Investment opportunities in steel

It’s no secret that Climate Tech is experiencing a renaissance year, and the recent passage of the CHIPS and Science and Inflation Reduction Acts has brought even more attention to the sector in the past few months. And while certain technologies and subsectors like solar and batteries are getting the bulk of the public’s  attention, emissions associated with industrial activities comprise more than a third of global carbon emissions. At Creative, we have been looking closely at several of the most pollution-heavy industrial processes—an analysis that has already resulted in our investment in Terra CO2, a low-carbon cement. The company recently closed a $46m Series A, which was backed by Creative, Breakthrough Energy Ventures, and others. 

We’ve now honed in on the iron and steelmaking industry, which accounts for approximately 8% of global CO2 emissions. What follows is a summary of our research and thought process.

What’s so special about steel?

As Creative has described in-depth, we invest in technologies that are market-driven. In industrial sectors, this typically means the pertinent industry is experiencing rising challenges due to raw materials shortages, is in search of a cost-driven process change, or is subject to new geopolitical or macroeconomic considerations that make the status quo hard to maintain.

We have started to see a movement toward (and investment in) green (i.e. less carbon dioxide intensive) iron and steelmaking around the world, indicating that investors see potential to decarbonize this sector at a commercial scale. So what’s at play with the movement toward greener iron and steel? And does any white space remain? 

Raw material shortages aren’t driving the green transition 

The inputs to primary steel are iron ore, metallurgic coal, and limestone, but global shortages don’t appear to be causing the accelerating transition to alternative methods of production. These materials experienced shortages and price fluctuations during the pandemic, but so did many other materials. Shortages also corresponded with a decrease in demand for steel products, largely due to slowdowns in the construction industry. Still, the transition toward greener steel doesn’t appear to be due to actual raw material shortages or any corresponding price fluctuations. 

While coal has a bad reputation in the climate movement, that furor is primarily directed at thermal coal (coal used to generate power) and not metallurgic coal, which is used in the steelmaking process for its carbon content, and comprises a small portion of the overall coal market. Indeed, a new metallurgic coal mine recently went online in West Virginia and China has continued to invest in new blast oxygen furnaces, which are heavily reliant on coal. Clearly, nations around the globe see coal continuing to play a role in steelmaking at least for the next several decades. And while they receive less attention from an environmental standpoint, it’s worth noting that iron ore and limestone also don’t appear to be limiting factors in steel production over the next several decades.

Steelmaking process changes are mostly about electricity

As mentioned above, a host of institutional steel companies and startups are piloting lower-carbon approaches to steelmaking in order to bring green steel to commercial scale. The leading approach uses hydrogen in lieu of natural gas to reduce iron, which is then processed into steel in an electric arc furnace. Steelmakers have understood the potential for hydrogen-based production for decades, but the price of hydrogen has only recently dropped enough to make widespread production viable. This is largely due to the high quantity of electricity needed to produce green hydrogen.

Another process, called molten oxide electrolysis, is being developed by Boston Metal. The company alleges they can circumvent using coal and furnaces during the steelmaking process entirely. These advancements would be fantastic for our planet, but what all of them have in common is that their degree of “greenness” largely depends on the source of electricity powering both the production of hydrogen and/or the steelmaking process itself.

To put it into context, experts calculate that Europe would need to build 50,000 additional wind turbines to power a full transition to green steel. Thus, decarbonization is not a steel problem so much as a renewable energy problem, which brings us to the economic incentives at play. 

Economics and politics are driving the decarbonization of steel 

While a multitude of factors is pulling the steel industry toward lower-carbon operations, policy-driven macroeconomic factors remain the primary driver.

In the past two years, the world’s leading steel companies—ArcelorMittal (Europe), Baowu Steel (China), and Nippon Steel (Japan)—made commitments to achieve net-zero emissions by 2050, which will have both decarbonization and bottom line implications. To dramatically simplify, these companies are hedging that present and future carbon credits, increased reticence from financial institutions to finance new coal mines, and geopolitical conflicts that lead to energy price fluctuations will devalue their firms if they continue business as usual and don’t decrease their environmental impact. And in the United States, the Inflation Reduction Act will undoubtedly speed up the movement toward greener electricity and thus greener industrial processes like steelmaking, in addition to supporting other Climate Tech advancements.

These actions and carbon targets align with commitments set in their respective regions and countries. This shift is happening now because scaling green steel takes a long time, given the capital expenditures required to build or retrofit plants, so steel companies are making a bet that green steel will eventually be necessary for them to remain competitive. While some of these challenges may impact steelmaking more heavily than other industrial sectors, the basic premise is the same across the board in capex-heavy industries. So what then, are the unique investment opportunities in steel decarbonization?

Steel has an infinite recyclability

A little-known fact is that steel is the most recycled material in the world. The potential for a circular steel economy presents unique investment opportunities. Indeed, the world will eventually have all of the steel it will ever need and can then recycle it as needed. This may sound far-fetched, but it’s important to remember that we are already witnessing a rise in steel substitutes that could alleviate some of the demand. In fact, the world’s tallest timber skyscraper just opened this summer, demonstrating that steel alternatives are becoming viable for larger infrastructure projects.

Unlike primary steel, secondary (recycled) steel has the potential to become essentially zero carbon. In contrast, the most cutting-edge, low-carbon primary steel technologies appear to pencil out around 100-250 kg of CO2 per ton. Scrap steel is also a critical component for geopolitical security, and countries are becoming more protective of their scrap. China, for example, imposes a 40% export tax on iron and steel scrap, and the conflict in Ukraine led to a spike in scrap steel prices in the US. 

Despite these challenges, the United States (and to a lesser degree, Europe) are already well primed to create robust circular steel economies given their higher percentages of steel produced using electric arc furnaces (which are best equipped to handle scrap steel) and status as late-stage economies. The latter point is important because steel can be locked up for years as building infrastructure or in cars. Developing countries, in contrast, still tend to be building much faster than steel is being recycled. 

However, one of the bottlenecks of scrap steel is that it often contains traces of other metals that must be removed in order to reprocess it into high-grade steel, which is commonly used in cars and other high-tech steel products. Removing impurities can be done by manual sorting, but that is a labor-intensive and slow process. And some steel products, like galvanized steel, must have their metal coating stripped off in order to be recycled. Another problem is that metal processors currently lack the technology to remove metals after the scrap has been melted down. Copper is one such metal that can lead to brittleness in steel. Thus, steelmakers must currently add additional virgin iron to the scrap steel mixture, in order to lower the ratio of trace elements. The added bonus to improving the impurity removal process is that many trace metals in steel scrap, unlike primary steel inputs, are experiencing supply constraints, so recovering them from steel scrap will have additional cost benefits to steelmakers.

Technologies in this space all appear nascent, from advanced automatic sorting to AI-based sensors that can detect metallurgic impurities, to chemical-based processes for purifying melted scrap. As more and more countries start to shift toward electric arc furnaces and break down aging infrastructure and cars, ensuring that steel can be recycled at the highest rates and with the fewest impurities will be critical to creating a circular economy and reducing the need to compete for imported scrap steel. We’re excited by what’s to come in this corner of the deep tech world. 

If you are working on a company that fits our thesis, we would love to hear from you. 

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