Due diligence for financing a green steel project

The client planned to build a new 2.5 Mt capacity steel plant and associated rolling and coating facilities as a greenfield project – the first such investment in European steel capacity in over 40 years.

The project was to deploy new technology in the form of hydrogen-based reduction of iron ore (H2 DRI) to feed an electric arc furnace, together with high-quality scrap, with the aim to reduce CO2 emissions of the finished steel to less than 200 kg CO2/t of steel (compared to the global average of c. 2t CO2/ t ie a 95% reduction in CO2 emissions).

In support of the Euro 4.2 billion debt raising, we were retained as the lender market advisor working over a period of 2+ years. Our work included market sizing and segmentation of the European sheet steel market and forecast of demand and supply; price forecasts (including carbon cost effects and green premium for which new methodologies were developed, supported by an interview program with potential off-takers to test willingness to pay a green premium); cost modelling to place the project on European cost curve including other ‘green’ steel projects planned in the region; review of ‘Go-to-Market’ strategy and target product mix; review of offtake contracts for finished steel; and review of raw materials procurement strategy and supply contracts. Our work identified a number of risks that needed to be mitigated, which were subsequently addressed by the client.

 Our analysis to both quantify the green premium and provide a view on how such a premium might evolve over time was of critical importance to lenders in finalising their lending decisions.