LME Week: European steel sector committed to decarbonization despite ongoing economic woes
Downturn in Europe
Steel consumption in Europe has been deteriorating in 2024 so far, and European steel industry association Eurofer has downgraded its outlook for the sector several times already this year.
Apparent demand is expected to recover by 1.4%, rising to 127 million tonnes in 2024, Eurofer said in the latest report in July – a downward revision from the previous, more optimistic, forecast from the end of April, when it predicted a 3.2% recovery to 130 million tonnes.
Notably, the automotive and construction sectors, the two key steel-consuming sectors, are both facing downturns.
Automotive is now expected to decline by 3% in 2024 (revised down from a 0.4% decline in a previous outlook) before recovering in 2025, with a predicted increase of 2.3% (up from a previous estimated growth of 0.8%).
“We have around 20% fewer orders from the automotive sector year on year,” a steel service center source in Germany told Fastmarkets.
One of Germany’s leading car producers, Volkswagen, is considering closing of some German factories, claiming that the transition to electric vehicles (EVs) has been “brutal” for the European car market.
The downturn in the automotive sector was reflected in Eurofer’s latest quarterly report.
“Uncertainties around the [introduction] of EVs and delays to launches of new models – many of them, hybrid or fully electric vehicles, preparing the ground for the ban on petrol cars in the EU by 2035 – have proven [to be] unsupportive factors [in terms] of consumer demand. Coupled with the lack of facilities such as recharging points, they have also delayed investment decisions by carmakers,” Eurofer said in the report.
Construction, which is the largest steel-using sector and represents 35% of total steel consumption in Europe, is widely expected to have declined for the second year in a row in 2024, although Eurofer predicts the decline in construction activity will slow to 1.4% rather than its previous prediction of a 1.9% decline.
Despite the looming challenges, however, European steelmakers remain committed to the green steel transition and expect the market for green steel to grow exponentially in the upcoming years.
Public investment in ‘Green Steel Hubs’
The EU is fully committed to the transition to green steel, with multi-billion investment projects announced and more than 50 million tonnes of new steelmaking capacity expected to come online in 2025-2027, according to Fastmarkets estimates.
And in 2023-2024 alone, more than €10 billion ($11.1 billion) in public investment has been granted by European governments to finance new green steel capacity among producers in Germany, France, Spain and Sweden, among others.
“The steel sector is a backbone of the European economy. To meet EU’s climate goals, it needs support, especially [at a] time like this,” a mill source told Fastmarkets.
Green steel premiums a challenge
In the past few years, European steel producers have accelerated their decarbonization efforts and the new market for steel with a reduced-carbon footprint has emerged. with all the major flat steel suppliers in Europe developing their own green steel brands – XCarb, Arvzero, SSAB Zero, Bluemint, Greentec, among them.
But there is no common standard or official definition for “green steel” as yet.
Fastmarkets’ methodology, however, provides a the following definition for European green steel: “Steel produced with Scope 1,2 & 3 emissions of maximum 0.8 tonne CO2 per tonne of steel.”
Sources estimate that green steel volumes traded in Europe have amounted to about 100,000 tonnes so far in 2024.
Offers for green steel produced in European electric-arc furnaces and with emissions for Scope 1,2 and 3 of below 0.8 tonnes per 1 tonne of steel were reported at €200-350 per tonne in September.
However, most buyers estimated the achievable premiums for green steel with Scope 1, 2 and upstream Scope 3 emissions below 0.8 tonnes of CO2 per tonne of steel at closer to €100-200 per tonne.
“Premiums of €250-350 per tonne can be achieved for steel sold under long-term contracts. In the spot market, but it is possible to get lower prices,” a buyer source said.
Notably, recent trades for steel with Scope 1, 2 and upstream Scope 3 emissions of less than 0.8 tonnes of CO2 per tonne of steel were reported at €100-150 per tonne in September, with some transaction undercutting the mark of €100 per tonne, Fastmarkets reported.
“This year [2024] started on a positive note, but [overall] steel demand is deteriorating, the steel market is weak in general and the willingness to pay a premium [for green steel] is not there,” a mill source told Fastmarkets.
Market participants said there was a lack of projects across Europe requiring green steel and that demand from the key consumer – the automotive industry – had also been slowing down lately, in line with the general downturn in the steel sector.
And Fastmarkets’ steel hot-rolled coil index, domestic, exw Northern Europe, fell to its lowest level since November 2020 when it dipped to €549.88 per tonne on September 25, down by €2.83 per tonne from €552.71 per tonne the previous day
And there have been no signs that the downtrend in the carbon market has stopped, sources said, with short-term expectations among market participants were quite bearish given the lack of end-user demand.
“This year [2024] is a lost cause; [There are] No signs of demand recovery until the year-end and European mills are selling [HRC] at prices below costs to fill order books,” a steel service center in the Benelux area told Fastmarkets.
As a result, European suppliers have also started to be more flexible with their green steel sales prices and have been offering discounts for bigger lots, sources said.
Fastmarkets’ weekly price assessment of the green steel domestic, flat-rolled, differential to HRC index, exw Northern Europe was €100-200 per tonne on September 19, stable on-week.
Decarbonization remains the priority
Despite the limited demand for green steel and the difficulties with charging a premium for it, most market participants said they remain optimistic that green steel will take off in Europe in the coming years.
“The transition to green steel is still on the cards – it’s coming; it’s inevitable. But considering the current economic situation [in Europe], it is going to be delayed,” a source at a large buyer in Northern Europe said.
One of the major drivers behind the decarbonization of steelmaking in the EU and globally remains the European Carbon Border Adjustment Mechanism (CBAM) – a tool intended by the EU to put a fair price on the carbon emitted during the production of carbon-intensive goods that enter the trading bloc.
The CBAM will be phased in, starting from January 1, 2026, alongside the phasing-out of the free carbon allowances applicable under the European Emissions Trading Scheme (ETS).
The price of CBAM certificates will be calculated by the European Commission on a weekly basis, based on the average price of the closing EU ETS carbon dioxide (CO2) allowances for each week.
The price of a carbon emissions permit in the EU was €66-70 per tonne in September 2024. And the EU envisages that the free allocation of such permits will be fully eliminated by 2034.
Market participants told Fastmarkets that CO2 allowance prices will jump to €200-250 per tonne when the free allocations are halved in 2030, and that there will be a surge above €400 per tonne by 2034, when free allocations are fully phased out.