At The Crux

Most UK steel is made using blast furnaces, the technology with the highest CO2 emissions. This means the replacing of assets as they reach end of life will require investing in new low-emissions technologies with new supply chains, bringing new risks, to achieve climate change goals and avoid the risk of stranded assets.

This paper looks at risks relating to UK domestic steel production at a national level, starting with the role the industry currently plays in the resilience of the UK economy and what the implications of further reductions in steel production capability might be for national risk. It then assesses risks created in the alternative scenario where large-scale investments are made in low-emissions technologies.

The paper concludes that the highest-risk pathway is the status quo and continued delay to investment in the sector. Although the UK is a major outlier in terms of the small size of its steel production, it has until now managed to maintain a notable presence in most product segments, which is important for the ongoing functioning and resilience of the economy. Further loss of capacity would leave segments of the economy entirely reliant on imports, in some cases from single international suppliers.

Investing heavily in steel assets comes with risks, however. The economic fundamentals of the sector are not sustainable, and a more level playing field with European competitors is required for a healthy industry that is not reliant on government support. Low-emissions technologies have risks, particularly when they rely heavily on one technology or supply chain across the industry. This paper identifies the supply of scrap steel and high-grade iron ore, the potential for major increases in gas demand in electric arc furnace steelmaking, and the effectiveness and competitiveness of carbon capture as risks that motivate an approach which encourages and supports multiple technologies. It argues that the cost to the UK as a whole of such an approach would likely be less than the cost of any significant disruption to the steel supply chain.

Introduction

This paper assesses some of the national risks posed by the situation in the UK domestic steel industry, both from the status quo and moving forward through the energy transition. Steel is acknowledged by the UK government as a ‘foundation industry’ that is ‘vital for the UK’s manufacturing and construction sectors’. The material is widely used in household goods, critical national infrastructure (CNI) and communications, defence platforms, and medical, industrial and agricultural equipment. Secure supply is therefore strategically important to the functioning of UK society. Steel comes in many forms and grades, each with distinct chemical properties suited to specific applications. Some are used in massive volumes, while others have very specialist applications, making international trade important for efficient supply.

Excess global production capacity can overshadow the varied role that domestic production in different product segments plays in supporting the wider economy and society. The dramatic reduction in the size of the UK domestic industry since 1970 can give the impression that UK steel producers are superfluous, particularly when they request significant backing from the public purse. But domestic producers provide a layer of resilience across the economy as suppliers of last resort and strategic national assets in times of crisis, as innovators and innovation partners in areas which can be significant for sustaining strategic advantage through science and technology, as suppliers to the UK defence industry and CNI, and as competition for international suppliers.

The role of domestic production is important, but it has limits. Many military and civilian steels are imported from reliable suppliers in allied countries, and a lack of cost competitiveness and downstream processing capacity constrains the domestic industry’s ability to participate in some markets. Local and international market headwinds hamper innovation, impacting UK steelmakers’ ability to enhance strategic advantage or improve profitability.

The UK steel industry has reached a crux. Continuous financial crisis since 2008 and the need for heavy investment to decarbonise before ageing assets reach end of life mean that government action is needed to prevent sector collapse. Many European steel producers have similarly ageing assets and face the same global market pressures, but are receiving large-scale government support to install lower-emissions plants, and they face significantly lower energy costs. Without moves to level the playing field, alongside joint efforts between industry and government to chart a path to more efficient and low-emissions production, it is possible that two of the UK’s four operational blast furnaces will cease to operate within a few years, potentially alongside one or more of the four electric arc furnaces (EAFs) that operate around Sheffield and Cardiff. While the decline of the industry has so far had relatively limited impact beyond the people and businesses directly affected, it is likely that the national security implications of further loss of capacity would be felt more widely. The UK would become the biggest economy by far worldwide to have no significant domestic steelmaking capacity.

Government action which prevents further loss of capacity and supports modernisation and sustainability would therefore reduce risk to the UK economy and society, and indications in January 2023 that the government will support the sector should be welcomed. However, this support would benefit from being nested within a transparent strategic framework that both sets a direction for the sector and outlines what the government wishes to achieve by supporting it, particularly in the context of a rapidly changing technology environment. Reform to the investment environment remains essential to reduce reliance on the public purse in future. The government’s consideration of a carbon border tax suggests that it may be moving in this direction.

The European Climate Foundation funded this research as part of RUSI’s UK National Security and the Net Zero Transition project. It aims to examine the relevance of the domestic steel industry to national security and to offer an analysis of the options for decarbonising the UK steel industry from a risk perspective. This paper addresses three research questions:

1. How does the domestic steel industry impact national security, specifically economic resilience?

2. What current dependencies (raw materials, fossil fuels, energy) exist within the UK steel supply chain and what security issues arise as a result?

3. What options exist for decarbonising the UK steel sector that minimise national risks?

This paper presents its findings in three chapters. Chapter I introduces the steelmaking technologies and processes currently used in the UK and outlines existing dependencies and security issues. It goes on to present the main options for decarbonisation. Chapter II assesses the relevance of domestic steel production for economic resilience and the risks associated with the continued decline of the steel industry in the UK. Chapter III addresses systemic risks facing several decarbonisation pathways and suggests that a diversified approach may offer the lowest overall risk profile.

A literature review was conducted from September to November 2022 to assess the current challenges facing the industry and the most viable decarbonisation pathways, as well as UK government policy. The review covered government policy and research documents and net zero pathways from a range of industry and civil society organisations, in addition to academic literature from 2017 onwards.

Between October and December 2022, the author conducted 18 interviews under the Chatham House rule with heads or directors of sustainability or government affairs at steel companies and industry associations, in the civil service and civil society organisations, as well as academics, to contextualise the risks and understand perceptions of the commercial and market environment for UK steel producers. A roundtable was held to validate findings. The research focused on steelmaking and did not cover downstream activities such as casting, rolling or finishing.

Legacy Steelmaking and Decarbonisation Technologies

This chapter briefly presents current steelmaking technologies and some of the ways they are being adapted to reduce emissions to very low levels. Other technologies do exist but are at an earlier stage of development and are not discussed here. The chapter then discusses existing supply chain vulnerabilities; this allows discussion of some of the risks associated with different decarbonisation pathways in Chapter III.

Steelmaking Technologies

Steelmaking is currently dominated by two technologies. Steel producers making primary steel from iron ore most commonly use blast furnace–basic oxygen furnace (BF-BOF) processes. Iron ore (iron and oxygen, alongside other minerals) is reduced and melted in the blast furnace using coke, produced by oven-heating metallurgical coal (producing tar and sulphur as byproducts), coal and lime. The process removes oxygen from iron ore through chemical reactions with carbon monoxide from the coke and coal, which produce CO2. Limestone helps remove impurities, creating slag, which is used in roads, cement and other applications. Iron-rich liquid metal is then transferred to a basic oxygen furnace, alongside up to 25% scrap steel, where oxygen further removes impurities, and other elements can be added to alter the character of the steel produced. Carbon monoxide and slag are the main byproducts.

Sometimes natural gas or coal are used to reduce the oxygen content of iron ore without melting, producing direct reduced iron (DRI), which is then fed into a blast furnace to remove impurities. Where very high-quality iron ore is available, the DRI can be used in an EAF to produce primary steel, reducing emissions by around 50% when DRI is produced using gas, compared with conventional BF-BOF. Emissions per tonne of steel produced using gas DRI are around 1.65 tonnes of CO2, compared with around 2.32 tonnes using BF-BOF.

The possibility of using DRI in an EAF creates one of the main decarbonisation pathways for primary steelmaking, as DRI can also be produced using hydrogen. Zero emissions (or green) hydrogen can be produced using zero emissions electricity to power electrolysis of water, while low-carbon hydrogen is possible from the reformation of natural gas coupled with carbon capture, utilisation and storage (CCUS) technology. DRI can be compacted into briquettes to form hot briquetted iron (HBI), which it is possible to transport globally, creating the possibility of producing HBI where green hydrogen is cheapest, possibly along transport corridors close to iron-ore mines. HBI import is therefore a potentially cost-effective alternative to domestic DRI that does not result in the offshoring of steel production.

Currently, EAFs are typically used to recycle steel, producing new steel with very low emissions of around 0.7 tonnes of CO2 per tonne of steel. The range of steels that can currently be produced in an EAF is limited to a degree (in particular for flat products), and is further constrained by the availability of scrap with low levels of residual elements such as copper and phosphorus, a particular challenge in the UK. Scrap steel is heated in the EAF and lime and other materials and gases added to reduce impurities, with slag as a byproduct. EAFs are often used for alloy steels and are always used for stainless steels. They can be economical at small scale, allowing the production of more niche specialist products, which are produced in batches, meaning there is potential for demand management for the electricity network.

Producing in batches can make EAF producers more resilient in the face of price volatility. One UK EAF producer shut down production for around a day at a time in 2022 when energy prices were high, while another EAF producer in financial difficulty only produced in batches for relatively price-insensitive aerospace customers. In contrast, to be economically viable, BF-BOF plants must operate around the clock, making them more exposed to extreme price spikes.

Steelmaking in the UK and Current Dependencies

All the UK’s steel production from iron ore takes place at two large integrated sites: Indian-owned Tata Steel UK’s Port Talbot steelworks and China’s Jingye Group-owned British Steel plant in Scunthorpe. These sites accounted for 81.7% of UK domestic steel production in 2021 and around 96% of related CO2 emissions. They are also heavy emitters of other air pollutants. As shown in Table 1 in Chapter II, they produce complementary products, with Port Talbot supplying flat products used in automotive, construction, engineering and packaging, and Scunthorpe producing long products such as steel beams, rails, and wire rod. Scunthorpe also produces semi-finished flat products that are rolled by third parties for plate production. The two sites are therefore integral to mainstream steel production in the UK.

The remaining 18.3% of production takes place at EAFs operated by Celsa in Cardiff, Outokumpu in Sheffield and Liberty Steel in Rotherham, using recycled steels of various qualities and producing products ranging from rebar for construction to engineering steels for aerospace (see Table 1 for descriptions). The main decarbonisation challenge for these plants is heating, which currently requires gas and accounts for around 50% of emissions, with the other half coming mostly from electricity. Decarbonisation options for heat at the sites include hydrogen, syngas, biogas, electricity and waste recovery, showing the likely need for hydrogen at dispersed sites. Engineering and stainless steels also face decarbonisation challenges through the use of ferro-alloys, which contribute to direct and indirect emissions.

The two integrated sites rely on imports of iron ore and metallurgical coal and coke for steel production. These supply chains are well established but do have vulnerabilities. In 2020, the UK imported iron ore worth $725 million, mostly from Canada ($270 million), Sweden ($198 million), Brazil ($91.4 million), South Africa ($62.6 million), and Russia ($56.6 million). Iron and steel imports from Russia were banned on 14 April 2022, and although this does not appear to have disrupted steel production (in fact iron-ore prices fell over the year), steelmakers reported that operations were made challenging by strained supply chains and import delays. The Covid-19 pandemic proved disruptive for iron-ore prices, with rapid increases in demand in 2021 resulting in prices of $223 per tonne in July 2021, up from $96 per tonne in January 2020, and volatility has continued.

Metallurgical coal has also been impacted by Russia’s invasion of Ukraine. Russia supplied 48% of the UK’s coal in Q2 2021, falling to 19% in Q2 2022, while metallurgical coal imports from Russia fell to zero over the same period. In Q2 2022, the UK imported 1.4 million tonnes of coal – thermal and metallurgical – and produced only 190,000 tonnes. The UK has been scaling down domestic production of metallurgical coal as demand has declined, with controversial plans to develop a new mine in Cumbria approved but questions persisting about the extent to which it will supply UK steel production. Given uncertainty over future metallurgical coal demand from the two integrated sites – as it is possible that coal-free technologies will start to be adopted within the next decade, or that primary steel production will end in the UK altogether – it is unlikely that the mine is being financed on the basis of supplying UK industry.

There are longer-term risks around the supply of metallurgical coal. While investment in mining has remained relatively steady, despite reduced investment in thermal coal mining, analysts are beginning to report that some investors are turning away from metallurgical coal for environmental and reputational reasons. Financiers also report challenges in securing funding for metallurgical coal mines in some regions. Under-investment could cause further price spikes, after the cost of metallurgical coal hit record highs of around $600 per tonne in late 2021 from around $200 in 2019 and with additional volatility following Russia’s invasion of Ukraine.

UK steel is heavily reliant on foreign capital and increasingly reliant on foreign technology. This has the benefit of bringing inward investment, but for a systemically important industry also creates risks. Decisions important to the UK economy are made internationally according to imperatives which may not always be in the country’s long-term interest. Foreign ownership also reduces the incentive for public funding for innovation to build advantage in science and technology, as technology can be moved offshore and may not be scaled in the UK. This has knock-on impacts for industry sustainability. Technology is core to profitability in commodity industries, where innovation to produce steels not available from other producers or to produce them more cheaply is the main route to higher margins. As global profitability of the steel industry has declined, multinational steel companies have consolidated research and development operations and much of the legacy UK research capacity has closed or moved abroad.

There are implications beyond economic security. Steel technology is an important element of defence technological advantage, and companies such as Liberty Steel produce specialist engineering steels used in aerospace, including missiles, which have historically not been available in countries like China. Frequent financial challenges and lack of protection mean these technologies and potentially sensitive commercial data have historically been vulnerable to acquisition by companies closely connected to or owned by foreign governments. It is possible that the National Security and Investment Act 2021 will at some point see their use in the sector, particularly if large public investments are made.

Already an Outlier

This chapter sets out the case that the UK is already a global outlier in terms of the size of its domestic steel production capacity and that further decline could meaningfully damage economic resilience. While the decline of the industry to date has not been widely felt outside directly affected businesses and communities, this may not be the case should further capability be lost. This is because some presence has so far been maintained in most product segments, but in many cases only one significant domestic producer remains. This chapter highlights some of the ways in which domestic production is important for the smooth functioning of the national economy, particularly at times when the global steel supply chain faces disruption.

Steel production is considered here in the context of its role in the economy. Its role in the defence industry is covered elsewhere. The terms ‘economic security’ and ‘economic resilience’ are used interchangeably to refer to the ways in which the presence of a domestic steel capability may affect the likelihood of serious disruption to downstream sectors during periods of tight supply. Serious disruption in this context means delays, lack of availability, or price increases that might threaten the ongoing viability of a steel-consuming sector.

▲ Figure 1: Steel Production Against GDP. Note: Includes steel production against GDP for all countries other than the US and China, for which data is available from the World Steel Association. The UK is ringed in yellow. Sources: IMF, ‘World Economic Outlook Database’, October 2022; World Steel Association, ‘2022 World Steel in Figures’.

As one of the most widely used intermediate goods, steel is required to maintain economic output (replacement and upgrading of existing stock) as well as to support GDP growth (new buildings and factories require large quantities of steel, wealthier populations consume more steel goods) and is related to GDP composition, in particular the size of the manufacturing sector. Domestic steel output is broadly related to these factors, as well as whether the country is an exporter, and the relative cost of domestic steel production.

The UK is already an outlier in terms of domestic steel production against GDP, as is clear from Figure 1. The UK’s steel production per unit GDP at 2.27 kg/$1,000 is comparable to Tanzania (2.06 kg/$1,000) and the Philippines (2.28 kg/$1,000). Other outliers are unusual cases, such as the US, with its extremely large GDP (despite this, US steel production per unit GDP was still 65% higher than the UK in 2021), and Denmark, Norway and Switzerland, with small populations and economies that are fully integrated into the EU single market. In absolute terms, domestic production (7.2 million tonnes per year in 2021) is dramatically less than similarly sized advanced economies such as France (13.9 million tonnes per year), Italy (24.4 million tonnes per year) and Germany (40.1 million tonnes per year).

Domestic steel production is related to the size of the manufacturing sector, as shown in Figures 2 and 3, and the relatively small size of the UK manufacturing sector is sometimes thought to account for the small size of domestic steel production. In Figure 2, the cluster of countries around the UK does suggest either a greater willingness to rely on imports, or structural factors that reduce reliance on imports where manufacturing is relatively less important to the economy.

However, this should not be overstated for the UK. The countries clustered around the UK in Figure 2 all have much smaller economies and populations, making the domestic steel market much smaller. The UK also has a more diverse steel demand from a large (in absolute terms), varied and sophisticated manufacturing sector. This is very apparent in Figure 3, where the UK stands alone among high-income countries in terms of the absolute size of its domestic steel production relative to its manufacturing sector. France, the closest country to the UK in terms of GDP, population and size of manufacturing sector, produces almost double the amount of steel. It is also noteworthy that only one quarter of finished and semi-finished steel was exported globally in 2021 (net exports were even lower, as most major exporters are also major importers), indicating that the sizeable majority of steels produced internationally are consumed in the country of origin.

On the one hand, this shows that the UK has been able to sustain a large manufacturing capacity despite limited domestic steel production. On the other, as is shown in Table 1, the UK has managed to maintain a steelmaking capacity across many product segments and some parts of the economy will face a more vulnerable steel supply if this remaining capacity is lost, particularly if emissions costs continue to rise, making long-distance import of steel less competitive.

This study does not attempt an international comparison of steel supply since the onset of the Covid-19 pandemic, which, along with Russia’s invasion of Ukraine, has tested supply chains extensively. Questions about the importance of domestic steel production for supply security would benefit from additional research on the impact of the two crises on steel supply. However, given global steel shortages, which included shortages in the UK, it is likely that the domestic industry did play a role in reducing the impact of global supply disruption. Certainly, domestic producers adapted to local shortages – for example, producing tin cans following panic buying of food, enabling shops to restock, and steel for beds in emergency Nightingale hospitals built as part of the UK’s response to the Covid-19 pandemic. Furthermore, the crises of recent years have taken place in the context of global over-capacity of steel. It is not clear how implementation of instruments such as carbon border adjustment mechanisms or the worsening relations between the West and China – which produced 53% of the world’s steel in 2021 – will affect global supply dynamics. Restrictions on the purchase of steel from unabated blast furnaces – which accounted for 70.8% of global steel supply in 2021 – could make global steel supply more vulnerable to major shocks such as the Covid-19 pandemic and Russia’s invasion of Ukraine.

▲ Figure 2: Domestic Steel Production Intensity Against Manufacturing Value Added, 2021. Note: Data excludes the US and Japan; manufacturing value added refers to the value of manufacturing output minus the value of intermediate consumption. Sources: Author generated using data from World Steel Association, ‘World Steel in Figures 2022’; IMF, ‘World Economic Outlook Database’, October 2022; World Bank Group and OECD national accounts, ‘Manufacturing, Value Added (% of GDP)’.

▲ Figure 3: Steel Production Against Manufacturing Value Added, High-Income Countries 2021. Sources: Author generated using data from the World Bank Group and OECD national accounts, ‘Manufacturing, Value Added (% of GDP)’; World Steel Association, ‘World Steel in Figures 2022’; IMF, ‘World Economic Outlook Database’, October 2022. Data is from 2021 except in four cases – Canada (2018), Japan (2020), Kuwait (2020) and New Zealand (2019). Data for Taiwan was sourced from Statista, ‘Contribution of the Secondary Sector to Overall GDP of Taiwan from 2011 to 2021, by Subsector’, 15 December 2022. Data excludes the US.

The UK sector is additionally vulnerable because of its reliance on two integrated sites for most production and its poor investment environment for steel. Should production cease at either site without replacement elsewhere, the UK would be left without a meaningful steel production capacity in many of the largest consumer segments (see Table 1). The largest economy currently without domestic steel production is the Republic of Ireland (whose GDP is 16% of the size of the UK’s), followed by Denmark (12%), Hong Kong (12%), Puerto Rico (3%) and Ethiopia (3%). If steel production were to cease in Port Talbot and Scunthorpe, the UK’s position would be globally unique as by far the largest economy and steel consumer to be almost completely reliant on imports.

Domestic Resilience

While the UK steel industry has been hollowed out since its peak in 1970, it maintains a notable presence across most steel product segments (see Table 1, which contains the most recent available breakdown). Also clear from the table is the limited overlap between different UK steel producers. This shows the degree to which the UK maintains a skeleton steel industry; losing more capacity would result in the loss of all domestic presence and capability in some market segments. This means that the end of steel production at any one site could leave some steel consumers completely reliant on imports – in some cases from single suppliers (see the structural steel case study, p. 22) – even when impact on national production volumes is limited. CNI could be impacted, with 95% of rails for rail transport produced by British Steel in Scunthorpe (see Table 1), although regulation could be amended to allow increased imports. Construction is the largest customer for UK steel, and where supply chain disruption may be most widely felt.

▲ Table 1: UK Steel Industry Capability Across Product Segments. Source: Department for Business, Energy and Industrial Strategy (BEIS), ‘Future Capacities and Capabilities of the UK Steel Industry: Technical Appendices’, BEIS Research Paper No. 26, 15 December 2017.

The breadth of the UK steel industry is significant for national security and resilience, providing a buffer against delays due to global supply chain disruption and some degree of price insulation, depending on the cause of inflation. As mentioned above, both the energy transition and geopolitical disruption have the potential to impact the supply of steel available to UK consumers.

Loss of capacity at a large scale might take decades to recover, if it is recoverable at all, because of the loss of supporting infrastructure and expertise. This creates the potential for the UK to suffer shortages or price inflation that are worse than those of comparable countries. Although small, the industry in its current form can reduce or prevent shortages through unused capacity and, if necessary, expand production relatively quickly using existing sites, infrastructure, personnel and, in some cases, mothballed assets.

UK steel companies argue that the industry provides flexibility and a depth of customer relationship that is hard to replicate with imports. One UK producer alone supplies 60,000 grade and dimension variations each year. Many of these are made to customer specification, facilitating downstream efficiencies by reducing processing or steel intensity. Imports are more likely to take the form of standardised bulk shipments. UK producers are also innovation partners with downstream manufacturers, both civilian and military. The need for these relationships may be heightened during the energy transition, where collaboration between steel producers and downstream companies may play a heightened role in innovation and product development.

Some products supplied by the industry do not have ready alternatives and their production can depend on multiple steelmakers or production of commodity steels when there are no orders for specialised steels to ensure maximum asset utilisation. One example is a specialist steel critical for Rolls-Royce jet engines, which is first produced by Outokumpu in Sheffield before being remelted and rolled by Liberty Steel to decrease the risk of non-metallic inclusions and achieve the correct metallurgical properties. Alternative international suppliers are not readily apparent should either site cease production, threatening Rolls-Royce’s supply chain. High-speed rails are also difficult to substitute with imports, as their lengths make them difficult to ship efficiently.

Loss of capacity at one or both of the integrated steel sites would also bring longer-term risks. The closure of sites may result in loss of infrastructure at ports – primary steel producers import huge quantities of raw materials – and local rail facilities. The size of sites themselves also makes them very hard to replace. This would increase the barriers for future entrants to the market, making industrial recovery more challenging. Access to emerging steel products might also be threatened. New steels such as electrical steels – an alloy with magnetic properties used in electric motors, generators, transformers and other electrical applications – are often supply constrained. Electrical steel supply is expected to remain constrained globally for several years, and a country with a steel market as large as the UK might seek to attract producers to the country in order to supply domestic manufacturers. If the infrastructure is not there because of historic loss of industry, establishing operations in the UK will come with costs that are not present in any other advanced economy.

`Case Study 1: Structural Steel

Domestic steel production can play an important role in supply diversity. The market for open-section structural steel – the steel I- and H-beams typically used in building frames – is supplied roughly equally by British Steel in Scunthorpe and ArcelorMittal from its European operations. The closure of the Scunthorpe site would result in open-section customers – which make up the largest demand segment of the 1.2-million-tonne-per-year structural steel market in construction – relying almost exclusively on one supplier that is based abroad.

Relying solely on imports would therefore risk monopoly pricing and supply delays, as well as greater potential for longer delays during periods of broader steel supply disruption, such as recently with the Covid-19 pandemic. In the longer term, changes in market dynamics, such as ArcelorMittal finding more profitable markets elsewhere or undergoing a strategic reorientation, could result in shortages or price gouging in the UK, with no alternatives readily available for UK customers.

Lack of action on decarbonisation also has the potential to disrupt open-section supply. Demand for low-carbon steel is already having an impact on overall demand, particularly from large corporate clients with net zero commitments. British Steel has embodied emissions for its open sections of about 2.45 tonnes CO2 per tonne steel, while ArcelorMittal’s are around 0.524 tonnes CO2 per tonne, as it uses recycled steel. Steel producers also face competition from alternative materials with different emission profiles, such as timber and concrete.

Decarbonisation Pathways

Market pressures and UK and international government regulation mean that UK steel producers will need to drastically reduce CO2 emissions if they are to continue operating. The UK’s Climate Change Committee recommends that emissions from iron and steel are reduced to ‘near zero’ by 2035, although this target has not been formally adopted by government or specified as an absolute value. From the perspective of risk, the decarbonisation options for the UK’s two integrated sites can be approximately divided into four pathways, summarised in Figure 4. Each option has different risks and benefits. Two have intermediate steps to bridge the gap to hydrogen becoming commercially available. Combinations of approaches are possible and may prove beneficial in reducing risks.

▲ Figure 4: Decarbonisation Options for the UK’s Integrated Steel Production Sites. Source: Author generated.

The UK has some comparative advantages. In Europe, its geology is second only to Norway’s for CCUS potential, with more prospective capacity than the rest of the continent combined. Both of its integrated steel sites are coastal, and Port Talbot has gas import infrastructure already in place that could be used for gas DRI or, in future, hydrogen imports, although it is poorly positioned for increased electricity supply. The port might be used to ship CO2 captured using CCUS to the HyNet storage fields off Merseyside. Scunthorpe is close to gas pipelines that may eventually transport green hydrogen from Scottish wind farms or CO2 to storage sites. British Steel is an integral part of the East Coast Cluster, selected alongside HyNet as the first CCUS projects to be developed in Track 1 of the UK’s CCUS programme, with around £1 billion of public funding on offer.

Operational and in-development offshore wind plants may make the UK competitive with the rest of Europe producing green hydrogen domestically, depending on appropriate regulatory and pricing structures being put in place. National Grid ESO (the system operator for the electricity grid) is assessing the practicality of using curtailed wind at low cost to produce hydrogen, while National Grid Gas is looking at the potential to convert around 25% of its existing network to hydrogen. The economics and opportunity costs compared with other potential uses of curtailed wind power or importing green hydrogen or related products such as HBI are not yet clear, as electrolysers would likely be oversized with lower capacity factors, adding to costs. In the longer term, the UK is unlikely to be globally competitive in green hydrogen production and might benefit from its historic openness to trade by building strategic partnerships to import competitively priced intermediate products such as HBI.

Decarbonisation Risks

This chapter identifies and discusses specific systemic risks associated with decarbonisation pathways that may impact the UK’s steel supply or the sustainability of the industry. Systemic risk here refers to risks associated with the availability of resources necessary for steel production and capacity to scale up availability, technological risks where solutions are not yet proven, and market risks beyond the control of individual companies or countries.

Systemic Risks

Steelmakers face significant risks in each decarbonisation pathway, as summarised in Annex II. The government will need to manage both macro and financial risks for its own balance sheet. Most estimates of the cost of decarbonising a 3–4-million-tonne-per-year integrated steel site are in the region of £1–4 billion, depending on the site and not including upgrades to infrastructure such as electricity. Alternative models with new dispersed EAF sites may also require government backing, albeit with more diversified risk.

To ensure national requirements are satisfied, negotiations with incumbent steel producers over the optimal pathway for their sites should take place in the context of a clear national risk framework for the sector, the pillars of which are proposed in Annex I. Any framework will need to balance and manage to the greatest extent possible the following risks.

Scrap Steel

Conversion to scrap steel is one of the quickest, cheapest and most technologically proven ways to reduce emissions, and has the advantage of a domestic supply chain. However, converting the UK’s integrated sites entirely to scrap would come with two important risks.

1. Steel is already one of the most recycled materials on Earth; very little scrap steel that is collected is wasted, although collection rates appear correlated to price, suggesting that scrap availability could be increased, and scrap quality could certainly be improved. Global availability is most closely linked to historical steels reaching end of life. This means that at any one time the scrap supply is, roughly speaking, fixed and zero sum. As EU steel producers are already moving to secure more supplies, including in the UK, shortages or price rises in future are likely. This is exacerbated by increasing restrictions on scrap exports globally. UK steelmakers using scrap steel are concerned about supply. One producer using high-quality scrap – generally offcuts from manufacturing – reported being confident of their current supplies but questioned whether there would be sufficient supply should one or other of the integrated sites convert to scrap. A producer able to use lower-grade scrap expressed more concern over future availability due to increasing demand globally and lack of investment in the UK scrap supply chain. The company is investing in its own scrapyards to improve its security of supply, but will remain exposed to global price pressures.

2. Using scrap steel always reduces CO2 emissions, whether used in an EAF or a BF-BOF, albeit with widely varying potential for emissions reduction depending on the product being made. Because scrap supply is ultimately limited to historical use and global demand for steel is projected to continue increasing through to 2050, the increased use of scrap beyond growth in availability has climate risks if it substitutes rather than complements primary production globally. Metals consultancy CRU argues that decarbonisation using scrap beyond increases in primary scrap supply in advanced economies may not result in meaningfully lower global emissions, instead displacing scrap use to other markets, but that it would reduce investment in primary steel, which is expected still to account for 55–60% of steel consumption in 2050 because of growing global demand. The challenge should not be overstated. Some UK-made steel products, such as sections, can be made efficiently using scrap in an EAF with no changes to technology, and increased use of scrap for these purposes is a potentially quick and effective means of decarbonising. Furthermore, UK scrap is often exported to countries with less stringent environmental controls, generating other environmental risks. However, continuing primary steelmaking in some product segments reduces pressure on scrap supply while ensuring overall reductions in CO2 emissions, alongside the potential technological benefits discussed below.

Direct Reduced-Grade Iron Ore

Only very high grades of iron ore, making up around 4% of global reserves, are currently suitable for DRI – whether with hydrogen, gas or coal – without using a blast furnace. Where CCUS is not available or economical, as is the case for most of continental Europe, DRI is one of the few feasible decarbonisation pathways for primary steel production. This means that supplies of DR-grade iron ore could become highly competitive in the medium term, with potential for price escalation and availability constraints.

Work is under way to increase mining capacity, but this is unlikely to keep pace with demand. Estimates of the rise in demand for DR-grade iron ore range from five to 10 times current demand by 2050, and shortages by 2030 are already predicted in the absence of a technological breakthrough. Research and consultancy company Wood Mackenzie estimates that a fivefold increase in demand for DR-grade iron ore to 750 million tonnes per year globally will be needed, requiring $250–300-billion investment in mining by 2050, with two-thirds for new high-grade ore exploration. The Energy Transition Commission found that to meet demand, new ore deposits would need to be established, greater pre-processing of lower grades would be required, or new melter technologies would need to be developed.

There have been some successes in developing technologies allowing use of lower-grade ores – particularly coupling DRI with basic oxygen furnaces – but their timely commercialisation and extent of effectiveness is not guaranteed. With no pilots taking place in the UK, it is not clear that UK steel producers will have access to emerging technologies. This suggests that full conversion of both integrated sites to a DRI + EAF pathway without significant investment within the UK in technologies allowing the use of lower-grade iron ore could create unpalatable risks to the UK steel supply.

EAFs

There are some technological challenges facing EAFs, particularly around a subset of flat steel products. Around 96% of flat steel products (more than half of steel demand) in the EU were produced by BF-BOF, despite 79% of long products being produced in EAFs. Most steel products can now be made in an EAF, but there is a subset of flat steel products serving the automotive and food packaging industries that cannot. While a relatively small proportion of overall production, these products have high margins and are important for the business case for Port Talbot. There are some promising pilots where similar steels have been made using EAFs, but these have not yet been commercialised and none have taken place in the UK.

EAFs have the advantage of being a very well-established technology, and gas DRI for primary steelmaking is in operation in many locations across the globe (a gas DRI plant was previously operated by British Steel). This means that while there are questions about hydrogen technology, using gas as an intermediate step is well understood.

Plans to decarbonise primary steelmaking using EAFs nearly always use gas DRI as a step to hydrogen. Taking this approach would increase UK exposure to gas markets; around 10 gigajoules (GJ) of natural gas is required for each tonne of DRI, implying annual demand of 59 million GJ for conversion of both integrated sites at current levels of production, equivalent to roughly 27% of total industrial gas use in 2019 prior to the coronavirus pandemic. Conversion to hydrogen may not reduce reliance on natural gas in the medium term, with the UK planning initially to use blue hydrogen with CCUS. Decisions on using hydrogen or attaching CCUS to gas DRI sites are likely to be taken separately as supply becomes available, meaning emissions from the industry could continue for some time, albeit at a lower rate. It is not clear whether this would be feasible in the context of the sixth carbon budget as the government has not committed to a specific CO2 emissions reduction for steel.

EAFs generally employ fewer people, an economic risk for the areas around converted sites. However, greater dispersal of EAF sites compared with BF-BOF plants would mean the economic benefits of the industry would be more widely spread and the economic risk associated with any one site’s ongoing viability would be reduced, potentially contributing to a more competitive market.

CCUS

The workforces at both Port Talbot and Scunthorpe have long experience with BF-BOF technology. Use of the technology to produce their range of products is well established. This is an advantage of CCUS, which might provide steel companies with more certainty over the steelmaking technology itself than alternatives. The 25- to 30-year lifespan of a blast furnace might allow their replacement by other technologies around 2050 in order to fully eliminate emissions and other pollutants. In the UK, major investments will be required to modernise ageing steel production assets alongside any investment in CCUS, and this should be considered in pathway comparisons. CCUS critics argue that while pilot projects for DRI-based approaches have proliferated and major investments have been committed, very few if any pilot projects applying CCUS to steel are under way, suggesting that the business case may not be as positive as sometimes stated.

Opinions on CCUS economic feasibility within the industry and among analysts are diverse. The first CCUS schemes in the UK are targeting commercial operation around 2027, early enough for steel users to earn a first-mover premium if technological barriers can be overcome in time. However, the Energy Transition Commission estimates that at $1.1–2.2/kg for hydrogen, hydrogen DRI steelmaking would be more competitive than CCUS, and these levels could be achieved in the mid- to late 2030s, potentially earlier. This is supported by academic analyses finding that CCUS will be the most expensive technology, other than at times of unusually high electricity prices. But some steelmakers and the International Energy Agency argue that CCUS should have a role, with some preliminary assessments suggesting CCUS may already be competitive with the 2022–23 emissions scheme trading reference price of £62.10 per tonne of CO2. Questions also persist about the availability of hydrogen in sufficient volumes.

CCUS is an imperfect solution from a climate and environmental point of view. CCUS cannot remove all emissions. Pilots at coal power plants suggest that 90–95% of emissions might be removed from a point source of emissions, but steel has multiple emissions points, (depending on configuration and whether gases are used for power generation), not all of which are easily adapted to CCUS requirements. This may result in less effective CCUS performance, with associated emissions trading costs. Similarly, the effectiveness of retrofitting CCUS is uncertain. CCUS does not address other harmful pollutants affecting air quality in and around the integrated sites, which are present at much lower levels in scrap or DRI + EAF pathways. There are also technical challenges specific to applying CCUS to blast furnaces. Gas pressure at the top of a blast furnace is critical to its effective operation and the impact of adding a process in that part of the furnace is not well understood or researched, meaning that steel companies may not be in a position to use CCUS infrastructure immediately if it becomes available. Poor CCUS performance would have significant commercial implications for steelmakers because of emissions trading costs and potential loss of market share to lower-carbon alternatives. However, the technology also has the potential to remove CO2 emissions earlier and more thoroughly than alternatives, which would have a significant impact on carbon budgets.

There may be long-term strategic risks to over-reliance on CCUS. Bloomberg New Energy Finance forecasts that 56% of primary steel production will use DRI + EAF by 2050. This would mean a huge amount of research and innovation in DRI + EAF approaches likely to result in new methods to produce new grades of steel and a major global industry in technologies, such as pelletisation. It would also make DRI + EAF the major growth segment of one of the world’s largest industries. With no exposure to this technology, the UK would be a ‘technology taker’ with limited access to opportunities in what may become the fastest-growing steel technology segment.

Hybrid Approach

A hybrid approach would encourage the industry to use a mix of options, most likely dominated by EAFs but potentially with CCUS at one or two blast furnaces and other high-emission points like lime kilns. Such an approach is proposed in the British Steel Low-Carbon Roadmap. EAFs are able to vary proportions of scrap and iron ore depending on availability and price, introducing some resilience, although this is mitigated by the correlation between scrap and iron-ore prices. Industry representatives argue that colocation of EAFs and blast furnaces may bring some benefits, allowing molten iron to be used in the EAF to expand product capability and reduce overall energy demand. Gas demand may be complemented by and eventually replaced with green hydrogen to reduce exposure to international markets, but medium-term gas supply risks are difficult to mitigate without maintaining one or two blast furnaces with CCUS and a strong scrap steel supply chain. The combination of technologies could provide sufficient risk mitigation to ensure security of supply and access to emerging technologies. It also has the advantage of allowing flexibility in the face of infrastructure pressure points such as electricity supply, gas, hydrogen and CCUS.

Conclusion

There is no risk-free future for the steel industry. Weighing the risks of different approaches to decarbonisation definitively is impossible at this point, because of the low level of technological and infrastructural preparedness in key areas, and market immaturity for decarbonised inputs. What is clear is that the highest-risk route is the status quo and continued delay to investment in the sector, which comes with a significant risk that steelmaking capabilities and capacity essential to economic resilience will be lost and not recoverable.

Any policy approach seeking to minimise national security risks should begin with the premise that UK national security and economic resilience may be seriously impaired by further major reductions in the UK steel industry’s overall product range and market share. Risks to supply chain security are heightened by the lack of redundancy in the sector, which requires the government to work with the incumbent or take steps to facilitate new entrants into the affected market segment to avoid loss of capability. Creating a viable business environment would reduce this risk and could result in significant expansion in investment, given the relatively low levels of steel production in the UK relative to the size of the market. This would increase competition and add redundancy, while making it easier for the government to avoid picking winners.

Policy should recognise that security of supply is always improved by using less and reusing, which can also improve downstream productivity. Initiatives to reduce over-engineering in buildings and improve product design to reduce steel intensity, as well as to improve or create markets for used steel as opposed to recycled steel, will help boost overall economic resilience and reduce CO2 emissions.

All foundation industries face related challenges with the current business environment and technological, policy and market uncertainty around the energy transition. The government should consider putting in place a foundation industry strategy with measures to put the industries on a sustainable footing through the energy transition and chart a course to decarbonisation.

The government should consider a sector-wide arrangement similar to the North Sea Transition Deal for steel, bringing together government, industry and relevant regulatory authorities to guide the sector during the transition period. The deal would tackle issues such as funding for decarbonisation, the role of primary and scrap-based steelmaking, the potential for public–private facilities such as a shared DRI facility, and regulatory measures such as carbon and electricity pricing reform, as well as the creation of a market for low-emissions steel in the UK and globally.

Annex I: Pillars of a Strategic Risk Framework for Foundation Industries

The energy transition is a strategic risk for foundation industries: cement, ceramics, glass, paper, metals and bulk chemicals. Technological overhaul and market disruption threaten the competitiveness of traditional industries that produce the materials essential for the functioning of the UK economy. Individual industries would benefit from ongoing assessment through a strategic risk framework that establishes a national perspective on risks associated with the steel industry and helps clarify government priorities. This annex highlights the main risk areas for steel decarbonisation that might form the basis of such a framework and help inform strategy and policy, as the technological and commercial environment evolves.

▲ Figure 5: Pillars of Strategic Risk Framework. Source: Author generated.

What is Decarbonisation for?

Guiding any national risk framework covering the decarbonisation of an industry must be the question of what decarbonisation is expected to achieve. Decarbonisation of the UK industry must reduce emissions of greenhouse gases globally as part of the national contribution to fighting climate change. Decarbonisation should aim to retain critical UK industrial capabilities and market share and ideally improve competitiveness and innovation. The process should result in secure supply chains with limited price volatility and guaranteed availability. Any pathway must be backed by timely access to infrastructure and technology, along with an appropriate legislative, trade and regulatory environment, and should include risk mitigation to overcome bottlenecks. These decision factors make up the following strategic pillars.

Climate

In the UK, climate policy currently revolves around national targets centred on a single high-level number: a theoretically determined amount of CO2 that can be emitted over a set time period without exceeding legally binding carbon budgets. The approach comes with significant risk that emissions will simply be offshored, with UK consumers causing emissions through import markets and UK production undermined by lower-cost high-emissions alternatives. To ensure that a policy has a meaningful impact on reducing CO2 emissions, the impact on emissions from the whole supply chain, the industry globally and changes to customer behaviour should be considered.

Economy

The energy transition is fundamentally changing the competitive basing of economies. This is due to transitions to new technologies that may be more efficient, have new capabilities, or be more expensive but with lower emissions. It is also associated with the transition away from more commoditised forms of energy such as oil, coal and natural gas, to renewable technologies where competitiveness is determined by local and regional resources and access to the most efficient technology and low-cost capital. The result is that the balance of global economic competitiveness may face another period of upheaval and the impact of these changes on foundation industries should be carefully monitored to ensure ongoing sustainability.

Supply Chains

New technologies and processes will in many cases require new supply chains, both for technology and equipment and for raw materials, where new materials may be required or existing materials may be used in different proportions. With demand for certain technologies set to increase dramatically, in some cases exponentially, shortages of manufacturing capacity or raw materials are very likely. The impact of decarbonisation pathways and different policy options on supply chain resilience should always be considered.

New supply chains present new surfaces for environmental and human security challenges, corruption and disruptive geopolitics that require ongoing assessment. These will be examined in relation to net zero technologies in later research papers from this project and are an important risk, with the potential to cause significant disruption if not managed effectively.

Infrastructure

Net zero technologies require new materials and energy sources, some of which require new infrastructure. Access must be timely, affordable and secure. For foundation industries, electricity, hydrogen and CCUS infrastructure are the main areas of business-critical infrastructural change, and businesses will not be able to decarbonise without one or another of them. Policy and regulation relating to CO2 emissions and industry should take into account the availability of infrastructure necessary to decarbonise in order to avoid disincentivising investment and adding costs that companies have no possibility of avoiding because necessary infrastructure is not available.

Technology

The energy transition is a monumental economic challenge and opportunity. For industries such as steel and other hard-to-abate sectors, it will mean the technological rebasing of the entire industry. Sectors which have not seen changes to fundamental technologies for decades, such as iron, steel and cement, find themselves in a competitive environment where access to technology, the ability to innovate and the ability to source clean energy competitively are critical to survival. Industrial strategy needs to recognise these risks and ensure that policies will facilitate sufficient access to technology and innovation support.

New technologies bring new risks. These range from cyber risks to a changing profile of vulnerability to criminal, military or terrorist attack. In many cases, decarbonised industries are likely to be more dispersed – for example, relying on EAFs in multiple locations rather than large integrated sites – which in general should make the industry as a whole more resilient. But smart industry can be exposed to increased cyber risk, and safety systems running with limited margin for error or with new fuels with different safety characteristics, such as hydrogen, can also increase risks.

Legislation, Trade and Regulation

All aspects of the energy transition require a foundation of strong legislation, regulation and trade policy. Rapidly changing infrastructure requires responsive and adaptable regulators and policymakers. In order to invest, decarbonising industries not only require line of sight on the business environment but in conditions of systemic uncertainty, such as the energy transition, they also benefit from established and public government strategic objectives and an idea of the frameworks that will underpin future decision-making. This means that industrial policy and sector agreements may be much more important for the ongoing functioning of foundation industries than is normally the case, as both the government and industry seek to navigate the energy transition.

Annex II: Risk Register

Dan Marks is a Research Fellow in energy security at the Royal United Services Institute. His research focuses on national security dimensions of the energy transition in the United Kingdom and internationally. Prior to joining the institute, Dan was the power editor at African Energy, a division of Cross-border Information. He reported on energy issues across the African continent as well as heading the African Energy Live Data research team, which maintained and developed a database of more than 7,000 power plants and projects. Dan holds an MPhil in Theory, Methodology and Epistemology in Economics and Social Science from Université Paris 1 Panthéon-Sorbonne, as well as an MA in International Relations in the Middle East and a BSc in Physics and Economics, both from Durham University.