This article first appeared in The Edge Malaysia Weekly on October 16, 2023 - October 22, 2023
The pressure on hard-to-abate industries to transition to a lower-carbon future is increasing, whether it is from investors, customers or regulators. These industries — such as cement, steel and aluminium — have a huge carbon footprint because they rely heavily on fossil fuels as feedstock or for energy in their manufacturing processes. Yet, it is difficult for these companies to transition due to technology constraints and prohibitive costs. According to Bank Negara Malaysia, around 20% of Malaysia’s economy comprises hard-to-abate sectors.
One of the most discussed immediate threats these industry players face now is the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM), which will affect cement, iron, and steel and aluminium exporters to the region. Up to 57% of Malaysia’s exports to the EU will be impacted by 2026, according to Bank Negara.
But that’s not the only threat. Other countries are introducing carbon taxes, and customers are looking for low-carbon products that can help them reduce their own emissions.
Some Malaysian companies are forging ahead to manage these risks and make themselves more competitive. For this story, ESG speaks to Datuk Sri Tai Hean Leng, managing director and CEO of Malaysia Steel Works (KL) Bhd (Masteel), and Ivan Gan, head of group sustainability at Press Metal Bhd, to highlight the initiatives they have been taking to make the transition.
Datuk Sri Tai Hean Leng, managing director and CEO of Malaysia Steel Works (KL) Bhd (Masteel), knew back in 2017 that the steel industry would eventually be held accountable for its carbon emissions. He wanted to be prepared for it.
According to the International Energy Agency, the iron and steel industry is responsible for around 7% of energy sector emissions and 8% of global final energy demand.
“That’s why we decided to just get this going first. It was just one part of our thoughts in 2017 that we wanted to make our production more efficient and greener. The actual motivation was, of course, cost savings. The initial idea was that we wanted to find a technological pathway to further reduce cost,” says Tai.
The company began to invest in technologies that will reduce the consumables it uses, which are natural gas, oxygen, limestone and coke. In turn, this results in lower carbon emissions.
“These raw materials, when you incinerate them, emit a lot of greenhouse gases. But the fact that we don’t use them also means it’s more cost-effective for us,” says Tai.
“It was almost like a perfect convergence of the intention for the company to do better financially by being more cost-effective. And then, there was the global trend to decarbonise. The technology we put together happened to be able to achieve both objectives.”
Masteel started by replacing its electric furnace — which turns the raw materials into liquid steel — with an induction furnace (IF), which results in lower emissions. The first IF was installed in Masteel’s factory in Bukit Raja, Klang in 2018, and the third unit arrived in 2021.
“There were some plants already operating IF worldwide. So, we studied those plants and made some references,” says Tai. “We were able to buy one first, test it, understand the technology and once that was done, we went ahead with the second and third machines.”
According to Masteel’s 2022 sustainability report, the IF can enable 42.9% reduction of carbon emissions for the company. It also produces less waste materials, says Tai. “The recovery of the IF technology that we use is much higher than the possible recovery from the conventional electric arc furnace. These are significant savings.”
Masteel’s TCFD (Task Force on Climate-related Financial Disclosures) Report 2022 estimates the savings to be around 10.6% per metric ton.
After liquid steel is produced, it is fed through a rolling mill to become the finished product. This process requires the combustion of natural gas to reheat the steel, so it becomes malleable.
Masteel upgraded its rolling mill last year to eliminate the use of natural gas. Instead of letting the liquid steel cool down before reheating it again to go through the rolling mill, Masteel lets it move to the next step of the process immediately.
“We don’t allow it to cool down. By direct charging, we’re able to keep the temperature that is required for rolling. Doing this requires tremendous synchronisation between the steelmaking and rolling processes,” says Tai, who believes that Masteel is the only company currently doing this in Malaysia.
Its TCFD report estimates the savings from this revamped process to be around 5.7% per metric ton and increase steel bar production capacity by 48,000 metric tons per annum.
Of course, investments are necessary for this transformation to occur. Masteel invested RM180 million for the IF units and RM67 million to upgrade the rolling machine.
“We had the numbers to show our board and bankers that this is the right way to do it … These two to three years have been tough for the steel sector. But we’re still in the black, and that [also] comes from efficiency and lower costs of production arising from [the use of] technology.”
Masteel does not export to the EU, so it will not be affected by the Carbon Border Adjustment Mechanism (CBAM). It has a network of domestic and international customers from the Philippines, China, Australia and Singapore.
But Tai acknowledges the impact that CBAM could have on the rest of the market. Companies in other countries that must pay the carbon border tax might divert their goods to nations without a carbon tax, like Malaysia.
“You will have excess material coming to this part of the world and that will increase the competition, which will invariably put price pressure on our products.”
Having a carbon tax in Malaysia could level the playing field and encourage Malaysian companies to transition and stay competitive, he adds.
“If we are producing [products] with lower carbon intensity, we would have access to the European market by having to pay less carbon taxes.”
Tai, who is also vice-chairman of the Federation of Malaysian Manufacturers’ Sustainable Development and Climate Change Committee, has been recommending that the government adopt an emissions trading scheme (ETS) instead of a direct carbon tax. The ETS imposes an emissions limit on each industry.
Companies that emit above that limit must pay, while companies that emit below the limit receive an allowance that they can sell to others.
“It’s actually counter-inflationary because the more efficient ones will have [additional] resources [to transition] and therefore, there is no reason for them to increase their prices,” he says.
Another of Tai’s suggestions is for the government to set up a common secretariat to manage environmental, social and governance (ESG) initiatives. Currently, many ministries are doing different things, he says, and companies are being engaged by a variety of ministries and consultants.
“Get everyone to funnel their resources [to a secretariat] and use [organisations such as] to coordinate, so that all the ministries can be on the same page.”
According to Masteel’s 2022 sustainability report, the company hopes to achieve a further 10% reduction in emissions by 2026 and another 15% by 2031.
Its absolute emissions increased from 2020 to 2022, which Tai says is because its operations went back to full capacity after the Covid-19 lockdown. It also began to calculate several categories of Scope 3 emissions — such as business travel and upstream leased assets — in 2022.
However, the emissions intensity fell from 0.939 tCO2/mt in 2020 to 0.804 tCO2/mt in 2023, according to Tai. He says Masteel is producing low-carbon emissions steel because its carbon intensity is lower than the benchmark set by the US Steel Manufacturers Association (0.85 tCO2/mt). This will go down to 0.754 tCO2/mt by 2024.
Tai is also confident that the company can reduce its absolute emissions.
“We like the trajectory of where we are going. We’re also looking at technology to capture the carbon from our process if we want to. The big problem now with everyone is what to do with the carbon that has been captured,” he says.
This alludes to one of Tai’s projects: generating carbon credits from processes that remove carbon emissions. He is currently researching how carbon captured from the factory’s processes can be mineralised and injected into wet concrete.
“It makes the cement denser and stronger. It will lock the carbon dioxide in the cement,” he explains.
It is a new technology, he adds, so Masteel will have to figure out how to make it affordable and localise it. “We’ve given ourselves a five-year timeline to really appreciate this technology and, if possible, reduce the cost because it will be a commercial endeavour by itself.”
The company will have to convince ready-mixed concrete manufacturers to use this technology. Even if it costs more, “their overall cost might be somewhat reduced because the density has gone up and [they] might not need as much [concrete]. And there would be a green certification for it”.
Press Metal Bhd started its aluminium smelting plant in Malaysia back in 2007 to take advantage of Sarawak’s hydropower potential. That decision continues to benefit the company now, as it is able to produce low-carbon aluminium, thanks to the generous supply of renewable energy (RE) in Sarawak’s grid.
Apart from the good location, Press Metal also started its sustainability journey early because it is a major exporter to Europe, says head of group sustainability Ivan Gan, and global investors are also expecting the company to take action.
“Many of our customers expressed a preference for sustainable suppliers, and Press Metal was in a good position to fulfil this, given the RE source powering our smelters,” says Gan.
Currently, two of Press Metal’s manufacturing facilities have received the Aluminium Stewardship Initiative performance standard certification.
These initiatives bode well for the company, which will be affected by the European Union’s Carbon Border Adjustment Mechanism (CBAM). Gan says the company is taking proactive steps to prepare by developing a climate change strategy, introducing an internal carbon pricing mechanism and assessing the carbon footprint of its value chain.
“We viewed this as an opportunity to strengthen our market position and reputation as an integrated aluminium producer,” says Gan.
The company is, after all, geared up to provide the aluminium needed in the green economy, whether it is for the frame of solar panels or battery casing of electric vehicles.
The aluminium industry is responsible for around 4% of the world’s direct industrial carbon emissions, according to the International Energy Agency (IEA).
Aluminium is produced by refining bauxite into alumina, which then goes through smelting to become aluminium. This is done via electrolysis, for which a significant amount of electricity is required to power the process, contributing to Scope Two emissions.
Additionally, electrolysis uses a carbon anode, which creates carbon dioxide at the end of the chemical process. This contributes to smelters’ Scope One emissions. According to Gan, emissions from carbon anodes for modern smelters are mostly similar.
Meanwhile, Scope Three emissions, which cover the raw materials, depend on where supplier companies source bauxite and how it is refined. Those that use coal for the refinery process will have a higher carbon footprint than those that use natural gas.
Purchased electricity — or Scope Two emissions — is the biggest source of emissions for the smelting process, coming up to 70% (including indirect emissions) of total aluminium production emissions in 2022, according to the IEA.
This is where Press Metal has made headway, since RE accounts for 77% of Sarawak’s total generation mix, going by state utility Sarawak Energy’s 2021 annual and sustainability report.
According to its 2022 sustainability report, the company achieved a 7.1% reduction in emissions intensity (Scopes One and Two). The absolute emissions have been increasing since 2020, primarily due to expanded production volumes.
Press Metal is not stopping there. It is working on increasing energy efficiency and process efficiencies to reduce waste and resource use, and increasing the amount of aluminium scrap buyback that it can reuse.
“We are digitalising our production; we call it a ‘smart factory’ concept. We have monitoring sensors to keep track of our operation parameters. We input data into the system, which studies and gives us the best operation decisions,” he says.
Carbon capture is the next project that the company is eyeing, adds Gan. “It’s to capture the emissions from the process and turn them into products or store them in the ground.”
Additionally, Press Metal is ramping up efforts to buy aluminium scrap for recycling. It has a full recovery plant to recycle waste from its own production stream, and it also recycles post-consumer scrap.
According to its 2022 sustainability report, it recorded 17,993 metric tons in total aluminium scrap buyback and a 90.2% waste diversion rate. It is more energy efficient to recycle aluminium, since only 5% of the total energy used to manufacture an aluminium product is required for remelting the collected aluminium.
The challenge, says Gan, is securing aluminium scrap and separating the alloy metals that have aluminium. Otherwise, it is an economically viable process.
What would be helpful for companies like Press Metal to transition?
In response, Gan cites well-communicated regulatory frameworks that are supported by government policies, as well as collaboration between various stakeholders.
“Additionally, a focus on research, technology adoption and sustainable practices will enable companies like Press Metal to thrive in a low-carbon economy, meeting international expectations while contributing to global sustainability goals,” he says.
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