Goncalves: Carbon Border Mechanism Could Replace Section 232

Goncalves began by pitting the U.S. against China, highlighting the United States’ unique attributes in steelmaking and its relatively small carbon footprint. That makes the U.S. steel industry the environmental benchmark for the world, which stands in stark contrast to China’s high greenhouse gas (GHG) emissions totals. He contended that U.S. emissions from steelmaking are responsible for 90 million tons, or just 2%, of global steel CO2 emissions, while steelmakers in China are responsible for 2.5 billion tons, or 64%, of total global steel CO2 emissions. He noted that the disparity in steelmaking-GHG emission wasn’t due to total steel production but instead to the amount of CO2 generated per ton of steel. “Each ton of steel produced in China generates 2.5 times more CO2 than in the U.S.,” he added.

The reason for this disparity is the distinctive characteristics of the American steel industry compared to the rest of the world, Goncalves said. Namely, abundant ferrous scrap, widespread natural gas-based power generation, natural gas’s use as a reductant, and the use of iron ore pellets.

Ample scrap has allowed for the prevalence of electric arc furnace (EAF) steelmaking in the U.S. EAFs account for 71% of domestic steelmaking, and that number could soon reach 75% as new capacity—most of it EAF based—comes online. That compares to EAFs accounting for 10% of steelmaking in China. The U.S. also uses a higher percentage of scrap in its basic oxygen furnaces (BOF), which results in a lower carbon footprint for integrated mills as well, he said.

But abundant scrap reservoirs alone are not enough, Goncalves cautioned. “In addition to prime scrap, EAFs will continue to rely on iron reduction from outside sources—such as pig iron and DRI/HBI (hot-briquetted iron) to produce flat-rolled steel.” As the largest net importer of pig iron—roughly 6 million net tons per year—the U.S. will have to account for the CO2 emissions generated by pig iron producers under scope 3 as upstream feedstock, Goncalves noted.

A potential solution for the pollution associated with foreign pig iron is Cliffs’ new HBI plant in Toledo, Ohio. It has an annual capacity of 1.9 million metric tons and will be a key driver of Cliffs’ CO2-reduction efforts, he added.

Another advantage of cheap, abundant and high quality natural gas: The U.S. steel industry is on track to get 50% of its electricity from natural gas. And natural gas is also used as the reductant in the direct-reduced iron (DRI) process—replacing coal, which emits far more carbon. Natural gas is in addition used to supplement coking coal, the reductant used in blast furnaces. That reduces integrated mill’s need for coal and significantly cuts their GHG emissions too. The U.S. is also the only integrated steel industry that relies entirely on iron ore pellets. Pellets generate 85% less CO2 emissions than sinter. And Cleveland-Cliffs runs all of its eight active blast furnaces exclusively on pellets, a stark contrast with the sinter-feed that is the primary charge used by Chinese steelmakers, Goncalves said.

“Global warming is the problem,” said Goncalves. “Currently, natural gas is the best actional path to address the dilemma.”

Cliffs blast furnaces “are currently among the lowest GHG-intensive integrated operations in the world.” The company is committed to reduce GHG emission by 25% through 2030 under scope 1 and 2 by using natural gas via direct reduction and in blast furnaces, adopting clean energy and energy-efficient projects, and continually lowering CO2 emissions with a carbon capture strategy.

Goncalves turned his attention to trade policy—and Section 232 tariffs and quotas—during a Q&A session following his keynote. Cliffs would be supportive of a carbon border adjustment process for the U.S. market, including for pig iron, he said.

He also indicated that he would support easing the national security protections rolled out in 2018 by the Trump administration. “Section 232 was never supposed to be a permanent solution,” said Goncalves. “It was a stop-gap measure that played a very important role. Massive investments have been deployed in the U.S. due to Section 232. … It served its purpose.”

But the issue of fair trade must continue to be addressed. A carbon border adjustment—if based on good data, including upstream emissions—is taken into account. “Free trade is necessary,” Goncalves concluded. “The way to promote free trade would be a carbon border mechanism including scope 1, scope 2, and scope 3.”

Scope 1 refers to emissions generated directly by a producer such as a steel mill. Scope 2 refers to emissions related to the energy that powers that company. And scope 3 includes other emissions associated with a mill’s manufacturing process—such as emissions embedded in imported pig iron.

Lourenco Goncalves will be a featured speaker at this year’s SMU Steel Summit Conference in Atlanta (August 23-25). You can learn more about the conference agenda, speakers, attending companies, costs to attend (in-person or virtually) and how to register by clicking here.

By David Schollaert, David@SteelMarketUpdate.com