The Economist January 29th 2022 Business 59
Thegreeningofsteel
L
akshmi mittal has two passions: the steel industry and his
family. His embrace of the first turned a poor boy from Raja
sthan into the “Carnegie from Calcutta”, a man who built the
world’s secondbiggest steel empire from scratch, culminating in
a takeover in 2006 of Arcelor, a European champion. The second
sometimes sounds like tabloid fodder: lavish weddings in Paris;
family homes—one known as the Taj Mittal—on London’s “Bil
lionaire’s Row”. Yet Mr Mittal’s family knows the steel business in
side out. Last year Aditya, his 46yearold son, became ceoof Arce
lorMittal. It now falls to him to transform the industry again.
That is because about half of ArcelorMittal’s revenue comes
from Europe, where pressure to decarbonise steel production,
source of up to a tenth of global carbondioxide emissions, is be
coming irresistible. The region is laden with coalburning blast
furnaces, the carbonheaviest of steelmaking technologies. Many
are on their last legs. Rather than refurbishing them, some firms
are opting to replace these with new directreducediron (dri) and
electricarcfurnace (eaf) plants. Blastfurnace steelmaking is
doubly carbonintensive: it uses coking coal to soak up oxygen
from iron ore, as well as dirty energy to heat the furnaces. drieaf
technology, hitherto dependent on natural gas, can use hydrogen
and renewable energy instead. Once scaled up, it could mark a rev
olution in steelmaking. By jettisoning their oncecherished blast
furnaces, European steelmakers hope to start slashing emissions
this decade in order to become netzero by midcentury.
Aditya Mittal still has his 71yearold father, ArcelorMittal’s ex
ecutive chairman, by his side. But the challenge ahead is uniquely
tough. Whereas the older Mr Mittal made his own luck, Aditya is
not master of his own destiny. He needs a vast infrastructure of hy
drogen and carbon capture to emerge from nowhere to achieve his
ambitions, not to mention a market for expensive “green steel”.
Unlike his father, who made his fortune by taking privatised steel
works off government hands, he will not succeed unless Arcelor
Mittal receives taxpayer support. He is not alone in seeking that.
The whole industry believes that rapid decarbonisation will be
impossible unless governments foot part of the bill. History, how
ever, suggests the state and steel are unpromising bedfellows.
ArcelorMittal starts with some advantages. For decades the el
derMr Mittal bought minimills in different parts of the world
that used dri pellets and eafs rather than blast furnaces and basic
oxygen furnaces. The technology is still only a bitplayer in Eu
rope. Fuelled by hydrogen and renewable electricity, it could be
come the dominant one within a decade. ArcelorMittal is not the
most advanced among European steel companies in developing
zerocarbon mills. It has three lowcarbon drieaf projects under
way, in Spain, Belgium and Canada. ssabof Sweden is ahead of it.
Yet it has reduced debt to shore up its balancesheet, giving it the
flexibility to increase spending. Moreover, its presence in poorer
countries such as India, where steel use per person is a fraction of
its level in the West, gives it plenty of growth opportunities.
The transition will be costly, though. McKinsey, a consultancy,
estimates that decarbonising steel requires investment of $145bn
a year on average for the next 30 years, and could push the cost of
making the stuff up by 30%. ArcelorMittal says its three lowcar
bon plants will cost $10bn in total by 2030, which is doable for a
company with annual capital expenditure of about $3bn. How
ever, its strengthened balancesheet is raising investors’ hopes of
higher payouts, and it needs to weigh their demands against big
investments in green steel. Even with modest government sup
port for capital and operating expenditures, says Jefferies, a bank,
returns would be too low to justify a normal steel project.
That is why the industry believes hefty state backing is essen
tial. ArcelorMittal expects governments to fund about half of its
$10bn decarbonisation commitments over the next ten years. In
vestors argue that subsidies for operational expenses such as elec
tricity bills should be thrown in, too. The same, they say, goes for
aid to ramp up production of clean hydrogen, whose price must
fall by 60% for clean steel to become costcompetitive with the al
ternatives, according to McKinsey. On top of that, government
money is needed to speed up the rollout of more renewable ener
gy required to power the clean furnaces. Jefferies estimates that
total electricity demand by eusteelmakers will more than double
by 2030. The developing world’s blast furnaces, which are younger
than Europe’s, will probably be fitted with carbon capture and
storage rather than replaced. That nascent technology, too, needs
a legup from the government.
It goes beyond that. By the mid2020s, Europe’s steelmakers
will begin losing the free allocations of carbon permits they re
ceive under the euEmissions Trading System. To compensate,
they await the introduction of a carbonborderadjustment mech
anism, starting in 2026, which will protect them further from im
porters selling cheaper dirty steel. They also need governments to
help kickstart demand for green steel. Some sectors, such as car
makers, are keen to buy it, believing that they can pass the costs on
to carbonconscious consumers. But the construction industry,
the steel firms’ biggest market, is not nearly as enthusiastic.
Hence steelmakers say they need lots of public works built with
lowcarbon steel to justify their investments.
Kicking the coke habit
Some state action is warranted. In the long run subsidies for elec
tric vehicles may curb emissions by less than curing the steel in
dustry’s coal addiction. But the cure must be judicious. It is all too
easy for a closer relationship with governments to degenerate into
jobsafeguarding schemes, protectionism and a revival of the old
revolving door between bureaucrats and business. That is what
happened the last time the state and steel were intertwined. Until,
that is, the elder Mr Mittal made his fortune prising them apart.n
Schumpeter
Lakshmi Mittal transformed an industry. His son has a tougher task