Steel Industry Landscape Shows Promising Growth

Nepal's steel sector has experienced remarkable expansion in recent years, with the country now hosting 83 registered iron and steel industries, 54 of which specialize in Thermo-Mechanically Treated bar manufacturing. The nation's steel melting capacity has surged beyond 2 million metric tons per annum, supporting a market valued at more than $1.12 billion in FY 2023-24, with projections indicating continued growth. Currently, Nepal remains heavily dependent on imports, sourcing approximately 80% of its raw iron materials from India, including MS billets, steel sheets, and MS wire. This dependency is reflected in the significant increase in sponge iron imports, which jumped by 55% year-on-year to reach approximately 800,000 metric tons in FY 2023-24, up from 500,000 metric tons in the previous fiscal year. Overall iron and steel imports climbed to around 1.8 million metric tons in FY 2023-24, compared to 1.6 million metric tons in FY 2022-23, underscoring both the industry's growth and Nepal's reliance on foreign materials. This growing demand presents both challenges and opportunities as Nepal seeks to develop its domestic production capabilities and reduce its trade deficit in the steel sector.

Rich Domestic Iron Ore Deposits Await Development

Nepal possesses substantial iron ore resources that could significantly reduce its import dependency if properly developed. The country has identified approximately 10 major iron ore deposits and several minor occurrences distributed across various regions, with total estimated reserves of approximately 208 million metric tons, potentially sufficient to meet domestic steel demand for the next century. The Thosey deposit in Ramechhap district holds historical significance as Nepal's oldest known iron ore site, with mining operations dating back to 1893 when they began at Ekan Phedi before relocating to Thosey. The most substantial reserves are found in the Jhumlabang deposits of Rukum East, containing approximately 200 million metric tons of hematite ore spread across 100 hectares, and the Dhaubadi reserves in Nawalparasi East, which hold around 99 million metric tons in a similar area. Currently, Dhaubadi Iron Company Limited is advancing exploration efforts, having sent ore samples to China for detailed analysis. Preliminary findings suggest that producing sponge iron represents the most viable option given the ore's composition, and the company is now preparing a detailed project report to progress toward commercial production. Additional deposits at Thoshe (Ramechhap), Labdi Khola (Tanahun), Jirbang, and Chitwan further enhance the country's resource potential. The government has initiated mining development projects at the Jhumlabang and Dhaubadi sites, while major companies including Jagdamba Steels, Jay Ambe Steel, Narayani Ispat, and Sarbottam Steel have made substantial investments to capitalize on these resources.

Technological Challenges Impede Green Transition

Despite its rich resource potential, Nepal faces significant technological barriers to developing a modern, sustainable steel industry. The country currently lacks the advanced reduction systems based on hydrogen and the sophisticated electrolyzers needed to produce green hydrogen for steelmaking. These technologies require substantial capital investment and specialized expertise that remains scarce within Nepal. The existing steel sector relies heavily on conventional blast furnace technology, which necessitates coal as a reduction agent, resulting in significant carbon emissions. Transitioning toward green steel operations would require extensive facility upgrades demanding both enormous funding and considerable time to implement. This technological gap represents one of the most formidable obstacles to Nepal's ambitions of developing a self-sufficient and environmentally sustainable steel industry. Without access to modern production methods, the country risks remaining dependent on carbon-intensive processes or continued imports, even as it develops its domestic ore resources. Bridging this technological divide will require coordinated efforts between government, industry, and international partners to build both the physical infrastructure and human capacity needed for modern steelmaking.

Policy Support Essential for Industrial Transformation

For Nepal to successfully transition toward green steel production, comprehensive government policy support is essential. The government must establish a supportive regulatory framework that includes green hydrogen production subsidies, tax incentives for sustainable technologies, dedicated research and development funding, and industrial standards that promote environmental sustainability across the sector. Without stable, long-term policies in place, progress in clean energy adoption and industrial decarbonization will likely face significant delays and uncertainties. The policy environment directly impacts private investment decisions, as investors remain hesitant to commit capital to long-term green steel initiatives that rely on emerging technologies without clear governmental support and regulatory predictability. This reluctance creates a financing gap that further complicates the transition process. Effective policies would need to address multiple aspects of the green steel value chain, from renewable energy generation to hydrogen production, steel manufacturing processes, and market development for sustainable steel products. By creating a coherent policy framework that aligns environmental objectives with economic development goals, Nepal could accelerate its transition while maximizing the benefits for both industry and society.

Investment Challenges and Risk Perceptions

Private investors face substantial challenges in financing green steel projects in Nepal, primarily due to the perceived risks associated with emerging technologies and uncertain returns. The long payback periods typical of major industrial infrastructure projects, combined with the relatively unproven nature of green steel technologies at commercial scale, create significant hesitation among potential funders. Traditional financial institutions often lack the specialized knowledge needed to accurately assess the risks and opportunities in this evolving sector, further complicating access to capital. Additionally, the current cost differential between conventional and green steel production methods creates concerns about market competitiveness, particularly in price-sensitive markets. Without clear mechanisms to bridge this green premium, either through policy support or market differentiation, investors may continue to favor established technologies with more predictable economics. Overcoming these investment challenges will require innovative financing mechanisms, risk-sharing arrangements between public and private sectors, and potentially international climate finance support to recognize the global climate benefits of decarbonizing steel production in developing economies like Nepal.

Hydropower Surplus Creates Unique Opportunity

Nepal possesses a distinct competitive advantage for green steel production through its abundant hydropower resources, which could provide clean electricity for hydrogen production and electric arc furnaces. According to government projections, Nepal's installed hydropower capacity is expected to reach 28,500 MW by 2035, while peak domestic demand is anticipated to be only 7,581 MW, creating a potential surplus of approximately 21,000 MW. Without strategic planning for this excess capacity, more than half could go unutilized, representing a potential economic loss exceeding Rs 5 trillion annually. However, if just 10,000 MW of surplus electricity were directed toward green hydrogen production, it could generate approximately 1,500 kilotons of green hydrogen annually. This hydrogen could support the production of around 30 million metric tons of green steel, far exceeding Nepal's domestic demand and creating significant export opportunities. The economic potential is substantial, with 30 million metric tons of green steel potentially generating annual revenue of Rs 22.5 trillion. Beyond the economic benefits, this approach would deliver significant environmental advantages. Producing the same quantity of steel using conventional processes would consume approximately 23 million metric tons of coal and release more than 50 million metric tons of CO₂ into the atmosphere. By leveraging its hydropower resources for green steel production, Nepal could position itself as a regional leader in sustainable industrial development while addressing both economic development and climate objectives.

Circular Economy and Environmental Benefits

By developing an integrated green steel industry, Nepal has the opportunity to establish a circular economy model that minimizes waste and environmental impact while maximizing resource utilization. This approach would involve not only using domestic iron ore and clean hydropower but also implementing advanced recycling systems for steel scrap, reducing the need for primary raw materials. The environmental benefits would extend beyond reduced carbon emissions to include decreased air and water pollution, lower land disturbance from coal mining, and reduced transportation emissions from importing raw materials. A green steel industry would align with Nepal's national climate commitments and enhance its standing in international climate negotiations, potentially attracting climate finance and technology transfer opportunities. Furthermore, as global markets increasingly demand low-carbon products, Nepal's green steel could command premium prices and preferential access to environmentally conscious markets, particularly as border carbon adjustments and other climate-related trade measures become more common. By embracing circular economy principles in its steel sector development, Nepal could create a model for sustainable industrialization that balances economic growth with environmental protection, potentially serving as a blueprint for other developing nations facing similar challenges.

Key Takeaways:

• Nepal possesses approximately 208 million metric tons of iron ore reserves across 10 major deposits, potentially sufficient to meet domestic steel demand for the next century, with the largest deposits located in Jhumlabang (Rukum East) and Dhaubadi (Nawalparasi East).

• By 2035, Nepal is projected to have 21,000 MW of surplus hydropower capacity that could produce 1,500 kilotons of green hydrogen annually, potentially supporting production of 30 million metric tons of green steel worth Rs 22.5 trillion while avoiding 50 million metric tons of CO₂ emissions.

• Despite its resource potential, Nepal faces significant technological and investment barriers to developing a green steel industry, requiring comprehensive government policy support including subsidies, tax incentives, and R&D funding to attract private investment and build necessary expertise.