The real deal on NZ Steel: Climate change win or corporate welfare?
ANALYSIS: NZ Steel will receive up to $140 million from the Government to change the way it produces steel under the terms of a provisional agreement that was announced on Sunday. Is the agreement a big leap forward in the fight against climate-change or an unnecessary piece of corporate welfare? The answers, perhaps, are not that simple. The Government and the Australian-owned metal-maker have described the arrangement as a win-win that will slash the countrys carbon emissions by about 800,000 tonnes a year. Energy Minister Megan Woods noted that would be equivalent to taking all the cars in Christchurch off the road. Climate Change Minister James Shaw said the reductions would be equivalent to just over 5% of the all the emissions reductions the country needed to make to meet its carbon budget between 2026 and 2030. NZ Steel chief executive Robin Davies said the change would cut its own carbon emissions by about 45%. A not-insignificant bonus is that the greater electrification of steel-making at NZ Steels Glenbrook mill should make it easier to trim the countrys reliance on gas to meet the peaks in electricity demand. That is because NZ Steel has agreed to reduce the amount of steel it makes, and therefore the electricity it consumes, at times when electricity is in short supply. To New Zealand, probably yes. The trickier question is whether the agreement will reduce the amount of carbon emissions globally by as much as that. New Zealands emissions matter in terms of the country living up to its pledges, but it is only global emissions that count when it actually comes to climate change, after all. Davies says that, at moment, the new metal NZ Steel makes is made from a mix of 80% iron ore and 20% scrap metal. Its new production arrangements will see it switch to a mix of 50% iron ore and 50% scrap metal. Most of the carbon savings NZ Steel will make will come from it no longer to having to smelt as much iron ore, Davies says. That smelting process currently requires coal, not just to produce the heat needed to smelt the ore but also to change the chemical composition of iron to make it into steel. Using a higher proportion of scrap steel means NZ Steel can switch off two of the four coal-fired kilns that it currently uses to process iron ore. New Zealand produces about 500,000 tonnes of scrap steel a year, most of which is exported to steel mills in Asia, Davies says. The new production process at Glenbrook will see about 300,000 tonnes of that scrap metal recycled in New Zealand. But of course that means there will be an equivalently smaller amount of scrap steel for smelters in Asia to process. Those overseas steel producers will now need to either use more iron ore in their mix, thereby increasing their own carbon emissions, or search harder for supplies of scrap metal from elsewhere, assuming they are going to carry on making the same amount of steel. Davies points out that recycling more scrap metal locally will reduce the carbon emissions involved in shipping that scrap metal to the other side of the world. The deal between the Government and NZ Steel should lower global emissions even only if for that reason, but the biggest effect may be to put a smaller proportion of global carbon emissions on the New Zealand ledger. NZ Steel says the cost of the change is $300m, so it will be footing $160m of the bill. The Government estimates that the abatement of 800,000 tonnes of carbon emissions will be achieved at a cost about $16 a tonne, while carbon credits which provide a right to emit a tonne of emissions are currently priced at about $61. That suggests that if NZ Steel needed to pay for carbon credits to offset its emissions, it would have had a strong incentive to switch to using a higher proportion of scrap metal anyway rather than continuing to produce steel the way it currently does. However, NZ Steel receives free carbon credits from the Government on the assumption that if it had to pay for its emissions, it might close and steel-making might move to potentially more-polluting producers overseas. It is conceivable that if it doesnt receive the government grant it might just shut up shop. NZ Steel has threatened to do that before , in 2017, although it has been making good profits during the period of high steel prices that followed Russias invasion of Ukraine. Davies stated categorically on Sunday that NZ Steel would not make the production switch without the government grant. But cynics might argue he could hardly say otherwise. Steel plants around the world have been switching to making more use of scrap metal because of the cost of energy and carbon emissions. Would NZ Steel have joined them, or closed the plant, without the promised grant? Who other than NZ Steels Australian owners, Bluescope, could know for sure? This one is simpler. The greater electrification of steel-making does mean that the country will need to produce more electricity. But building more renewable generation and producing more electricity, as such, isnt really the problem in New Zealand. The real difficulty lies in meeting the peaks of demand during winter mornings and evenings on days when the wind drops, and in dry years when hydro power is in short supply. Any additional demand-response, such as will be provided by NZ Steels new power contract with Contact Energy, helps chip away at the latter problem and enables the power system to move closer to 100% renewables. Not all the details of for how long and in what circumstances NZ Steel might turn down its production in periods of short electricity supply, have been released. But any additional demand-response is a good thing. The 30MW of demand-response the power contract would offer is certainly not to be sneezed at. Contact chief executive Mike Fuge goes as far as to describe it as hugely significant and the steel deal as a watershed moment. But to keep it in perspective, the Government sees a need through the possible Lake Onslow power project for about 1000MW of generation that it could bring on tap, as and when needed, to meet the demands of a dry year.