From grey to green – challenges for the European steel market

Steel demand by economic sector

The steel market in Europe is a key economic factor and a cornerstone of industrial production chains. As the largest steel producer in the EU, Germany holds a leading position. Steel is not only important for the construction and automotive industries, but is also a key factor in the success of the energy transition. Offshore wind energy requires large quantities of steel for foundation structures, while steel is used for the tower, engine room and rotor blades in onshore wind turbines. Solar power plants also need steel for their supporting structures. However, the switch to green production methods and growing international competition pose major challenges for the sector.

Price index for hot rolled coil (HRC) steel quoted on the London Metal Exchange (LME) for the North American market. The price index was provided by Platts, a provider of energy and commodity market information.

1. Market structure and trade dynamics

Germany is the largest steel producer in the EU and around 80% of German steel exports go to the EU. The steel trade mediates between steelworks and the processing industry and ensures a fast and efficient supply. Many SMEs and smaller companies purchase their steel from traders as they do not require the minimum purchase quantities from the steelworks. The steel trade therefore makes a decisive contribution to a stable supply chain.

However, the price of steel is volatile and reacts sensitively to unforeseen global events such as the coronavirus pandemic or geopolitical conflicts. Futures contracts on commodity exchanges provide an indication of price trends, but only cover the prices for different types of steel, not for semi-finished products. Nevertheless, conclusions about prices can be drawn from historical data and stock market prices.

The steel market in the EU is currently experiencing a downward trend, which has been ongoing since the first half of 2023 and has intensified in the last two quarters. This is due to ongoing conflicts, energy price uncertainties and a deteriorating economic situation. Domestic deliveries are also showing weak demand and have been declining for six consecutive quarters. A further decline is expected in 2024, caused in particular by the ongoing recession in the construction sector.

The largest steel importers and exporters in 2023

According to the European steel association Eurofer, global overcapacity is currently four times greater than European demand for steel. The overcapacity is the result of rising imports from the most important steel exporting countries such as China and is exacerbated by steel from new countries of origin such as Algeria, Egypt, Indonesia, Malaysia and Vietnam. The global steel market grew from 514 million tonnes in 2019 to almost 560 million tonnes in 2023. Competitors often use government subsidies and dumping practices to increase their market share, leading to cut-throat competition that European producers will not be able to withstand in the long term.

Eurofer Director General Axel Eggert explains that Europe has now become a favoured export market for carbon-intensive overcapacity. This threatens the development of European clean-tech value chains at a crucial time of transition. To stabilise the European steel market, the EU extended the safeguard measures for European steel by two years in June 2024. The new guarantees and adjustments came into force on 1 July 2024 and will remain in place until 30 June 2026.

Introduction of the Low Emission Steel Standard (LESS) at the Hanover Trade Fair on 22 April 2024. From left to right: Sandra Gerhartz; Gunnar Groebler; Dr Anne-Marie Großmann; Dr Robert Habeck; Bernhard Osburg

2. Sustainability and the transition to green steel

With growing awareness of climate change and environmental protection, the demand for green steel is increasing. Initiatives to create green lead markets are crucial for promoting climate-neutral steel production. These markets make it possible to offset the additional costs of producing green steel by enforcing higher prices on the market. However, the discussions at this year's Kallanish Europe Steel Markets conference showed that the willingness of end users to pay extra for green steel is still low.

2.1 Green Lead Markets

Green lead markets are sales markets for environmentally friendly products that promote their market acceptance and demand. In the steel industry, they play a decisive role in supporting the transition to climate-neutral production. They help to establish sales markets in which higher prices can be achieved for green steel in order to offset the additional costs of production.

These markets complement climate protection contracts, which serve as start-up financing for the transformation. An initial supply of green steel is an essential prerequisite for the establishment of green lead markets and a basis for companies to switch to climate-friendly technologies at an early stage. The higher the customers' willingness to pay for green steel, the lower the compensation payments agreed via climate protection contracts.

Potential lead markets for green steel include public procurement and customer segments that are already under pressure to reduce their upstream chain emissions. For example, public procurement could prioritise products with low CO2 emissions in tenders. Or requirements could be introduced that public construction projects must use a specified minimum amount of low-carbon steel from a certain point in time. As the energy transition progresses, these requirements would be tightened to incentivise further transformation steps.

"Green steel is initially more expensive to produce and will have to compete with conventionally produced steel from Germany and abroad during a transition phase. The key, in addition to government start-up funding, is the development of green lead markets based on a clear definition of the term 'green steel'." WV Steel

Requirements for LESS labelling

2.2 LESS – The Low Emission Steel Standard

A decisive factor for the establishment of green lead markets is a clear and binding definition of green steel. This is the only way to create markets for climate-friendly products. Product carbon footprints, which are determined in accordance with recognised ISO standards, are an important first step. This should be supplemented by a classification system for climate-friendly steel that reflects the gradual transformation process towards climate neutrality and rewards investments in transformative processes.

On 22 April 2024, the German Steel Federation and the Federal Ministry for Economic Affairs and Climate Protection (BMWK) officially introduced the Low Emission Steel Standard (LESS) to promote green lead markets for climate-friendly steel. LESS was initiated by the German Steel Federation and is supported by the BMWK. Federal Minister Robert Habeck welcomes the LESS labelling as an important step towards sustainable standards and greater comparability in transformation efforts.

LESS is the first standard that covers both main production routes in the steel industry: the conventional blast furnace route and scrap-based electric arc furnace production. It enables the comparability of decarbonisation efforts and is intended to accelerate the transformation to climate neutrality. At the heart of LESS is a labelling system with a tiered classification scale for low-carbon steel. Companies must prove their scrap quota and the CO2 footprint of their steel.

Cover of the trade journal stahl., issue 1/2024, Vulkan Verlag

The system takes into account emissions along the entire value chain, including Scope 1 (direct emissions), Scope 2 (indirect emissions from energy procurement) and relevant Scope 3 emissions (upstream chain emissions). It comprises six classification levels that reflect the progress of decarbonisation.

The introduction of LESS followed a one-year stakeholder process in which over 60 representatives from politics, industry, trade, NGOs and science were involved. LESS builds on the internationally recognised proposal of the International Energy Agency (IEA) and will be managed by an organisation based in Brussels from autumn 2024. The standard is open to all steel producers for voluntary use.

3. Challenge: lack of demand and lack of a pan-European standard

At this year's Kallanish Europe Steel Markets 2024 conference in Milan, leading steel traders and steel manufacturers discussed the challenges in the European steel market. They agreed that there will be no strong regional demand driver by the end of the year. High overcapacity, high production costs and growing competition from Asia are weighing on the market.

The statement that customers are unwilling to pay a premium for green steel is a cause for concern. Most steel buyers are guided by price, not environmental concerns, and are more likely to opt for the cheaper steel if they have the choice. Widespread demand for green steel is still a long way from becoming the industry norm.

Carlo Beltrame, CEO at Donalam & LME at AFV Beltrame Group, said: "The green steel revolution should come from the market. And nothing comes from the market. Nobody is willing to pay more. "

Only in the automotive sector and among household appliance manufacturers is interest in green steel growing, as it is seen as a prestige object. The automotive industry is increasingly endeavouring to secure long-term access to this premium product, even if it is more expensive. This development is being driven by the growing interest of end consumers in climate-friendly products. Companies hope to be ahead of the competition if they can demonstrate the lowest carbon footprint.

Steel in the energy supply

Uniform standardisation across Europe, similar to the German LESS, would also significantly improve the promotion of the market for green steel. However, this does not yet exist, let alone an internationally harmonised standard – even though China produces over 55% of the world's steel. The difficulties begin with the definition of the term "green steel". Another reason for the disagreement is that not all types of steel can be produced with the same CO2 intensity. While basic steels are produced using scrap and green electricity, resulting in a very low product carbon footprint, speciality steels cannot be produced from scrap and therefore have a very different footprint.

Harssha Shetty von Jindal Shadeed Iron & Steel suggested that Europe could focus on engineering and source low carbon steel from other regions. He pointed to the rapid decarbonisation in China, which plans to convert 150 million tonnes of steel production from blast furnaces to electric arc furnaces in the near future.

The fundamental question of whether Germany or Europe needs the energy-intensive steel industry at all was also discussed at the Handelsblatt conference Zukunft Stahl 2024 in Essen. Several economists, such as Bastian Synagowitz from Deutsche Bank Research, argue in this direction. Politicians and businesses, on the other hand, argue that steel production is important for the supply chain, for example in the automotive industry. If steel production disappears, the purchasing companies will also disappear.

José Noldin, Managing Director of the French-based company GravitHy, which specialises in the production of low-emission iron, is confident. At the Fastmarkets International Iron Ore & Green Steel Summit 2024 in Vienna, he said that he is observing a growing interest in green steel. And the EU is a good place for it, as the Green Deal enshrines the need to supply green products in law.

"The European iron and steel industry can be competitive, but it is a competition based on sustainability. We need to look beyond price and cost criteria. Transparency is key. Traceability is key. Circular economy is key," said Noldin. "We are not competing for the same applications as cheap steel from other countries."

4. Outlook

The European steel industry is facing major challenges: global overcapacity, rising imports and the need for decarbonisation. Standards such as LESS and green lead markets are crucial to overcoming these challenges. Europe must maintain its competitive edge, navigate economic downturns, respond to changing market demands and capitalise on technological advances in green steel production.

The willingness of end consumers to pay a premium for green steel is a basic condition for transformation.