- Historically, steelmaking has been a dirty process, but new technologies are changing this
- Green steel is made using electric furnaces powered by renewable energy as opposed to coal
- Many steel companies are transitioning to green steel and could be a smart investment
As more industries work to become more environmentally friendly, it was only a matter of time until the trend came to steelmaking.
Historically, making steel is a dirty job that adds pollution to the air. But thanks to technology, a cleaner version of steel, green steel, is now available. Let’s explore what green steel is and the stocks to consider investing in to profit from this transition.
How steel is manufactured
Steel is made from melting iron and carbon together in a blast furnace or electric arc furnace to turn both ingredients into molten steel. The blast furnace generates the high temperatures needed to melt iron ore and carbon. In turn, the carbon used to produce steel is released in large amounts as carbon dioxide into the air. Between 1.5 and 3 tonnes of carbon is released into the air for every tonne of steel produced.
Electric arc furnaces, primarily used for melting scrap steel, typically rely on power generated by nearby power plants. The power plants use a variety of materials to generate electricity for the furnaces, which may include burning coal.
The blast furnace process, also known as the Bessemer process, results in ground, water and air pollution that contaminates the site and lowers air quality for the employees, nearby residents and the environment. Great strides have been made over the decades to reduce the amount of contamination and pollution produced by steel mills, but it’s almost impossible to overcome the waste generated by steel manufacturing.
Steel manufacturing is a vital part of the economy with its products underpinning the infrastructure needed for the construction of just about everything people use daily. Fortunately, green energy generation technologies are making it easier for steel manufacturers to move away from the processes that pollute and towards ones that get the job done just as effectively without adversely affecting the environment.
What is green steel?
The most commonly accepted definition of green steel is steel made with a lower carbon footprint. Efforts are being made to reduce the number of waste products that are generated by the smelting process, but the most significant impact comes from using wind and solar to power electric arc furnaces instead of using blast furnaces. One steel manufacturer, EVRAZ North America, has successfully used solar power to generate enough electricity to power its Colorado facility. The company is also constructing a solar power plant.
Another variation of the green steel concept is capturing the carbon dioxide emitted during the process and combining it with slag for a usable steel product. Slag is a waste product that is removed from molten steel during the manufacturing process. Making slag usable creates a new revenue stream for steel mills. Other strategies to reduce the amount of slag are being developed but are not ready for widespread use.
How green steel minimizes carbon footprint
In 2018, the steel industry was responsible for 1.8 million tons of carbon dioxide emissions around the globe, or 8% of all carbon dioxide released into the atmosphere. The U.S. steel industry has been making strides to reduce its carbon production and emits less than other countries. Reducing carbon emissions from steel plants means less carbon dioxide entering the atmosphere, which drives down the impact steel production has on the planet.
Many industries have been moving away from using coal as an energy source, but the steel industry has held onto its use due to a lack of viable alternatives. Now, advances in generating energy from renewable resources have been proven effective in producing steel, freeing the steel industry from using coal. Not only is renewable energy economical, but it also reduces the overall carbon footprint of a mill.
A steel plant that moves to green energy sources isn’t pulling coal from the ground and burning it for fuel. This reduces the amount of carbon released into the air.
Stocks to invest in for green steel exposure
Green technologies are making solid strides in replacing older technology, and while clean tech is better in the long run, companies are making this transition slowly as it represents an overhaul of infrastructure. Buying stocks in these companies, especially from ones actively adopting green technologies, exposes a portfolio to an industry that is a historically solid performer and will most likely continue their track record as they shift.
The following are a few stocks worth considering for green exposure. Understand that these are long-term investments due to the time it will take to transition to green steel and the headwinds of a possible global recession this year.
U.S. Steel Corp (NYSE: X)
U.S. Steel struggled for many years as the steel giant was involved in business segments that were losing money. Additionally, China began producing steel and undercut prices, shrinking the profit margins of U.S.-based steel companies.
Over the years, U.S. Steel has been on a mission to sell many underperforming assets. While the company is still working on this, they have also begun to invest in electric arc steelmaking.
Over the past year, shares of the company have traded as high as $38.45 and as low as $17.05. This has more to do with the belief in a slowing economy than the long-term outlook for U.S. Steel. Most market analysts consider this stock a hold until more details emerge about the company’s turnaround plans and the economy as a whole.
Nucor (NYSE: NUE)
Nucor has been around for over 100 years but didn’t get involved in the steel industry until 1969. Since then, the company has become the largest steelmaker in the United States.
This is primarily due to their electric arc furnaces, which allow the company to better handle upswings and downswings in demand. The company is a dividend aristocrat, meaning it has increased its dividend for 25 consecutive years.
Steel Dynamics (STLD)
Steel Dynamics was founded by a former Nucor employee and follows many of the same strategies for running a steel business. This includes using electric arc furnaces and keeping low debt loads.
The advantage investors have in this firm compared to Nucor is that Steel Dynamics is a much smaller company, which means its growth rate could outpace Nucor. Of course, there is a downside to this, the main one being there isn’t a long history of reliable performance showing that the company can profit regardless of the condition of the economy.
Rio Tinto Group (NYSE: RIO)
Rio Tinto is a company that explores, mines, and processes mineral resources, including copper, gold, diamonds, iron ore, lithium, aluminum, salt, and more. Iron ore is its connection to the steel industry.
The company has been performing well, primarily due to higher commodity prices. If prices drop, Rio Tinto could feel the squeeze on its margins. However, the company has a long history, and with its exposure to so many minerals, it should be able to handle most economic issues.
Cleveland-Cliffs (NYSE: CLF)
Cleveland-Cliffs got its start mining iron ore and eventually transitioned into steelmaking. Their vertical integration makes this company different from the others on this list. They have business in every aspect of the process, including mining, steelmaking, and even stamping.
The company is a leading supplier of automotive-grade steel and recently negotiated higher prices from car manufacturers. At the same time, Cleveland-Cliffs has been able to reduce its costs.
In 2020, the company bought competitor ArcelorMittal to help with its vertical integration. The only concern with the company regards its automaker clients. If a recession hits and there is a significant downturn in auto sales, car manufacturers might reduce production, thus reducing their need for steel. Still, analysts have mixed outlooks, with six recommending to buy the stock and six recommending to hold.
It is important to note that GM and Ford are looking to make their electric vehicles from sustainable materials, which includes buying green steel from steel manufacturers. The automotive industry is a major consumer of steel, making this shift a boon for green steel manufacturers. Going green has the potential to raise their stock prices.
While investing in any company listed could be a wise choice, there is an alternative option in the Clean Tech Kit from Q.ai. This investment uses artificial intelligence to spot trends in the market and invest in companies as a result. With this kit, investors gain exposure to all stocks involved in clean technology, making them more diversified than if they simply invested in steel stocks.
The bottom line
The future is in green steel, and the giants in the industry are working on making the transition. While the long term looks great, the short term could be bumpy as increased costs and manufacturing delays arise during the transition. But by investing in high-quality stocks, the risks are smaller than with companies that do not have a solid balance sheet. As always, when investing in stocks, it is critical to do your due diligence first.
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