Green-steel manufacturing is crucial for the steel industry and the planet, but decarbonizing the global steel production chain is a massive undertaking. Today, the global steel industry is responsible for 7 percent of global greenhouse gas (GHG) emissions.1 Europe is likely to be the first region to decarbonize, with CO2 taxes and other legislation offering incentives for rapid emissions reductions there. Other regions are likely to follow, driven by similar regulatory and sustainability pressures.
Many companies have already started their decarbonization journeys, looking into technologies such as using alternatives to blast furnace–based metallics—such as scrap, hot briquetted iron (HBI), and direct reduced iron (DRI)—as well as integrating green energy and carbon capture, utilization, and storage (CCUS). However, much progress remains to be made. According to McKinsey analysis, more than 1,650 existing plants around the globe will need to be decarbonized to lower emissions to meet targets, which will simultaneously increase the need for green energy.
Our research shows that, in the years to come, one successful strategy could be to establish new green-steel hubs in locations with favorable access to low-cost energy and the right metallics feedstock. These hubs are not a magic bullet to decarbonize the entire industry, but they could complement the decarbonization journeys of existing steel players (integrated DRI-EAF2 plants, CCUS, and so on), potentially become a part of hybrid solutions in the short to medium term, and help the industry meet demand for green steel in critical industries such as automotive, machinery, and construction.
Reshape global supply chains
Decarbonization could lead to the largest asset reconfiguration the steel industry has ever seen. Today, the industry mainly produces steel in integrated blast furnace–basic oxygen furnace (BF-BOF) plants. These combine upstream ironmaking and steelmaking with downstream finished-product production (for example, hot rolling and surface finishing). These traditional plants rely on coke to reduce iron ore and have high emissions.
To decarbonize while meeting demand, steel players need to find alternatives to highly emissive BF-BOF plants. This might include making DRI with green hydrogen (potentially using natural gas as a bridge fuel), using premelters powered by renewable energy and electric-arc furnaces (EAFs) to make steel, and then incorporating carbon capture solutions. This also might involve creating hybrid solutions, such as using scrap in combination with HBI that is produced in low-cost energy regions (green-steel hubs) and shipped to the EAF, where the scrap and the HBI are melted to allow for optimized sourcing of both.
As companies reconfigure their assets, they could also consider rearranging steel value chains across regions, potentially in the form of green-steel hubs. These hubs could come in a number of forms, but one option would be to create “green iron” hubs that decouple ironmaking from the production of raw steel. This could allow both processes to be optimally located: DRI production could be located in regions with favorable access to low-cost natural gas or hydrogen and iron ore, and raw-steel production could be located in regions with favorable access to renewable energy. The iron that is produced could be shipped between regions in the form of HBI for easier long-distance transport to EAF steel mills.
For any of these solutions to be effective, cross-industry collaboration will be crucial, and companies will need to consider the best path forward for them. A combination of solutions is likely to be the most advantageous—specifically, a mixture of integrated DRI-EAF production (which allows for hot charging DRI and independence from imports and global trade dynamics) and HBI imports from green-steel hubs with EAFs. Below, we explore the building blocks that need to be in place for players considering green-steel hubs as part of their decarbonization journey.
The biggest-ever asset reconfiguration of the steel industry is needed
Around the world, there are two main steel production routes, each with different CO2 footprints: integrated BF-BOF, which accounts for more than 650 plants globally, and (scrap-based) EAF, which accounts for more than 1,000 plants globally.1
Although (scrap-based) EAF is less emissive than BF-BOF and could be powered completely by renewable energy, there is likely not sufficient scrap to meet global demand, and EAF has a limited product portfolio.
As such, the industry can increase its use of EAF, but it cannot rely solely on scaling up EAF to decarbonize, because scrap of the required quality will likely be limited. The industry will need to find ways to decarbonize the BF-BOF route, particularly its highly emissive upstream production of iron.
Electricity cost is the driver of future competitiveness
Historically, the cost of steel production was driven by the cost of iron ore and coking coal. Because coke and coal have global markets, companies were competitive based on their own operational efficiencies.
This is expected to change as the industry transitions away from coal- and coke-powered processes and becomes increasingly dependent on electricity. Green-steel production does not rely on coking coal but instead requires significant amounts of electrical energy, particularly during the ironmaking process. For instance, one metric ton of DRI requires more than 60 kilograms of hydrogen, equivalent to 2,700 kilowatt-hours of electricity per metric ton of DRI. Overall, according to McKinsey analysis, electricity (including electricity for hydrogen production) accounts for 40 to 50 percent of production costs for green steel.
As a result, regional variations in electricity prices (in addition to iron ore prices) are expected to drive both costs and competitiveness for green-steel production.
Different new value chain setups are possible
A new value chain optimized for green steel could appear in a number of different ways. Companies could keep using integrated assets (using DRI-EAF, rather than BF-BOF), but they could also choose to break up the process at different points, allowing companies to capture energy cost advantages and accelerate the buildup of green-steel capacities. Likely, many companies will combine the different solutions.
Looking ahead, established steel companies must carefully weigh the implications of partially giving up vertical integration. While forgoing vertical integration allows them to switch capital expenditures in favor of operational expenditures and reduce the costs of decarbonization, it also means giving away part of value creation.
To balance energy cost advantages and value-creation opportunities, one promising option is creating manufacturing hubs dedicated solely to energy-intensive DRI production. The iron produced could then be briquetted into HBI for transport as feedstock for EAF steel plants.
HBI hubs could offer a strategic advantage and fast-track green-steel production
Green-steel hubs that produce HBI could help accelerate the decarbonization of the steel industry because of a few benefits:
- HBI hubs can isolate the ironmaking process, allowing it to be decarbonized more easily while allowing companies to retain direct oversight of downstream green-steel production processes.
- Hubs can be built in locations where the scale-up of low-cost renewable or green energy can happen at a faster pace.
- The ring-fenced nature of new greenfield assets could encourage investors to provide funding.
Establishing green-steel hubs in regions with these conditions (such as the Middle East, Oceania, and South America, among others) could be favorable as long as logistical costs for offtakers are competitive at the same time.
To match the scaling up of HBI production via green-steel hubs, HBI melting capacities at existing steel sites would need to be increased by building new EAFs or premelting units.
Green-steel hubs would also need to align with decarbonization plans of offtakers. In many markets, using natural gas as a reducing agent may be acceptable into the 2030s as a transition step because it offers significant emission-reduction potential relative to the BF-BOF route. However, as deep decarbonization accelerates toward 2050 to meet climate targets, a clear strategy to switch to green hydrogen must be established. Implementing a sequential approach (using natural gas in the near to medium term and switching to hydrogen later) could enable the steel industry to decarbonize faster and more economically in certain regions.
Green-steel hubs will need an ecosystem to support them
Setting up green-steel hubs is a complex task and would require building new ecosystems with multiple stakeholders and partners. Additionally, the ownership structures of such hubs could be fundamentally different to traditional steel sites because other stakeholders—such as energy and infrastructure companies, among others—could be potential shareholders as well.
If they choose to pursue green-steel hubs, industry shapers would need to build an integrated business case for all stakeholders:
- Mining companies. It will be crucial for HBI manufacturers to secure partnerships to source raw materials and the high-grade iron ore needed for direct reduction. Such partnerships could economically benefit both HBI manufacturers and mining companies.
- Energy companies. Green-steel hubs need guaranteed access to renewable electricity, natural gas, and (green) hydrogen, with consideration for potential national energy transition plans.
- Investors. Building new DRI and HBI production plants requires major capital expenditures and smart financing to minimize the cost of capital. These greenfield projects could prove compelling for investors as ring-fenced, low-emissions assets with stable offtake from steel companies, with potential mitigation of raw material volatility risks.
- Equipment OEMs. Equipment needs to be procured to establish new DRI plants. In turn, to ramp up production of necessary equipment, OEMs need to attract talent and navigate legislative factors such as subsidies, permitting, and export finance.
- Governments. Green-steel hubs could create GDP growth and employment opportunities for local and national governments, but industry shapers will first need to collaborate to obtain necessary permits and lay the groundwork for development. HBI hubs in greenfield locations will also need access to basic infrastructure (such as roads, harbors, grid connections, and natural gas network connections), which can require cooperation with local governments. At the same time, green-steel hubs could be an opportunity for governments and industry shapers to scale hydrogen infrastructure effectively due to the high concentrated demand.
- Logistics companies. HBI hubs will need to establish strong inbound and outbound logistics capabilities to ensure steady material flows. For example, outbound HBI could require transport in large-scale vessels, which would then necessitate suitable port infrastructure (such as deep-sea capabilities).
To make the ecosystem work, a solid sales and go-to-market strategy is critical. The HBI hub operator needs to secure long-term offtake contracts with steel companies in key markets, ensure that deliveries fulfill strict quality requirements, and negotiate margins that strike a balance between the economic success of HBI hubs and the competitiveness of offtakers.
Green-steel hubs are not a one-size-fits-all solution for decarbonizing the steel industry, but they could serve as one method of accelerating decarbonization, particularly in steel-producing countries that have high energy costs. Over time, green-steel hubs could also shift to encompass different parts of the value chain, producing semifinished products or finished products (such as slabs or hot-rolled coils, respectively) for global markets.
Companies establishing green-steel hubs must ensure that the basic building blocks for success are in place: access to supplies of low-cost renewable energy and raw materials, minimal cost of capital through smart-financing concepts and potentially through public support, and a successful sales and go-to-market strategy that locks in long-term partnerships with acceptable margins for all parties. If done right, green-steel hubs could be a transformative tool in transitioning the industry from highly emissive to green.
