Five in 5: Metals industry challenges

1. There are various net-zero technologies in the market to decarbonize the metals industry. We’ve seen some uptick in adoption, but not everyone is quite there. Why do you think this is?

Brad Johnson: There are some obvious and not-so-obvious reasons why companies might not immediately adopt these decarbonization technologies. Obvious reasons are technology maturity and technology costs. Not all decarbonization technologies have been proven—many are in pilot phase or require significant investments or ecosystem plays to bring them to life. When it comes to costs, part of the high cost is simply supply and demand: There is not enough demand to reduce prices to a competitive level. The decarbonization of steel using hydrogen is a great example of this. As noted by Deloitte in our recent report Decarbonizing steel: Forging new paths together, as of 2023, the direct reduction of iron ore using hydrogen with electric arc furnaces (DRI-EAF) has only been demonstrated by one European consortium; it has yet to be deployed at commercial scale due to a lack of high-quality iron ore, limited availability of clean energy and green hydrogen, and a slow buildup of demand for green steel.¹

When it comes to the not-so-obvious reasons, those are more rooted in change management: The employee base might not be upskilled on how to implement or manage the new infrastructure or process; the company might have competing priorities; the asset it is replacing might only be at 50% of its useful life, impacting the business case—or the company might not have identified the people who need to be part of this conversation to make it happen, among many other reasons.

Kelsey Carvell: I often see the not-so-obvious reasons as being the hindering issue. We work closely with companies to identify all the stakeholders required to ensure that everyone understands what we are doing, why we are doing it, how we are doing it, and what their role is. Making sure everyone is on the same page and that their voice is heard is critical to success. We also work closely with various stakeholders to build out an effective business case that takes into consideration the age of the asset (in fact, many steelmaking assets are young, making the business case for replacement more challenging) and the ongoing costs required, including employee upskilling (especially in engineering, metallurgy, and IT/software), and opportunity costs, among many others.² A lot of work needs to happen before the investment is even made—and a lot of work must happen afterward to make sure that the technology or process implemented is maintained.

2. You mentioned upfront costs. Can you elaborate on this and explain some of the ways organizations are mitigating capital expenditure (CapEx) costs?

Brad Johnson: CapEx costs can be large. The same Deloitte report that I mentioned previously provides an example: The CapEx associated with abating a traditional basic oxygen blast furnace (BF-BOF) steel mill via carbon capture and sequestration or conversion to DRI-EAF resulted in lifetime production cost increases from $49/ton of steel today to $143/ton and $191/ton, respectively, in 2030 due to the amortized CapEx.³ Yet, there are several things companies can do to reduce costs. The most obvious way to reduce profit and loss (P&L) costs are through the use of tax incentives and credits. The United States passed the Inflation Reduction Act (IRA) of 2022 that provides more than $416 billion toward decarbonization and net-zero technologies to reduce emissions—including carbon capture, clean hydrogen, and clean energy.⁴ Most of these funds will be quite competitive—it will be important for companies to pull together a strong application to ensure that this funding can be obtained.

Kelsey Carvell: Another lever companies can use is investing in emerging or promising technologies through a company’s own investment or innovation fund (if they have one). Helping to jump-start or accelerate a startup’s journey can help it find novel ways to lower its own costs—and therefore, lower its customers’ costs. Companies could also see if they could lease the equipment, rather than pay for it upfront.

3. Let’s jump to ongoing costs. What other ongoing costs are necessary to consider with these net-zero technologies, and how have organizations addressed these costs?

Brad Johnson: Ongoing costs fall in two predominant buckets: costs having to do with ongoing operations of the asset (e.g., leasing costs, fuel costs, maintenance costs, software costs, etc.) and costs having to do with people (e.g., upskilling employees, hiring new employees, etc.). These are critical costs that companies need to factor into their business plan and investment ask. For example, Deloitte found that one of the largest operating costs associated with abating steel via DRI-EAF is the price of clean hydrogen.⁵ In 2020, hydrogen feedstock accounted for as much as 75% of the end-product cost for green steel.⁶ Yet, there is promising news: With the rapid scaling of clean hydrogen currently underway, this percentage could drop to 50% or lower as clean hydrogen prices decline. Businesses will need to account for the changing cost of both CCUS [carbon capture utilization and storage] and hydrogen when planning for abatement between now and 2050—and incorporate these changes within business case models. When it comes to people, we often see employees wearing multiple “hats” (i.e., playing both an operations role and a maintenance role) or we see employees learning on the job. This is often not sustainable.

Kelsey Carvell: That said, we’ve also seen companies take innovative steps to upskill their employees. For instance, we’ve seen companies use augmented reality/virtual reality (AR/VR) to teach employees how to navigate around a plant in a safe manner. These techniques could be used to quickly upskill employees—in a fun way—before they have to do it on the shop floor.

4. All of this points to the importance of organizational and governance structures. What have you seen as the most amenable structures to implementing and sustaining these net-zero technologies?

Brad Johnson: This is often something that companies don’t put as much effort into as they should! As we mentioned earlier, it’s critical to ensure the right stakeholders are brought along for the entire journey. This often involves engaging teams at the plant, regional, and global levels as needed. One structure we’ve seen work well is a hub model: representatives at the plant level who provide plant-specific perspectives, who then report to a hub leader, who then reports to a global lead. This model enables ownership at each level while ensuring lessons learned are shared among all plants—also creating some degree of standardization to help avoid duplicative work.

Kelsey Carvell: Another important aspect is creating strong key performance indicators (KPIs) at each and every level that are tangible, easy to measure, and tie back to the company’s goals. Each individual should be aware of these KPIs—why each is important, how each is measured, how they influence their own evaluations, and what the consequences are if they don’t achieve the KPIs. Of course, it will be important to develop these KPIs in a collaborative way to make sure they are reasonable and effective and understood by all parties.

5. How do you establish a business case to create stakeholder buy-in?

Brad Johnson: Almost all the clients we work with have extensive processes for investment asks. Strong, data-driven business cases are required—backed by vetted assumptions. This process can take time and often operates under strict guidelines for investment asks. Once again, identifying who needs to approve this business case and its accompanying assumptions—and what that socialization cadence looks like—will be critical. One tool for supporting this sort of business case is the establishment of an internal price on carbon when evaluating abatement-related investment decisions. By pricing in the externality of carbon emissions over the course of an asset’s lifetime, metals producers can more accurately account for the true cost of abatement decisions while reducing the risk of future external prices on carbon upending their production costs. Deloitte has already observed this sort of carbon price in Europe, either generated by market forces or through direct regulations, given the region is more advanced than most in terms of climate maturity. In that region, producers have already started reducing emissions or producing green steel, creating an advantage as carbon prices rise.

Kelsey Carvell: Another thing we’re starting to see companies think about are other benefits from decarbonization technologies that might not be directly associated with the technology (e.g., reduction in gas prices or maintenance costs). Deloitte has done a considerable amount of work identifying other positive business levers that can drive a “premium” for a company—greater brand recognition (less revenue spent on marketing), entry into new markets (new customers), operational efficiencies through improved processes (lower operating costs), increased worker retention (lower hiring expenses), enhanced risk management (reduced regulatory fines), and increased capital access (lower cost of capital).⁷ All of these aspects should be part of a company’s business case to help support a transition to a decarbonized society.

Endnotes

¹ Deloitte and Shell, Decarbonising steel: Forging new paths together, 2022, p. 3.
² Andrew Zoryk and Ian Sanders, Steel: Pathways to decarbonization, Deloitte, 2023, p. 2.
³ Deloitte and Shell, Decarbonising steel, p. 21.
⁴ Zoryk and Sanders, Steel, p. 3.
⁵ Deloitte and Shell, Decarbonizing steel, p. 21.
⁶ Ibid, 21.
⁷ Tom Schoenwaelder et al., The purpose premium: Why a purpose-driven strategy is good for business, Monitor Deloitte, 2021, pp. 6–7.