LAKSHMI MITTAL has two passions: the steel industry and his family. His embrace of the first turned a poor boy from Rajasthan into the “Carnegie from Calcutta”, a man who built the world’s second-biggest steel empire from scratch, culminating in a takeover in 2006 of Arcelor, a European champion. The second sometimes sounds like tabloid fodder: lavish weddings in Paris; family homes—one known as the Taj Mittal—on London’s “Billionaire’s Row”. Yet Mr Mittal’s family knows the steel business inside out. Last year Aditya, his 46-year-old son, became CEO of ArcelorMittal. It now falls to him to transform the industry again.

That is because about half of ArcelorMittal’s revenue comes from Europe, where pressure to decarbonise steel production, source of up to a tenth of global carbon-dioxide emissions, is becoming irresistible. The region is laden with coal-burning blast furnaces, the carbon-heaviest of steelmaking technologies. Many are on their last legs. Rather than refurbishing them, some firms are opting to replace these with new direct-reduced-iron (DRI) and electric-arc-furnace (EAF) plants. Blast-furnace steelmaking is doubly carbon-intensive: it uses coking coal to soak up oxygen from iron ore, as well as dirty energy to heat the furnaces. DRI–EAF technology, hitherto dependent on natural gas, can use hydrogen and renewable energy instead. Once scaled up, it could mark a revolution in steelmaking. By jettisoning their once-cherished blast furnaces, European steelmakers hope to start slashing emissions this decade in order to become net-zero by mid-century.

Aditya Mittal still has his 71-year-old father, ArcelorMittal’s executive chairman, by his side. But the challenge ahead is uniquely tough. Whereas the older Mr Mittal made his own luck, Aditya is not master of his own destiny. He needs a vast infrastructure of hydrogen and carbon capture to emerge from nowhere to achieve his ambitions, not to mention a market for expensive “green steel”. Unlike his father, who made his fortune by taking privatised steelworks off government hands, he will not succeed unless ArcelorMittal receives taxpayer support. He is not alone in seeking that. The whole industry believes that rapid decarbonisation will be impossible unless governments foot part of the bill. History, however, suggests the state and steel are unpromising bedfellows.

ArcelorMittal starts with some advantages. For decades the elder Mr Mittal bought mini-mills in different parts of the world that used DRI pellets and EAFs rather than blast furnaces and basic oxygen furnaces. The technology is still only a bit-player in Europe. Fuelled by hydrogen and renewable electricity, it could become the dominant one within a decade. ArcelorMittal is not the most advanced among European steel companies in developing zero-carbon mills. It has three low-carbon DRI–EAF projects under way, in Spain, Belgium and Canada. SSAB of Sweden is ahead of it. Yet it has reduced debt to shore up its balance-sheet, giving it the flexibility to increase spending. Moreover, its presence in poorer countries such as India, where steel use per person is a fraction of its level in the West, gives it plenty of growth opportunities.

The transition will be costly, though. McKinsey, a consultancy, estimates that decarbonising steel requires investment of $145bn a year on average for the next 30 years, and could push the cost of making the stuff up by 30%. ArcelorMittal says its three low-carbon plants will cost $10bn in total by 2030, which is doable for a company with annual capital expenditure of about $3bn. However, its strengthened balance-sheet is raising investors’ hopes of higher payouts, and it needs to weigh their demands against big investments in green steel. Even with modest government support for capital and operating expenditures, says Jefferies, a bank, returns would be too low to justify a normal steel project.

That is why the industry believes hefty state backing is essential. ArcelorMittal expects governments to fund about half of its $10bn decarbonisation commitments over the next ten years. Investors argue that subsidies for operational expenses such as electricity bills should be thrown in, too. The same, they say, goes for aid to ramp up production of clean hydrogen, whose price must fall by 60% for clean steel to become cost-competitive with the alternatives, according to McKinsey. On top of that, government money is needed to speed up the roll-out of more renewable energy required to power the clean furnaces. Jefferies estimates that total electricity demand by EU steelmakers will more than double by 2030. The developing world’s blast furnaces, which are younger than Europe’s, will probably be fitted with carbon capture and storage rather than replaced. That nascent technology, too, needs a leg-up from the government.

It goes beyond that. By the mid-2020s, Europe’s steelmakers will begin losing the free allocations of carbon permits they receive under the EU Emissions Trading System. To compensate, they await the introduction of a carbon-border-adjustment mechanism, starting in 2026, which will protect them further from importers selling cheaper dirty steel. They also need governments to help kick-start demand for green steel. Some sectors, such as carmakers, are keen to buy it, believing that they can pass the costs on to carbon-conscious consumers. But the construction industry, the steel firms’ biggest market, is not nearly as enthusiastic. Hence steelmakers say they need lots of public works built with low-carbon steel to justify their investments.

Kicking the coke habit

Some state action is warranted. In the long run subsidies for electric vehicles may curb emissions by less than curing the steel industry’s coal addiction. But the cure must be judicious. It is all too easy for a closer relationship with governments to degenerate into job-safeguarding schemes, protectionism and a revival of the old revolving door between bureaucrats and business. That is what happened the last time the state and steel were intertwined. Until, that is, the elder Mr Mittal made his fortune prising them apart. ■

Correction (January 28th 2022): ArcelorMittal will spend $10bn on cutting emissions, and not—as we originally wrote—just on three low-carbon plants.

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This article appeared in the Business section of the print edition under the headline “The greening of steel”