Driving Industrial Decarbonisation

Transcript

Driving Industrial Decarbonisation

Dino (00:03):
We have a policy setting in Australia where you get a significant cash back for burning diesel. In fact, you get $5 back for burning the diesel for every $1 you get for not. Even with that in place, we were able to create an economic and profitable case for turning diesel off with the current pricing.

Axel (00:26):
We are currently investing around about 30 billion euros in capital investment in order to decarbonize about 40% of European steel production by around 2032, 33. The steel industry in principle needs to be decarbonized by 90% by around 2035, according to current legislation, which is a huge challenge. So we have to speed up.

Bertrand (00:56):
There is more money going into rolls than into decarbonizing cement or steel, and we have to recognise that. One of my investors told me better I'd like to put money into that, but I'm being called by my government every morning to put money into defence. The money I will put in tanks and jets, I will not put in decarbonization and climate.

Dino (01:13):
Sovereignty is a great vote getter, but the reality of when you work through the economics of what sovereignty means, then the challenges really become real. What for me is certain is that the single-handed reliance on oil and gas is over.

Tom (01:34):
Hard to abate sectors. The heavy industries of steel, cement, chemicals, plus transport, aviation and mining are responsible for nearly a third of global greenhouse gas emissions. Decarbonizing heavy industry at scale is no longer just an environmental imperative. It is a massive economic advantage if you get it right and even worse if you fail to do so. For decades, the narrative surrounding these hard to abate sectors has been trapped in a paralysing triad of assumptions that transforming the backbone of world industry is simply too risky to execute, too complex to engineer, and far too expensive to justify. And on paper, that cost argument seems real. Clean production alternatives still carry a severe green premium. Net zero steel costs anywhere from 10 to 75% more to produce. Green cement, you're looking at 30 to 125% price increase. Welcome to the next five podcast. In today's episode, we look to dismantle the myths of the two hard to abate sectors and instead show that there are low energy lights at the end of a green, cleanly built tunnel.

(03:02):
Joining me to discuss this are three experts. First up, we have Dino Otranto, CEO of Fortescue Metals.

Dino (03:11):
Thanks, Tom. It's great to be here.

Tom (03:12):
Next is Axel Eggert, Director General of Europa, the European Steel Association.

Axel (03:18):
Delighted to be here, Tom.

Tom (03:20):
And finally, Berton Padre, managing partner and founder of Blue Like an Orange Sustainable Capital and former managing director and CFO at the World Bank.

Bertrand (03:32):
Hi, Tom.

Tom (03:33):
Berton, let's start with you. I want to get into the financials and discuss the claim that decarbonization is too expensive to justify. Is this true? And can you walk me through where we are today from a financing POV and is there available capital and a strong desire to decarbonize heavy industry?

Bertrand (03:54):
Is there capital and is there a desire to use that capital? So thank you for raising this question. The panorama you described is a triad of issues that we are facing was not totally invented. These were real issues and we cannot ignore them. But before moving into the real financial thing, I'd like to make a distinction between the different economies in the world. It's a global issues, but it must be tackled zone by zone. Advanced economy in particular in the EU or Europe more generally, Japan or the US have specific issues. It's really about transforming existing assets. Whereas in emerging markets you have difference, you have countries where you have already assets which are old and needs to be retrofitted, but you also have to build the next generation of assets and to get started on the right foot. So I think it's very important to have this distinction in mind and not just say it's a global issue that needs to be tackled globally.

(04:45):
So the point of whether we can afford that or not is a good point. The real question is can we afford not to do that? I think this is the point and that's where we're hitting the basics of our corporate finance. I mean the fact that part of the benefits are not accounted for in our P&L, part of the benefits are socially spread around and we are still very much limited by the way we compute financial income. So I think there is a broader conversation on how to incorporate externalities, but even if we exclude that, I think going in that direction is absolutely essential. It will not happen overnight because of all the reasons you described. And first of all, we have to recognise that there are issue that it's costly. I will not deny the figure you mentioned. It's costly to do green cement.

(05:28):
It's costly to do green steel. It's costly. And we are in our environment as designed today, maybe not in five years, maybe not in 10 years, that's another fight that we have to run in parallel and I'm working on that as trustees of the IFRS Foundation where we work on sustainability standards. So it takes time, it's costly. And the other issue that there are now competing priorities. There is more money going into roles than into decarbonizing cement or steel, and we have to recognise that issue. But there is money available. Actually, there has never been as much money available, but most of this money is sucked into AI, is sucked into defence, and is not that tempted going into what we are discussing today. So we have to work on that and demonstrate that it's part of this issue. It's not just about greening our economy, it's about competitiveness.

(06:16):
And I'm sure Axel and Vino will mention that. It's also part of sovereignty. That's a new kind of thing. Sometimes I say if sovereignty is a new name of impact, be it. I don't care. I don't question the motivation of people, but I think this is very important to move in that direction. And thus, we need to have a holistic perspective. We don't need to fragment the issue. It's not just the CO2 pricing, it's also the cost of energy. It's the type of client demand, et cetera. So we have to take this into account. And coming back to your point, yes, there is capital available, but it has to realise that it needs to move and it needs to be supported. And I guess we'll discuss that present to the conversation, how can we mobilise public and private together? It's not going to be just one or the other.

(06:58):
And in today's world, it's even more challenging because we talk about public proportion and we do less and less actually. So that's really where I'm coming from. We have to work on the tools. We have to work on making this sector more investible, more bankable, more predictable, more supported, more visible, and not to lose sight that it is one of the priorities, not the only one, one of the priorities, and it's still a priority. And again, focus on the specific issues that are affecting emerging markets, which are very different. It's different to change a steel factory in Dankerek in the north of France than to build a new one in Nigeria today. It's not exactly the same problem.

Tom (07:34):
Axel, following on from what Berton has laid out, can you give us an insight into why the steel industry needs decarbonizing, why there are premium costs for net zero or green steel, and can you explain some of the financing models that are available to support green steel?

Axel (07:51):
Yeah. First of all, the global steel industry is responsible for about 10% of human-made CO2 emissions, 10% from extraction of the raw materials to the point where we finish the steel product for delivery to our customer. And for that, we have responsibility to help protect the global climate, and therefore it is very important that the global steel industry is going ahead as one sector. There are many others, but we are one of the key sectors that have to decarbonize. And the costs, of course, as Betran has said, are there. You cannot compete with conventional steel making. Why is that? That is because for primary steel making, you use next to iron ore, you need cooking coal to reduce the iron from the ore. And cooking coal has a global price. If you want to switch from that fossil fuel to alternative energy carriers, that has a price.

(08:56):
That is actually the biggest price increase you can have. Of course, you have capital investment in new installations, but as also Betron has said, from time to time, you have to refurbish your installation. That is the point where you need to invest. Then you get, of course, you should have the possibility to get support from investors, banks, loans, or from the public hand that also gives you some funding when you really can prove that you are greening your production. So finance models are there, but it's of course much, much more complex than it looks like. But the European steel industry, as I'm the representative of European Steelmakers, we are currently investing around about 30 billion euros in capital investment in order to decarbonize about 40% of European steel production by around 2032, 33. These are around about 60 industrial scale projects. Most of those have been decided financially.

(10:03):
Some are stalled because the surrounding conditions are not yet there for a business case. So we are moving ahead and we are taking our responsibility, but of course we need our competitors to do the same. Otherwise, the increased price, because electricity, natural gas, hydrogen has a much higher price than using coking coal, and therefore we need somehow to stay competitive during and after the transition.

Tom (10:32):
Dino, let's bring you in on this. Can you give us some of the figures around the mining sector and its need to decarbonize? Where are the areas that you can decarbonize and how are you tackling this?

Dino (10:44):
We set out a very ambitious plan to decarbonize our entire mining operations for three real reasons. One was climate, one was economics, and one was sovereignty. And at the time, ESG was a significant agenda amongst our shareholder base. So that alone drove a lot of sentiment and support for the flow of capital into what we are doing, which is a $6.2 billion US investment to completely reconfigure how we operate our iron ore mines, which we're currently producing around 200 million tonnes a year of iron ore. So it's a significant operation. In the last few years though, the latter two have really come to a head. Economics for what we are doing is now beyond reasonable doubt with or without incentives in the Australian context, which I can share. The price of diesel is such that what we are doing now was profitable, but now it's almost lucrative for us to do what we're doing.

(11:39):
And the third one, which again has come out of nowhere since the unfortunate events in the Middle East is sovereignty and everyone's talking about sovereignty, the unique position we are in Australia, our sun and wind together allows us to have arguably the cheapest source of renewable energy on the planet. Coupled with the reduction in the cost of battery storage, we are landing the cost of electron to electrify our iron ore business now to a point where internally without reliance on any foreign export or import into Australia to fully and self-sufficiently cater for the iron ore business. And we're on the cusp now of getting that electron to the price point that the hydrogen makes economic sense for us to make liquid steel here in West Australia. In fact, a month ago, our first liquid green metal was poured and granulated using the sun, the wind best to produce hydrogen and then our own reduction facility with a smelter and our own low-grade iron ore to produce a metalized product of over 95%, which is a unique breakthrough from a technology perspective.

(12:50):
But also, as I said, we're on the cusp of that electron cost being at the right point where you don't need to rely on that premium. And what we've learned through our journey in the last four years of decarbonization, I'd agree with our guests, the market is yet not ready to pay, particularly outside of Europe, for a premium for a decarbonized product. So where we have reconfigured our intention to ensure that we're competing with the grey market.

Tom (13:20):
Coming back to you, Bethong, Dino mentioned there the economics, and I said at the top of the show that there is an economic advantage if you get it right. And conversely, inaction carries a financial penalty, should we say. I looked at some of the figures and according to McKinsey, industrial players that fail to transition risk eroding 20% of their economic profit by 2030. And that's driven by the compounding pressures of asset stranding, a rising cost of capital and rapid loss of market share. Conversely, there is a potential nine to $12 trillion of annual sales by 2030 available to companies who choose to decarbonize, and that's because customer demand and capital shift towards a low carbon future. When you see a multi-trillion dollar delta like that between the winners and the laggards, how are institutional investors actually evaluating that risk today? And are capital markets already actively penalising the companies that refuse to pivot?

Bertrand (14:31):
Traditional dilemma of capital markets, short-term versus long-term, and nothing new for us around the table. On the one hand, as we all discussed, I mean, it's an investment and with an investment comes cost, risk, uncertainty, et cetera. We all know this. Even if the kind of trajectory is pretty straightforward, in a world where, let's put it mildly, global corporation is not that great, in a world where there is some form of backlash on all these issues, in a world where there are competing priorities, the argument is probably more difficult to make and McKinsey is good, maybe not good enough. My point is really as few investors are facing that. There is this gap, there is an opportunity and there is money moving that direction. But as we all say, we recognise that, again, there is uncertainty and there is cost. So we need to make this as predictable as possible, which needs commitment of guns, which needs international corporation, all the effort that we can do on pricing carbon, et cetera, will help and so on and so forth.

(15:34):
So the point is really, and I really like what Vino said, it's not just a traditional climate policy advocate. We need to combine the climate policy with industrial policy and the security policy to make investors realise that it's in their interest and the interest of their portfolio to move in that direction, even if short term, it can have a negative impact on their performance. So that's really the trick we are seeing. Again, I think it's important when you discuss with investors, they're fully conscious. In particular, when you talk to insurance company, they are very well aware that as the CEO of Axa rightly said 10 years ago, we cannot insure a world at best for the great Celsius. And if we cannot ensure it's the end of your affair, it's the end of the mining in Australia. With no insurance, you cannot run no business.

(16:19):
So it's as simple as that. How do we get that? So for an insurance company as an investor, you have to move in that direction. They want to move in that direction, but we need to collectively build a narrative because today, again, the pressure, one of my investors told me better I'd like to put money into that, but I'm being called by my government every morning to put money into defence and there is so much I can do. The money I will put in tanks and jets, I will not put in decarbonization and climate. So how do we make these things compatible? How can we just build something where everything we discuss is part of this global narrative? I think it's extremely important that we're capable of focusing not just the kind of rational technique argument that the cost of national, which is very valid, but we have to recreate a momentum in that direction by saying that everything should be provided.

(17:06):
It's climate, industrial, and security policy at once.

Tom (17:09):
Dina, you already mentioned some of this in your first answer. I want to discuss what's made it possible for you from a tech risk or cost perspective that wasn't available a decade ago, and what have you learned so far?

Dino (17:21):
Look, for us, we have a hybrid technology stack. Some is quite old school tech that is readily available off the shelf and I refer to transmission lines or transformers, chargers, et cetera. But what hasn't been there is the full stack of electrification solutions and the light vehicle and EV sector over the last 10 years has really propelled the power system productivity and the energy that you can now harness out of electric motors from battery packs has meant that industrial applications are now within reach. And when we started doing this, it was four years ago, but we were the only one contemplating moving a 240 tonne payload, a 400 tonne truck in total, fully electrified with the type of torque curves that we require. Now now, and I'm pleased to say that we are not the only one in the market. And what has propelled that is the intensity that you're getting out of that single decel battery, the same range extension you're seeing on the electric vehicles that you have in your own garage are now translating into industrial applications.

(18:36):
So when you combine that with the advancements that you've seen in battery energy storage and the cost reduction that you're seeing in solar, and for us, the cost reduction is not only the panel cost, but installation costs here in Australia are exceptionally high with embarking on a fully autonomous installation of our solar panels. We also have wind turbines that erect themselves utilising technology from tower cranes. So the overall cost and speed at which you can do that now gets that magic electron number at a price point where it clearly makes sense to offset the diesel consumption. And in our case, it's nearly one billion litres equivalent per year.

Tom (19:24):
And Axel, to you also, given the other two points of the triad mentioned in my intro about projects being too risky or too complex to engineer, can you discuss the complexities and risks of green steel production and how projects in Europe are championing it?

Axel (19:40):
Yes. So technically we don't see an issue. We can do it. The complexity is however huge because first of all, you start with how long does it take to get a permit to build a new installation? Do I have the equipment provider ready to do it in the short term? Because in particular in Europe, we have strict climate targets for the industry. The steel industry in principle needs to be decarbonized by 90% by around 2035 according to current legislation, which is a huge challenge. So we have to speed up. The companies are already queuing for equipment providers. Then the next issue is the infrastructure. Is the infrastructure there in particular for energy supply, electricity, hydrogen? So we will require for the next few years roundabout 165 terawatt hours of additional electricity. Part of that would be used for direct use and another part for the production of hydrogen.

(20:48):
So to get this infrastructure in place and time is a big challenge. Next is, are we able to provide all the raw material, direct reduced iron? So that is Dino's business from Europe itself. Can we do that or do we need to diversify and import some of the direct reduced iron, which is then produced with low carbon energy and could bring it an additional benefit? But will we have access to that? And then the next point is will we have access to sufficient scrap? Ferrous scrap is a means where you can further reduce emissions from primary steel making. So there also we have a challenge. And then of course the financing. The financing, even though we have no major projects running, it remains a challenge because we have different speed, different enabling conditions per region, and that policymaker need to take into consideration as well that you have, for example, in Scandinavia, you have easier access to clean energy carriers at the more convenient price as you have, for example, in South or Central Eastern Europe.

(22:04):
So how do you manage that, that you don't leave anyone behind? You will want to decarbonize all of your domestic or regional industry and not only few and the others will have to close down and then you have huge job losses. And all that is because the green steel or greener steel has a price, has a higher price, and we have different speeds globally, and that makes it in terms of competitiveness, not very easy. So we do not need to protect the steel industry, but what do we need to do is protecting the transition of the industry. That is very important because otherwise no one will follow.

Tom (22:50):
This is a question for all of you, and I know we've touched a little bit already on geopolitics and this idea of security and sovereignty, but I want to look into a little bit more in depth. What has the wars in Ukraine and the Middle East done to near term and long-term net zero and decarbonizing initiatives? Because according to the IEA, surging oil and gas prices are boosting coal demand, but also these conflicts have spurred clean tech adoption for some based on energy security. So Berthong, I'm going to come to you first.

Bertrand (23:25):
Yeah, no, I think you perfectly summarised the situation. Maybe it's a crisis in Iran and before that the crisis in Ukraine or let's call it war because that's what they are actually and nobody wants to discuss the world war. Maybe a trick of history, something that we did not expect. It's a tipping point for everything we have discussed so far. So of course, short term, people are coming back to coal because they need to find energy rapidly and coal is available. They move back to oil and gas for sure. But you're absolutely right. Longer term, I don't think any reasonable sovereign country can bet its future on fossil fuel today. It's over, not so much because of climate concern, but because of sovereignty and security concern. And that's where I think what we've discussed before, where everything is converging, which is maybe the miracle that climate advocate like we were expecting, where now it makes sense to connect the dots between climate policy, industrial policy, and security policy.

(24:21):
All this goes into one bucket and move in that direction. The flip side is that to make this work, we need a real cooperation within countries, between countries, et cetera. And let's face it, in today's world, cooperation is not really mainstream. It's really the war of everybody against everybody, and that makes things difficult. That makes things difficult to agree on the global CO2 pricing. That makes things difficult to agree how can we share the burden? Even the World Bank cannot choose the world climate anymore. That's the world into which we are living to do. So we have to find ways to basically, and I think to have Europe and Australian together makes sense. That's what Mark Carney called the middle powers approach. There are a number of countries which are neither China nor America that can do things together. And that's probably our job, our duty to find ways to work on these things, to build the proper instruments.

(25:11):
Of course, ensure investors might want to come, but they need some guarantees, they need some support. We need to engineer all of that, and that's what we have to make mainstream. There are a lot of projects which are very idiosyncratic, but we have to repeat them and to do this at an industrial scale to facilitate the life of the three of us, your life, and we are not there. So that's really for me, if this crisis, if the geopolitical environment might force some of us to move forward with the proper instrument, the proper prioritisation, and the understanding that the cost of inaction is really way higher than the cost of action. But to make this real, we need to put together the financial instrument that help cross the channel as Axel said. We need to help people do the little things that make them move forward and not just wait endlessly for some financial support from a government, et cetera.

(26:00):
That again might be, but not there yet, might be the tipping point we're all expecting. Unfortunately, it has a high price. And Dino?

Dino (26:08):
My comment would be that sovereignty is a great vote getter, but the reality of when you work through the economics of what sovereignty means, then the challenges really become real. What for me is certain is that the single-handed reliance on oil and gas is over. I'd agree with Betran. I think what this new weld is exposing is a very different supply chain that could be evident. I think an opportunity I take out of today is why haven't I already met the two other guests? Because I have an abundance of energy. I have an abundance of the ability to make a metalized product. I can help solve some of the challenges that Europe has. But on the flip side, my home country being Germany, Germany then needs to open its ideology about where it sources coal, where it sources iron ore from, can we offshore a certain part of our steel industry?

(27:05):
If we don't work together like that, then I think we missed the point of what sovereignty actually means. I think for me, sovereignty is diversifying its energy base, entering to a new supply chain partnerships which are now being driven by force because ultimately you cannot get the diesel, and when you do, you need to run these very complex assets at 20, 30, 40% higher cost profile. And all that does is contribute to a global inflationary environment. So I think I'm encouraged actually by the opportunity set for middle powers like us to actually work together in a very, very different way and maybe turn back the clock where we used to work together like this and have probably felt that we've been safe in our little bubbles, really addicted to diesel. Now that's changed. It's now allowing us or forcing us to think very differently.

Bertrand (28:00):
I just want to give a quick smile to Dino because my daughter is working in Australia on renewable energy, so it's a first step.

Tom (28:08):
Brilliant. Thank you, Versang. Axel, coming on to you.

Axel (28:12):
Yes, I believe that the geopolitical situation in which we are with the crisis aggression of Russia towards Ukraine, the Middle East, Hormuz, that is speeding up things, things we should have done long years ago to become more resilient in terms of fossil-free energy supply. Now, Europe is speeding up because we would have had all the means to do it earlier. Now the problem of course is the speed. Is the speed of decarbonization requirement for the industry while infrastructure interconnections across country for energy supply, they are lagging behind. So it is speeding up. It has a positive element on the other side. Energy prices have increased so enormously that it becomes harder to invest right now. So there is a flip side, pros and cons, positive and negative sides on the current situation, what concerns the decarbonization. But I'm sure that, of course, for Europe, it has become clear that it's not only the energy where we need to become more resilient, it's the value chain.

(29:30):
It's a full value chain. And therefore I would not argue displacing or removing steel production, that means steel factories from Europe to other areas of the world because we need complete value chains not only globally but also regionally because basic metals is the basis for technology progress and innovation. It starts all with metals. If you look in To the manufacturing value chains, you'll see most of the materials, the most important materials is steel, but also other methods. So we need to have this value chain here. Where we should increase now the cooperation is what we are already doing for iron ore since centuries that we are importing iron ore, we can also import more direct reduced iron, which Dino is or intends to produce to diversify our supply for the decarbonization. That would save energy in Europe, the energy which you have more abundantly in Australia.

(30:37):
So I think there the corporation is starting and many of my companies are around globally to make sure that they have the right supply. So there needs to be diversification in all kinds of raw material supply for our industry, but also of course energy, how do we do that? And I think we can. It's just a time question. How quick will we be? It's not a question whether we do it, whether we want or don't want to do it. No, we want to do it, but it's a question of time and all the enabling conditions are being in place everywhere.

Tom (31:12):
We touched on some of the policies already and I want to look into it a bit more. There are some that support and there are some that are challenging decarbonization. Dino, if you look at Australia, Axel, if you can take Europe and Bergsong, you can choose global policy or Europe if you want to. Are they doing enough and what more could be done? And if you could create a policy, what would it be?

Bertrand (31:35):
No, I think in an ideal world, the issue that we are not in an ideal world, we should have a global cooperation led by the G7, G20s, the international organisation. It should be a priority. 10 years ago ahead of Paris 21 agreement, we were all working together on setting up a very ambitious objective in terms of financing, cooperation, et cetera. As I say, today's world has changed fast for all the reasons we know. The international cooperation is not working that well, so we have to reinvent some form of cooperation maybe between Australia and Europe, maybe adding Japan, Canada, et cetera, to work on all these issues, meaning making everything we discussed again mainstream, building instruments that can be replicated, not reinventing the wheel at every operations. If it's a priority, we can make it. As I said, Axel said it very loudly, Lino said it very loudly, there is no technical obstacles to everything we discussed.

(32:28):
We know what to do, we know how to do it. What we miss is mobilising the proper combination of public and private resources and a political commitment over the long term because all these things are costly. They require projecting yourself five, 10 years, meaning you need some agreement to have some visibility on the customer's behaviour, et cetera. So all this needs a joint effort. It's not going to be any of us alone that will make a difference. It's really this cooperation. Unfortunately, there is no master of the world today or at least they are competing master of the world that will not make the decision for us. So how can we build this bottom up instead of expecting something to come from somewhere? That's for me as a priority. We need to build a credition of the willing for these issues, which is essential. And again, I believe in 10 or 20 years from now, it's going to be absolutely central to European competitiveness.

(33:18):
It's going to be central for Australian competitiveness. And the Chinese have made this very clear. They say we want to be the first sustainable superpower in the 21st century. And they've put together trade policy, industrial policy, all types of policy. And now they're supplying 80% of the renewable backbone for the world. We should have done that and they did it.

Tom (33:37):
Brilliant. And Tino?

Dino (33:39):
When we embarked on this journey, we a little naively thought that policy would be supporting an ambitious company like ours to decarbonize. We were in the world of the IRA and CBAM in its early times. So I guess we expected in the Australian context that we would have similar regime support. However, what the reality is here in Australia and a lot of jurisdictions around the world is the incentives for burning diesel are actually significantly higher than not. So even though public policy would advocate decarbonization and energy transition, the reality is it's not the case. We are the beneficiaries Fortescue alone. We have a policy setting in Australia where you get a significant cash back for burning diesel. In fact, you get $5 back for burning the diesel for every $1 you get for not. Even with that in place, we were able to create an economic and profitable case for turning diesel off with the current pricing.

(34:47):
However, I don't believe all industries would take the investment based on the returns that we've accepted. Hence, I'm calling out globally that you need a level playing field. Even if you want to incentivize the oil and gas sector for other reasons, jobs, nationalisation, why put such a handbrake on what I think is now economically as a standout investment? What we find in Australia, the combination of solar, wind, and batteries is now significantly cheaper than building a coal-fired power station and creating electrons that way. And again, the land mass that we have makes it almost an inevitable partnership that we will have with smaller landlocked, higher consumption of energy countries like Europe, like Japan, like what we've just mentioned. However, it would be great if we had a level playing field.

Axel (35:47):
Yes, indeed. Level playing field. That's what is required. Unfortunately, we do not have a global carm price. Countries did not manage to agree on that. So we have a very fragmented situation globally. We have an emissions trading system in Europe. We have some similar systems elsewhere, but with a much, much lower or almost no carbon price. We have carbon taxes somewhere. So if you look as Europe into the rest of the world, you would say, okay, we have today a carb price of around about 85 euros, a tonne of CO2 in the market. What are the prices or the costs outside Europe? Because they need to be equally as ours, otherwise we will not be competitive on the global nor on the European market. So then if you look into that, you can maybe see, okay, next to the European Union, Great Britain, Canada, maybe Australia, but then that's it.

(36:54):
So that leads to a situation where you, as I said before, you need to protect the transition in your region where you have high carbon prices, high carbon costs for the industry. And that is what Europe tries to do, and there is still a lot to do to make it competitively through the transition. The European Union has taken a set of measures to make sure that we can do that. And the first one is the carbon border adjustment measure. It was absurd that in Europe, we had a carbon price for the domestic industry since 2008, but no carbon price for imported steel, for imported aluminium, for imported products. So this has now changed with the carbon border adjustment measure, which basically came into force effectively beginning of the year. It still needs to show its efficiency. So this is one part level playing field in the internal market, but what was our exports?

(37:56):
Europe was very good in exporting steel, 25 million tonnes, 30 million tonnes. In the past, now we had 12 million tonnes. So we lost a lot of exports already. So what is the solution? We cannot simply export with the higher price of our steel if our competitors do not have a similar carbon cost constraint. So solutions need to be looked there. We have also, for example, the overcapacity in the global steel industry is an issue where steel is basically dumped at a very low price, often below production costs on the global market. That reduces the margins of the companies globally, not only in Europe, and therefore also reduces your capacity to invest. So then Europe has taken some additional positive initiatives that is to create lead markets for CO2 lean steel, for CO2 lean other materials like aluminium. And these initiatives are currently in the legislative process, but those say, for example, that X percent of public spending and infrastructure needs to be with decarbonized materials.

(39:16):
And that of course has a bit of higher price, but I would say a tonne of green steel or green metals is not expensive when you see it in the final product. There's one tonne of steel in a car or more. The price of steel today for that is let's say 1000 euros, probably less. If you have decarbonized steel, you put 30% on that. That is a fraction of the total price of a car. In Europe, the average car costs 35,000 euros. So it's a fraction of that. So it's not expensive to use green material. The issue is in the production you have competitive disadvantages vis-a-vis our competitors globally. If our costs increase by 30%, then of course our customers will say, look, we rather import steel from elsewhere where the costs are lower because they do not have to decarbonize. So this has to change.

(40:19):
The EU is working on that to do this, but it is perceived as a kind of protection outside the EU. And I say it is protecting the transformation to carbon neutrality because if we are not doing this, no one will follow. If Europe is not showing that it is possible to do with all types of support measures, then no one will do it.

Tom (40:45):
As we come to the end of the show, I've got a quick fire question for all of you just as our last one. If you can answer it in under 60 seconds, that would be great. What's your one hope of where we will be in five years time when it comes to heavy industry decarbonization?

Dino (41:01):
For me, it's simple. Inside our organisation, we will be real zero. We'll demonstrate to the world it's possible. We will prove to all of the doubters that you can do it technically and economically. And personally, I trust that we'll lead the example to other industries and they're following and they're well down their path of decarbonization.

Bertrand (41:26):
I will echo what Dino just said. As we agree, there is no technical obstacles. We know what to do. We know how to do it. I hope that within five years this will become pretty banal, pretty mainstream to move in that direction. The cooperation will be the name of the game, that there will be shelves with the products available and we know which type of products who are the actors, et cetera, to make this a kind of, if I may say, an industrial process to decarbonize while also keeping in mind what I said in my intro. The problems are very different in the EU or in Australia than they are in South Africa, Colombia, Nigeria, India, et cetera. And whatever we can do in our country is great, but we also need to make sure this country go in the right direction upfront. And I think it's very important that we cooperate with the rest of the world.

(42:14):
So for me, international corporation, even in the circumstances we know today is of the essence.

Axel (42:21):
Yes. My hope is that all the investment the European steel manufacturers are currently executing and planning will show its fruits within five years. We will have a massive new hydrogen ready capacity by and around 2032, and that needs to be successful. That needs to find a market with lead markets, with lower energy, the infrastructures need to be in place. And we want to show to our partners globally that it is possible to decarbonize in an economic and a competitive sound manner. I hope that also that would then motivate some of our partner countries to come back on the table and to agree to a similar carbon cost approach for the domestic industry so that we have a global level playing field with the right incentives for everyone.

Tom (43:19):
Well, it's been a fascinating discussion, but one that unfortunately must come to an end. Many thanks to my guests, Dino Otranto.

Dino (43:27):
Thank you very much. Thanks for having us, and it was a great session today.

Bertrand (43:32):
Thank you very much, Tom. It was great to see that there was a convergence between Europe and Australia on those topics.

Tom (43:39):
And Axel Eggett.

Axel (43:40):
Yeah, Tom, thank you very much. I enjoyed a lot. I think there's still a lot of room for discussion. There are so many issues here behind mate in EU, lead markets for green products. So there are so many topics still to discuss and maybe we see each other again.

Tom (44:01):
Listening to our experts today, there are a few points that stand out. We need to remove the handbrake, level the playing field and collaborate at speed. It's clear that decarbonization of heavy industry is of paramount importance. It is complex, but what isn't nowadays? An age old saying, if it's not hard, then it's not worth it springs to mind. But with cross industry blueprints, financial mechanisms, and policy frameworks, with each day, it might become that little bit easier so that in five years time, industrial decarbonization is no longer just a bet on the future, it's a living, breathing, competitive strategy, a no-brainer, a time where decarbonization and profitability are no longer intention, and that time is of the essence. I'm Tom Parker, and this has been the next five podcast.