Iron and steel manufacturing from iron sand

Summary of submissions

Three submissions were received from NZ Steel relating to the activity of Iron and steel manufacturing from iron sand.

Key issues from the submissions are as follows:

  • Start point – Whether the start point of the activity should be before or after the concentration of iron sands.
  • Number of allocative baselines – How many allocative baselines are required for the activity
  • Structure of baselines – Whether baselines are required solid pig iron, molten pig iron, cast steel, hot rolled steel, vanadium bearing materials
  • Amount of cold ferrous feed – Whether or not there should be restrictions on the amount of cold ferrous feed such as scrap steel or cold ferrous feed (imported or otherwise) that can be added during the steel-making process
  • Treatment of generation of electricity from waste gases (bottoming cycle generation)– This issue is separate from the activity definition and is not discussed here 
  • The NZ ETS should be suspended or allocation increased to 100% - This issue is separate from the activity definition and is not discussed here. 

Proposed activity definition by industry

New Zealand Steel proposed activity definitions in their first and third submissions. The key differences between the activity definition proposed in New Zealand Steel’s third submission and that proposed by the Ministry were as follows: 

  • NZ Steel sought an allocative baseline for vanadium bearing materials (vanadium oxide slag). This is a slag that must be removed from molten iron in the process of making steel, but one that is sold. The activity definition proposed by MfE did not include an allocative baseline for this output.   
  • NZ Steel sought 4 allocative baselines, structured in a residual fashion, molten iron, vanadium bearing materials, cast steel and hot rolled steel. The definition proposed by MfE included baselines for pig iron, cast steel and hot rolled steel.
  • NZ Steel proposed that there be no deduction to allocation when increased quantities of cold ferrous feed were used in the process. MfE had proposed that where steel was produced as a result of importing and re-melting scrap steel, that no allocation would be granted for the increased quantities of cast steel. 

Summary of analysis

Activity start point

The activity should begin with the input of iron sand. The activity should not extend upstream beyond this point because concentrated iron sand is a tradable commodity (it is currently traded from New Zealand) and because emissions from the extraction and production of raw materials used in the activity are excluded (therefore mining and extraction activities will be separate activities).

Activity end point

Typically activities will end at the first tradable commodity that is produced. In the case of this activity, this means that the activity would end at the point cast steel and solid pig iron were produced.  However, this activity is very similar to the activity defined under the proposed CPRS as “integrated iron and steel manufacturing”, this activity produces the same products (cast steel which is often subsequently hot rolled) using a different process. Reflecting this definition would suggest that the activity should extend to hot rolled products. The definition gazetted in New Zealand for “Manufacturing of carbon steel from cold ferrous feed” (also an activity defined in the proposed CPRS) also produces cast steel via a different process which is often subsequently hot rolled. Consistency between New Zealand producers of hot rolled products suggests that the activity should extend to cover hot rolled products  

Number of allocative baselines

MfE agrees that allocative baselines are justified for either pig iron or molten iron and for cast steel and hot rolled steel.

The case for a vanadium bearing materials baseline is more complicated.  Products typically require separate baselines if they can be produced in independent quantities and changing the relative quantities of the products will result in a significant change to the emissions from the activity, as conducted by a particular firm. Typically, slag is not independent of steel production, it is important to remove slag for the final quality of the steel. [Withheld]

Although the change in emissions intensity from the new investment would not be particularly material and creating more allocative baselines introduces complexity into the definition, on balance, officials recommend that a vanadium bearing materials baseline should be included to provide flexibility for New Zealand Steel and protection for their potential future investment. 

Structure of baselines

MfE agrees with New Zealand Steel’s approach of having residual allocative baselines for molten iron, vanadium bearing materials, cast steel products and hot rolled steel products. MfE was initially concerned about the ability to accurately measure molten iron which will account for most of NZ Steel’s emissions, however, NZ Steel have noted that they accurately and routinely measure molten iron production and that a baseline for pig iron would require increased tracking and production monitoring systems at NZ Steel.

MfE also agrees with the approach suggested by New Zealand Steel of structuring allocative baselines on a residual basis. This is consistent with the approach taken in other activity definitions, is the most transparent approach and avoids potential over allocation when one step in the production process changes.

Amount of cold ferrous feed

Depending on the structure of allocative baselines there is potential for double counting of emissions to occur when baselines are set or for over allocation to occur when intermediate products are recycled into the production process.  This is reflected in the CPRS definition for “integrated iron and steel manufacturing” which restricts the amount of cold ferrous feed that can be added to the steel making process to 30% by mass. However, the CPRS definition does not contain a molten iron baseline. This means that increasing the quantity of cold ferrous feed prior to cast steel beyond historical levels would result in over-allocation (because recycling steel is less emissions intensive that making it from raw materials). In the case of NZ Steel, the molten iron to cast steel stage will have an allocative baseline set on the historic amount of cold ferrous feed that is used. If NZ Steel increase the amount of cold feed, this will increase the energy requirement (and emissions) per unit of cast steel for this step, but allocation per unit of cast steel will not increase, meaning no over-allocation should occur.

MfE agree with NZ Steel that no restriction on cold ferrous feed is required for the proposed allocative baseline structure. However, regulations will need to be clear that the measurement of molten iron needs to occur before any additives such as solid pig iron or scrap steel.    

Matter Analysis
The requirement to define each activity by reference to a physical, chemical or biological transformation of inputs into outputs. The proposed activity definition is consistent with this matter. The activity description is expressed as a physical and chemical transformation of inputs into outputs.
The undesirability of activities being defined by reference to the technology employed, the fuel used, the age of the plant, or the quality of the types of feedstock used when the activity is carried out. The proposed activity definition does not reference technology, fuel used, age of plant, or the quality of the feedstock.
The desirability of defining activities:
  • consistently and equitably across industries.
  • in a way that takes into account the impact that definitions may have on business investment, geographical location, and the structure of activities.
  • in a way that takes into account the potential for intermediate inputs produced when the activity is carried out to be substituted for bought-in inputs.
 The proposed activity definition takes in account consistency and equity with the other activity definition produced to date that contains the same final outputs.
The activity definition takes into account impacts on business investment, particularly with respect to the start point of the activity.
The activity does incorporate the intermediate input of cast steel, however, this maintains consistency with the other activity definition that produces the same final outputs and reflects the activity definitions proposed for use in Australia.   
The desirability of there being no overlap between activity definitions. The proposed activity definition does not overlap with other activities.
Any other matters the Minister considers relevant, including activity definitions proposed to be used in Australia. While the same activity does not exist in Australia, the proposed activity definition reflects the definition of integrated iron and steel manufacturing used in Australia, which is an analogous activity (primary steel manufacturing)

Recommendation

We propose that a Gazette notice calling for data is based on the attached activity definition for “Iron and steel manufacturing from iron sand”.

This means that each baseline represents the emissions just for that step in the process.

Last updated: 24 May 2010