Profit margins

Background

Producing green or low-emissions steel generally requires different resources, new technologies and new infrastructure, which are expensive and time-intensive to set up, often involving the need to overcome various bureaucratic barriers.

Several factors make the financing of the transition even more difficult. Steel producers generally operate with low profit margins, making the internal financing of green endeavors difficult. This challenge is exacerbated by continued global steel overcapacity. The initial construction and installation of a BF-BOF plant cost approximately USD 1–1.5 billion, or USD 200–300 million per million tonnes of capacity. The reinvestment cost after 25 years is, on average, 25–50% of that number. To afford such investments, owners are often dependent on external financing, loans, and/or subsidies for new steel plants. At the same time, many owners are still paying back their loans from current steel plants and will, therefore, find it hard to secure additional financial resources. This challenge is reinforced by the fact that low-emissions steel demand is, despite its growth, still too low to provide market security for many steel plant operators. A feedback loop is created, in which low demand for low-emissions steel leads to low production, keeping prices of low-emissions steel high, reinforcing low demand for the low-emissions product. Small profit margins mean that there is a higher dependency for external funding to invest in decarbonization, posing a challenge to the green transition.

Policy Action

Policy targets to increase capital availability include:

• Provide resources and government funding for relevant R&D projects, the construction of low-emissions steel plants (and energy) infrastructure, the refurbishment with low-emissions and energy-efficiency technologies, or to cover increasing costs from renewable energy purchases. This could include grants, loan guarantees, subsidies, public expenditures, tax credits and deductions, or agreements with financial institutions and investors, including through Public Private Partnerships (PPPs).

Policy targets to increase access to funding include:

• Enable access to capital through frameworks for sustainable finance. This should include criteria or definitions of green and low-emissions steel.
• Create climate-aligned investment principles (Mission Possible Partnership, 2022). This should include recommendations for client engagement, information disclosure, and exclusion and inclusion criteria.
• Collaborate with banks and investors to create partnerships and align on investment criteria.
• Increase the availability of funding for low-emissions steel producers, through increased government spending and green projects, or collaborations with other financial stakeholders, e.g., green funds, PPPs, carbon credit funding, future contracts, etc.
• Accelerate projects towards final investment decision status (FID) to commit to reaching the necessary decarbonization milestones.
• Use regulations or financial incentives to encourage investments in low-emissions steelmaking.

Examples and Case Studies

EU ETS Free Allocations

Sustainable STEEL Principles

Glasgow Financial Alliance for Net Zero (GFANZ)

Responsible Steel (Green Steel Standards)

German Carbon Contracts for Differences

ThyssenKrupp Green Steep Subsidies

Arena Green Steel R&D commitment

Global Forum on Steel Excess Capacity

EU Innovation Fund

External Links

Green finance in steel

The Breakthrough Agenda

Climate Finance Lab - Financing steel decarbonization

Climate Policy Initiative - Financing steel decarbonization

Steel decarbonization in emerging economies

Breakthrough Steel Investments

Green Steel for Europe