Global Energy Monitor analysis finds that coal-based steelmaking capacity under development globally is on the rise and is almost all being built in Asia, highlighting the issue of a just transition.
- China and India together hold 79% of coal-based steelmaking capacity under development.
- The stranded asset risk could be as much as $554 billion if the capacity proposed or under construction is fully developed, operated with unabated emissions, and historic overcapacity trends continue.
- As countries in the Global North are transitioning to green steel, governments subsidising coal-based capacity will be left behind.
In the latest Global Steel Plant Tracker report, Global Energy Monitor analysed 1,016 owned by over 900 companies across 89 countries. It highlighted that, while the industry is undergoing a transformation to low-carbon processes, some countries continue to build dependence on coal.
Caitlin Swalec, programme director for heavy industry at Global Energy Monitor, said: “Steel producers and consumers need to raise ambition for decarbonization plans. The transition away from coal-based steelmaking is underway but moving far too slowly. Developers that add coal-based capacity now run the risk of facing billions in write downs in the future.”
What did the report find?
According to Global Energy Monitor, coal-based steelmaking capacity under development globally that follows the ‘blast furnace-basic oxygen furnace’ production method increased to 380 million metric tons per annum (mtpa) in 2022 from 350 mtpa in 2021. Almost all of the coal-based capacity under development is in Asia (99%), with China and India together holding 79% of these developments.
For the first time ever, India surpassed China as the top developer of coal-based capacity, as it holds 40% of coal-based blast furnace-basic oxygen furnace capacity under development compared to China’s 39%.
South East Asia continues to lead in the development of steel production capacity and is now emerging as a “stranded assets hotspot”, the report says. New projects in the region need to be redesigned in alignment with net zero plans, meaning no new coal-based steelmaking developments and plans to retire and replace blast furnaces with fossil-fuel-free alternatives.
What is the financial risk?
The steel industry faces stranded asset risk as countries build out coal-based capacity while simultaneously working towards their carbon neutrality commitments. From 2021 to 2022, blast furnace-basic oxygen furnace assets under development in countries with net-zero carbon commitments increased by approximately 7%.
These plants would be vulnerable to significant financial risk if the cost of carbon is realised through carbon pricing, such as taxes, or emission standards, and a conventional steel plant may be unable to price competitively with low-carbon steel production plants.
The stranded asset risk could be as much as $554 billion if the capacity proposed or under construction is fully developed, operated with unabated emissions, and historic overcapacity trends continue. Indeed, as of June 2023, over 130 countries announced net zero goals that are incompatible with steel’s business as usual.
In order to avoid it, steel companies should turbocharge retrofits and reverse their coal-based projects yet to be completed. It is also crucial to ensure that the transformation strives for fully decarbonised production routes, rather than other fossil fuel-based alternatives.
What is the progress made by the industry so far?
Although coal-based steelmaking has in recent years ceded part of its share to cleaner forms of production, the transition is moving far too slowly, according to Global Energy Monitor. New developments indicate a growing proportion of electric arc furnace (EAF) steelmaking compared to blast furnace-basic oxygen furnaces. In March 2022, the proportions of planned capacity nearly matched the existing operating capacity, which would lead to no change in future operating capacity shares.
In order to reach the International Energy Agency’s net zero by 2050 scenario, the total share of EAF capacity should hit 53% by 2050. This means 347 mt of coal-based capacity would need to be retired or cancelled and 610 mt of EAF capacity would need to be added to the current fleet. While the growing proportion of EAF in planned capacity is promising, existing coal-based capacity must be closed and those planned cancelled.
The industry is experiencing a significant push for transformation, with governments handing out subsidies for green steel in areas such as the EU, the US and Australia. There has been significant market movement, with green steel technology developers attracting funding and clinching partnerships with legacy players. According to Global Energy Monitor, it “is becoming a race” and governments subsidising coal-based capacity will be left behind.
SGV Take
The report serves as a reminder of the importance of a just transition globally, as it highlights the difference between how the steel industry is evolving in the Global South and the Global North.
On the one hand, economies such as India and China, which have seen a more recent boom, are resorting to coal which is cheaper and widely available. On the other hand, the EU, the US and Australia, whose governments are more focused on the energy transition for legacy industries, are looking at the more costly, but more sustainable, electrification technologies.
Betting on coal is a short-term solution as it will lock in huge amounts of emissions for decades to come, while buyers are likely to shun the product as it would inflate their Scope 3 emissions. This will lead to yet more division in the supply chain, with Global North buyers being forced to purchase locally, and Global South steelmakers only having to sell to clients with looser environmental requirements.
Ultimately, they are likely to end up retrofitting their coal-based capacity anyway, incurring costs that could have been avoided had they not committed to coal in the 2020s.
The just transition issue presents the conundrum of polluting sectors: some countries may not be able to afford new, green technologies at scale, and should not be berated or left behind. While this is true for existing coal-based steel capacity, building more only exacerbates the problem.
