Financial and policy uncertainty hamper SA steel industry as it gears up for decarbonisation

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About 60% of the steel produced in South Africa is through the blast furnace-basic oxygen furnace (BF-BOF) production route. The remaining 40% of the country’s steel production occurs through electric arc furnace (EAF) technology, which relies mainly on recycled scrap steel as an input.

There are several approaches that can be taken to reduce emissions in the steel sector. In the coming years, the share of EAF production in South Africa is expected to increase as the country transitions towards a low-carbon economy.

The production of steel is a highly energy-intensive process that traditionally relies on coal as a primary energy source, which is a problem for the industry’s decarbonisation ambitions. Coal is used to produce both the iron and the heat required in the steelmaking process. As a result, reducing the carbon footprint of the industry will require a shift away from coal towards alternative, low-carbon energy sources such as hydrogen or renewable energy.

The use of carbon capture and storage (CCS) technology can also play a role in decarbonising the steel sector.

All this will require significant capital investment in infrastructure and technology development, which will be a challenge for steel producers, especially smaller or mid-sized companies, many of whom are already facing financial pressure in the face of demand constraints.

The South African steel sector is part of a global supply chain, and many of the inputs, such as iron ore and coal, are sourced from other countries. Decarbonising the steel sector will require coordination and collaboration across the supply chain to ensure that these inputs themselves are produced with a low carbon footprint.

The other side of the value chain also faces difficulties because the growing impetus to address climate change is resulting in related regulations in countries to which the South African steel industry exports. The EU Carbon Border Adjustment Mechanism (CBAM) — a type of carbon pricing — will be implemented later this year and will initially cover the carbon-intensive sectors of iron and steel, cement, fertilisers, aluminium, electricity and hydrogen, as well as some precursors and a limited number of downstream products.

While several details still need to be finalised, the imposition of the CBAM could have significant implications for some African countries, most notably South Africa, which, on average, exports $1.4 billion a year of products from sectors covered by the European Union’s offset mechanism, including the iron and steel sector.

A working paper produced for South Africa’s Presidential Climate Commission (PCC) warns that the country’s iron and steel sector was most at risk to CBAM, with chemicals and aluminium exports exposed to negative implications too.

Another important export market for the South African steel sector is the United Kingdom. The UK is following the EU lead in proposing a carbon price on imports. The UK government is currently consulting on a range of potential policy measures, including a CBAM similar to the EU’s to mitigate future carbon leakage risk.

According to the consultation documents, the mechanism would consider both the carbon emitted in production and any gap between the carbon price applied in the country of origin and the carbon price that would have been incurred if produced in the UK.

Besides the proposed carbon price on imports into the UK, which could further dent South Africa’s competitiveness, the UK government is also considering imposing mandatory product standards (MPS). The MPS would apply to both domestically produced and imported products and would set an upper limit on the embodied emissions for individual products placed on the UK market, or produced in the UK, prohibiting products that are more emissions-intensive than the defined limit.

The iron, steel and non-ferrous metals sectors are among those that would be most affected by this legislation.  

In addition, steel producers in South Africa face competition from producers in other countries that may not be subject to the same carbon regulations, such as the country’s carbon tax currently levied only by South African producers and not on imported products. This creates an uneven playing field for South African steelmakers who are trying to transition to low-carbon steel production while remaining competitive in a global marketplace.

The South African steel industry is taking bold and determined steps to fast-track decarbonisation, including hydrogen-based reduction processes, increased use of renewable energy, a shift towards electric arc furnaces, and exploration of carbon capture and storage (CCS) technologies. But addressing these problems will require a comprehensive and coordinated approach that involves government policies, industry investments, and collaboration across the supply chain to move towards a low-carbon economy effectively and efficiently.

There is undoubtedly a growing move globally toward trade policies designed to achieve environmental objectives. These measures should be consistent with the fundamental principles and basic rules of the World Trade Organisation, strike a balance between environmental and trade considerations, and should avoid protectionist measures or green trade barriers that distort the playing field.

Charles Dednam is the secretary general of the South African Iron and Steel Institute

The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.