Green Steel Economics – Australia Factsheet
The global steel industry accounted for over 7% of global greenhouse gas (GHG) emissions and over 11% of global CO2 emissions. The Hydrogen Direct Reduced Iron (H2-DRI) process utilizing green hydrogen made with renewable/no-carbon electricity promises significant emission reductions and a transition to greener steel production in the sector. The adoption of green H2-DRI-EAF steelmaking involves financial considerations varying by country, influenced by hydrogen costs and carbon pricing mechanisms. This study assesses the costs of green H2-DRI-EAF steelmaking compared to traditional Blast Furnace-Basic Oxygen Furnace (BF-BOF) and Natural Gas Direct Reduced Iron-Electric Arc Furnace (NG-DRI-EAF) routes across seven major steel-producing countries.
Green Steel Premium across H2 Prices and the Impact of Carbon Prices in Australia
In Australia, without carbon pricing, green H2-DRI-EAF steelmaking costs start lower than traditional methods at $516 per ton for H2 at $1/kg, compared to $536 for BF-BOF. The cost-competitiveness of green H2-DRI-EAF diminishes as the H2 price increases with the cost parity with BF-BOF happening at $1.3/kg H2. The implementation of a $15 carbon price significantly enhances the economic viability of green steel. At a H2 price of $2/kg, and at $30 per ton of CO2, the LCOS for green H2-DRI-EAF further drops to $527 per ton, and at a $50 carbon price, it decreases to $493 per ton, which are lower than LCOS of $536 for BF-BOF in Australia.
The Australian Government is seeking to boost the development of a competitive green H2 industry through its National H2 Strategy, most recently updated in 2023. This strategy prioritizes both domestic production and the potential for future exports. A cornerstone initiative is the $2 billion H2 Headstart program, which directly allocates funding to large-scale green H2 projects, aiming to drive down production costs. Beyond financial support, the strategy emphasizes technological innovation by supporting domestic capabilities. Recognizing its vast renewable energy resources and suitable land, Australia is also strategically investing in regional H2 hubs through a dedicated $500 million program.
Impact of green steel premium on car prices
The automotive industry accounts for 12% of global steel demand. The additional cost attributed to using green H2-DRI-EAF steel in passenger vehicles—known as the green premium— is aligned with studies that estimated automotive sector as a likely first mover for green steel procurement and demonstrates minimal impact on overall vehicle pricing. For example, in Australia, when the price of H2 is at $5/kg, the green premium for steel produced via green H2-DRI-EAF, compared to the traditional BF-BOF methods, stands at approximately $227 per ton steel. Assuming on average 0.9 ton of steel used in a passenger car, this translates to an additional cost of about $204 per passenger car, which represents a less than 1% price increase on an average price of passenger car in Australia (over $30,000), maintaining affordability and market stability. Future projections suggest that with H2 costs potentially reducing to $1.3/kg, the green premium could effectively disappear, making green H2-DRI-EAF steel economically comparable to conventionally produced steel. With the introduction of carbon price/credit, the green premium for H2-DRI-EAF steel can substantially drop even further.
Impact of green steel premium on building construction cost
The construction industry (building and infrastructure) accounts for 52% of global steel demand. In the context of building construction in Australia, the economic effect of adopting green steel produced by H2-DRI-EAF route can be considered minimal when compared to conventional BF-BOF steelmaking route. Using the green H2-DRI-EAF route, the additional cost of steel at a H2 price of $5/kg is approximately $227 per ton of steel, translating into an added expense of about $568 for a 50 m2 residential building unit (assuming 50 kg steel per m2 used for low to mid-rise residential building). This represents a small fraction of the total cost of a residential building. In addition, with future reductions in H2 cost or the introduction of carbon pricing, the green premium could diminish or even disappear, making green H2-DRI-EAF an economically viable alternative for building construction in Australia.
Impact of green steel premium on shipbuilding cost
The top three shipbuilding nations, China, South Korea, and Japan, account for over 90% of global shipbuilding. Incorporating green H2-DRI-EAF steel into shipbuilding shows a small cost increase for ship building. While there are many types of ships in the global market. This study focused on bulk carrier ships which are built in large numbers every year around the world. For example, to build an average 40,000 DWT (Deadweight tonnage) bulk ship, approximately 13,200 tons of steel are needed. If green H2-DRI-EAF at $5/kg H2 is used in Australia to build this ship, the additional cost would be about$ 3 million per ship. Considering the average cost of a new 40,000 DWT bulk ship is over $30 million, this represents less than 10% increase in the ship’s price for Australia.
The reason for this relatively higher green steel premium as a share of total cost for shipbuilding compared to cars and buildings is higher share of steel cost in the shipbuilding cost. Over 95% of a ship consists of steel. Anticipated reductions in H2 costs in the future could nullify this green premium, aligning the costs of green H2-DRI-EAF steel with those of traditional BF-BOF steelmaking. Moreover, the introduction of carbon pricing could further reduce the green premium costs, enhancing the financial attractiveness of adopting green H2-DRI-EAF steel in the maritime sector.
Financing the transition to H2-DRI steelmaking requires both public and private investments to mitigate financial risks. Our recommendations for stakeholders include:
Government:
- Enact tax rebates and other incentives for green H2 production to make it more economically viable.
- Invest in R&D and infrastructure to drive down the costs of green hydrogen production.
- Implement public procurement policies that prioritize green steel in publicly funded projects to boost market demand.
- Provide enabling policy support to develop a renewable energy infrastructure needed for green H2 production.
Steel Companies:
- Transition from traditional BF-BOF routes to green H2-DRI by forming partnerships for a reliable hydrogen supply.
- Engage in industrial-scale pilot projects to demonstrate the feasibility and benefits of green H2-DRI.
- Secure market demand through long-term supply agreements with major end-use sectors and share the costs of the green premium.
Automotive and Construction Companies:
- Integrate green steel into procurement strategies to stimulate demand and help cover the green premium.
- Enhance market positioning by promoting the climate, environmental, and health benefits of green steel.
- Cater to climate-conscious clients by engaging in green private procurement practices.
Shipbuilding and Shipping Companies:
- Utilize both public and private procurement strategies to boost the adoption of green steel in the industry.
- Establish robust supply chains with green H2-DRI steel manufacturers to ensure a steady demand for green steel.
- Promote broader industry adoption through government policies and commercial agreements to reduce the green premium.
