The future of steel: Hydrogen vs coal

| January 12, 2022

There are many routes to low CO2 steel but the most talked about method is through direct reduction with hydrogen to produce sponge iron followed by an electric arc furnace to produce steel.

When starting research for this piece, the benefits of using renewables to refine low grade ores such as nickel, copper, and lithium rather than ship “dirt” with metal content of 1~6% seemed to be apparent, but the possibility of refining ores like iron at around 60% metal content seemed remote

The conventional wisdom is that hydrogen must reach US$2/kg to compete with fossil fuels. It is expected that that will be many years away if ever. However, in the case of steel making, that low price seems to be unnecessary.

At current Chinese metallurgical coal prices (US$320~350/tonne) the coal required per tonne of steel, about 750kg, is approximately US $255. In China there is also a carbon price of only US $8/ tonne of C02 but that adds about $17/ tonne of steel, so the “fuel” cost is US$270/tonne of pig iron.

To make a tonne of iron there is 1.7 tonnes of iron ore at average grades. Currently freight costs including rail freight to the mill are around $25/tonne, so the ore freight adds $42/tonne and coal freight another $5~15/tonne to the steel cost. For a total of US$315~350 CIF material costs in addition to the iron ore.

In Australia and Brazil, the Iron ore provinces are close to good renewable resources. In Australia, a combination of tracking solar and high capacity factor wind turbines can provide 70~80% availability renewables with little or no storage.

In Brazil a mix of wind solar and hydro will also provide high availability. The high productivity of wind and solar in those regions means minimum investment in generation capacity while backup in the form of batteries, hydrogen etc would require less investment than in any traditional steel producing region. For example, a solar farm in the Pilbara has one tenth of the land costs and 80% more output than one in Germany and 50% more than in the Steel regions of the US, China and Japan.

The challenge for Australia is that Brazilian iron ore is more suitable for hydrogen reduction than most Pilbara hematite. This means that we need to find ways of upgrading hematite or shift the bulk of iron ore production to the magnetite provinces in the Midwest of WA, SA and Tasmania. Whether there are sufficient quality resources there is a key question

Sponge iron delivered to the mill in China/Korea etc for US$330/tonne premium over the ore price is US$305 FOB Australia. If the non-fuel operating costs of the mill are the same as a blast furnace that means that the hydrogen cost can be around US$300. As 70kg of H2 is required, that works out at a bit over US$4.20/kg for hydrogen.

As to the manufacture of hydrogen, currently the electrolyser costs are about $1.50~1.80/kg depending on utilisation. Electrolysis needs 65~75 kWh/kg including auxiliary power   Now if the power is 3.5c/kWh, the total hydrogen cost is still under the target $4.20.

There are dozens of projects around the world to lower electrolyser costs to US70~120c/kWh and renewable plants in the Middle East and southwest USA are entering into long term PPAs at between US 1.4 and 2.8c/kWh. Many wind and solar projects in Australia have contracted at the equivalent US 3.5~4.5c/kWh.

Given the scale of plant needed for significant green iron production, it should be possible to aim for A 4~4.5c production cost so the cost per kg of hydrogen should be between US$2.80 and $3.50/kg within 5 years. At US$2.80 it will still be competitive even if coal price halves.

Then there is the aspect of a premium for green steel. It appears many manufacturers of vehicles, whitegoods etc. are prepared to pay a premium for green steel to meet their own carbon reduction objectives.

A premium of US$50/tonne of steel allows another US60~70c/kg increase in the acceptable hydrogen cost.  Even after allowing for markups right through the supply chain a premium of $50/tonne is only a 0.3% increase in the price of a medium size SUV

Then there are the operational issues of moving and storing iron ore and coal and operating coke ovens. These all create significant local dust, noise and pollution hazards which will largely be ameliorated by using imported sponge iron.

The saving in land and environmental management costs for steel mills will be substantial. It is difficult to quantify those costs, but they could easily add $30~$50/ tonne to production costs or 30~60c to the breakeven for hydrogen reduced sponge iron.

Finally, there is the locational flexibility offered by eliminating blast furnaces. Minimills fed by a combination of scrap and sponge iron can be economical in the 250,000 to 2,000,000 tonne per year range, whereas as modern blast furnaces need 2~5m tonnes per year to be economical. Thus, small mills can be located near markets offering more flexibility to their customers and lower transport costs across the supply chain.

In summary, if the hydrogen reduction process proves reliable and non-fuel costs are similar to blast furnaces, the full supply chain benefits of hydrogen reduced iron produced at or near the mine could justify a hydrogen price of at least US$5 and as high as $6/kg even with a low carbon price. At European carbon prices of €66/tonne, a hydrogen price at the mine of US$7/kg is just about breakeven

As that price can be achieved today the task is to prove hydrogen reduction is a reliable robust process without excessive maintenance costs while at the same time reducing electrolyser costs and planning an efficient build up of renewable capacity.

While the benefits to other metals will be different, in almost all cases it will be cheaper to use renewables and green hydrogen to refine metals here rather than use coal in the Northern Hemisphere.

In conclusion the green steel revolution may be much closer than many can possibly believe.