BUSINESS STRATEGY

IN (AND FOR) A
DECARBONISED WORLD
CASE STUDY OF THE STEEL INDUSTRY: THE SCENARIO
ANALYSIS RUN BY CARBONE 4 !

How do end-markets evolve in a low-carbon

world?

How are industrialised facilities redesigned to

Alexandre Joly
Specialist in business strategy
alexandre.joly@carbone4.com
meet climate expectations?
What are the risks to anticipate and the
opportunities to seize in a changing market?

Carbone 4 invites you to explore its scenario

Strategy Practice analysis by physical flow on a concrete case:
January 2019
the steel industry.

Clément Ramos
Strategy Practice Co-leader
clement.ramos@carbone4.com

Hughes-Marie Aulanier
Strategy Practice Co-leader
hughes-marie.aulanier@carbone4.com

Carbone 4
54 rue de Clichy 75009 PARIS
contact@carbone4.com
+33 (0)1 76 21 10 00
www.carbone4.com

1 www.carbone4.com
TABLE
OF
CONTENTS

SYNTHESIS 3

INTRODUCTION 4

1 Supply 5

Two main production routes whose impacts on

climate change are radically different

2 Demand 8

The steel demand by end-market depends on

scenario physical underlyings

3 The steel sector in 2050 10

A steel production increasingly reliant on recycling with

flat or even decreasing volumes in 2050
CONCLUSION 12

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EXECUTIVE SUMMARY
KEY STUDY MESSAGES
SUPPLY: TWO MAIN PRODUCTION
ROUTES WHOSE IMPACT ON
CLIMATE CHANGE IS RADICALLY
DIFFERENT
The primary route has a global market
share of 75%. Rest of the market is hold by
the secondary route that recycles scrap,
using electricity. Furthermore, the primary
route emits 4 times more CO2eq per ton of
steel than the secondary route with the
European electricity mix.
Given a price of 50$ per ton of CO2, costs
of the 2 routes break even. In a realistic
trajectory with global warming limited to
2°C, the price of a ton of CO2 would go
up to hundreds of dollars. The recycling
route would then get more competitive.
DEMAND: THE STEEL DEMAND BY
END-MARKET DEPENDS ON
SCENARIO PHYSICAL UNDERLYINGS
We project the demand for steel
according to two scenarios:
• A techno-optimist one, relying on a
strong penetration of CCS (Carbon
Capture and Storage) and a drastic
energy efficiency improvement
• Another one, sober and circular, taking
into account the physical limits of
resources and emissions
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A STEEL PRODUCTION MORE AND
MORE RECYCLED WITH FLAT OR
EVEN DECREASING VOLUMES IN
2050
There is no technical barrier for the
recycling route to penetrate the market:
70% of steel volume could be covered by
recycled steel in terms of quality by 2050.
The techno-optimist scenario enables to
increase the production volumes by 25%
by 2050 while emitting much less
greenhouse gases than today, thanks to a
strong development of CCS together with
unprecedented energy efficiencies.
On the contrary, the circular economy
scenario predicts a 15% decrease of steel
production by 2050 (vs. 2017) to be
compatible with a 2°C trajectory while
focusing on the less emissive recycling
route.
LESSONS LEARNED
Whatever the scenario is, the future of
steel industry lies in recycling: from 50% to
65% in 2050 vs. 25% in 2017.
A slowdown in steel production might
occur by 2030. The growth of this sector
would then be flat of even negative in the
longer-term.
Make its industrial strategy resilient:
strengthening its historical business and
engaging in resilient markets
INTRODUCTION

The scenario-based analysis is a powerful prospective tool to support decision-makers

in a constrained world. This is particularly true in the context of profound and systemic
changes such as those caused by climate change and/or a transition to a low-carbon
economy.

In order to take maximum advantage of the opportunities offered by a scenario

analysis, Carbone 4 recommends a methodological approach based on physical
flows. The respect of this sequence – physics first, then economics – is crucial and
ensures a deep understanding of strategic impacts of each scenario.

In this document, Carbone 4 proposes to make this approach more concrete with
a specific case: the steel industry.

4 www.carbone4.com
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SUPPLY: 2 MAIN PRODUCTION ROUTES WHOSE
IMPACT ON CLIMATE CHANGE IS RADICALLY
DIFFERENT

AN HISTORICAL PRIMARY ROUTE

Notes: 1 Scrap EAF ; for DRI-EAF, scrap can account from 20% to 80% according to steel quality requirement
Sources: World Steel Association, expert interviews, Carbone 4 analysis

2 main routes in global steel production
coexist:
• The primary route called “BOF”: it is the
historical sector which produces steel from
primary iron and coke. Coke, used as
reducing agent and combustible, enables
to reduce and melt iron oxide in the blast
furnace. Then, hot metal is combined with
scrap iron (5% to 25%) and introduced in
the basic oxygen furnace (“BOF”) to
produce liquid steel. This route accounts
for 75% of the global production.
• The recycling sector called “Scrap EAF”: it
produces steel in an electric arc furnace
from recovered scrap steel. The percentage
of scrap used varies from 70% to 100%. This
route accounts for 20% of the global
production. Note that the quality of steel
produced depends on the quality of the
scrap introduced.
There is another route « DRI EAF » that uses
directly reduced iron ore combined with
scrap steel in an electric arc furnace. It
produces partially “recycled” steel at a
quality similar to the primary route. It
accounts for less than 5% of today’s global
production.

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TWO ROUTES WITH RADICALLY DIFFERENT IMPACTS ON CLIMATE CHANGE

Sources: « Steel’s contribution to a low-carbon Europe 2050 » study, expert

interviews, Carbone 4 analysis

Based on the European average electricity • The “DRI EAF” route has the advantage of
mix, the primary route “BOF” emits around 4 being 35% less emissive than the primary
times more CO2eq than the “Scrap EAF” route while producing the same quality of
route. Emission reduction potentials remain steel. Its carbon footprint could benefit
limited: from both route carbon reduction
methods.
• Using alternative reducing agents such as
biomethane or green hydrogen could Many projects emerge all around the world.
reduce only by 10% the carbon footprint For instance, Swedish group SSAB is building a
of the primary route €150m pioneer pilot plant. Scheduled for
• Decreasing the European electricity mix 2020, this pilot plant should prove the
carbon footprint by 50% would reduce by feasibility of directly reducing iron with
25% the carbon footprint of the “Scrap hydrogen made from renewable electricity,
EAF” sector, thus reinforcing its before being converted into steel in an
competitiveness from a climate electric arc furnace.
perspective

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A CLOSE FINANCIAL PERFORMANCE BETWEEN THE 2 ROUTES

Sources: World Steel Dynamics, expert interviews, Carbone 4 analysis

The historical route is today 20% more Furthermore, the “Scrap EAF” route has a
competitive than the « Scrap EAF » route; flexibility advantage for a world that needs
which explains its dominant market position. to adapt: an electric arc furnace can be
However, due to its high impact on climate stopped and activated quickly whereas the
change, the introduction of a carbon tax primary route must be running continuously.
could change this situation: with a tax of 50$
per tonne of CO2, the production costs of the
“Scrap EAF” route would be equal to those
of the primary route. In a realistic trajectory
with global warming limited to 2°C, the price
of a ton of CO2 would go up to hundreds of
dollars. The recycling route would then get
more competitive.

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2
DEMAND: THE STEEL DEMAND BY END-MARKET
DEPENDS ON SCENARIO PHYSICAL
UNDERLYINGS

A 2°C SCENARIO EMBEDS STRUCTURING ASSUMPTIONS IMPACTING STEEL

DEMAND

To project the steel industry in a 2°C world, we use two scenarios:

• The 2DS scenario of the International Energy Agency (IEA)

• A “2°C C4” scenario designed by Carbone 4 based on assumptions closer to historical trends

Let us start with the IEA scenario which depicts a world with a growing consumption of primary
energy from 570 EJ in 2014 to 630 EJ in 2050.
Besides, the global warming would be kept below 2°C mainly due to:

• An ambitious improvement in energy efficiency: +2.8%/year from 2015 to 2050 vs 1.1%/year

observed between 1990 and 2015
• A tremendous development of carbon capture and storage (CCS) capacities: 6 Gt of CO2
captured in 2050 whereas the technology is currently in its early days; in other words, a
growth of 17%/year until 2050

With this in mind, we have designed a

second scenario called “2°C C4”
based on more conservative
assumptions: +2%/year of energy
efficiency and 0.6 Gt of CO2 captured
per year in 2050 (10 times the storage
capacity expected for 2025!) for a
consumption of 420 EJ of primary
energy in 2050.

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DEMAND EVOLVES DIFFERENTLY BY END-MARKET

Sources: World Steel Association, MCI, USGS, AIE, expert interviews, Carbone 4 analysis

Let us take the 2DS scenario of the IEA: the steel demand increases by 1%/year until 2030, then
remains stable between 2030 and 2050. However, in 2050, some industries will keep growing such
as electronic devices in a smarter and more electric world, whereas other markets will stop
growing such as the automotive industry where the global car fleet will settle down with lighter
and better filled cars.

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3
A STEEL PRODUCTION MORE AND MORE
RECYCLED WITH FLAT OR EVEN DECREASING
VOLUMES IN 2050

70% OF STEEL VOLUMES CAN BE COVERED BY RECYCLED STEEL IN 2050

Sources: World Steel Association, AIE, expert interviews, Carbone 4 analysis

Although the quality of recycled steel has
improved significantly in recent decades,
some sectors still do not accept much, such
as the automotive industry with specific
requirements for flat steel. On the other
hand, the construction sector could
technically consume almost nothing but
recycled steel. In total, recycled steel could
meet quality specifications for 80% of overall
demand.
Beyond quality, the collection of scrap is also
key.
There would be no barriers to reach
collection levels that could satisfy 70% of
steel demand by 2050. In the short term, an
inertia in recoverable scrap potential can be
experienced in emerging countries: for
example, the scrap from a building is
collected 50 to 100 years after its creation.
The scrap is then initially absorbed by the
"BOF" route before reaching the critical
volumes required for the development of the
"EAF" route.

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SCENARIOS DIFFER ON STEEL DEMAND AND SHARE OF “EAF” ROUTE
EVOLUTION

Note: « Recycling » route is « Scrap – EAF » and « DRI – EAF »

Sources: World Steel Association, AIE, expert interviews, Carbone 4 analysis

In a 2°C scenario introducing a carbon price,
the recycling route gets more and more
competitive with an increasingly carbon-free
electricity mix. In 2050, the recycling route
then reaches 50% of the production mix in
the 2DS scenario and 65% in the "2°C C4"
scenario.
This contrast in secondary route share comes
from the structuring hypotheses of the
scenarios:
• By increasing energy efficiency by 3% per
year starting in 2017 and leveraging
massively on CCS, the IEA 2DS scenario
increases steel production volumes by 25%
• by 2050 while emitting much less
greenhouse gases than today.
• However in the “2°C C4” scenario where
CCS and energy efficiency are already
reaching reasonably ambitious levels, a
15% reduction in steel production by 2050
(vs. 2017) will be necessary to meet a 2°C
trajectory, while massively favoring the less
emissive recycling route.

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 LOWERING STEEL PRODUCTION?
The carbon budget to stay below 2°C by the end of the century is fixed as well as the amount
of underlying energy consumed.
If the CCS does not reach as high levels as depicted by the IEA, a significant part of the future
“stored emissions” could not take place, and the steel production associated will not exist. The
same applies for energy efficiency: the lower it is, the more energy it takes to produce a
good. However, the amount of energy is fixed because of the 2°C carbon budget.
Hence, we must reduce production. In other words, emission and therefore energy constraints
invite us to transit to more simple and circular production processes that lead to the reduction
of the annual demand for steel.

CONCLUSIONS

Whatever the scenario is, the future of steel production lies in the recycling industry: it is
significantly less emissive than the primary sector and virtually competitive without carbon tax.
In addition, the collection of scrap and the quality of steel are not limiting factors for its
medium-term deployment.

At the crossroads of scenarios, a slowdown in steel production cannot be ruled out by 2030.
Growth in the sector would then be flat or even negative in the longer term.

In such a context, the industrial strategy of a steelmaker must tackle the following topics
among others:

• Making your historical business more resilient:

o Identifying the production sites the most exposed to the introduction of a carbon tax and
to more ambitious climate-related regulations (cost structure, asset life, energy efficiency
potential, fuel used)
o Analyzing the regional competitiveness of the most critical assets
o Defining an ambitious investment and divestment plan following this strategic review of
the asset portfolio

• Engaging in resilient markets:

o Identifying the dynamics of growth or contraction of different steel consuming sectors in

a realistic transition scenario and the evolution of their technical expectations
o Promoting investment in recycling means of production according to the local context
o Evaluating the upstream vertical diversification potential on scrap metal collection and
processes
o Investing in R&D on improving the quality of recycled steel, reducing the costs of the DRI
route…

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Created in 2007 by energy and climate experts Jean-Marc Jancovici and Alain Grandjean, who were
joined by Laurent Morel in 2017, Carbone 4 is the leading consulting firm specialized in low carbon
strategy and adaptation to climate change.
Our team assists businesses in their transition to a low-carbon and climate resilient economy.

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