CRUsteav: A value for emissions abatement on the road to green steel

Significant work remains to achieve a decarbonised steel industry

European flat-rolled mills are generally low-emitting on the global scale relative to others using the same technology but are not necessarily low-emitting in absolute terms. Buying options for low-emissions steel are limited today. Without a market actively pricing green premia, CRUsteav offers a way to value lower-emissions steel with a consistent system boundary and underlying driver, the EU ETS carbon price.

Data from: CRU Steel Cost Service

Today’s options are limited for buying low-emissions steel

Emissions in steelmaking are predominantly due to the production of primary iron. This is due to the need to reduce iron ore to a usable state – i.e. removing oxygen and adding carbon. The blast furnace produces primary iron using coke as a reductant (n.b. coke-making is highly emitting). Iron is then refined into steel in the basic oxygen furnace (BOF). To meet product quality needs, an electric arc furnace (EAF) producing flat-rolled steel also requires a part charge of iron, either from a blast furnace (i.e. pig iron) or direct reduced (i.e. DRI/HBI). DRI/HBI uses natural gas as a reductant and generates less emissions less than blast furnace-produced iron.

Buy from domestic BF-BOFs

The traditional BF-BOF is the highest-emitting steel production process. This means today’s choice is to accept a product with high absolute CO₂ emissions or to buy the same steel but certified to have lower emissions. These products are based on a certified CO₂ reduction in carbon intensity using CO₂ savings from previous steel producer investments.

Opinion varies among buyers and sellers over the green credentials of such products, but they have become increasingly popular. Nevertheless, the signal that choosing to pay for them sends is powerful in building the business and investment case for the journey towards a lower-emitting product in the future. This is because it demonstrates the existence of a market for a product where lower emissions are a key characteristic.

Buy from domestic EAFs

In Europe, there are very few steelmakers producing flat-rolled steel via the EAF route. Until now there was no differential value placed on EAF-steel based on its lower-emissions content. Now, mills would like to be able to charge more as buyers start to value this aspect of the product. The experience to date suggests this has had limited or inconsistent success, with some buyers willing to pay considerably higher prices due to the emissions footprint, and others not willing to pay anything additional.

There are longer term questions of whether EAFs are ‘the answer’ and CRU’s view is that it is neither feasible nor desirable to attempt to simply switch the whole industry to this route. There is not enough scrap available to make all the steel needed, nor can all qualities of steel be made entirely from scrap. Because of this, eventually if steel buyer X switches to scrap-based supply, this removes its availability for steel buyer Y and emissions are not cut any further at the global level. Such actions are rational in the short term at company level (because buyer X gains an advantage over buyer Y), but do not progress decarbonisation.

Buy imports

Import options for low-emissions steel are also limited. EAF steel is available from some non-European suppliers, though again, there are relatively fewer producers of flat steel via this route. The greatest concentration of these EAFs is in the USA. Imported BF-BOF steel is typically (though not always) higher-emitting than the European equivalent, but today does not generally incur costs for those emissions, and for the buyer this can create a strong price proposition. The aim of CBAM, when it comes fully into force, is to remove this differential by exposing all EU market supply to the same emissions costs.

Investments for a lower-emission future are ongoing

Most of the European BF-BOF mills are investing in, or have plans to invest in, different process routes for the future that will result in the production of low-emissions steel. Operating costs of these future assets will be higher than for today’s unabated grey steel. They also require large amounts of capex, which governments are providing some assistance with. Financing this capex is aided by buyer commitments to the future lower emission product.

These factors lead to the ongoing debate about a green premium for low-emission steel. Today, this is not a mature market to assess, nor is it a concept that is standardised or well understood. For example: what is it the premium above? Is it a price premium or does it measure avoided costs? Is it one value or a range of possibilities?

However, what can be assessed is the value of CO₂ abatement of a given magnitude. This value can form an input for discussions about the price of mass balanced steel or emissions reduction certificates today, and about the price of future low emission steel from new process routes. It can also feed into investment cases for companies and governments looking at capital projects to switch from BF-BOF to those lower-emitting process technologies.

CRU launches Steel Emissions Abatement Value

In recognition of the above, CRU is launching CRUsteav, a weekly calculation of the value of CO₂ emissions reduction for possible abatement levels at a given unit cost of CO₂. The abatement levels are informed by CRU’s modelling of current steelmaking technologies, relating back to unabated BF-BOF technology. The values do not imply that steel must be produced via these processes to achieve the value. Rather, the steel must have emissions levels equivalent to what the process typically achieves. For example, flat-rolled steel cannot be produced using 100% scrap (i.e. Scrap EAF). To achieve this value level, the emissions from steel produced using iron in some form would need to be abated by some other means.

CRU has chosen to adopt this method of calculating the abatement value for steelmaking technologies because there is currently not a mature spot market to assess a green premium for the steel industry. Therefore, CRUsteav should not be seen as a green premium. CRU plans to publish additional modelling tools to help with the calculation of such a premium in the coming months.

Use cases of CRUsteav

CRUsteav provides a simple yardstick for the value of emissions abatement and highlights the potential value of shifting to specific process technologies that are viable today. One example may be that a HR coil buyer is looking to achieve a lower level of emissions from its steel purchases. This buyer currently buys from traditional BF-BOFs with average emissions of about 1.98 tCO₂/t of HR coil – this is the average level in Europe. There are several best-in-class BF-BOF operations in Europe that emit about 15% less (i.e. 1.69 tCO₂/t HR coil). CRUsteav indicates that securing volume from these suppliers could be worth about €15 /t of HR coil more than the market price in the week commencing 26 February. If the buyer could secure material from an EAF using natural gas based DRI for its iron feed, they could consider a value of €62t /t of HR coil in the same week for the ~60% reduction in emissions relative to the current purchases.

This ~60% reduction in emissions is about as far as a buyer can go if they are looking for purely physical abatement that does not include offsets or other certificates for reduced emissions. If a buyer was willing to also accept these non-physical forms of abatement, then consideration could be given to the value of abatement for Scrap EAF and Full Abatement, that value an emissions reduction of ~80% and ~100% compared to traditional BF-BOF, respectively. A buyer would need to assess the value they achieve relative to the incremental increase in the value payable for said emissions.

Value above CRUsteav

CRUsteav values abated emissions based on prevailing EU ETS carbon prices. Ultimately, this is a measure of how the carbon is valuing emissions today. The willingness of buyers to accept higher prices in line with this value is an indication of how actively the market is supporting a green transition.

To achieve low absolute emissions in the future will require investment in new steel production technologies. These will be high-cost, both in terms of invested capital and future operating costs. CRUsteav today may not be sufficiently large to cover all those costs, which would indicate that the market is not yet at a level to incentivise them without other forms of support.

CRUsteav therefore provides a starting point for pricing discussions between buyers and sellers on emissions levels through technologies that are available today, though it does not attempt to value future cost increases in full. Future work by CRU will begin to close the gap between what CRUsteav offers the industry now – an anchor for pricing lower-emissions steel – with what it needs to fully transition to a low emissions industry. CRUsteav affords an anchor when considering investments and future prices. While each individual investment will differ substantially, if buyers are increasingly willing to accept the ‘extra’ indicated by CRUsteav, over time this may build increased comfort that future prices will provide a return on invested capital by steelmakers looking to decarbonise their processes. However, if buyers are unwilling to adopt levels indicated by CRUsteav, this may indicate greater resistance in the future without further policy action.