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Iron & Steel: a bumpy road from the world’s hardest-to-abate industries to a cornerstone of a net-zero economy


Introduction

Exploring the role of low-carbon technologies, investment strategies, policy and financing frameworks supporting future of Iron & Steel.

Iron & Steel are key for the energy transition as a core structural component of low-carbon technologies, such as wind turbines, solar panels, electric transportation, among others.  At the same time, the sector is also a significant driver of global energy demand (currently representing approximately 8%), while accounting for around 7% of energy related CO2 emissions[1] .

There are two predominant technologies in the industry today: conventional Blast Furnaces (BFs) and Direct Reduced Iron (DRI) technologies, which are respectively paired with Basic Oxygen Furnaces (BOFs) and Electric Arc Furnaces (EAFs), see figure 1 below for their respective emission intensity.

Source: IEA, WorldSteel

Primary steel production is considerably more carbon-intensive than secondary steel production (from scrap recovery or recycling), primarily due to the reliance on metallurgical coal for the reduction process (in both BF and coal-based DRI). The BF-BOF route involves using a blast furnace with coke to convert iron ore into molten pig iron and then using a basic oxygen furnace to convert that pig iron into steel. 

Alternatively, the direct reduction of iron involves removing oxygen from iron ore in solid form, traditionally using natural gas, though hydrogen could also be used for this process, resulting in water (H2O) as a byproduct instead of CO2. Hydrogen-based direct reduction (HyDR) presents a promising future for green ironmaking without direct CO2 emissions. 

Source: Bataille et al., 2021

In 2024, while EAF constituted 55% (115 million tons per annum - mtpa) of the projects starting construction, 45% (96 mtpa) was BOF-based[2], indicating that the deployment of carbon-intensive infrastructure continues to expand. Since 2019, the total CO2 emissions from the Iron & Steel sector have risen globally, primarily driven by increasing steel demand, which is expected to grow by 0.7% per year by 2030[3]. To align with the IEA Net Zero Emissions by 2050 (NZE) Scenario, substantial reductions in emissions intensity are critical in the near term. Immediate GHG emissions mitigation in the sector can be achieved through energy efficiency improvements and enhancing scrap recovery, but more material abatement avenues will require the adoption of new technologies.

The IEA projects that for the Iron & Steel sector to meet the initially projected Sustainable Development Scenario 2050 decarbonization objectives, the main drivers will be material efficiency, CCUS and technology performance. Combined with fuel shifts, electrification, hydrogen, and bioenergy, these goals would be achieved.

 

Source: Mexican Sustainable Taxonomy, First Edition, 2023.

As of 2024, the steel industry’s decarbonization efforts remain far behind global climate objectives. Technical and economic barriers continue to slow progress: the BF-BOF route depends heavily on coking coal, DRI-EAF struggles with low-grade ore incompatibility, scrap supplies for EAFs remain insufficient, and hydrogen-based DRI-EAF has yet to reach commercial viability at scale. Without sufficiently high carbon prices or reliable global abatement mechanisms, low-carbon hydrogen in DRI-EAF cannot yet compete with conventional steelmaking methods.

Still, signs of transformation are emerging. EAF capacity grew nearly 11% in the early 2020s and is expected to rise another 24% by 2030[4]. Half of global steel production plans involve shifting to EAF technology, with about half of those projects integrating DRI-EAF.

 

The Net-Zero Imperative

For the steel sector to meet net-zero targets, scaling up low-carbon technologies is non-negotiable. Process and energy efficiency measures alone could cut 450-750 million tons of CO₂ by 2050[5], but far deeper structural change is needed. A major shift from BOF to EAF will be essential, requiring around 60% of global blast furnace capacity to be either retired or converted by 2030 to remain viable into the 2040s[6].

Technology readiness levels (TRLs), in a range from 1 to 9, underscore the near-term options. According to the IEA, natural gas–based DRI with carbon capture is already at TRL 9[7] and considered of very high importance for the transition. Hydrogen-based DRI, by contrast, is at TRL 7, of high importance, but not expected to be commercially viable before 2030, as further technological development is needed, particularly in terms of the capacity to incorporate higher blends of hydrogen and the accessibility of low-cost renewable energy.

 

Scrap: The constrained feedstock

Scrap will play a decisive role in reducing emissions. Global EAF output has risen by 2% annually since 2020, but scrap trade has fallen by 2%, reflecting growing self-sufficiency among producers[8]. While steel boasts one of the highest recycling rates, around 80-85% of material is recovered at end-of-life, further gains will be marginal. Scrap availability is ultimately limited by past steel production volumes, the long lifespan of steel products, and collection rates. Ensuring a steady supply of high-quality, low-contaminant scrap is therefore critical for EAF expansion.

 

Ore, Energy, and Regional Opportunities

As green steel demand grows, high-grade iron ore is becoming increasingly valuable. Wood Mackenzie forecasts that premiums for direct reduction-grade (DR-grade) ore will rise as steelmakers chase both efficiency and emissions reductions. Its 2025 Steel Energy Transition Outlook projects a 48% expansion of the EAF market under a 1.5°C scenario.

Countries with abundant renewable energy and iron ore reserves, such as Australia and Brazil, are particularly well-positioned to lead in DRI-EAF production and green steel exports. However, scaling this transition will depend on reliable access to affordable clean energy and hydrogen.

 

Financing the Transition

The World Economic Forum’s Net Zero Tracker (2023) estimates that building near-zero-emission steel infrastructure will require $1.8 to 2.6 trillion in investment[9]. Yet industry profitability remains under pressure due to structural overcapacity, compounded by a surge in Chinese steel exports that has intensified global trade competition[10]. According to the Woodmac Emission Benchmarking Tool, in 2025, China accounts for 55% of global production, with an intensity primarily driven by coke for ironmaking, averaging above 1,800 kgCO2e/t of crude steel. Only 5% of global production exceeds this intensity, while 8% has an intensity below 600 kgCO2e/t of crude steel.

Despite these headwinds, investor sentiment is shifting. A survey[11] by the Australasian Centre for Corporate Responsibility (ACCR) of 500 global steel investors highlighted growing confidence in green steel. Beyond emissions cuts, respondents identified enhanced reputation (48%) and alignment of portfolio with ESG benchmarks (41%) as key opportunities driving future investment.

 

Outlook

The steel industry’s decarbonization is constrained by technology readiness, feedstock availability, and cost competitiveness. Nevertheless, progress is visible: EAF capacity is expanding, investors are showing confidence, and regions[12], such as MENA, Canada, Australia and Brazil, rich in renewable energy and high-grade ore could emerge as global leaders.

Closing the cost gap for green products, maximizing scrap recovery, and deploying transitional technologies like natural gas-based DRI with carbon capture are immediate priorities. In parallel, strong government policies, ranging from carbon pricing to investment incentives, will be essential to create a level playing field.

In short, while the sector faces challenges, it also holds unprecedented opportunities for transformation. With the right mix of technology, finance, and policy support, steel can move from being one of the world’s hardest-to-abate industries to a cornerstone of the net-zero economy.

Natixis supporting its Steelmaking clients in their transition

In this challenging context for the steelmaking industry, Natixis is convinced of the necessity to support its clients in their decarbonization pathways. This year, we have engaged in multiple transactions aimed at promoting the development of the DRI-EAF production route. We believe that every activity in the steel value chain, from mining to end-use, requires support to encourage low-carbon steel production. Therefore, we have assisted steelmakers through Green Finance, based on the design characteristics of their facilities, and demonstrating alignment of their plants with a science-based 1.5-degree scenario.

 

As an example, we have accompanied Ternium Mexico in developing the Green Financing Framework and structure[9] for its new steel mill in Pesquería, Mexico, acting as Green Coordinator. The Framework received a Medium Green rating under S&P Global’s Shades of Green methodology. The assessment emphasized the environmental benefits of replacing imported BF slabs with low-carbon DRI-EAF production. Ternium Pesquería plant’s decarbonization strategy combines multiples levers: energy efficiency, renewable energy use, circular economy practices, increased scrap utilization, wastewater reuse, carbon capture and long-term compatibility with green hydrogen adoption when it becomes economically viable.

 

Following our involvement as Co-Chair in the development of the ICMA Green Enabling Guidance, we have also leveraged this work to structure upstream transactions as well, highlighting sustainable supply chains towards enabling a low carbon global economy. This is crucial for Electric Arc Furnace operations & associated mitigation strategies being deployed, to ensure decarbonization of the steelmaking value chain while avoiding carbon lock-in. For example, we are supporting Mesabi Metallics in developing their green financing program covering their High-Grade DR Pellet facility in Minnesota. This production employs the best available pollution control technologies to minimize emissions, ensuring low carbon intensity while facilitating the decarbonization of steelmaking as it supports the DRI-EAF production route. Additionally, the facility achieves zero discharge of surface water from mining operations, further enhancing its environmental sustainability.

Footnotes

[1] https://sciencebasedtargets.org/sectors/steel#2200840

[2] https://globalenergymonitor.org/report/pedal-to-the-metal-2025/

[3] https://www.oecd.org/en/publications/oecd-steel-outlook-2025_28b61a5e-en.html

[4] https://globalenergymonitor.org/wp-content/uploads/2025/05/GEM-global-steel-report-May-2025.pdf

[5] https://my.woodmac.com/document/150374609

[6] Wood Mackenzie - Green steel: challenging the status quo

[7] TRL 9: The Technology is on its way towards full commercial operation in the relevant Environment; TRL 7: The technology is moving to the demonstration phase, where it is tested in real-world environments.

[8] https://my.woodmac.com/document/150346103

[9] https://www3.weforum.org/docs/WEF_Net_Zero_Tracker_2023_STEEL.pdf

[10] https://www.oecd.org/content/dam/oecd/en/publications/reports/2025/05/oecd-steel-outlook-2025_bf2b6109/28b61a5e-en.pdf

[11] https://www.accr.org.au/downloads/ahead-of-the-game_steel-decarbonisation-survey-results.pdf

[12] https://steelwatch.org/steelwatch-explainers/steelwatch-explainer-why-green-iron-trade-will-catalyse-steel-industry-decarbonisation/

[13] https://www.ternium.com/en/media/news/sp-assigns-medium-green-rating-to-the-green-financ--09890881525