Can ‘green’ steel halt EU deindustrialisation?

Summary

Toxic mix of factors hurting EU’s aspirations for global leadership in green steel

Cleaner domestic steel production waning, dependence on dirtier imports rising

Europe’s steelmaking slump added 15.3 mtCO2 to industry’s global footprint since 2014, equivalent to annual emissions of Lithuania

Deep decarbonisation is possible for as little as €76/tCO2, but scalability is a challenge and free ETS allocations remove economic incentives

CBAM creates headroom for green steel to compete, but socio-political risks abound

Europe has high hopes of leading the global push to decarbonise steel. The combination of CO2 levies and support for pioneering green steel production processes could accelerate uptake of carbon pricing and decarbonisation of export-oriented heavy industries in climate laggard markets. These long-term policies should lay the groundwork for Europe’s global leadership in green steel production, but the path to get there is strewn with complex and messy challenges.

Europe’s steel industry has for years struggled to compete globally due to high costs, as illustrated by TransitionZero’s Global Steel Cost Tracker (GSCT). Those problems were exacerbated by war in Ukraine and a bruising energy crisis, which crushed already-slim margins for European heavy industries. Soaring energy costs triggered a spate of industrial plant closures in 2021 and 2022, prompting fears of the continent’s metals, fertilisers and chemicals sectors accelerating their structural decline.

The threat of deindustrialisation looms large over Europe’s flagging steel industry. Production of crude steel[1] fell by 11% across the EU and 12% in non-EU European countries in 2022, far deeper than the overall global decline of 4.3%. Proportionally, Europe’s steel slump was second only to that of sanctions-hobbled Russia and war-torn Ukraine. An estimated 15 European steel plants had suspended or planned to suspend production as of July 2022, with ArcelorMittal accounting for the vast majority (7 million tonnes of annual production capacity).

Europe leads global steel slump

The energy crisis has abated in recent weeks, and with it fears of a deep global recession. Natural gas prices returned to pre-Ukraine invasion levels in December but they remain significantly above the pre-war average (read more in our blog, Is gas-fired power back in the money?). Reprieve from soaring costs is probably only temporary and European steel producers are wary. It will take more than a few months of relative price stability to reverse a years-long trend of decreasing competitiveness.

A big problem for the European steel industry is that domestic production is falling faster than demand. Apparent steel consumption across the continent is expected to fall by 3.5% in 2022 and 1.7% and 2023. With production dropping 11-12%, cheaper imports with a higher emissions footprint are filling the gap.

The problem is aggravated by the EU’s tendency to import some of the world’s dirtiest steel. Six of the most emissions-intensive steel exporting countries have consolidated their grip on the EU steel market, squeezing out cleaner rivals. The race to replace domestically produced steel – generally the least emissions intensive of all – is being won by the dirtiest contenders.

Ten years ago, the EU’s mix of finished steel product imports was far more diverse than it is today. Countries with steel emissions intensities below the global average – Taiwan, V1, Egypt and Brazil – were vying for a spot in the top-ten EU exporters club. Fast-forward to 2023 and those countries have lost significant market share to rivals with much higher steel products emissions factors: China, India, South Korea, Russia and Ukraine. The exception to the rule is Turkey, which has below average steel product emissions and was the EU’s top supplier by volume in 2022.

Europe’s steel import burden

Modelling by TransitionZero reveals the extent of the imported steel emissions burden on Europe. Underpinning the model is a mass balance equation, whereby country-level steel imports and apparent consumption volumes are derived from industry statistics on production pathway [2], exports and changes in national steel stocks [3].

Mass balance equation

Production + Imports = Exports + Demand + Change in stock

Pairing the mass balance with historical data on global trade movements and emissions intensities of each steel exporting country, it is possible to calculate the shifting emissions footprint of the steel consumed in each country over many years. Since domestic European steel tends to be cleaner than imports, the footprint is measured in terms of the emissions balance.

Emissions balance equation

Consumption related emissions = [National production - Exports] x Domestic steel emissions factor + [Steel imports by exporting country x Emissions factor of corresponding exporting country]

A negative emissions balance score implies imports are less than the sum of domestic production plus exports, while a positive score implies imports are greater. A score of zero indicates imports are equal to production plus exports.

Across Europe, the emissions balance score has ticked steadily upwards over the last decade. At least four countries – Czechia, Germany, Romania, and the UK – appear to have passed a tipping point from negative to positive emissions balances in the early 2010s, as imports replaced indigenous production.

Countries which passed that tipping point long ago – France, Italy, Hungary and Poland – are deepening their CO2-intensive import dependency. And in countries with surplus domestic production – Belgium, Finland, Slovakia and Sweden – growth in imports is eroding the negative emissions balance score.

This is reflected at the continent level. The volume-weighted emissions balance for the EU27+UK flipped definitively from negative to positive in 2014, and has been rising ever since.

Over the 2002 to 2013 period, European steelmaking reduced the net global emissions burden of the steel industry by an estimated 9.2 million tonnes of CO2. In the period since then, the decline of European steelmaking has added 15.3 mtCO2 to the industry’s net global footprint. This is more than the annual CO2 emissions of Nepal or Lithuania, and equivalent to the annual emissions of 9.4 million UK cars [4].

There are parallels to be drawn here between macro steel trends and Europe’s energy mix. Indigenous fossil fuel production is declining more quickly than demand, creating an opening for dirtier imports. And just like in steel, the EU imports oil and gas from some of the world’s most emissions-intensive exporting countries.

Those parallels only go so far. The major difference between EU trade balances in steel and energy is renewables. TransitionZero’s Coal-to-Clean Price Index (CCPI) reveals that wind and solar power are cheaper on a lifetime basis than existing coal and gas-fired electricity across Europe, and their uptake is offsetting the trend towards more expensive and polluting fuels. By contrast, steel made in Europe tends to be uncompetitive against imports, so there is no economic rationale for Europe to transition to cleaner steel – at least, not yet.

Putting a price on imported CO2

That could change with the introduction of the EU’s Carbon Border Adjustment Mechanism (CBAM), which will levy a tariff on steel and certain other products made in countries that do not put an EU-parity price on carbon. Companies importing into the EU will be obliged to pay the difference between the carbon price paid in the country of production and the price of EU emissions allowances (EUAs) on the EU Emissions Trading System (ETS) – but only once free emissions allocations for EU heavy industries are phased out in the mid-2030s.

In theory, the switch from free ETS allocations to CBAM will create a level playing field between EU and non-EU steel producers. It will also encourage exporting countries to raise their own carbon pricing to EU levels to repatriate CBAM levies that would otherwise be paid to EU customs authorities.

CBAM levies will raise significant sums for the EU. The amount is a function of the carbon price and the EU’s import dependency. If CBAM had been in force, the cash levy raised against finished steel products alone would have ballooned from €250 million in 2017 to €2.7 billion in 2022. With EUAs this month rallying towards €100 per tonne, that figure could be breached again in 2023. And remember that this figure applies only to products, not crude steel, which would roughly double the total funds raised by CBAM steel levies.

The EU Parliament estimates that total CBAM revenues across all import categories will range from €5 billion to €14 billion per year. Who will benefit from this fund? In the early years only a small proportion is likely to be repatriated by the creation of domestic carbon pricing regimes in exporting countries. There is a debate underway around how the EU will utilise CBAM revenues: are they a windfall tax for member states to support homegrown green industries, or will they be spent overseas to help the EU’s least developed trade partners decarbonise their export industries?

CBAM will come into effect in October 2023, but its full force will not be felt until free ETS allowances for EU industries are phased out. This will happen gradually between 2026 and 2034, meaning the EU has some time to figure out whether there is a way to produce decarbonised green steel that is cost-competitive with imported steel plus the CBAM levy.

That is the $278 billion question facing Europe’s steel industry today: how cheaply can green steel be produced, and how quickly can it be scaled up?

The cost of ‘green’ steel

Answering this question is not straightforward. There are many pathways for reducing steel emissions, and many variables determine their cost effectiveness today and in the future.

Modelling by TransitionZero shows that a broad range of carbon prices is required to render each pathway commercially viable today. For example, injecting hydrogen into a basic oxygen blast furnace (BF-BOF) is just one pathway but it could have a marginal abatement cost of anywhere between $121 and $754 per tonne of avoided CO2 (€113 and €702 per tCO2).

The variance is due to the many ways of creating hydrogen. These figures were modelled using plant-level data from Thyssenkrupp's Duisburg steel plant in northern Germany – one of Europe’s oldest and largest BF-BOF facilities, with a nominal capacity of 11.6 million tonnes per annum (mtpa) of crude steel. It is also one of the dirtiest, with an emissions intensity of 2.3 tCO2 per tonne of steel produced.

In the best case scenario, hydrogen injection reduces the emissions intensity at Duisburg by less than 20% at an abatement cost of $121 (€113) per tCO2. But by switching to an altogether different steelmaking process using an electric arc furnace (EAF), much deeper emissions savings can be achieved at a lower cost per tonne of CO2.

Running an EAF-based steel plant using 100% scrap steel as feedstock emits an estimated 85% less CO2 than a theoretical 2 mtpa capacity BF-BOF plant, at a cost of $81 (€76) per tCO2. This is well below the current ETS price of ~€90/tCO2, but the economic incentive for switching is muted because free allowances insulate steel producers against this cost.

Scrap recycling offers the most cost-effective green steel pathway since it skips the emissions-intensive direct reduction ironmaking (DRI) step of the process, although it faces scaling limitations. Steel recycling is an established industrial process but scrap collection and processing supply chains will take time to develop in many markets. Also, certain types of high specification steel will always require virgin steel derived from iron ore.

Decarbonising ironmaking will therefore be essential too. Replacing natural gas with ‘blue’ or ‘green’ hydrogen at the DRI stage achieves this, reducing the final emissions intensity of crude steel by 64% and 69% respectively, at a cost of $95 and $150 (€89 and €140) per tCO2.

These pathways face their own challenges. The achievability of CO2 capture rates are a concern for ‘blue’ H2. Similarly, widespread usage of ‘green’ H2 in steelmaking implies Europe will address long-standing obstacles to mass deployment of renewable power capacity.

The Great Green Race

Green steel incentives will grow over time because the replacement of free allocations with CBAM will happen against a backdrop of rising CO2 prices. The gap between CO2 abatement costs and current EU-ETS carbon pricing will narrow as allowances are removed from the market to achieve the EU’s tightening carbon targets. This will make conventional steelmaking more expensive. Also, green steel technology costs are expected to fall as deployment ramps up, learning is absorbed into supply chains and economies of scale are achieved.

Economics alone will not determine how steel is decarbonised, nor how quickly. Scalability, technology readiness level, conversion complexity and other non-financial barriers mean there is no silver bullet, and the best option depends on existing infrastructure and the prevailing energy mix. Carbon pricing, border taxes and regulation will be just as influential, if not more so. In this sense, Europe is well positioned to lead the global race to secure low-carbon industrial investment.

The EU fired the starting pistol on this race with CBAM but others are catching up, raising the prospect of a new wave of ‘green protectionism’ (read more in our end-of-year blog, 2022 in review: Goodbye normality, hello volatility). Reports of EU leaders being in “panic mode” over European industries relocating to the US to take advantage of generous tax credits illustrate how carbon trade wars could antagonise Western alliances. A hastily composed EU Green Deal Industrial Plan is causing friction among member states by threatening the integrity of the single market.

There has been less discussion about the cost to consumers of decarbonising steel, and the socio-political repercussions of CO2 levies on essential consumer goods. Green steel might be cost-competitive with unabated conventional pathways by 2050, but the transition over the intervening decades implies heaping new costs onto consumers and taxpayers.

Risk is inherent in transition, but failing to transition poses the highest risk of all. Previous modelling by TransitionZero found Germany and Italy among the countries facing the highest risk of stranded steel assets from 2030 (see blog, Stranded asset and carbon pricing risk in the steel industry).

Decarbonisation presents an opportunity for Europe to reinvigorate its flagging steel industry and reverse the twin trends of declining production and rising import reliance. To achieve this, European politicians must find a way to support industrial decarbonisation while protecting vulnerable consumers, preserving fiscal integrity and nurturing transatlantic relations. The good news is that numerous green steel projects are making headway across Europe. If successful, these could become a global reference in the race to cut industrial emissions and secure green collar jobs.

Notes

1. Crude steel is steel in its first solid (or usable) form: ingots, semi-finished products (billets, blooms, slabs), and liquid steel for castings.

2. Includes basic oxygen furnace (BOF), electric arc furnace (EAF) and other pathways

3. This is necessary because there are gaps in the available data. The same is true of steel trade flows, meaning that robust conclusions cannot be drawn across the whole of the EU or Europe more broadly without relying on assumptions around steel import origin that could deviate from reality.

4. Assumes 1,682,383 grams of CO2 per average UK car, per UK government data