Strategy Note /
Russia

Eco Warrior: Carbon-intensive metallurgy on the verge of transition

  • The next few years should define the industry as projects to reduce the carbon footprint show financial sustainability

  • It is hard to assess the outcome as the carbon tax mechanism is not yet clear

  • Global assets that include varying degrees of ESG criteria are on track to exceed $53 trillion by 2025

Boris Krasnozhenov
Boris Krasnozhenov

Head of Research (Managing Director)

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Yulia Tolstykh
Yulia Tolstykh

Analyst, Metals & Mining

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Alfa
1 April 2021
Published byAlfa

Carbon neutrality: The slogan is sounding louder across the globe with more countries pledging their goals to go carbon neutral by 2050. The carbon intensive metallurgy industry is also on the verge of transition. The next few years should define the industry as projects to reduce the carbon footprint show financial sustainability. Complete decarbonisation of the steel industry would require a developed infrastructure of green hydrogen production that would secure stable and safe supply of input material. Current projects have yet to show viability in the switch to hydrogen raising transition risks. It is evident that the switch of iron production to the DRI route and using decarbonised hydrogen will be driven by the cost of electricity used for electrolysis. At this point, we expect more progress in R&D for carbon capture and storage of blast furnace emissions as well as other initiatives to make the supply chain greener.

It is hard to assess the outcome as the carbon tax mechanism is not yet clear. We assume that in the current steel price environment with hot-rolled coil (HRC) quotes staying above $850/t level, and slab cash costs of Russian integrated steelmills at around $200/t, steel exports would still secure attractive margins after imposing potential carbon tax. The absence of emission standards and trading platform in Russia provides an opportunity for the EU to take a leading role in carbon tax negotiations. The market is approaching the development of a new global carbon market, which may create trading opportunities similar to cryptocurrencies and derivatives. We view the Sakhalin 2021-25 “initiative” to bring the entire region to carbon neutrality by 2025 as an opportunity to define the duration and road to carbon neutrality in Russia. Adequate estimations of carbon absorption capacity is of great importance considering Russia’s share of the global carbon stock.

ESG flows: According to Bloomberg, global assets that include varying degrees of ESG criteria are on track to exceed $53 trillion by 2025, representing more than a third of the projected $140.5 trillion of total AUM. ESG and value-based ETFs crossed $218 bn in 2020 after increasing almost 2.5x vs the previous year. ESG ETF inflows reached $59 bn delivering c.19% annual return. YTD ESG inflows are $21.5 bn. BlackRock was seen moving its ESG ETF’s into its own portfolio models. More than a $3 trillion in fiscal stimulus is expected to be dedicated to green recovery which should support spending, corporate funding and employment. Bloomberg reported a threefold increase in the number of companies setting netzero targets. During 3Q20 to January 2021 more than 330 new funds were launched. Market authorities across Europe, China and the US are accelerating ESG disclosure requirements for both companies and investors.