbonization projects at this scale require the financial resources of players outside the steel industry. It is therefore up to the energy sector and possibly also governments to set the tone on whichever national and global green energy strategy is the most beneficial to them, whilst steelmakers will most likely have to play the hand they are dealt. 

Steel can be decarbonized via multiple routes. If it is to be produced ‘CO2 lean,’ the coal feedstock in its production process must be replaced with non-fossil-based alternatives. Pioneering projects use green hydrogen for this purpose. However, the steel plants are often located in regions with an uncompetitive hydrogen infrastructure in terms of availability and costs. That goes in particular for heavily industrialized countries such as Germany, Japan, Korea, and many regions of China.

Given their capital-backed decision power, investors will always choose the option that generates the highest risk-adjusted return. Energy generation facilities are often situated in remote locations in the global south, in countries with high risk-profiles, where high profit margins are essential to justify them. Steelmakers do not have the financial firepower or profit margins to bear such risks compared to the energy sector.

Consequently, steelmakers face an uphill battle to secure capital willing to be allocated to remote, high-risk regions for the production of hot briquetted iron (HBI), for instance, which companies rely on to decarbonize steel production via the direct reduction route. 

An alternative could be ammonia, as it would not only provide the steel industry with a reductant, but it also has a large existing market for fertilizer and chemicals, as well as a growing market for co-firing in power plants in the Asia Pacific region. The offtake market is diversified and much bigger, consistently offering producers the flexibility to sell to the highest bidder, whereas HBI production is a much narrower and much more rigid value chain. Ammonia production has an inherently lower risk profile and has at least the same or better profitability. Capital will thus most likely be drawn to ammonia as its higher risk-adjusted return acts as gravity for investment.

In summary, our analysis indicates that the responsibility for global and regional decarbonization strategies will likely extend beyond the steel sector itself. This is due to the significant financial and infrastructural resources needed, which are better handled by players with larger budgets, such as those in the energy sector. Additionally, these entities seek to maximize returns while minimizing investment. Among the options, ammonia presents more opportunities for utilization, has existing infrastructure, and involves lower risk compared to alternatives like hot briquetted iron (HBI).

At present, the outlook for the steel industry is that it will serve as one of several players in a larger strategic plan, exploited by energy giants to their own benefit. However, novel technologies such as the Paul Wurth EASyMelt, which allow the efficient direct use of ammonia in the process, thereby avoiding energy losses from hydrogen separation out of imported ammonia, can represent a wild card in the steel industry, allowing it to have its part of the cake and eat it, too.

The Paul Wurth EASyMelt requires a much smaller initial investment compared to other decarbonization options, shifting capital risks to the energy sector, whilst being able to efficiently utilize ammonia in the green steel value chain. This efficient usage inevitably results in cost savings, i.e., a slice of the pie that can be shared amongst steelmakers and energy suppliers. As a result, ammonia is not only the financially preferred investment for the energy sector but can also be the more profitable energy source for steel making.

By using ammonia, steelmakers can both source a green reductant at a global seaborne price, and also allow the flexibility to easily adapt the energy form the plant consumes (coal, natural gas, local hydrogen, local electricity, or ammonia) in varying proportions. All of which could be sourced from multiple possible suppliers. This is a valuable and unique economic advantage of the Paul Wurth EASyMelt, which a conventional DRI based green steel plant simply does not have. The steel production supply chain/OPEX is thus derisked and energy purchasing negotiating power is restored to the steelmaker.

Lower operating risk on both the renewable energy producer side and consumer side inevitably translates to either lower costs of borrowed capital or higher risk-adjusted return of equity. Therefore, capital from all sides win, as capital always tends to and should do.