Opportunities and Risks of Making Steel Production CO2-Neutral

Interview with Nicole Voigt, Managing Director & Partner, Boston Consulting Group

marketSTEEL: First, a very general question. Where do you see the chances or risks of switching steel production to CO2 neutrality in Germany?

I like to start as follows: Germany is an industrialized country, a country that still has a large industrial base. We must ensure that this remains the case. To do this, we need "basic foodstuffs": This is the basic chemistry, but it is also steel. What is the distinguishing feature of the German and European steel industry? We are strongly networked: The BFI, the research institutes in Aachen, the steel producers, and consumers, all these players are very well connected. We are more expensive in local production, but we have the advantage of having this valuable network, of being able to drive new developments, of being able to drive research and development efficiently. This is why new steels continue to be developed primarily in Europe.

The green transformation is an epochal task. It will fundamentally change the steel industry. The question is what impact this will have on the steel ecosystem. It is essential that the production and processing of steel takes place close to the customers of high-quality steel products. However, the question is whether each production step is necessary on site or whether there are areas where compromises can be made. The current discussion focuses mainly on the process of "iron making", i.e. the first step in steel production. The production of green, directly reduced iron or sponge iron (DRI) is particularly energy intensive. Countries with lower renewable energy costs have a significant cost advantage. Although it does not seem ideal, sourcing DRI could be considered to increase efficiency while keeping the entire steel value chain local. Simply put, where iron ore was once bought, the focus is now on buying green iron.

But this does not mean that we only buy. This can be seen from the fact that the big German players in the steel market (e.g. ThyssenKrupp, Salzgitter, or ArcelorMittal) are building the first direct reduction plants here in Central Europe. The question is: Will these companies also build the second or third DRI plant here - knowing full well that the production costs here will be higher than in comparable plants in the Middle East, for example, or in Spain or Sweden, which can make better use of cheap green energy?

It is important to preserve the advantages of the existing network, such as customer proximity and just-in-time delivery. At the same time, it may be necessary to make the unpleasant decision to relocate some of the steel production. Of course, you could also turn the game around: I leave all the production here. Then I am exposing the industry to either high subsidies or high risks. I do not know if that is so good, so I am calling for a mix here.

marketSTEEL: Do you think you buy the pig iron practically finished?

Not necessarily, you also have to know the quality and how to handle the raw material, but from the basic idea: yes. You have to remember what makes Germany and Europe an industrial location. And that is the co-development and networking with universities and so on. These aspects should be at the forefront, even if it means giving up some of the iron production. Transparent communication is important. The reality must be recognized: Part of the steel production could be diverted, but the essential value-added process of steel production remains in Europe.

marketSTEEL: Yes, the added value is often actually in research and development, whereas in Germany, in turn, we are not exactly predestined for cheap energy and do not have the raw materials on site. What opportunities do we have when we focus on our strengths?

By transforming the steel industry to focus on our strengths, we can produce high quality steels for all industries. From construction to high-strength special steels. And that is exactly what we can do at the same time to ensure that the downstream industries stay here.

marketSTEEL: A negative example is England, where that has not worked. It can be said that England today has neither a functioning steel industry nor a significant processing industry. Even the automotive industry is on the run and is looking for alternative production locations.

Yes, the UK is an example of how not to do it. And the British government has noticed this and is trying to counteract it. This shows that when it comes to transformation, you have to think through the decisions and communicate them well. It is not a simple matter. It is important to work together with the unions and other stakeholders and to get the message across: We secure a large part of the industry locally. But in order to build on our strengths, we have to make some sacrifices.

marketSTEEL: From which side do you expect the most resistance?

I don't even know if you can say that. Not everybody understands what is going on here. If we go out on the street and say, "We are moving sponge iron abroad," most people will say, "I only know kitchen sponge. It is really up to the industry and the trade associations to explain what our value chains are and what is particularly good about them and what needs to be kept at home.

marketSTEEL: This strategy also has the advantage that perhaps not so much government support is needed.

Yes, at the end of the day I have to think about how I can build an industrial landscape that is not subsidized in the long run. Of course, I need a lot of help at the beginning, because we are talking about investment costs that no one can handle alone. But all this has to be designed in such a way that we do not have permanent subsidies. After all, we still want market principles to apply in the design and optimization of processes.

Fotos: BCG und fotolia