Opinion: NZ Steel’s plans to cut its carbon emissions by 45 percent, with the help of $140 million of funding recycled by the Government from the Emissions Trading Scheme, is welcome news. After all, it will reduce our national emissions by 1 percent at modest cost per tonne of greenhouse gases saved.
But two strategic concerns arise. First, some unique factors make it an industry-government partnership that cannot be replicated elsewhere across the economy. That said, there are lessons in it for the Government and other companies on their decarbonisation journeys.
* Govt offers NZ Steel $30m more in bonuses for bigger, faster emissions cuts
* Steel mill expects 20-plus year consent, thanks to loophole in climate law
* Bluescope Steel offers hope of continued production at the Glenbrook mill
Second, a massive, disruptive decarbonisation is underway in the global steel industry, which accounts for 8 percent of humanity’s total greenhouse gas emissions.
NZ Steel will benefit from some of the technology transformations such as hydrogen to turn local iron sands into emissions-free pig iron. But its investment in an electric arc furnace to make steel means it needs scrap steel as a feedstock. It expects to use NZ sources but those are subject to a turbulent global commodity market.
“Ferrous scrap has already become a strategic raw material,” CMK Center, a steel industry consultant, wrote last year.
There are ways NZ Steel and the Government can address both sets of issues.
First, it’s helpful to take stock of the global steel industry’s climate transformation. Two useful articles on the clean tech pathways it’s pursuing are this one in Energy Monitor from January and this one in The Economist.
It will cost US$1.4 trillion to make global steel production zero emissions by 2050, estimates Wood Mackenzie, a leading UK-based global consultant to metals, mining and energy sectors. One of its reports describes the massive scaling up of green hydrogen, renewable electricity and carbon capture and storage required, as the chart below summarises. The cost of the transformation is laid out in the second chart.
The US investment bank Morgan Stanley estimates that a premium of US$115 per tonne will be needed for green steelmakers to break even – nearly 20 percent of the current market price for conventional steel. But some climate-conscious steel users are already prepared to engage. Volvo, for example, is one.
NZ Steel will earn a $10m incentive payment from government if it gets the new furnace operational by January 2027 and another $20m if it can double by 2030 the 800,000 tonnes of emissions savings it is initially targeting
Most crucial of all is the high cost and limited availability of hydrogen to turn iron ore (or iron sands, in the case of NZ Steel) into pig iron and then steel. Currently green hydrogen (produced from renewable energy sources) constitutes about two-thirds of the green steel premium. But hopefully green hydrogen will eventually become cheap and abundant.
Next is the issue of global scrap steel supply. It is already widely used as a feedstock for electric arc furnaces. EAF is the conventional technology NZ Steel is investing in at its Glenbrook mill to cut its emissions by 45 percent.
Wood Mackenzie estimates global supply will have to double to 1300 million tonnes a year to help the steel industry decarbonise. Currently, about 85 percent is sourced within countries and 15 percent traded across borders.
But the rising demand is likely to cause more to be traded internationally and prices to become more volatile. NZ Steel says its new EAF will consume 300,000 tonnes of scrap a year, which it’s confident it can source economically from the New Zealand supply of 500,000 tonnes a year.
NZ Steel will earn a $10m incentive payment from government if it gets the new furnace operational by January 2027 and another $20m if it can achieve by 2030 and additional 800,000 tonnes of emission savings above its initial target agreed with the government.
But that second furnace will push the company’s scrap demand beyond current domestic supply. So, the company, the steel sector and government will need to increase domestic iron and steel recycling to meet demand.
Given there are no other point-source emitters as big as NZ Steel, the great decarbonisation challenge is to encourage and reward behaviour change by many small emitters in farming and other sectors
The switch to EAFs will also expose NZ Steel to price variations in the scrap commodity market, which in turn will be influenced by global market conditions. Currently, it has no exposure because its feed stock is iron sands it mines locally, priced on a cost-plus basis in the steel-making process.
Having invested in one or two EAFs, sooner rather than later NZ Steel will have to invest heavily in renewing the rest of its ageing steel-making processes. Given the totality of these investments, at some point NZ Steel may lobby the Government to curtail scrap exports and/or steel imports to help maintain Glenbrook’s profitability.
There is some irony in all of this. Glenbrook used to have two small EAFs installed in 1969, with the last decommissioned in 1996. Meanwhile, Pacific Steel, owned by Fletcher Building, had a larger EAF in south Auckland. But that was decommissioned before NZ Steel bought Pacific Steel in 2015; and New Zealand became a scrap exporter.
The new $300m EAF NZ Steel announced on Sunday will be modern technology much superior to its three local predecessors. And though it will be conventional technology, it will play a long-term role in decarbonising steel making at Glenbrook. And, in due course, the upstream iron sands-to-iron stage will be decarbonised, likely by hydrogen.
This chart from Wood Mackenzie shows why NZ Steel is picking the readily available currently clean technology but has lots of hard work to do to decarbonise its upstream operations.
But NZ Steel is the only example in the country of where an existing conventional technology can be used to clean up a large point-source of emissions. The chart below, and the Newsroom story it accompanied, shows why.
Of the large emitters, the electricity generators are making good progress building more renewable generation and new technology will in due course help them store clean electricity.
But the oil and gas companies (BP, Z, Mobil, Gull, Todd, OMV, and Greymouth) will hang on to their conventional, heavily emitting activities as long as they can.
Likewise, dairy, sheep and beef farmers are still strongly resisting any meaningful reduction in their emissions. Fonterra and its farmers, who generate 21 percent of NZ’s entire greenhouse gas emissions, are the most intransigent.
More hopefully, Silver Fern Farms in meat and Synlait Milk are much more engaged on their climate challenges but they must bring thousands of farmers along with them.
Given there are no other point-source emitters as big as NZ Steel, the great decarbonisation challenge is to encourage and reward behaviour change by myriad small emitters in farming, other sectors and among consumers. The government has yet to figure out how it can help stimulate such behaviour change across society at such scale and speed.
If there’s one message intransigent farmers and co-ops should take from the NZ Steel deal: grab the first-mover advantage while you can. Because the money from the government via the ETS is dwindling fast.
Why? Because resistance to the Emissions Trading Scheme by farmers and other vested interests means the Government has knee-capped the ETS, as National would do if it forms the next government. So, there’s much less money available to help sectors invest in decarbonising.
That’s just the kind of vicious, counter-productive cycle in the economy and climate we don’t need in New Zealand.