American leadership on green steel

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Hi there,

Today’s newsletter is part two of our deep dive on Nucor, the #1 producer of steel in the U.S. and a global leader in decarbonizing steel. Last week we explored whether ‘hard to abate’ is really a relevant term for steel. Today, we expand the analysis to explore what’s needed for the rest of the world to catch up to Nucor and how Nucor can play a leadership role in this effort.

DEEP DIVE

Last week, we covered how Nucor produces steel that’s already much ‘greener’ than most steel produced globally. When we say “greener” here, we’re not talking about 5-10% emissions reductions. We’re talking about 60%+ emissions reductions across all emissions scopes.

Today, we’ll explore questions this insight gives rise to. How can leadership from companies like Nucor in countries like the U.S. inspire and drive decarbonization results around the rest of the world? It’s a question we’ve explored in these pages previously that we now have a greater foundation to expand on.

The history: Why Nucor produces lower-emission steel

Today, steelmakers around the world produce close to 2 billion tons of steel annually, more than half of which is produced in China. Plus, the majority of steel globally is still produced in an emissions-intensive process that relies on blast furnaces. Blast furnaces are where most of the world’s emissions from steelmaking stem from: The emissions footprint of steel made in blast furnaces stems from both the electricity and heat needed in the production process as well as direct chemical reactions that are part and parcel of the production process.

There are other ways to make steel that are much lower in emissions, however. As we explored in greater depth last week, Nucor makes steel in a predominantly circular fashion; it uses recycled scrap content for most of its production. This is because 100% of Nucor’s steel is produced in electric arc furnaces (EAF) as opposed to in blast furnaces. The result is a 67% emissions reduction comparatively.

It’s important to note that Nucor has always made its steel this way. Nearly sixty years ago, when the company first started making steel, it didn’t lead with more extractive steel technologies only to transition subsequently. Originally, Nucor was a large consumer of steel products. However, in the sixties and seventies, there were serious steel shortages, and the company was having a hard time acquiring sufficient steel. Rather than import more steel from outside the U.S., Nucor elected to begin producing its own steel. Given material constraints at the time, producing steel in an electric, circular fashion also made economic sense due in part to the abundant scrap supply at the time. 

Since then, Nucor has replicated that model to become the largest steel producer in the U.S. In the 80s, Nucor built the world’s first commercial plant to make flat rolled steels using EAF steelmaking technology in Crawfordsville, Indiana, allowing them to start supplying companies like U.S. auto manufacturers with domestic, lower-emission steel.

In all this, it’s important to note that producing lower-emission steel wasn’t necessarily the impetus. But that doesn’t detract from the story. Rather, the history here is a great example of how material constraints and economics can drive process innovation that also often has decarbonization benefits. As we see today with other technologies, such as batteries and their mineral content, the solution to high prices is, often, high prices and innovation. Plus, prioritizing circularity and the resilience of domestic production as opposed to offshoring can have other long-tailed, positive impacts. 

Policy tailwinds for lower-emission steel

While it wasn’t in the 70s or 80s, today, decarbonization is a significant topic of discussion in the steel industry. Given Nucor's position as a major steel producer that has already invested in the infrastructure to produce significantly lower-emission steel, Nucor finds itself in a leadership position as policy begins to incentivize lower-emission steel production globally. 

When we think about the global steel landscape, many capital expenditure questions crop up. As Nucor embodies, decarbonizing steel production is as much a question of getting producers to invest in infrastructure like electric arc furnaces and to build a recycling supply chain for ferrous scrap as it is a question of how to reduce residual emissions that are still inherent to a scrap + electric arc furnaces production process. These dynamics aren't always conducive to decarbonization; blast furnaces are 50+ year assets. Where there are new blast furnaces under construction or where blast furnaces are only 15 years into their useful life, the economic incentive for producers is to use them for the majority or all of their useful life. As noted by the Center for Research on Energy and Clean Air, China continues to invest in new blast furnaces:

When we consider how to shift capital expenditures, policy becomes a key consideration. While policy deals with many things and can seem quite complicated, it is often largely a question of "What are we going to allocate money to, and who will pay?" 

Steel travels well, and represents a very global market. New policies globally are noteworthy insofar as they could shift steel purchasing practices to favor lower emission approaches like Nucor's, which would, in turn, inform how producers evaluate future capital investments. The European Union, for instance, has a new Carbon Border Adjustment Mechanism (CBAM) that effectively imposes a carbon price on commodity-like products, including cement, steel, aluminum, and fertilizers. Effectively, if global producers of these products import products with a high emissions intensity, the cost of those goods for purchasers rises, offering a material advantage to producers with lower-emissions footprints. 

Some producers are making capital expenditure decisions to try to reduce the emissions intensity of their steel production as a result of CBAM. For instance, earlier this year, Erdemir Group, which includes Turkey's two top steelmakers, announced plans to build a $3.2B plant where it will use hydrogen and electric arc furnaces to reduce the emissions intensity of their steel production, alongside building more solar capacity. While Nucor doesn't export much steel to Europe today, if regulations like CBAM are 'successful,' that could change quickly.

Other players globally are making changes to hit decarbonization targets. For example, SSAB, the Swedish steel giant, is undertaking a massive blast furnace overhaul to transition to electric arc furnaces at its Luleå mill in a project that could reduce Sweden's carbon dioxide emissions by 7%. This type of capital expenditure can't be expected everywhere; Sweden is very aggressive about its decarbonization aims, much more so than other countries. Plus, the magnitude of investments other players now have to make to decarbonize their steel production drives home how much of a leadership position Nucor finds itself in by virtue of the fact that it already produces all its steel with production techniques the rest of the world is now trying to transition to.

Another factor to consider is the supply chain for recycled scrap itself. The share of steel produced with Nucor’s process globally should increase as more scrap supply comes online. Ideally, China’s production mix will change as steel created during China’s steel production and consumption boom in the early 2000s reaches its end of life.

Regardless of what the impetus or constraint, however, Nucor is well ahead of a transition to production techniques the rest of the world is now catching up to. 

Owning the leadership position

Much will be made in coming months about the political landscape in the U.S. and, for our purposes, how it bears on the energy transition and decarbonization. What's important to me in the Nucor story is that the company is emblematic of a decarbonization leader whose story plays regardless of the political landscape. Whether you emphasize emissions reductions or domestic steel production and domestic jobs, the story is strong. Having resilient decarbonization stories to tell that work across the political aisle will become all the more critical in coming months and years (especially in steel and as Pittsburgh-based U.S. Steel becomes Tokyo-based Nippon Steel.)

Nucor's leadership position stems from more than just its historic investments in lower-emission steel manufacturing. The company isn't resting on its laurels despite its sizable lead on decarbonization compared to most global steel manufacturers. Given greater availability of clean electricity, Nucor's emissions from steelmaking can and will also become even lower in the future. At present, emissions associated with its electricity use continue to represent 20-30% of the lifecycle emissions footprint of Nucor's steel (depending on geography). 

Further, demand growth for electricity is another hot topic right now. Whether or not you believe demand growth predictions for energy consumers like data centers are overblown, we can flip the positioning of demand growth from challenge to opportunity. Specifically, demand growth is an opportunity for companies that use a lot of electricity to step up and orient their businesses such that they're catalytic to the addition of clean energy onto grids, as that benefits almost everyone. As grids continue to become cleaner in the U.S., so will Nucor's steel and all the products, whether EVs, solar panels, or others, that that steel gets used in. 

In most of the jurisdictions where Nucor operates steel mills today, they're one of if not the largest industrial customer of electricity in that region. Hence, they're uniquely poised to influence what types of resources utilities and other electricity producers bring online. Its aim is to play a catalytic role on this front: In recent years, Nucor has inked several large PPAs for clean energy and has made more venture-capital type investments in companies attempting to bring net new clean energy generation technologies to market, like Helion, a nuclear fusion company. Further, alongside other major electricity customers with decarbonization targets like Google and Microsoft, Nucor announced an RFP earlier this year to "accelerate the development of first-of-a-kind and early commercial projects, including advanced nuclear, next-generation geothermal, clean hydrogen, long-duration energy storage (LDES) and others."

In all of this, we can draw a few key conclusions. Whether any individual stakeholder’s priority is decarbonization, reshoring American manufacturing, investing in more hardware-oriented businesses and innovation, or catalyzing and paving the path for global climate action, there are examples of domestic leadership hiding in plain sight. Nucor is a perfect example.

The net-net

As the second half of 2024 wears on, the political, decarbonization, and energy transition discussions may get more fraught. We’ve seen that over the past month. What’s most important to me in the Nucor story–alongside the conclusion that producing much ‘greener’ steel is already available–is the fact that the company is perhaps the best yet the least well-known example of a company that is both a) a major domestic industrial company and b) a serious leader in industrial decarbonization. 

Energy transition and decarbonization work need not all focus on the sexiest early-stage companies or moonshot technologies; there’s a lot of strength to build on in unexpected places. For those who haven’t historically thought of companies like Nucor as decarbonization leaders, it’d be prudent to reevaluate that position.

Learn more about how Nucor is a leader in decarbonizing the steel industry here:

Find this one interesting? Let us know if so.

— Nick