Strategic scrap: The future of green steel

In brief

• The steel industry is shifting toward sustainability through the use of electric arc furnaces (EAFs), which offer many environmental benefits.

• With the use of EAFs in steelmaking increasing, there is a need to focus on strategic sourcing of scrap metal, one of the main components of EAFs.

• Steel companies need to secure scrap at the right price, volume and quality and ensure they stay in control of their costs and production capacity.
  

Strategic scrap: The future of sustainable steel

With a growing focus on sustainability and reduced carbon emissions, the steel industry is facing massive disruption and pressure to reinvent itself. And in the quest for sustainability, the steel industry has found a vital ally, in the form of scrap metal. This material isn’t just leftover junk; it’s the cornerstone of a greener production process and a key player in the industry’s journey towards environmental responsibility.

But the switch to sustainability isn’t going to be easy – or quick. Steel is an integral part of the global economy, with the world consuming more than 245 kilograms (kg)¹ of steel per person a year in the form of everything from durable products and electric equipment to buildings, bridges and other infrastructure.

The steel industry is the largest emitter of greenhouse gases among the heavy industries, accounting for approximately 7% of global emissions.² Much of this is due to its use of the basic oxygen blast furnace (BOF), a fossil fuel-intensive process that has its roots in ancient times. Now, however, consumer demand for “green steel” is driving a shift from blast furnaces, which convert iron ore to iron using coal, to electric arc furnaces (EAFs). Scrap metal is primarily used in EAFS, a technology that marks a significant departure from the traditional BOFs. EAFs require considerably less energy and, crucially, they emit far fewer carbon emissions – about one-eighth – than their blast furnace counterparts. ³ 

The benefits of using scrap metal in steel production extend beyond reducing emissions, as outlined in our Powered for change report. EAFs are not only greener than BOFs, but they also offer operational flexibility. EAF production is the method of choice for mini-mills, which unlike BOFs can be built near densely populated areas, and thus close to both construction industry customers and scrap supplies.

The projected growth of EAF steelmaking

The past few years have seen both a shift in focus to sustainability and therefore a rapidly growing interest in new EAFs. Globally, more than 110 green steel projects, with a combined value of more than US$95 billion,⁴ were announced in 2020-2023. EAF steel output is expected to grow by 80% to 100% in the coming decades, and account for 500-600 million tons of additional production by 2050. (See Figure 1) At the same time, the BOF share of steel production is expected to decline significantly in most major countries, with the exception of India, where the ready availability of iron ore and lack of available scrap make BOF-based manufacturing more attractive.

The shift to EAF production will help the steel industry reduce emissions. At the same time, a number of factors indicate that finding reliable sources of quality scrap may be a complicated and increasingly challenging task, which means that the EAF steel company of the future will need to take a strategic approach to securing its supply.

Understanding the scrap supply chain needs

EAFs require a large amount of scrap. To produce a ton of crude steel, a typical EAF uses just over 700 kg of scrap, while BOFs, on the other hand, require only 125 kg of scrap.⁵ On a macro level, there is enough scrap available globally to support the expected growth in EAFs—and there may even be a surplus. (See Figure 2) The question is how to get the scrap to the right place at the right price and at the right volume and quality, which can be challenging.

Securing the supply chain

The amount of scrap steel produced varies from year to year and from region to region, depending on factors such as economic activity and steel consumption. Generally, most obsolete steel scrap—that is, scrap from products that have reached the end of their life—is generated in developed countries with large installed bases of mature industrial plants, electricity and rail networks, and large numbers of automobiles. 

The single largest scrap-generating country is China, but China does not export scrap and is not likely to do so in the future. The United States (U.S.), the European Union (EU) and Japan, on the other hand, are net exporters of scrap. While they have large domestic steel industries, they are not yet able to absorb local scrap volumes. As EAF capacity and scrap demand grows, and pressure mounts to cut greenhouse gas (GHG) emissions, these countries may restrict exports to ensure enough scrap is available for domestic purposes.

A range of complications

As EAF operators look for sources of scrap, they will need to consider a number of other factors. For example, different geographies produce different mixes of scrap. The EU generates higher levels of construction scrap; the U.S. creates higher levels of end-of-life vehicle scrap; and Japan produces higher levels of home scrap that is generated by steel mills. In general, scrap comes in different forms and quality levels, and not every type of scrap is acceptable for each process and grade of steel. Alloying elements and coatings, for example, can affect quality specifications. Thus, finding the specific scrap that a company requires will drive the need to cast a wider net.

The locations of EAF operations will also play a role. With electricity accounting for 15% to 20% of the total cost of steel production in an EAF,⁶ access to competitive energy prices—and ideally, renewable energy—will be crucial to EAF competitiveness. Local energy prices and green energy availability will thus drive the location of many EAF operations, which could increase the need to look further for sources of scrap and lead to higher transport costs. 

Additionally, sourcing will be complicated by the scrap industry’s significant market fragmentation. Currently, the scrap metal market consists of relatively small, private and local scrap metal collecting and handling companies. Even the largest scrap companies in the EU, for example, have a market share in the single digits. This has led to unreliable and opaque supply chains, compared to those that steelmakers and iron ore miners have put in place. 

There is also uncertainty about future regulation. In the EU, there are now discussions about limiting the scrap exports going to countries that do not follow EU recycling and sustainability standards. If approved, such an export ban would secure affordable and excessive supply to Europe-based EAFs but do so at the expense of the profitability of the scrap collection industry. 

Getting ready for the era of strategic scrap

In this complex and increasingly competitive scrap market, steelmakers will need to put scrap in the category of strategic raw materials and consider a range of steps to address supply challenges. For example, they could:

• Form scrap buyback agreements with customers (product manufacturers), or long-term agreements with local and international recyclers. 

• Enter into partnerships with scrap recyclers to build and operate shredding and sorting facilities near their EAF operations. 

• Take advantage of the fragmented scrap market and acquire scrap recyclers (backward integration). 

• Secure enough direct-reduced iron (DRI) capacity to feed EAFs, ensuring a flexible balance between scrap and DRI use (and other metallics such as pig iron, for that matter).

• Consider new business models, such as leasing rather than selling steel or buyback agreements with the steel users, where the transparency of life cycle duration is possible, although that will only lead to an impact in the longer term. 

• Establish scrap trading digital marketplaces that could, in time, include both international scrap sources and local scrap yards and waste managers that provide greater transparency into volume, quality and price.

In addition to securing supply of scrap, EAF steelmakers will need to consider how to make the best use of it. Having a leading cost position will be key, and the growing investments in new EAF assets are likely to raise the bar significantly. EAF operators will have to integrate new levels of digitalization, fully utilize data to optimize asset operations and automate manual tasks and material handling. Implementing new ways of working and new organizational structures to reduce manufacturing costs will also be essential. And operators will need to use predictive analytics to better understand the impact of scrap quality on steel quality.

With the need for greener steel and the rise of EAFS, the steel industry is facing an epic shift that will reshape profit pools and competitive advantage. To succeed, EAF operators will need to strengthen their ability to source and use scrap and take a strategic approach to managing both the risks and opportunities that are being created in this rapidly evolving environment.

A call to action

If there is one clear call to action for metals companies, it is to treat scrap more strategically than in the past. Metals companies have become accustomed to raw materials for production always being available; however, as the industry adopts new production methods, visible raw material inventories dwindle and geopolitical tensions simmer, scrap sourcing will become an operational risk management concern. And if steelmakers wish to stay in control of their costs and production capacity as they look to reinvent themselves for a net-zero future, they must adopt a vision of scrap as a valuable resource of choice that is critical to their long-term success.

Sources / Citations

_{¹ Accenture analysis of 1950-2021 data from Wood Mackenzie and World Steel Association, World Steel in Figures 2021}

_{² IEA (2020), Iron and Steel Technology Roadmap, IEA, Paris}

_{³ Ibid.}

_{⁴ Accenture analysis; Wood Mackenzie, Global steel 10-year investment horizon outlook, Q3 2022.}

_{⁵ World Steel Association (2023), Steel Facts}

_{⁶ European Commission, Joint Research Centre, JRC Technical report (2022), Production costs from iron and steel industry in the EU and third countries}