Material Insights · Understanding the Material World

Natural gas and Steel

Natural gas can replace coke as the agent that strips oxygen from iron ore, in direct reduced iron (DRI) plants that feed electric furnaces and emit about half the CO2 of a blast furnace. About two thirds of world DRI is gas-based, but India, the largest DRI producer, makes most of its DRI from coal, and the same gas-based shaft furnaces can later switch to hydrogen.

Natural gas (energy) and Steel (commodity): 4 relationships.

How they are linked

1. Reductant in gas-based DRI

Physical flow · Strong · Natural gas to direct reduced iron

In a shaft furnace, gas is reformed into hydrogen and carbon monoxide, which remove oxygen from iron ore pellets without melting them, and the DRI is then melted with scrap in an electric arc furnace.

  • about 10 GJ/t total energy use of a gas-based DRI plant per tonne of DRI
  • about 65% share of world DRI made with natural gas, 2025
  • 37.2 Mt Iran's DRI output, 2025, all gas-based

Gas-based DRI is concentrated where gas is cheap, notably Iran, the Gulf states and Russia. World DRI output reached a record 151 Mt in 2025. Gas also fuels reheating furnaces in rolling mills across all routes, so a gas price shock raises costs even for blast furnace producers, especially in Europe.

Sources: Midrex Technologies; European Commission, Innovation Centre for Industrial Transformation

2. Coal-based DRI in India

Substitution · High in India · Coal rotary kilns replace gas where gas is costly

Where gas is scarce or imported, DRI is made in rotary kilns using non-coking coal, which is cheaper locally but emits far more CO2.

  • 49.9 of 58.8 Mt India's coal-based DRI output, 2025
  • almost 80% share of India's sponge iron made by the coal route (Crisil, 2024)
  • above 75 Mt India's sponge iron output expected by FY2030

India makes about 39% of the world's DRI, and the faster growth of its coal kilns has lowered the gas-based share of world DRI over the past five years. In 2025 India's coal-based output rose while its gas-based output fell to 8.9 Mt. The choice between gas and coal for new DRI capacity is therefore an LNG price and emissions decision.

Sources: Midrex Technologies; DT Next (IANS)

3. Hydrogen-ready DRI

Transition · Rising · Gas-based shaft furnaces can switch to hydrogen

The shaft furnace already reduces ore with a gas rich in hydrogen, so the same plant can move from natural gas towards green hydrogen as it becomes available.

  • 53% vs 86% CO2 cut against blast furnace route with natural gas and with 100% hydrogen
  • about 70% hydrogen content of the reducing gas in existing ENERGIRON plants
  • 2.1 Mt a year Stegra's hydrogen DRI plant at Boden, Sweden, under construction, start-up planned 2027

Gas-based DRI is the bridge route: it roughly halves emissions now and can cut them further later without rebuilding the furnace. Jindal Steel Duqm chose Danieli in September 2025 to build a second hydrogen-ready plant in Duqm, Oman. The pace of switching depends on the cost of hydrogen against gas.

Sources: Midrex Technologies; European Commission, Innovation Centre for Industrial Transformation

4. Price link: energy cost

Cost and price · Strong · Both ways

Gas fuels reheating furnaces and DRI plants, so gas shocks raise steel costs, though monthly steel prices respond mostly to demand.

  • 0.09 monthly change correlation, European gas and steel
  • 0.75 12-month change correlation
  • 0.33 fitted elasticity

The strong yearly link reflects the shared 2021 to 2022 energy and inflation cycle as well as cost pass-through. Producers that rely on gas-based DRI, or on European gas for reheating, are most exposed, while coal-based Indian producers are hedged against gas but not against coal.

Sources: Material Insights (World Bank, FRED, IMF data)

For investors

Key learnings

  1. Gas-based DRI halves emissions against the blast furnace and can move to hydrogen, so cheap gas regions have an edge in low-carbon iron.
  2. India is the largest DRI producer but makes about 85% of it from coal, so its DRI growth raises emissions rather than gas demand.
  3. Steel margins in Europe are exposed to gas prices through reheating and DRI, which the 0.75 yearly correlation reflects.

What to track

  • Gas-based share of world DRI: A falling share means coal kilns are growing faster than gas plants (Annual · Midrex World DRI Statistics)
  • LNG import prices in Asia: Higher prices weaken the case for gas-based DRI in India (Daily · ICE JKM; monthly · World Bank Pink Sheet)
  • Hydrogen DRI project final investment decisions: Signals how fast the gas to hydrogen switch proceeds (As announced · company filings)

For policymakers

Key learnings

  1. Gas-based DRI is a lower-emission bridge for India's steel growth, but it depends on affordable LNG or domestic gas.
  2. Coal kilns made about 85% of India's DRI in 2025 (49.9 of 58.8 Mt), so sponge iron will weigh on steel emissions unless new capacity moves to gas or hydrogen.
  3. Hydrogen-ready shaft furnaces let a plant built for gas today switch fuel later, which lowers the risk of stranded assets.

What to track

  • India's DRI output by route: Shows whether new capacity is coal or gas based (Monthly · Sponge Iron Manufacturers Association; Joint Plant Committee)
  • Gas allocation and prices for steel: Lower prices make gas-based DRI competitive with coal kilns (Monthly · Petroleum Planning and Analysis Cell)

India

India produced a record 58.8 Mt of DRI in 2025, about 39% of the world total, but only 8.9 Mt of it came from gas-based plants.

Sources

  1. 2025 World Direct Reduction Statistics, Midrex Technologies (2026)
  2. ENERGIRON technology: DRI-EAF production route using natural gas or hydrogen, European Commission, Innovation Centre for Industrial Transformation (2025)
  3. Sponge iron production clocks 8 pc growth in India, set to rise above 75 MT by FY30 (Crisil), DT Next (IANS) (2024)
  4. Price correlation, Material Insights, Material Insights (World Bank, FRED, IMF data) (2026)