CRU: DRI/HBI will need to play a significant role in global steel industry decarbonization

Written by Matthew Poole & Wahome Muya

The steel industry is an essential part of the building & infrastructure, machinery, automotive, and consumer goods sectors worldwide, and its products currently account for 7% of global greenhouse emissions due to the carbon-intensive nature of its traditional production processes.

However, there are greener alternatives to those high-emitting production processes:

  • Producers can manufacture steel using either higher rates of recycled scrap, or 100% scrap;
  • Iron can be produced using low-carbon production processes that replace natural gas with green hydrogen;
  • Emissions can be reduced via technologies such as carbon capture, utilization, and storage.

Although the first of these alternatives – increasing scrap usage in steelmaking – will play a significant role in reducing emissions from steel production globally, CRU does not see this as a panacea for the decarbonization of the steel industry.

Limits on the global supply of scrap (quantity), and issues presented by impurities within scrap (quality), will mean that ore-based metallics will be required to supplement the scrap charge to electric arc furnaces (EAFs) when grades of steel other than the basic commodity types are manufactured. The issue of scrap quality is likely to become gradually more prominent, as producers of high-grade flat rolled products switch to EAF technology, while still requiring low-impurity metallic inputs in order to maintain the quality of their product.

As a result, direct reduced iron (DRI) and hot briquetted iron (HBI) will play a fundamental role in the decarbonization of the global steel industry, as they allow for the use of ‘virgin iron’ (i.e. new iron units with low impurities) alongside recycled steel scrap, without the requirement for carbon products to be used as a reductant in their production processes.

Although the vast majority of DRI and HBI is produced by the reduction of high-grade iron ore pellets using natural gas, green hydrogen will increasingly be used as a low-carbon reductant in the process, enabling the production of green DRI/HBI for steelmaking.

Emerging segments

Over the long-term horizon, we expect the global DRI/HBI market to become increasingly diverse, with the product being used in a number of different ways to support the reduction of carbon emissions across the steel industry.

Although we anticipate the main sector for DRI/HBI demand to be the aforementioned high-grade product with low carbon emissions that will be used in EAF steelmaking, there are emerging segments for DRI/HBI demand in submerged arc furnaces (SAFs), blast furnaces (BFs), and basic oxygen furnaces (BOFs).

In the long term, we expect a substantial part of the industry to be accounted for by lower-grade DRI/HBI, which can be produced from BF-grade iron ore pellets, or even iron ore lump and fines products. Although this DRI/HBI will not be inserted directly into EAF plants, it can have much of its impurities removed in an SAF plant before the resulting hot metal is fed into a BOF unit. This, combined with the usage of green hydrogen, would enable a green steel product to be manufactured.

DRI/HBI will also increasingly be consumed in blast furnaces in order to reduce coke rates and improve furnace productivity. In addition, greater consumption of DRI/HBI directly in BOF plants will provide a substitute for high-quality prime scrap (leftover scrap generated during the manufacturing process of steel and goods such as cars and consumer durables), which will become an increasingly scarce commodity.

In both cases, it is not necessary for the DRI/HBI product to have been produced with low carbon emissions, as the emission reductions would be small in the context of the carbon intensity of those production processes. However, in the case of DRI/HBI charged directly into the BOF, the product will still need to have low impurities, as it would not be subject to a melting process that removes these impurities via slag.

This potential segmentation of the future DRI/HBI industry is shown in the figure below:

DRI/HBI trade forecast to grow 13-fold by 2050, with significant potential for ‘decoupling’ of iron and steelmaking

Overall, global demand for DRI/HBI is forecast to increase four-fold over the long term to 2050, (Source: CRU Steel Long-term Market Outlook) as growing consumption of the product in EAF plants is coupled with the emergence of demand in BF, BOF and SAF operations as well.

DRI/HBI consumption in EAFs is forecast to account for 38% of the global demand growth that we expect over this period, while the three non-traditional end-uses will account for 62% of growth. 36% of this will be SAF-related DRI/HBI demand growth, 20% is accounted for by BF operations, and 7% by BOFs.

Although there is relatively limited trade of DRI/HBI globally (trade accounts for 5–6% of the global market), we forecast a very significant expansion in the traded market over the next ~25 years. Global DRI/HBI trade is projected to increase 13-fold between 2025 and 2050.

The regions that have domestic prerequisites for competitive DRI/HBI production – either adequate iron ore resources, or cheap energy, or both – such as the Middle East, the CIS, Latin America, Africa, and Oceania, will have additional volumes available for export. In contrast, regions such as the JKT (Japan, Korea, and Taiwan) and countries such as India, do not have the necessary domestic resources required to produce DRI/HBI competitively, and will therefore need to source via imports.

As a result, there is the potential for significant ‘decoupling’ of the iron and steelmaking value chain globally, whereby available supply of DRI/HBI from regions such as the Middle East (which have the potential to become global hubs for DRI/HBI exports with low carbon emissions) is shipped to growing import countries and regions such as the JKT, India, and possibly even Europe – despite the numerous green DRI/HBI project announcements in this region in recent years.

Long-term shifts in DRI/HBI trade patterns will see the JKT and India emerge as significant importers by 2050

In 2022, the largest inter-regional net exporters of DRI/HBI (trade between countries in separate regions) were the CIS and Latin America (2–3 Mt each), with the largest trade flows from these regions directed towards North America, the EU27+UK, and China. (Source: CRU Metallics Market Outlook)

India and North America were also notable inter-regional exporters of DRI/HBI (0.5–1 Mt each), with flows from India mainly directed towards nearby South Asian markets, whereas exports from North America were directed towards the EU27+UK.

One of the major differences in our forecast of DRI/HBI trade flows to 2030 is the emergence of the Middle East as a significant inter-regional net exporter of the product. This product is likely to be targeted primarily at the JKT region and Other Asia (including markets in Southeast and South Asia outside of India).

Similarly, our forecast for 2030 sees Africa emerging as a notable exporter, with the most likely supplying countries being those in North Africa such as Algeria, due to their competitive natural gas and renewable energy costs. We expect volumes to be targeted at the EU27+UK and Other Europe, primarily Turkey.

The CIS is forecast to become an even more considerable seaborne supplier of DRI/HBI by 2030, boosted especially by more product sent to Asia.

Between 2030 and 2050, we see a noticeable shift in global DRI/HBI trade away from markets such as the EU27+UK (which is forecast to stop importing by this point), towards growing import markets in Asia, such as the JKT and India.

We forecast significant DRI/HBI trade flows from Oceania and the Middle East into the JKT by 2050, in order to satisfy the region’s growing import demand. Product from Oceania (likely to be lower-grade DRI/HBI but also low in carbon emissions) will be well-suited to the growing SAF sector in the JKT between 2040–2050. Middle Eastern DRI/HBI will be flexible in grade and quality, and could be used in any of the four demand sectors (EAF, SAF, BOF, or BF).

For imports into India, our forecasts show mainly Middle Eastern and CIS-based DRI/HBI being sourced, primarily for the EAF and BF sectors, but also BOF and SAF production as well.

Shipping: The impact of increasing DRI/HBI trade on sourcing and trading strategies

CRU’s forecasts for a sustained increase in DRI/HBI trade out to 2050 have important implications for shipping markets. In turn, the response of shipping companies to the changing trade flows and the evolution of shipping costs are factors that will impact the economics of DRI/HBI in the steel industry.

While approximately two-thirds of the international trade in DRI/HBI is currently overland, the focus will shift decisively towards seaborne flows into the 2030s and beyond. This will require a step-change in how the shipping industry approaches DRI/HBI. The consequences of these changes for how the transport of DRI/HBI is organised in the future are far-reaching.

At present, given the relatively small scale of seaborne trade and the hazards associated with the carriage of DRI/HBI, trade is currently controlled by a relatively small group of shipowners, with deliveries performed almost exclusively by ships under their direct control. Those shipments are also usually done on the basis of relatively long-term contracts with customers, with elements of fixed shipping rates.

Our modelling indicates several important shifts in the market over the coming decades. We expect a rapid and sustained increase in the number of vessels required for DRI/HBI trade. From approximately ten vessels today, the fleet carrying DRI/HBI will rise to over 250 vessels by 2050, which will make the commodity an important focus for the maritime sector.

We also expect to see a gradual shift in the types of vessels that carry DRI/HBI cargoes as new export sources emerge. While the trade currently depends on relatively small and regionally-focused Handysize and Supramax vessels, an increasing proportion of cargoes will be carried by the much larger Panamax vessels as exports from the Middle East and Oceania increase.

These changes will make the market for DRI/HBI shipping services much more open and closely integrated with the wider shipping markets. Consequently, DRI/HBI shipping costs will be exposed to all fundamentals that impact shipping and are likely to become significantly more volatile.

In formulating their trading strategies, both importers and exporters will need to recognise that developments in the wider shipping markets will impact their costs of shipping, as well as how they contract shipping services.

Contact Maritime Strategies International (MSI) for more information on the impact of increasing DRI/HBI trade on the global shipping industry.

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