Executive Summary
The production cost of green steel in Africa is currently estimated to be 20-50% higher than that of traditional steel . This gap primarily stems from the substantial upfront investment required for new technologies like hydrogen-based direct reduction and the infrastructure needed for renewable energy. However, Africa’s unique advantages—such as its abundance of high-quality iron ore and immense potential for low-cost solar and wind energy—position the continent to potentially close this cost gap faster than other regions in the coming decades . The evolving global carbon pricing landscape, including mechanisms like the EU’s Carbon Border Adjustment Mechanism (CBAM), is also expected to enhance the competitiveness of green steel produced in Africa .
1 Current Cost Comparison: Green Steel vs. Traditional Steel
The financial landscape for steel production in Africa presents a clear challenge for emerging green technologies. Producing green steel, particularly using methods like hydrogen-based direct reduction (H-DRI), involves significantly higher initial capital expenditure compared to conventional blast furnace routes . These costs are associated with installing electrolyzers for green hydrogen production, electric arc furnaces (EAFs), and dedicated renewable energy infrastructure like solar farms or wind parks to power the operations .
While traditional steel production in Africa also faces cost pressures from aging equipment and unreliable energy supplies—evidenced by South Africa’s state-owned steel company experiencing higher energy consumption per ton of steel —the operational costs remain lower in the short term. However, it’s crucial to recognize that this cost comparison is dynamic. Africa’s exceptional solar radiation levels create a fundamental long-term advantage, potentially making it one of the most competitive regions globally for producing the green hydrogen essential for carbon-neutral steelmaking .
2 Key Factors Influencing the Production Cost Gap
2.1 Energy Infrastructure and Renewable Resources
The single most significant factor affecting the cost of green steel is the availability and price of clean energy.
- Abundant Renewable Potential: Africa possesses about 39% of the world’s renewable energy potential, with solar radiation levels that make it a prime location for cost-effective solar power generation . An electricity system combining solar, wind, and storage is projected to be significantly cheaper to build in Kenya than in Spain, highlighting the continent’s inherent advantage .
- Hydrogen Production Costs: The cost of green hydrogen, produced via electrolysis using renewable electricity, is a major component. Africa’s high solar irradiance can lead to lower levelized costs of electricity (LCOE), which directly translates to lower hydrogen production costs compared to regions with less solar potential.
- Current Energy Deficits: A major hurdle is the existing lack of reliable electricity infrastructure across much of the continent. This affects all industrial activity, but it is a particularly critical barrier for establishing a reliable green steel industry, which depends on consistent and large-scale clean power .
2.2 Raw Material Quality and Availability
- High-Grade Iron Ore: Africa is endowed with some of the world’s highest-quality iron ore deposits. The Simandou project in Guinea, for example, has ore with an iron content exceeding 65%, which is ideally suited for the direct reduction iron (DRI) process central to most green steel pathways . Using high-grade ore improves efficiency and can lower reducing agent consumption, positively impacting production costs.
- Scrap Metal Supply: Another pathway for green steel involves recycling scrap in Electric Arc Furnaces (EAFs) powered by renewables . The availability and development of a structured scrap collection and processing ecosystem can influence the viability and cost of this production method.
2.3 Technology Investment and Capital Costs
- High Upfront Investment: The technologies underpinning green steel, such as hydrogen-based DRI plants and large-scale EAFs, require massive initial capital investment . This presents a significant financing challenge.
- Infrastructure Requirements: Beyond the steel plant itself, large investments are needed in renewable energy generation capacity, hydrogen production facilities, and modernized grid infrastructure . The combined cost of these supporting infrastructures is a major contributor to the current cost gap.
2.4 Carbon Pricing and Regulatory Frameworks
- EU Carbon Border Adjustment Mechanism (CBAM): This mechanism, phasing in from 2026, will impose carbon costs on imports into the EU . For African producers who can establish low-carbon steel production, the CBAM could provide a significant future competitive advantage in the European market, effectively narrowing (narrowing) the cost gap with more carbon-intensive competitors.
- Local Policies and Incentives: Supportive government policies within Africa, such as tax incentives for green technology investment or mandates for using low-carbon materials in public construction, can help stimulate the green steel market and improve its economics .
3 Pathways to Closing the Cost Gap
The journey toward cost-competitive green steel in Africa will likely involve strategic, multi-faceted approaches:
- Phased and Transitional Approaches: Several countries are adopting pragmatic strategies. Angola is leveraging its abundant natural gas as a transition fuel to produce gas-based DRI, which has about 50% lower emissions than traditional blast furnaces . This provides a lower-carbon stepping stone while building the foundation for a future shift to green hydrogen.
- Integrated “Infrastructure-for-Resources” Models: A promising model involves bundling steel production investments with the development of necessary infrastructure. For instance, the development of the Simandou iron ore project in Guinea includes the construction of a 650-kilometer railway and a new deep-water port . Similar bundled approaches can be applied to building dedicated renewable energy capacity for green steel hubs.
- Leveraging International Partnerships and Finance: Collaborations with international technology providers and development finance institutions are crucial. Partnerships, such as those between Chinese enterprises and African entities, can facilitate technology transfer and provide essential capital . Mechanisms like the African Continental Free Trade Area (AfCFTA) can also help create larger, more integrated markets, making large-scale production more viable .
4 Conclusion: A Future of Strategic Opportunity
The 20-50% cost premium for green steel in Africa today reflects the nascent stage of the industry and the significant infrastructure investments required. However, this gap is not permanent. Africa’s unparalleled combination of high-quality iron ore resources and low-cost renewable energy potential provides a foundational advantage that few other regions can match.
The future competitiveness of African green steel will be heavily influenced by global carbon pricing policies like the EU’s CBAM, which will make carbon-intensive steel less economically attractive. While challenges related to financing, infrastructure, and technical skills remain substantial , the strategic direction is clear. With the right policies, international partnerships, and phased investment strategies, Africa is uniquely positioned to not only meet its own growing steel demand sustainably but also to emerge as a significant exporter of green steel, ultimately reshaping its role in the global industrial landscape .
