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South Korean steelmakers look beyond borders for decarbonization amid slow renewables expansion at home

09 December 2021 Max Tingyao Lin

South Korean steelmakers are forming partnerships with international miners in their initial decarbonization phase, focusing on potential value-chain emissions cuts before the government can secure domestic supplies of what's required to produce low-emissions steel: renewable power.

POSCO and Hyundai Steel, which together account for over 90% of the South Korean steelmaking sector's GHG emissions and crude steel output, both signed memorandums of understanding (MOUs) with Vale to develop low-carbon iron in November.

Earlier this year, POSCO—the No. 1 player at home and No. 6 globally—also teamed up with BHP and Rio Tinto to explore technologies to reduce emissions across the steelmaking value chain, some of which could be used to optimize coke quality.

Those initiatives came after POSCO and Hyundai Steel committed to carbon neutrality by 2050 last December and February, respectively. The two companies also have interim targets of a 20% cut in CO2 emissions by 2030.

Joojin Kim, managing director of Seoul-based non-profit Solutions for Our Climate (SFOC), said international cooperation is an important way to exchange experiences and knowledge in cutting emissions.

But he expressed concern that the partnerships focus on indirect reduction activities rather than decarbonizing the steelmaking process. "POSCO may opt out of investing in proper infrastructure and technologies to meet their net-zero goal by signing these MOUs," Kim told Net-Zero Business Daily.

When establishing national decarbonization roadmaps earlier this year, the government said South Korean steelmakers will achieve emission cuts mainly via replacing blast furnaces with electric arc furnaces (EAFs) and swapping out coking coal for clean hydrogen as a reducing agent.

Both POSCO and Hyundai Steel have yet to firm up investment plans on those fronts. In a recent report, SFOC called on South Korean steel firms to be "more proactive" in fleshing out their decarbonization proposals to "forge a genuine pathway to net zero."

However, SFOC and some industry experts also agree that the government's suggestions would only make sense when there is sufficient renewable energy to power EAFs and generate green hydrogen in the country.

"It's not just about the steel industry. The key is the power industry … the key is how we can produce the clean electricity," said Steel Scrap Research Center Director Kyungsik Kim in a webinar held by the SFOC last month.

"To have carbon neutrality in [steelmaking], I think that government support is very critical," added Kim, who is a former managing director of Hyundai Steel.

Power market reforms

To help avert climate disaster around the globe due to global warming, South Korea is aiming for a 40% cut in GHG emissions relative to its 2018 levels by 2030 and carbon neutrality by 2050.

The government is aiming to increase the proportion of renewables in its electricity generation mix from 6.2% in 2018 to 30.2% in 2030. Based on the government's proposed pathways, renewables will account for either 60.9% or 70.8% of the generation stack in 2050.

Vince Heo, associate director for power and gas at IHS Markit, said the deployment of renewable power faces challenges as a result of the complex permit process in South Korea.

"It requires developers to manage every step of the process by themselves—we estimate that in total 25 permits from nine agencies are required before an offshore wind turbine can be operated, which can take up to 10 years," Heo said.

"Due to this regulatory hurdle, offshore wind uptake is very slow, but some provincial governments and agencies are still opposed to streamlining the permit process as they are concerned about opposition from fishery industries," he added.

In May, POSCO signed an MOU with Ørsted to support the Danish firm's plan to develop 1.6 GW in wind projects off Incheon, and the partnership could help the steelmaker secure renewable electricity to produce hydrogen down the line.

But SFOC's Kim said the government needs to reform the power market rather than rely on individual steel firms to develop a sustainable supply chain for green steel.

Currently, state-owned Korea Electric Power Corp. (KEPCO) controls over 70% of power generation capacity and all the country's transmission and distribution networks.

"This has stifled competition in the market, and has allowed KEPCO to maintain an outdated regulatory paradigm that does not easily allow diverse energy sources, including renewables, to enter the grid," Kim said.

Even if some South Korean manufacturers have the financial resources to build their own renewable capacity, Heo said they will still prefer to purchase electricity from the grid for cost effectiveness.

This is because their return on renewable investment will be linked to the pricing level of corporate power purchase agreements (PPAs). In South Korea, KEPCO is likely to be able to offer renewable electricity at a lower, subsidized rate than PPAs by 2030, Heo added.

Hydrogen plans

Both Hyundai Steel and POSCO are planning to increase grey hydrogen production by 2025 to supply the road transportation sector.

Looking forward, POSCO aims to produce up to 500,000 metric tons (mt) of blue hydrogen annually from fossil fuels while utilizing carbon capture and storage by 2030. It is also targeting producing 2 million mt/year of green hydrogen by 2040 and 5 million mt/year by 2050. The clean hydrogen will be for its clients and own decarbonization.

"The government needs to bolster renewable energy-driven power generation and support the establishment of diverse distribution channels of renewable energy, which will, in turn, help steelmakers effectively use green hydrogen to produce direct reduced iron," the SFOC report said.

POSCO estimates 3.7 million mt of green hydrogen per year would be needed to decarbonize its steelmaking processes. Aside from tapping into its planned production domestically, with a large portion of the hydrogen expected to be sourced at home, the company has also signed deals with Origin Energy and Fortescue Metals Group to explore opportunities for sourcing hydrogen from Australia.

"These needs cannot be met without improving the way that electric power from renewable energy sources is supplied and the way permits and licenses for renewable energy businesses are issued," the SFOC said. "It is also important to invest in building a supply chain that secures a reliable supply of green hydrogen from abroad."

To meet the country's climate goals, the government estimates South Korea's hydrogen demand will reach 3.9 million mt in 2030 and 27.9 million mt in 2050. This compares with the current level of around 200,000 mt/year.

"South Korea will likely rely on overseas suppliers for green hydrogen in the long-term," Heo said. "The main reason is that the domestic hydrogen production cost via water electrolysis is higher than importing hydrogen in the form of ammonia and reconverting back to hydrogen."

The government agrees, expecting over 80% of South Korean hydrogen demand to be met by overseas suppliers in 2050, but said it will seek to mitigate risks by deploying the country's capital and technologies to establish production sites in other countries.

Global competition

Experts believe South Korean steelmakers need to decarbonize their operations to remain competitive internationally in the long run.

The European Commission has proposed a tariff on overseas steel whose manufacturing process is deemed carbon intensive. Also, the EU and US are in talks over a trade pact that could keep high-carbon steel out of the two large import markets, which rank No. 2 and No. 3 in the world, respectively.

During the COP26 climate meetings last month, the US and World Economic Forum launched the First Movers Coalition that creates a platform for companies to make purchasing commitments for low-carbon products including steel.

But there are also concerns over whether South Korean steel firms can retain their market share at home, because they will need to sell their products at higher prices in order to reflect decarbonization investments. According to the Korea Iron and Steel Association, more than 60% of the steel produced in the country is sold to domestic customers like shipbuilders and car makers.

Heungwon Seo, president of Greenhouse Gas Inventory and Research Center at South Korea's Ministry of Environment, said Seoul could impose a tax on high-carbon steel in the country to promote the green transition.

"I think there needs to be some kind of an economic punitive measure … Without that certain cost being incorporated, it will be very hard to have many companies and countries motivated to make this transition," Seo said during the SFOC webinar.

The SFOC report said the government should establish a certification system for eco-friendly production or introduce environmental criteria for steel products used in public projects in the country.

"The government needs to pave the way for low-carbon, environmentally-friendly steel products to effectively compete in the market," according to the report.

Carbon costs

South Korea's Emissions Trading Scheme (ETS), launched in 2015, currently covers 85 steelmakers responsible for nearly all of the sector's emissions.

But critics said the cap-and-trade system has done little in decarbonizing South Korea's economy, with the government willing to hand over plenty of free allowances. In the 2021-2025 period, 90% of the allowances will be free while the rest are set to be sold in auctions.

"The cost implication has not been significant enough to induce companies to make investments in low-carbon options," Heo said. "The government will need to either redesign the incumbent ETS policy or introduce the carbon tax for accelerating decarbonization."

Heo added that the government should tighten up the ETS market fundamentals to provide heavy emitters with a clearer price signal. "A carbon tax could be also considered if the ETS market does not perform effectively," he added.

Observers expect Seoul to gradually reduce the allocation of emissions allowances to steel firms based on the country's climate targets. The government has targeted cutting emissions from the industrial sector—including steelmaking—by 14.5% from 2018 levels by 2030. Steelmakers are being asked to reduce their emissions by 95% by 2050.

But Seo suggested the government is unlikely to impose tighter caps on steel firms in the next few years.

"We believe that the emissions trading system should be more closely monitored to see how each company is managing its GHG emissions today," he said. "It will provide us with a more specific indicator of how much of a reduction is really necessary to achieve the 2030 industry target."

Posted 09 December 2021 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

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