00:00:00: Can it be that tomorrow's heavy Industries will be located where the sunshine stronger and longer and the wind blows night and day

00:00:09: and how will climate friendly policies changed the international division of labor in energy-intensive Industries this is what we want to discuss today in our sixth episode of shaping sustainable Supply chains

00:00:23: I'm Nicholas Martin thank you for listening.

00:00:26: Music.

00:00:38: Heavy Industries such as Iron and steel or chemicals are among the biggest

00:00:44: energy consumers according to the world economic forum

00:00:48: Global heavy industry and transport account for almost one-third of global CO2 emissions in Germany the direct emissions of the chemical steel and cement Industries alone make.

00:01:01: One ace of total greenhouse gas emissions but

00:01:06: politicians in Germany have decided that climate neutrality has to be reached until 2045

00:01:13: the heavy industry obviously has to contribute to reach this aim but to get there a massive expansion of renewable energy is needed.

00:01:24: In today's episode we shed light on a topic that has received little public attention

00:01:30: the possible restructuring of Global Supply chains we speak with two scientists who believe that the increasing focus on carbon-neutral energy production could change the division of labor.

00:01:41: If green energy sources like wind or solar play an increasingly important role than the heavy Industries could go where wind

00:01:49: and sun is available at low cost the new phenomena.

00:01:54: It's known as the Renewables pull and to dive into this topic we have with us such as samadhi he is an economist and Senior researcher at the vo portal Institute for climate

00:02:07: environment and energy where he works in the department for energy and Industrial Systems of the future great to have you with us Asha.

00:02:17: Thanks Nicholas happy to be here.

00:02:20: And with us is also claiming Schneider he's working in the same department and focuses on Industrial Systems good to have you on the show Clemens.

00:02:35: You both and the vote bottle Institute have established the term Renewables pull before we discuss the meaning and the consequences in depth.

00:02:46: I have a more general question for you politicians want to make the heavy industry climate neutral.

00:02:53: So how big is that challenge how much additional electricity from Renewables would be needed to make

00:03:00: only the steel sector in Germany climate-neutral claimants what do you think.

00:03:06: Yeah we calculate it this Sephora study and we think that 130 terawatt hours would be required for steel only

00:03:16: so and this is equal to the amount we had available from wind energy in Germany in 2020

00:03:24: so that's the amount we are talking of and for 2045 we would need 10,000 additional windmills only for the steel industry with an average capacity for megawatt

00:03:35: so that's a lot I think so only for the steel industry we would need to double the already existing infrastructure.

00:03:44: No it's half of it it's half of the electricity production we have available from Renewables today

00:03:51: only for the steel industry and for petrochemicals to make them fossil free we would need another 300 terawatt hours of renewable electricity.

00:04:02: And this will be equal to

00:04:05: that would be another 25,000 windmills okay so so we would need a lot just for these two industries wow thank you claimants for that perspective.

00:04:18: One more thing today's podcast will be divided into three parts I will first talk to Sasha about the Renewables pull phenomena and then dive with claimants into possible

00:04:29: consequences for the steel industry and at the end we want to discuss to what extent the Renewables pull phenomena

00:04:37: can be a chance for developing countries and risk for Industries in Germany so Sasha

00:04:45: if we look at the heavy Industries the German government wants to replace fossil energy with green electricity and green hydrogen.

00:04:55: Could you quickly explain what green hydrogen is and why is it important for your study or to understand your study.

00:05:03: Sure well let me start by saying that a green electricity will certainly be the main source of energy in the future

00:05:11: that's just because we have a large potential in Germany but also in other countries especially of wind power and solar PV and the costs are relatively low they have gone down considerably in the past years and the direct use of this electricity is generally

00:05:27: preferable because it's the most efficient way to use this form of renewable energy however

00:05:32: we cannot do everything with electricity we will still need gases energy carriers in the future for some applications where we simply cannot use electricity

00:05:42: and in Industry steel production is an example for this

00:05:46: because we simply do not yet know how to make steel by using electricity there's some research going on but it's still in its infancy so we do know however how to

00:05:57: primary Steel by using either natural gas or hydrogen

00:06:01: and that's exactly where a green hydrogen comes into play Green hydrogen is made of green electricity so of Renewables based electricity using electrolysis and by doing that we can generate hydrogen and this hydrogen then is virtually climate neutral

00:06:16: so in the future we are pretty sure that we will need both green electricity and green hydrogen to reach a climate neutral industry sector.

00:06:24: Mmm so we've already touched upon that you and your colleagues at the vo portal Institute invented the term Renewables pull could you explain in a few words always difficult what is meant by that.

00:06:39: Yes I will try so while we've had

00:06:42: differences in the cost of Renewables in the past between countries these have not yet been relevant for industry because so far industry has used almost exclusively for side fuels

00:06:52: but in the future this will change

00:06:53: the main reason is for climate protection reasons and so we believe it is likely that in the coming years and decades industry will increasingly use green electricity and green hydrogen and so

00:07:06: those parts of the world where this green electricity and green hydrogen can be produced most efficiently and at lowest cost will become more attractive for industry

00:07:15: so it is

00:07:16: likely that some industrial production could move from current locations for example Western Germany to other locations with better renewable conditions for example Scandinavia or Australia perhaps also North Africa

00:07:29: so these good Renewables conditions could pull in industrial production and that's why we coined the term Renewables pull.

00:07:38: So why are you and your colleagues so convinced that the Renewables pull phenomena might influence decision-making in the heavy Industries

00:07:47: well in the past fossil fuel based industrial production has almost always been cheaper but we are convinced this will change so

00:07:55: that's why renewable energy sources will become increasingly important in the future for industrial production

00:08:02: but these renewable energy sources we already mentioned electricity and hydrogen as the main sources in the future they are very difficult to transport so today

00:08:12: Industries using lots of cool and this cool can relatively easily be transported over long distances with electricity we do not have this comfortable situation we can only use electricity in short distances or transport it over short distances and with hydrogen while it is possible to Move It from one part of the world to another

00:08:31: that is very difficult and very cost intensive because we need to

00:08:36: change the hydrogen into other forms that are more easily transportable making it liquid or transforming it into ammonia we need additional systems to do this and we have energy losses in this process so that is why it will become more difficult in the future to transport

00:08:51: Renewables space energy from one part of the world to another and that's one main reason why Renewables pull could become effective it could be cheaper for industry to relocate instead of importing these renewable space.

00:09:03: Energy carriers mmm you say the cost of Renewables.

00:09:09: Might be an important location factor for the industries but do you think or don't you think that other factors might still be important in the future like.

00:09:18: The cost of Labor education and other location factors yeah.

00:09:23: I mean that's definitely a good point even for energy-intensive Industries for these industries of course the costs of energy is very important but even for these industries

00:09:33: energy costs are just one of many relevant location factors as you said there are many others for example political and legal stability close proximity to Consumers close proximity to supplying companies we need qualified labor and industries and of course also lower unit labor costs are of interest for Industries

00:09:53: so many countries with strong renewable energy conditions like good conditions in other location factors

00:10:00: and this multi-factor nature of decisions about locations make it very difficult to assess exactly how strong the Renewables pull phenomenon will actually be in the future

00:10:10: so we're still not certain how much of an effect it will have because there are so many other factors at Play.

00:10:15: So far we are talking about assumptions for the future but do you already have empirical evidence for the Renewables pull.

00:10:24: Did You observe that it has already affected companies.

00:10:27: Well we're still at the beginning of our research and we cannot say we have found clear empirical evidence that Renewables pull is at Play

00:10:36: but we have seen in the past few years a number of decisions and announcements by companies that indicate that Renewables pull might already be at work for example BMW has recently announced that it is purchasing aluminum produced from solar based electricity from a company and the United Arab Emirates so the company wants to lower its CO2 food

00:10:59: chains of the cars that it's producing and apparently it sees of possibility to import

00:11:04: aluminum from a place with very good solar conditions that might be Renewables pull at play and another example is the production of hydrogen based Steel in Sweden we've already talked about the possibility to

00:11:17: produce steel based on hydrogen and in Northern Sweden we have seen the construction of the world's first Hydrogen based direct reduction plant

00:11:25: because in Northern Sweden we have high availability of Hydro power and wind power at relatively low costs and

00:11:32: we are seeing that Elke a b which is a company in Sweden that is producing iron ore has recently announced plans to have all the iron ore of its mining being processed in Sweden and hydrogen-based direct reduction plans so that's their plan they do not

00:11:48: want to export iron ore as they're doing now.

00:11:51: But they want to process it in Sweden using this new technology using the cheap Renewables that are available and they then want to export the product direct reduced iron to other countries for further processing so this would also be a case of Renewables pull possibly.

00:12:06: Thanks Tasha great example I think what you just said about Sweden is

00:12:11: already a starting point for our focus on the steel industry and the impacts of the Renewables pull Clements

00:12:21: let's look at the steel industry we've already heard Sasha mentioned the abbreviation dri direct reduced iron

00:12:31: could you quickly explain why this could be the game changer when looking at the steel industry and its CO2 emissions.

00:12:39: Yeah let's look first at the predominant route we are using today so 90% of the Worlds

00:12:47: primary steel production and it's also equal to 70% of the total seal protection in the world.

00:12:54: Based on coking coal used in the blast furnace route and here

00:13:00: in this route the oxygen from the iron door is removed by reacting with carbon mainly.

00:13:07: And what dri we could use hydrogen as in reducing agent

00:13:13: so at the moment it's the only way to produce iron without carbon that is available on the market and we already have this dri plants that place they are operated with natural gas mainly in the Iran or in the US

00:13:27: and they are already competitive so the technology is available to produce iron together with natural gas and as inducing agent

00:13:37: I'm sure I mentioned this new plant in Sweden which already uses hydrogen as an increase engagement

00:13:43: and we see that it's the predominant Technologies of the preferred Technologies of the European co-producers in their plans to transform their their sides

00:13:52: looking again at the Renewables pull do you think it is likely that companies and even governments will follow the example of Sweden and relocate their production of iron.

00:14:04: At the moment the first move was we see they do not go abroad so I would say so they could pressure from their governments or down there where you chain and these disestablished

00:14:17: producers they have was know-how and they have a lot of plants special plants not only the steel production but it's also about hard rolling code or Ling and special treatment

00:14:29: they are now looking for one component of their internal value chain they want to change it and this is the process of reduction

00:14:38: and actually at the moment there's no hydrogen based dri on the market Sweden will come with it they realize

00:14:46: they have plans and so it's sensible now for the steel producers the first move was that they strive for political support and their own countries and their home markets to enable such a queen production

00:14:58: so they are striving for secure and cheap hydrogen Supply mainly that that's the point there.

00:15:04: You're touching a field which is one of the buzz words today resilience the strength of Supply chains what role do you think

00:15:13: the political circumstances such as energy Independence will play in that field.

00:15:19: In a political discussion we clearly see this argument and it's not only about energy Independence e but it's also about a secure

00:15:29: while you change in the steel industry so we've seen that the German government has published an industrial strategy

00:15:36: last year and it plainly states that steel industry is of strategic importance for the German industry as a whole

00:15:44: hmm the steel industry themselves they say that it's important to have an integrated production mainly for energy

00:15:51: reasons for Energy Efficiency reasons you can save energy if you produce at one site and not separate it around the world so but on the other hand we are convinced that there will be a take off for hydrogen-based seal making

00:16:06: in the 2030s at the latest.

00:16:08: And I think then we will be at a Crossroads and have to decide will be import hydrogen and the hydrogen will be

00:16:17: because of the high transport costs for hydrogen it will be not as cheap as in other regions in the world so you're saying 2030s we will stand at Crossroads import hydrogen or

00:16:30: direct reduced iron yeah how do you think this will change the industry then.

00:16:36: Yeah I think they will be really under pressure from the OPEC side so from the operational cost site yeah and therefore

00:16:45: it will be sensible for the steel industry in the long run I think to use more scrap in Europe which will be available in the whale ability will

00:16:54: increase in the future and end the other hand to go for imported dri which can be produced

00:17:01: and it's cheap way outside and this could strengthen then the competitiveness of the European steel industry but on the other hand we have new dependency.

00:17:11: On the World Market of course.

00:17:13: What do you think limits if we take as granted that the dri production will take place somewhere else could it happen that other industries that are part of the steel value chain

00:17:26: let's say for example the Auto industry will follow will go produce somewhere else.

00:17:33: I think in the midterm I do not see such a pressure so we see that established

00:17:39: steel producers that have their Market in the high-quality steel market like for example the European Automotive Industries I think that they will be

00:17:49: able to keep up steel production and we see that the automotive industry in Europe is adapting

00:17:56: to the new challenges they face but of course we see that that the automotive industry is changing

00:18:02: and of course there will be new markets for cars in Africa for example and these new markets for cars yeah they will be quite far off from

00:18:14: Japan from South Korea Germany so these are the main

00:18:18: car exporters today mmm and I think for these countries with new markets for cars for example that it could be sensible for these countries to establish.

00:18:30: Secure and cheap steel production

00:18:33: to attract Investments so I think for new markets it is likely that the investments will take place outside the traditional

00:18:42: car exporting countries.

00:18:44: Okay thank you claimants for that Insight so let's open up for a little discussion what do you both think would be the impact of an exodus of the German.

00:18:54: Dri production and how far would it change our supply chain dependency yeah we have to take into account that the primers deal

00:19:02: put diction in Germany is already very dependent so we have oligopolistic markets on the side of iron ore

00:19:12: and on the other side of coking coal

00:19:15: both are oligopolistic Market few exporting countries few companies and so we are already pretty dependent but of course with the discussion about Renewables we have always this story of getting

00:19:29: more independent.

00:19:31: From resource-rich countries and so with this situation of importing Bri we could just replace one dependency with another.

00:19:41: So from that perspective it's not such a good story but on the other hand it's a situation we are already used to and in Germany we have

00:19:51: W the resources and we have to import it's either hydrogen or it will be dri

00:19:56: so that's that's the question what to go for yeah

00:20:04: and as usual with import dependency I would say that it is important to not be dependent on a low number of suppliers and so

00:20:14: I think as long as we are able to choose from a sufficient number of suppliers of dri then the risk is relatively low and I think this is likely to be the case and because as

00:20:24: Clements mentioned before there are quite a few countries that have good resources to produce dri in the future

00:20:30: and also in addition of course it is feasible for Germany to find ways to ensure that a minimum

00:20:36: share of it's dri needs will still be produced domestically this could be for security reasons perhaps topical of policymakers to achieve this.

00:20:46: Yeah and I think therefore it's also sensible to have that first movers here in Europe erecting the I plants.

00:20:52: It makes sense from that perspective mmm so do you think that Germany has a country with high energy costs and

00:21:00: inadequate renewable energies should worry about the Renewables pull phenomena.

00:21:07: Yeah I would not say that Germany needs to worry too much but I do believe a country like Germany needs to take this phenomena seriously and plan ahead.

00:21:18: Because while there are some steps in the value chains of heavy industry which will likely move to other parts of the world at least to some extent I think Germany should make efforts to prevent other parts of the value chains to move especially those Downstream parts and that could

00:21:34: in theory be effected through knock-on effects we already talked about the Auto industry so I think Germany should make efforts to prevent such knock-on effects and strengthen its value chains and the conditions in Germany that we also mentioned already there so many other

00:21:50: important factors for industry to be here and as long as we strengthen these other factors and I think we will not see a very strong loss of industry and one

00:22:02: possibility could be to cooperate with other countries to create new cross National Supply chains so to cooperate with those countries that have good Renewables conditions and

00:22:12: by that we can make sure that German industry benefits from low cost production and these countries and then also produces more.

00:22:21: Products here in Germany in the downstream

00:22:24: part of industry and at the same time there are possibilities to prevent Renewables pull to some extent

00:22:31: my thing for Germany and one issue is to Simply fully exploit the potential of the renewable energy potential that we have in Germany and Europe

00:22:39: and also to build infrastructure for the low-cost transport of green energy if we can get green energy at relatively low costs this advantage of other countries becomes smaller and for example if we build hydrogen pipelines throughout Europe then this can reduce the cost of production here in Germany.

00:22:57: Mmm the car industry for example in Germany they are very dependent now on primary

00:23:03: steel because of quality issues but if they develop a car which could made from recycled material

00:23:13: that could also improve situation for them and I think that's because primary steel would be much more expensive even if it's produced elsewhere in the world then we know it today and so these relations will also change.

00:23:29: And I think it will be sensible to go for more recycled material and secondary protection.

00:23:37: Because then the dependency of the Imports just decreases right.

00:23:41: Yeah it would be decrease we have a lot of scrap available in Europe and at the moment we export it we exported to countries like turkey for example

00:23:51: who have a lot of infrastructure they are building up at the moment but in the future it would be a good for Europe to develop circular strategies to make use of the resources we have.

00:24:04: And that's crap.

00:24:05: Let's focus on a circular economy in general not just with steel but also with other products will have the potential to help us avoid strong Renewables pull effect I believe so in general Smart Energy and Industrial policy

00:24:19: can probably allow Germany to remain a successful location for industrial activity

00:24:23: some things might change but in general we do not think that we will become a country without any industry.

00:24:29: And the circular economy is one of the core policy agendas of the European Union as far as I know but well at the end of the day let's see how it's actually then Incorporated right

00:24:42: let's change the perspective one more time and how far do you think Renewables pull could be a game-changer for developing countries that

00:24:51: have a lot of sun and a lot of wind.

00:24:54: Yeah that's a good question we also planning to look closer into this issue in generally I am not sure I would call it a game changer but

00:25:02: for sure it is one opportunity for many developing countries however

00:25:08: as we already mentioned there are many other key location factors and many of these location factors will have to improve in many developing countries to give them a chance to benefit from Renewables pull so I think

00:25:21: some developing countries are likely to benefit from Renewables pull in the future but probably not all and other work has to be done in these countries.

00:25:29: Definitely I would recommend developing countries to aim to attract industrial production those Renewables rich countries should not only aim.

00:25:37: Become exporters of energy but I should try to attract industry production we've seen in the past how important it is for countries to develop their own industry instead of just exporting energy carriers.

00:25:49: Clements you want to add on that.

00:25:51: No special made the points thank you for okay so what your day we've mainly talked about the Renewables pull phenomena and the steel industry I know we cannot talk about that in depth but

00:26:04: what do you think could be other Supply chains that might be more sensitive to the Renewables pull than even the steel industry what do you think.

00:26:14: I already mentioned this example of BMW and the aluminium industry so that aluminum industry producing aluminum with electricity so here we're talking about electricity and not hydrogen.

00:26:28: I think easily affected and it will be very fast I think the development there

00:26:36: and on the other hand we have the chemical industry what is fast in years I think the 2020s will order it is see some effects

00:26:47: I'm quite convinced of that and perhaps it's the same in the chemical industry for ammonia.

00:26:56: Ammonia is produced from hydrogen so they are the hydrogen is really used as a material and it's Incorporated in the product.

00:27:05: Green ammonia production this has already been highlighted by the International Energy agency as saint.

00:27:14: Option for developing countries to create a new value chain so if they ramp up their agriculture production and need fertilizers then they also need ammonia.

00:27:26: And so this is an option and if they have renewable electricity potentials they can go for it.

00:27:33: Well thank you claim as for those insights and thank you Sasha for the insights into the phenomena of the Renewables pull was great talking to you

00:27:43: was great talking about this phenomena that might impact Supply chains of the near future that's it for this episode

00:27:52: the Renewables pull climate neutrality and Supply chains I was talking to Clement Schneider and Sasha samadhi from the bottle Institute for climate environment.

00:28:04: Energy thank you both for joining this podcast thanks it was our pleasure Nicholas.

00:28:10: Yeah thank you and class for the invitation we will be back next year with a brand new episode of shaping.

00:28:17: Supply chains then we will talk about how Global suppliers are increasingly concentrated in Asia despite International rhetoric about

00:28:27: bringing industry back home that's it for today I'm Nicholas Martin be safe.

00:28:32: Music.