Climate Risks
NLMK Group has analysed almost 200 risks and opportunities as classified by TCFD categories and prioritized them through identifying the most significant ones.
Among transitional risks, six were identified as most significant for the period of 2022–2030 and subject to further in-depth study:
- Introduction of carbon tariffs on product imports into the EU
- Introduction of carbon tariffs on product imports into the U.S.
- Introduction of a tax on greenhouse gas emissions in Russia
- Global decrease in steel demand
- Increased competitiveness of EAF vs. the BF–BOF chain
- Tightening of the green legislation in the EU
The Company estimates that its climate risks levels, both transitional and physical, indicate the Group’s high resilience to climate change. The Group has developed adaptation measures that significantly reduce its exposure in the medium to long term.
Significant risks and opportunities due to climate change
Timeframe
for short-term
for medium-term
for long-term
Financial evaluation of the risk
below $20 million
$20-100 million
over $100 million
Low-carbon economy transition risks
Regulatory risks
Description
For a proper financial assessment of this risk, the introduction of a European Carbon Border Adjustment Mechanism (CBAM) was considered together with the introduction of national carbon regulations, as the taxable base is the difference between the Russian carbon tax and the price under the European Greenhouse Gas Emissions Trading System (EU ETS)
Financial implications
Increase in operating expenses
Management of risks and opportunities
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Description
The introduction of carbon regulation in the U.S. will increase the Company’s costs and make supply of slabs to its US assets unprofitable. The assessment includes concurrent introduction of national carbon regulation.
Financial implications
Increase in operating expenses
Management of risks and opportunities
Reduction of the product carbon footprint Construction of new HBI-based steelmaking capacity. The cost of actions taken to manage the risk is assumed as the total CAPEX value for the upgrade of the operations at Stoilensky.
Description
The risk is related to the tightening of carbon regulations in the EU, which will precipitate a rise in the site operating costs.
Financial implications
Increase in operating expenses
Management of risks and opportunities
A climate strategy for the Group’s European sites is being developed that includes reductions of CO2 emissions. A CO2 purchasing strategy has been developed for NLMK Europe that accounts for the Company needs and the market volatility.
Market risks
Description
The gap between GDP growth and steel demand growth is caused by improvements in material efficiency and leads to lower sales of semi-finished, hot-rolled and long products, as well as high value-added products. This could result in foregone profits for NLMK.
Financial implications
Decline in revenues due to lower product demand
Management of risks and opportunities
Both the projects to increase capacity and individual projects aimed at cost-cutting and new product launches improve the competitiveness of NLMK’s steel and enhance its quality, as well as diversify its product mix, which reduces exposure to risk. The cost to manage this risk is assumed as the value invested in the above projects.
Technology risks
Description
Development of green steel production technologies may lead to the devaluation of capital expenditures on the upgrades of the BF-BOF chain.
Financial implications
Decline in revenues due to lower product demand
Management of risks and opportunities
The upgrade of metals and mining operations at Stoilensky will increase the added value of products by replacing pig iron and scrap with HBI. The cost of actions taken to manage the risk is assumed as the total CAPEX value for the upgrade of mining operations at Stoilensky.
Physical risks
Technology risks
Description
Frequency and severity of extreme weather events, such as floods, hurricanes, forest fires, droughts, and heat waves will increase in the scenarios that assume temperature growth.
Financial implications
Losses due to damage to buildings and structures Decrease in revenue as a result of logistical issues
Management of risks and opportunities
Building a system for monitoring of incidents caused by weather and climate Deployment of automated weather stations Monitoring the condition of facilities and taking proactive measures to protect them from weather and climate factors Redundancy in logistical chains.
Description
One of the most evident consequences of climate change is the increase in average temperatures. Furthermore, if certain climate scenarios materialize, the risks of changes in the precipitation patterns and water availability emerge. Likewise, increased atmospheric temperatures might lead to a globally rising sea level and flooding of coastal territories.
Financial implications
Growth of operating costs Growth of capital expenditures (e.g., restoration of assets) Increased insurance premiums and potentially lower availability of asset insurance in “high-risk” zones
Management of risks and opportunities
Regular monitoring of the condition of buildings and structures Adaptation measures aimed at staff, equipment and buildings.
Opportunities
Description
Investing in HBI to reduce dependence on scrap. HBI is a low-carbon raw material for steelmaking. The need to reduce CO2 emissions is driving the global demand for HBI. HBI has high added value since it replaces pig iron and scrap. Moreover, when clean hydrogen and electricity become available at affordable prices and in sufficient quantities, it will be possible to produce steel with a very low carbon footprint.
Financial implications
Return on investment in low-carbon technologies
Management of risks and opportunities
The key project under the Climate Programme is a new metals and mining facility at Stoilensky. The project is based on the most advanced and environmentally friendly technologies and involves the development of several production stages and launching a new product within the company — hot briquetted iron (HBI). The cost of actions taken to realize the opportunity is assumed as the total investment value in the upgrade of the operations at Stoilensky.
Description
Success of the CO2 utilization programme. The opportunity for NLMK to successfully implement its proposed CO2 utilisation programme will result in savings on a potential future carbon tax.
Financial implications
Reduction of direct costs
Management of risks and opportunities
The Company is investigating the feasibility of implementing CCUS projects together with its partners. The key issue is carbon dioxide utilisation. The Company considers several options for CO2 utilisation, including selling commodity CO2 and its derivatives or disposal in deep wells.
Description
Opportunity for NLMK to use carbon credits to finance low-carbon initiatives.
Financial implications
Optimization of investment
Management of risks and opportunities
Strategy is under development
Scenarios used as inputs for climate risk assessment
Paris Agreement scenario
The scenario assumes a quick decarbonisation in line with the Paris Agreement, which aims to keep global warming to well below 2°С vs. the pre-industrial age, with a probability of 66%. This scenario is believed to ensure the transition to a low-carbon economy with zero emissions in the second half of the 21st century. Like most low-carbon transition scenarios, this option requires significant emission reductions by 2100 in order to keep global warming below 2°C
IPCC Climate Scenario
Representative Concentration Pathway (RCP 2.6)
Global mean temperature rise by 2050*
1.6 ± 0.3°C
Social and economic development scenario
Shared Socioeconomic Pathway SSP 1: Sustainable development
Increase in global average temperature by 2100*
1.6 ± 0.4°C
Global GHG emissions in 2050 Mt of CO2-equivalent
25,000
–50% from 2015
* Temperature anomalies vs. the pre-industrial period of the 1850s–1900s
Business-as-usual scenario
An intermediate scenario, which assumes a higher probability of temperatures exceeding 2°C, which will lead to significant consequences for global climate systems. This scenario considers the current climate and energy policies, including commitments made as part of national plans to reduce emissions and adapt to climate change (Nationally Determined Contributions, NDCs). This scenario assumes a significant decarbonization in the second half of the 21st century.
IPCC Climate Scenario
Representative Concentration Pathway (RCP 4.5)
Global mean temperature rise by 2050*
2.0 ± 0.3°C
Social and economic development scenario
Shared Socioeconomic Pathway SSP 2: Median path
Increase in global average temperature by 2100*
2.4 ± 0.5°C
Global GHG emissions in 2050 Mt of CO2-equivalent
56,000
+13% from 2015
* Temperature anomalies vs. the pre-industrial period of the 1850s–1900s
Worst-case scenario
This scenario assumes that the existing climate and energy policies do not succeed. This will lead to a significant increase in global greenhouse gas emissions. Physical risks are expected to grow significantly in this scenario.
IPCC Climate Scenario
Representative Concentration Pathway (RCP 8.5)
Global mean temperature rise by 2050*
2.6 ± 0.4°C
Social and economic development scenario
Shared Socioeconomic Pathway SSP 5: Fossil fuel-based development
Increase in global average temperature by 2100*
4.3 ± 0.7°C
Global GHG emissions in 2050 Mt of CO2-equivalent
103,000
+109% from 2015
* Temperature anomalies vs. the pre-industrial period of the 1850s–1900s
In order to conduct a scenario analysis of climate-related risks and opportunities, data were collected from various sources, including:
- The International Energy Agency (IEA)
- The International Institute for Applied Systems Analysis (IIASA)
- Shared Socioeconomic Pathways (SSP)
- The Global Economic Forum
- The World Resources Institute (WRI)
- The Climate Impact Atlas of the Royal Netherlands Meteorological Institute (jointly with the CMIP5 project)
In 2022, an in-depth analysis of physical risks was carried out at Stoilensky, the Group's main mining asset.
The assessment included:
- Analysis of existing global climate models (CMIP615) and development of an ensemble model
- Scenario modelling of anticipated changes in the weather and climate of the Belgorod Region for the timeframes of 2020-2040, 2040-2060, and 2080-2100
- Identification of Stoilensky's exposure to weather and climate risks
- Analysis of historical exposure and vulnerability of the site's infrastructure to the identified risks
- Determination of climate impact thresholds that, if exceeded, will negatively affect the operation of Stoilensky's facilities
- Assessment of the risk materialization probability and infrastructure vulnerability
- Recommendations on risk management (including adaptation)
The assessment has determined that the number of days wherein extreme weather events occur will increase on the medium- and long-term horizons (heatwaves, tropical nights, torrential rainfall and abnormal precipitation, blizzards, abnormally high atmospheric pressure, strong thunderstorms). However, should the proposed adaptation recommendations be followed, both for the employees and the equipment, the potential damage from materialization of such risks will be negligible or non-existent.
Adaptation measures aimed at employees
- Development of a revised work schedule in case of extreme heat
- Arrangement of shaded areas
- Provision of potable water and electrolyte drinks
- Personal protective equipment against heat
Adaptation measures aimed at equipment
- Funding of research into heat resistance of motors and other equipment
- Development of a revised work schedule in case of extreme heat
Adaptation measures in case of more frequent extreme precipitation
- Improvement of roofing to prevent leaks
The Company uses internal carbon pricing in order to support assessment and prioritization of climate projects, forecasting of costs related to the introduction of CBAM and climate risks. The base for the internal carbon price is the projected allowance price under EU ETS adjusted for the Company’s share of exports to Europe.
An in-house team of specialists calculates the cradle-to-gate footprint for all types of NLMK Lipetsk's products on a high level of detail.
Internal calculations for NLMK Lipetsk's slabs and grain-oriented steel were verified independently in 2023.
The footprint data on NLMK Lipetsk's slabs are integrated into the PCF calculations by the Group's international companies that do downstream processing of these slabs.
NLMK Europe conducted a carbon footprint calculation for its major products in 2023 and had the results independently verified.