Gulf steel has a keen edge on Chinese and Indian rivals

February 7, 2024

Steel production in the Gulf produces less emissions than traditional coal-fired furnaces used in other regions

Decarbonisation boosts GCC mills
Renewable energy and hydrogen
Gulf’s production tech a boon

While the Gulf is currently a minor player on the global steel-making stage, economic diversification and the energy transition may be about to change all that.

As the world seeks to decarbonise, Gulf steel makers have a head start, already producing lower-carbon steel than global sector leaders China and India.

The region’s ample supplies of low-cost renewable energy and its front-runner role in the hydrogen transition mean that that advantage may widen further.

At the same time, the region’s ambitious diversification plans, often taking the form of mega-construction and infrastructure projects, are also boosting local demand.

Saudi Arabia’s Neom project alone needs about 4 million metric tonnes (mmt) of steel to complete.

“There’s a lot of demand for steel in the GCC region,” Sunil Seepana, steel analyst from CRU, tells AGBI, “far more than current local production can match”.

Construction and infrastructure contracts worth billions of dollars are on offer around the Arab world. The race is on to provide them with the low-carbon products they need.

China is the world’s leading steel maker, currently responsible for around half of global output, or about 1,000 mmt.

In contrast, the Middle East and North Africa (Mena) region’s total output in 2023 was about 70 mmt, or around 4 percent of the global total. Approximately half of this came from Iran.

That year, Mena was also responsible for about 5 percent of global consumption, with Iran, Saudi Arabia and the UAE the top consumers.

Person, Worker, Adult — Workers cut steel on a construction site in the UAE. The Emirates is one of the top consumers of steel in Mena, alongside Iran and Saudi Arabia

Most steel produced in the Gulf is “long”, products such as rebar, wire and rods used in construction.

Past investment in this form means that now “the GCC has an excess of long steel production,” says Burak Odabasi, Mena trade journalist at the commodities trade publication Kallanish.

“Flat” steel, such as plate, large-diameter pipes, coils and beams, is still largely imported, although Gulf nations are moving to boost home production.

At the same time, China’s and India’s steel mills are predominantly coal-based, using a traditional, blast furnace-basic oxygen furnace technique.

In the Gulf, however, steel mills predominantly use electric arc, direct reduced iron (DRI) technology. This uses hydrocarbon off-gases and hydrogen, instead of coal.

The difference in the amount of carbon the two technologies produce is now turning out to be critical, as about 8 percent of total global greenhouse gas emissions come from the steel sector.

Kieran Tompkins, a commodities analyst at Capital Economics, says: “De-carbonisation of steel is therefore crucial to meet global greenhouse gas emissions targets.”

According to Rio Tinto, about 96 percent of sector emissions occur at the mill, where the steel is produced.

Soroush Basirat, an energy finance analyst with the Institute for Energy Economics and Financial Analysis, says: “Gas-based steelmaking via DRI has lower emissions than the coal-consuming blast furnaces that dominate steel-making in most other regions.

“Mena already has more DRI plants than anywhere else, globally.”

In addition, when it comes to the basic feedstock, iron ore , “the region has an established, growing source of DR-grade iron ore, a commodity in limited supply that makes up just three to four percent of the total global iron ore trade,” Basirat says.

These factors have drawn global commodities giants to the Gulf.

In 2022, Brazil’s Vale, the world’s largest producer of DR-grade iron ore, signed agreements to establish steel decarbonisation “mega hubs”’” in Saudi Arabia, the UAE and Oman.

Vale followed these up in 2023, signing up for Saudi Arabia’s Green Steel Arabia project, Abu Dhabi Ports Group’s mega hub in the Khalifa Economic Zone Abu Dhabi, and with the Port of Duqm in Oman for a mega hub in Duqm’s special economic zone.

Architecture, Building, Factory — The interior of the Steel Saba Complex in Tehran

Other advantages for the Gulf include its cheap and abundant renewable energy and large pipeline of hydrogen projects.

The Gulf also has the advantage of proximity to major steel markets.

One of those, the European Union, has now initiated its Carbon Border Adjustment Mechanism. This will mean importers into the EU begin paying for embedded emissions from 2026. This should add to Gulf steel’s short-term cost competitiveness against China and India.

An area in which this may play out is in steel pipes. Odabasi says: “The EU is trying to shift more of its oil and gas supply offshore, bringing it in from North Africa, for example. For this, huge quantities of steel pipes are needed.”

However, there are also some challenges.

First, is the supply of water. Steel making requires large amounts of it, and in the Gulf this means desalinated water, adding to costs and emissions.

Second, other producers such as Canada, Sweden and Brazil already have larger quantities of renewable energy, often hydro-power, in their energy grids. This gives them a head start in green steel.

China and India also have plans in place to shift away from coal, although “this is proving no easy fix,” Tompkins says.

Between 2021 and the first half of 2023, China approved about $100 billion of investment in new coal-based steel plants, according to the Centre for Research on Energy and Clean Air. This was despite government commitments to decarbonise.

Gulf steel may continue to have a keener edge, then, for many years to come.