Researchers from the Department of Green Finance at the London School of Economics (LSE) suggest that Brazil and China will have a better chance of commercializing environmentally friendly steel if they combine their value chains.

A new study assessing the prospects for low-carbon steel production in Brazil, China, and Mexico shows that these three markets have certain advantages, but closing the profitability gap remains a structural challenge for all of them. It points to a difference of $95 per tonne in China and the global average of $140 per tonne when comparing production using the traditional blast furnace-based method and the promising hydrogen-based method using electric furnaces.

"The gap between BF — BOF and H2-DRI —EAF is substantial, repetitive, and reinforced by several layers of the system itself. "Energy pricing, capital intensity, underdeveloped waste recycling systems, and fragmented demand work together to maintain the cost advantage of traditional production," the researchers say. "Even when technology improves, the economy often doesn't."

Political intervention is crucial to narrow the gap to a level where the private sector feels comfortable, "where manufacturers can implement new technologies without taking on all the risks themselves," they continue. "Financial instruments can reduce the cost of capital and operational work; regulatory instruments can change market incentives; market instruments can take climate costs into account when making production decisions. None of them work in isolation."

The LSE study, which highlights the challenges in each market, indicates that the "most likely outcome" in achieving global leadership will be based on collaboration rather than the dominance of a single player, Kallanish reports.

"China's strengths, combined with Brazil's comparative advantages based on cheap renewable energy sources and proximity to raw materials, point to a territorial division of production," the LSE report said. "A model of cooperation in which Brazil develops as a major center for the production of environmentally friendly pig iron, and China coordinates further processing and technological innovation, could be more effective."

Without this approach, China would have become the most convincing argument for leadership in the production of environmentally friendly steel, but it would have been a slow, gradual process.