At Design World, we don’t often focus on the steel manufacturing industry or the ins and outs of building data centers, but it’s important to pay attention. The explosive growth of AI data centers is driving staggering demand for steel and intensifying pressure on greener production methods. When hyperscalers strike deals for green steel, and analysts describe future energy demand as “unquenchable,” it signals a cascading effect across materials, manufacturing processes, supply chains, and sustainability strategies worldwide. In this article, Shinichiro Nakamura explains the challenges steel manufacturers face and where the industry is headed next.
The surge in demand for AI data centers strains the steel manufacturing industry and its ability to scale green steel production.
By Shinichiro Nakamura, president of One to One Holdings
Microsoft recently entered into a deal with green steel provider Stegra for its data centers. This is a clear and loud signal that green steel isn’t an option anymore. This comes amid exploding demand for data centers in the wake of the AI boom.
A report from McKinsey shows that by 2030, $6.7 trillion worldwide will be needed to keep pace with the energy demand to power these data centers, describing this demand as “unquenchable.”
Huge pressure is going to sit on steel providers’ shoulders to keep pace with this ballooning demand. The next few years are set to be a crucible for the industry. Here’s what steel manufacturers need to know ahead of this reckoning period.
Contextualizing the broader challenges
Hyperscalers like Microsoft are behind most of this demand from data centers, driving 60% of the growth, according to BCG’s Global Data Center Model. But what does this mean for the steel industry?
Steel is an integral material in building these data centers. In fact, hyperscale data facilities can require up to 20,000 tons of steel. Moreover, experts note that, because of the nature of their machinery and operations, data centers need significantly higher amounts of steel beyond the primary building frame.
However, this demand is hitting right as the steel industry navigates one of its most difficult chapters. Tariffs, geopolitical tensions, and sustainability pressures are forcing steel manufacturers to pivot as quickly as possible.
Against this backdrop, skyrocketing demand from data centers also forces providers to rethink their supply chains. The entire picture is why many are turning to green steel— but that also comes with its own set of challenges.
Hurdles to scaling green steel
On paper, green steel appears to be the silver bullet to the manufacturing industry’s sustainability question. According to the World Economic Forum, the steel industry produces more carbon dioxide than any other industry.
Most of the problem is in the very manufacturing process. According to a SteelWatch report, “70% of steel is currently produced using coal-based blast furnaces to make iron.”
At the same time, steel providers are racing against the clock. It’s also widely documented that carbon emissions from steel manufacturing need to be drastically slashed to meet 2050 net-zero targets. This is why many steel manufacturers have turned their focus to green steel, which eliminates greenhouse gas emissions from the manufacturing process.
Hydrogen-based steel manufacturing is arguably the most popular avenue to meet the appetite for green steel: 78% of steel companies plan to adopt it as part of their decarbonization strategies, according to the OECD. In this hydrogen-based process, carbon is replaced with hydrogen in blasting furnaces.
Unfortunately, this is an extremely expensive avenue to pursue. It also requires a huge amount of renewable energy, which is not a resource that manufacturers universally have unlimited access to. Moreover, at least two to three decades are needed before this technology can be trustworthy and scalable.
Another option is to turn to electric arc furnaces, but these almost exclusively rely on scrap steel. This opens up a whole new set of problems for steel manufacturers looking to pivot their supply chains and processes.
For one, scrap steel supply can’t keep up with global demand. While some regions have more access to supplies than others, the current geopolitical environment and competitive global markets aren’t conducive to a willingness to share that supply. This means an unequal global supply on the scrap steel front, and could lead to further imbalances in other areas of the steel supply chain.
The investments and innovations needed to stay competitive
Manufacturers should not lean on one strategy in isolation. Now is the time for manufacturers to diversify their supply chains and lean into nurturing collaborations with key industry partners. This is at the heart of greater agility and resilience as the industry navigates a very tricky and volatile landscape.
For example, some regions, such as Europe and Japan, have made significant progress in R&D around hydrogen-based steel manufacturing. Rather than taking an isolationist approach, ideally, manufacturers should partner with other providers for greater knowledge transfer.
And it’s vital to recognize and embrace technology’s role in achieving a competitive advantage. To improve the quality of scrap steel, companies in China have been developing computer vision solutions. Computer vision’s power to enhance the quality of outputs lies in picking up on defects that the human eye might miss. It also helps manufacturers maintain consistently high quality in their products while optimizing workflows and operational efficiency on the manufacturing floor. Its speed and precision in achieving these are almost unparalleled.
Additionally, as an alternative to solely focusing on hydrogen-based steel-making, organizations should hone in on greener approaches to existing blast furnace-based manufacturing. It’s crucial for manufacturers to look to other means of slashing carbon emissions while the industry works towards a viable hydrogen-based production model. Scaling higher-quality steelmaking and investing in more energy-efficient operations of existing blast furnace technologies should be a strategic priority. An excellent example is Nippon Steel’s recent joint $14 billion investment plan with U.S. Steel, set to strengthen operational and cost outcomes.
Data centers’ entry onto the scene is forcing steel suppliers to rethink their supply chain management and manufacturing processes. Meanwhile, the rapidly increasing steel demand of these data centers is converging with sustainability pressures faced by the industry. To navigate these challenges, steel manufacturers must build cross-industry collaboration while turning to technology for accelerated innovation.