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What Tata Steel’s attempts to decarbonise tell us

The first report in this series had looked at India’s capacity to produce for the emerging energy transition. This report focuses on energy consumption. Are India’s manufacturing value chains ready for the energy transition? A case study from steel.

This is a tale of two steel companies.

The first is an Indian transnational with an annual steel-making capacity of 34 million tonnes. Climbing aboard the global energy transition, it is upgrading its steel plant in Europe to run on hydrogen.

Even back home in India—with a government yet undecided about decarbonisation and far lower social pressure on emissions—it has set up a small carbon capture and utilisation unit at its oldest steel plant to test the economics of carbon sequestration.

The second firm is smaller, one of India’s many second-rung steel-makers, with an annual steel-making capacity between 1-2 million tonnes a year. Over the past five years, between a slowing economy and a competitive advantage in India’s steel sector sliding towards larger companies, firms like this one have struggled. In 2018, it had a close brush with India’s bankruptcy courts—but survived.

The company knows it needs to move towards decarbonisation. Net zero comes up in its strategy discussions. But as a senior manager in the firm told CarbonCopy, firms like this are struggling with more existential questions. “Smaller firms are struggling to serve lenders. If anything is left, they have to serve equity [shareholders]. There is no capacity for additional investments.”

This is a tale about Tata Steel and Jayaswal Neco. More specifically, this is a tale of what their contradictory approaches tell us about India’s response—as a consumer of energy—to the renewables revolution.

A green crisis for India’s steel sector

Why is Tata Steel embracing hydrogen and running carbon capture pilots?

Early in October, CarbonCopy posed this question to Sanjiv Paul, Tata Steel’s vice-president (safety, health and sustainability). In his response, Paul, who spoke from Jamshedpur via Zoom, began by alluding to the reputational crisis looming before the global steel industry.

“At this time, 7% of global GHG emissions come from the steel sector,” he said. “That proportion will rise as other sectors clean up. And we do not want the tag of being a dirty industry.”

The risk is particularly applicable to India. Global steel production hovers between 1.6-1.8 billion tonnes right now. Half of this capacity is in China. The country, however, is cutting its steel output as it tries to achieve carbon neutrality by 2060. Not only are steel plants’ getting lower production targets, the country is also, Paul said, moving away from primary production—smelting iron from ore, etc—towards a bigger focus on making steel from scrap —secondary or recycled steel.

This is significant. Steel is a ‘hard to abate’ sector. It needs coking coal for reducing iron ore to iron. Unlike sectors like automobile, cleaner pathways are yet to prove themselves economically. As China pivots to recycled steel, its emissions will fall.

Indian companies are less well-placed. The country wants to double its steel production, from the current 143 million tonnes to 300 million tonnes by 2030. Its reliance on primary processes will continue.

A need to decarbonise

At the same time, attitudes towards the steel sector are changing in the developed world.

Steel-makers’ customers—and their buyers in turn—want clean products. Take Tata Steel. Its steel plant in IJmuiden, Netherlands, is under political and social pressure to decarbonise. It has to buy emission certificates worth €53 euros (4,613) for every tonne of steel it produces. That drives costs up. For these reasons, Tata Steel has decided to recast IJmuiden into running on expensive hydrogen.

The curious thing is: similar forces—like a policy insistence on decarbonisation, the compulsion to buy expensive emission certificates—are yet absent in India. And yet, the company has begun testing a small, but expensive, carbon capture and utilisation project at Jamshedpur.

Is this to protect access to export markets? After all, the EU plans to impose a carbon emissions tax on imports like steel—to offset the higher costs incurred by local producers of green steel.

So are other countries. “It is also reasonable to assume that the United States, particularly under President Joe Biden, will also pivot to a position similar to Europe on carbon border taxes,” wrote commentator Akshay Jaitley. China might, too, he added.

“Tata Steel wants to reduce the carbon intensity of its steel—in order to offer this to customers around the world,” agreed Asam Rafi, vice-president (global sales) at UK-based CarbonClean, which set up the CCU plant at Jamshedpur.

And yet, exports and carbon border taxes are not the complete answer. There is also ESG.

The new rules of the game

You know the backstory. ESG stands for Environmental, Social and Governance.

It first surfaced—as a descendant of socially responsible investing (SRI)—in the mid-2000s. Unlike SRI, which mostly followed moral principles like not investing in alcohol, tobacco or firearms, ESG said that studying a firm’s environmental, social and governance dimensions as well gives investors a better sense of its opportunities and risks than traditional financial analysis alone.

In the years since, an ecosystem of rating agencies and analysts—like the one that issues credit rating reports on firms—came up. Things were slow at first. India saw its first ESG-based investment fund in 2011—but it didn’t get a good response. ESG looked like another boutique investment idea.

Over the past three years, however, the market has turned red-hot. “Two years ago, this would have been a niche product,” said a senior manager in SBI’s ESG team. “But now, globally, $3 trillion are in this ESG market.” In India, too, since 2018, as many as 10 new ESG-based mutual funds have come up. Since 2019, the quantum of money vested with them has risen four-fold—from ₹2,400 crore to ₹11,800 crore in 2021.

Those numbers are just the proverbial tip of the iceberg. Between climate shocks in the west and the parallel realisation that green energy is here to stay, global finance is pivoting to ESG principles.

The question writes itself. Firms like Blackrock are still investing in fossil fuel sectors. And so, how large is such a pivot? And how durable, especially when global energy prices are rising again?

That morning on Zoom, CarbonCopy posed this question to Paul. “This [pivot] is not out of love for the planet, but because, if you are not looking at ESG, you will end up with stranded assets,” he replied. This is a time when national and sectoral emission reduction commitments are being negotiated and renegotiated. “A company which is polluting might become a stranded asset at the stroke of a pen,” he said. “People lending us money are asking us these questions because they will get impacted the most.”

This shift badly needs to be understood. Most critiques of ESG have focused on the accuracy of its assessments. As economist CP Chandrasekhar wrote in Frontline: “Non-standardised ratings that provide ESG compliance scores to funds and projects are used to back claims of pursuing and realising social and climate goals.” ESG executives CarbonCopy spoke to differed on this, saying investors will seek out ESG rating firms doing rigorous work, and focusing on risks relevant to a company’s core operations. According to them, between global finance increasingly wary of being saddled with stranded assets and the government push (like SEBI’s ESG disclosure announcement), ESG will go as mainstream as a company’s financial reporting.

According to Sandeep Hasurkar, the author of Never Too Big To Fail, a book detailing the collapse of IL&FS, ESG does more than give companies access to money. “It’s also an entry point into this new economy. You have to get into a space where survival is likely.” Money is always forward-looking, he added. “It moves faster than governments.”

India’s plan to privatise Bharat Petroleum Corp, for example, is not finding any takers for this very reason. The three bidders—Vedanta Group, Apollo Global Management and I Squared Capital––are currently struggling to find partners for the oil refiner.

The outcome is striking. For the longest time, developing economies have resisted emission reduction. What we are seeing now, if not by design then by outcome, is a large chunk of global finance bypassing national governments and forcing decarbonisation upon value chains.


One fallout? The nature of money coming into fossil fuel sectors will change.

As a clutch of global investors (and countries like China) step out, hedge funds and commodity companies are picking up oil and gas firms. This comes with different financial deliverables for these firms. That said, on the whole, the quantum of money available for carbon-heavy sectors will fall.

This has to be welcomed. Ours is a time when the world is careening past a 1.5°C rise in global temperatures, rendering parts of the earth uninhabitable, and pushing global biodiversity ever closer to mass extinction. Most countries, including India, continue to weaken their environmental laws. Seen like that, ESG will reduce some of the environmental and social stressors emerging from business activity.

In tandem, however, ESG will redistribute manufacturing competitiveness between countries.

Take India’s target of doubling the steel sector without factoring in the global push for green steel. “If no big investors come from outside, this target won’t be met,” said the Jayaswal Neco manager.

At the same time, local capital cannot step in and replace foreign capital. Not only are banks struggling, they have their own linkages with foreign capital. Take State Bank of India (SBI) as an example. European asset manager Amundi has not just invested in its green bonds, it also holds equity in SBI MF. When SBI’s investment into Adani’s Carmichael mine was announced, it threatened to drop SBI’s green bonds from a fund it manages. “SBI took that to heart,” said a senior member of SBI’s ESG team.

To attract money, they have to decarbonise. For that, as CarbonClean’s Rafi said, companies need technology developments whose value can be accelerated with supportive legislation. Europe, for example, has not only been working on the technological underpinnings of the energy transition – like alternative fuels and carbon capture tech – but has also created supportive policies and markets that encourage companies to switch to yet expensive alternative pathways. The latter includes carbon taxes, offsets and emission trading schemes.

Not to mention, as Rafi said, markets for sequestered carbon dioxide.

That is not what is happening in India. Steel being a ‘hard to abate’ sector, Tata Steel has to choose between carbon avoidance or carbon capture. The first is green hydrogen, which costs between $6-7 dollars a kilo (450-525). The second is carbon sequestration. At this time, that costs as much as $80 for a tonne of carbon dioxide. “At this time, we are seeing a rise of $100-150 to the cost of crude steel (Ed: $800 right now),” said Paul. “With such increases, most companies will go under. We need something similar to the European emissions trading scheme.”

Or the sector needs an ecosystem of companies willing to buy carbon dioxide. Neither exists yet.

And yet, Tata Steel is deep pocketed. It has cash-rich group companies. The problem gets especially acute for smaller steel-makers like Jayaswal Neco.

The fallouts are predictable. Even if the Indian government offers to decarbonise a couple of sectors, foreign money is unlikely to flow as before into the rest. The Indian government will have to find resources to help this large chunk of units decarbonise. Alternately, smaller firms will struggle to raise money—or raise it at higher rates. If India sets up an emissions trading scheme, they will have to buy certificates in order to sell.

The final part of our series will get into the consequences that follow.

“Most of these firms made crude steel,” a senior manager at Jayaswal Neco told CarbonCopy on the condition he not be identified. “They run rolling mills and blast furnaces. Most of them are already struggling for ebitda [Ed: profits].” Such firms cannot run the pilots Tata Steel can.

(Next: An interview with CarbonClean, on how to make carbon capture cheaper).

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