Case Study #2: CBAM Implications for Iron and Steel in South Africa

Implications of the EU Carbon Border Adjustment Mechanism (CBAM) for Hydrogen and Power-to-X Development in South Africa

Green hydrogen produced from renewable electricity can be used as an alternative reductant and energy carrier to natural gas and coal in Direct Reduced Iron (DRI) processes, allowing for a significant reduction in greenhouse gas emissions from iron and steel production. The adoption of Power-to-X and green hydrogen could in theory improve the sector’s competitiveness and reduce exposure to CBAM and other carbon-related measures. However, although there is some existing DRI capacity in South Africa, which is the technology best suited to conversion to using green hydrogen as a substitute for coal or natural gas, the existing scale is limited. This case study considers issues that inform whether the CBAM may increase the attractiveness of green steel exports from South Africa to the EU. Given the high level of uncertainty in global steel markets due to global overcapacity, and the highly competitive nature of the European market, the preliminary research presented in this case study suggests that the CBAM would need to provide a very clear cost advantage to green hydrogen-based green steel to incentive investment by South African entities in green steel capacity.