Hydrogen replacing coking coal – should owners of dry bulk ships take note?

The recent development of replacing coking coal with hydrogen in crude steel production has created a buzz that coking coal might soon be out of favour. For dry bulk operators this is a potentially negative development, but is this really the case?

Nippon Steel, which is the largest steel producing company in Japan, plans to replace coking coal with hydrogen in the reduction process while Mitsubishi Heavy is also planning to build a zero-carbon steel plant in Austria. A trial operation to run the plant using hydrogen in Austria is slated to begin in 2021. While Mitsubishi is developing next-generation technology using a process called direct reduced iron, Nippon Steel’s use of hydrogen will be based on the conventional blast furnace design.

Elsewhere, Arcelor-Mittal is also planning to build a steel plant based on hydrogen in Germany in 2021 while other big steelmakers such as ThyssenKrupp and Salzgitter are also planning to use direct reduced iron technology. Overall, as the world moves towards attaining zero-carbon targets, it seems inevitable that in time hydrogen will replace coking coal.

However, the shift in technology will come with many hurdles; the most significant of which is a massive increase in cost, both capex as well as opex. In short, the new technology, even though very efficient, is far more expensive than the conventional design using coking coal and a blast furnace.

Hydrogen is an expensive commodity at present (market cost of hydrogen in Japan are around ¥100 per cubic meter). However, with increasing use, its cost is likely to fall, with the Japanese government aiming to bring down the market cost to ¥30 per cubic meter by 2030. Nevertheless, the price of hydrogen will need to come down by 90% to below ¥10 per cubic meter if it is to compete with coking coal.

In addition, existing steel plants have long lives, typically 30-40 years and retiring them early to meet pollution targets will mean huge additional capital costs. The global steel market is highly competitive, and it will be difficult for individual steelmakers to increase their costs at a time when margins are already very thin.

Overall, we believe it will take many years before the impact of using hydrogen will be seen on the demand for coking coal with the impact of the shift in technology only visible in the very long term.

Demand for shipping capacity to transport coking coal has expanded by 1.8% annually over the last 20 years and the share of coking coal in dry bulk trade in 2020 was 6%. But during the same year, shipping demand (tonne mile demand) in coking coal accounted for a mere 1.5% of total dry bulk shipping demand. Given that this demand will be gradually reduced over a long period of time, the recent brouhaha claiming that the use of hydrogen in steel making will have a negative impact on coking coal trade appears somewhat overstated.

However, although little, the impact of the switch will be felt on Australia-Asia, Canada-Asia, US-Asia and to some extent on Transatlantic.

Major exporters of coking coal are Australia, the Americas and Russia which together supply 250-300 million tonnes annually, whereas Asia and Europe are the major consumers. As Australia-Asia trade contributes more than 55% to the global coking coal trade, this route will be impacted the most due to the switch to hydrogen.

Source: Drewry