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There is an unbreakable link between the steel and O&G industries that shows similarity in growth curves

The steel industry is known for being cyclical and reflective of overall market conditions—demand increases during economic booms and plummets during global recessions. Around the end of 2014, the steel industry went through a consolidation phase that was similar to the one that the oil and gas (O&G) industry experienced.

One of the serious problems faced by the steel industry has to do with its size. Towards the end of 2014, the supply-demand balance was tipped by an oversupply of steel by China. On one hand, due to over production, the export market of China grew substantially and resulted in it dumping its excess inventory in all other countries. On the other hand, some major producers (such as those in Europe and the United States) halted their manufacturing operations internally to compensate for these cheaper imports from China because they eliminated their operational costs. One of the consequences of Chinese oversupply was the collapse of steel prices. This led to steel industry job losses for several thousands of employees of Luxembourg’s ArcelorMittal, South Korea’s Posco, and US Steel, just to name a few. It is still unclear how the industry is going to recover from these losses. Another consequence of this excess production is the depletion of the high-quality raw materials needed to produce steel. Using low-quality raw materials in their stead could have detrimental effects by causing environmental pollution.

Steel is the most widely used industry in the O&G sectors when compared to all other industries. These two sectors have always been intertwined and dependent on each other because they use materials produced by each other. A significant percentage of all steel manufacturers’ revenue is from the O&G sector. The fall in crude oil prices during mid-2014 to 2016 resulted in projects being cancelled. This has directly affected the profitability of this industry due to the minimum purchase of steel products for projects.

Several initiatives are geared towards environmental conservation and are given a high degree of importance by various governmental bodies, especially in Europe. The process of manufacturing steel has to be altered to comply with these initiatives, such as by reducing the emission of toxic greenhouse gases (GHGs) that are extremely harmful to the environment. Carbon dioxide (CO2) is the most prevalent GHG emitted during steel manufacturing, and this will worsen global warming in the near future if these initiatives are not adhered to.

China—The top reason for the economic disruption of steel manufacturing countries

Over the last decade, Chinese steel production doubled from approximately 800 million tonnes to 1.6 billion tonnes and it constitutes around 50% of the global steel produced. As part of Chinese government’s plan to develop the country’s infrastructure and economy, it started to focus on steel production in 2005. Currently, the country is the largest producer of steel. While the majority of the steel produced in China was being used internally, the demand for steel in China decreased by 3.4% in 2014 due to slowing growth in the construction and manufacturing industries. This prompted Chinese steel manufacturers to sell their excess inventory to other countries at a significantly subsidized price, thereby affecting business in local markets of all other nations because it greatly saves on operational costs. The price of steel sharply fell from around US $430 to $470/tonne to US $250 to $270/tonne. This resulted in the shutdown of many steel producing plants in some developed countries, including the United States and Europe.

Consequences and outcomes

Initiatives, such as increasing import tariffs, have been adopted to improve the local steel production operations in countries other than China. At the beginning of 2018, the US government recognized the problem and began enforcing anti-dumping measures to protect domestic steel companies against foreign imports being supplied at throwaway prices. This decision to implement import duties of 25% on steel and 10% on aluminum will be effective after testing its impact and will apply to all countries with the exception of Canada and Mexico, as per the North America Free Trade Agreement (NAFTA). However, these duties could disrupt global trade and the relationships between countries. Countries including Europe, Australia, South Korea, and Canada are disappointed in this move by the United States and have threatened to take the issue to the World Trade Organization.

Similar to the United States, the European Commission has also imposed an anti-dumping tariff on corrosion-resistant steel from China with an import tax of 28.5%. This initiative follows a complaint from the European steel industry in December 2016.

Depletion of high-grade raw materials—Is recycling used steel products a solution?

The over-production of steel in the last decade has led to a depletion of high-grade raw materials. To address the challenge of future increased steel demand, the availability of high-quality raw materials will be essential to manufacturing steel in large volumes. There can be negative effects of using low-quality raw materials during production, such as higher GHG emissions, that could cause environmental disruption and higher energy consumption. While using a blast furnace (BF) and low-grade materials to produce steel, more energy is needed than when using high-quality materials and the waste non-metallic components are converted into byproducts (slag). There are two options that can be used to address the issues that accompany the use of low-grade materials. These include either finding new ways to more effectively produce steel with low-quality resources or finding a way to be less dependent on raw materials in general. Research into developing new production technology is ongoing and is in its pilot stages. More details about the different processes are explained in the “How can environmental challenges be addressed?” section. Another way of being less dependent on raw materials is through secondary processes that make use of recycled steel products. The industry utilizes a circular economy to ensure this type of product manufacturing, which is based on employing raw material according to 3Rs—recycle, reuse, and remanufacture. A circular economy works toward producing steel with a long life expectancy, thereby reducing the demand for raw materials due to its durability. In spite of recycling being an effective approach, finding scrap materials to be recycled could be a challenge considered the long lifetime of steel products.

Relationship between O&G and the steel industry

Although steel is indispensible in a wide range of industries, ranging from the automotive, construction, to domestic household sectors, it is predominantly used in the O&G industry. West Texas Intermediate (WTI) crude oil saw a price decline of 28% when the price of oil dropped to $78 per barrel—a trend that was observed from mid-2014 to almost the end of 2016. This price drop was due to the global crude oil supply exceeding demand as a result of the United States boosting O&G production through hydraulic fracking techniques. This supply-demand gap in the O&G market caused several plants to be shut down. This directly impacted the tubular steel products business because around 10% of the steel industry’s revenue is from the drilling sectors of the O&G industry. Using high-quality steel for building pipelines, tubes, drilling bits, and measurement tools, it is possible to prevent corrosion due to it constant contact with fluids that have high acidic properties. Northern slope of Alaska has been facing a major problem with this, with about 80% of crude oil transporting pipelines being corroded.

Steel products are more prone to corrosion due to higher content of hydrogen sulphide (H2S) in deep water exploration and drilling (E&P). In addition to the requirement of being resistant to corrosion, good quality steel with high tensile strength is essential in this sector to withstand extreme temperature conditions. Various compositions of steel are deployed for different applications, as shown in Table 1.

Table 1: Steel alloy and its applications in O&G industry

How can environmental challenges be addressed?

It is important to evaluate the environmental impact of steel manufacturing. Several countries have imposed environmental safety regulations to restrict the amount of GHGs (especially Co2) emitted by the industrial sectors. This places pressure on steel manufactures to come up with new processes or techniques to produce high-quality steel while reducing Co2 emissions and limiting energy consumption. Ultra–Low CO2 Steelmaking (ULCOS), a consortium formed by 48 European companies and 15 European organizations, is working on an R&D project that is focused on finding opportunities to produce steel using techniques that have at least a 50% reduction of Co2 emissions.

Its current focus is on four concepts:

  1. Carbon capture and storage (CCS)
  2. HIsarna with CCS
  3. Electrolysis
  4. Use of hydrogen instead of carbon

Carbon capture and storage (CCS)

With CCS technology, 90% of the Co2 that is emitted is captured and prevented from being released into the atmosphere. Instead, the captured Co is compressed by high pressure, converted into a liquid, and injected into a rock formation site to be stored permanently underground. Although this seems to theoretically be a very effective way of preventing Co2 emissions, there could be issues with finding a wide land space or real estate to store the emitted Co2.

HIsarna process

HIsarna is a completely new iron-making process based on bath-smelting technology. This process directly melts iron ore and coal into a reactor, which completely eliminates the BF route when undergoing the final reduction to produce liquid iron. This process requires less coal use and as a result, reduces the amount of Co2 emissions and energy consumption. Since May 2011, a pilot project using this process has been operational at Tata Steel’s site in Ijmuiden, the Netherlands.

Economic and environmental benefits of the HIsarna process:

Operational costs are observed to have reduced when compared to the costs when the traditional method was applied

  • Energy savings of up to 20% are observed
  • With CCS combined, CO2 emissions are reduced by up to 80% in addition to NOx, SOx, dust, and CO emissions
  • Low-quality raw materials can be used in this process

Electrolysis

Replacing the BF technique with an electrolysis method can prevent millions of tons of Co2 emissions. Traditionally, carbon in coal reduces iron oxide, producing Co2 and CO, thus leaving behind iron.
Like a regular electrolysis method, iron ore is dissolved in a solvent at a high temperature and current is passed through it to cause ionization. Elemental iron is then deposited near the electrode in the reactor and by this method; iron is produced in a completely different way. This project is still in the preliminary lab stages.

Use of hydrogen instead of carbon

Using hydrogen instead of coal in the conventional BF route is an effective way of eliminating Co2 emissions. Hydrogen is an excellent reducing agent and by substituting carbon with hydrogen, there is a high potential to diminish GHG emissions. Hydrogen reduces iron oxide to iron, thus emitting water vapor instead of Co2.

Conclusion:

The steel industry went through a low demand phase from 2014 to 2016 due to production that exceeded demand. The longevity of steel products could be attributed as one of the reasons for this low demand. The long life of steel products, a minimum of 10 years depending on the product, pushes the industry to go through a cyclic phase once every 5 to 6 years. China’s overproduction of steel worsened this situation, leading to the country dumping its excess inventories in other countries at low prices as a result of decreased domestic demand. Anti-dumping tariffs are now being imposed by countries such as Europe and the United States to promote local steel manufacturing. However, there are oppositions to such policies because they could disrupt global trade and relationships. A strong linear relation exists between the steel and O&G industries, which makes it easy to predict the growth of steel sector as it follows a similar trend as the O&G industry (there is a two month lag between the them). The O&G industry underwent a similar phase as the steel industry regarding an oversupply and low demand scenario around mid-2014 to 2016. As the 2017 crude oil prices pick up, according to Frost & Sullivan analysis, the steel industry is likely to follow the trend and is expected to improve. The World Steel Association expects 2018 to be a year of moderate global growth, predominantly due to slower growth in China. Manufacturers are investing in several R&D projects to discover new ways of manufacturing steel with a main goal of reducing emissions. Although these pilot projects are in the initial stages, the efforts taken towards environmental conservation is expected to be fruitful.

About Frost & Sullivan

Frost & SullivanFor over five decades, Frost & Sullivan has become world-renowned for its role in helping investors, corporate leaders and governments navigate economic changes and identify disruptive technologies, Mega Trends, new business models and companies to action, resulting in a continuous flow of growth opportunities to drive future success. Contact us: Start the discussion.

Frost & SullivanFrost & Sullivan

For over five decades, Frost & Sullivan has become world-renowned for its role in helping investors, corporate leaders and governments navigate economic changes and identify disruptive technologies, Mega Trends, new business models and companies to action, resulting in a continuous flow of growth opportunities to drive future success. Contact us: Start the discussion.

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