During the January-July 2022 period, steel production in the EU dropped 5.2Mt, or 5.7% y-on-y, a decline set to increase in H2.

Arcelor Mittal alone is reported to have stopped about 7Mtpy of production in Germany, France, Poland, and Spain. In addition, Germany’s Salzgitter, Slovakia’s Kosice, Serbia’s HBIS, Czechia’s Liberty Steel and Italy’s Acciaierie d’Italia have also stopped some of their operations. Although these stoppages should only be temporary, a weak demand outlook combined with high energy costs is likely to keep European steel production constrained for longer. The energy crisis and the looming recession which may hit Europe later this year (and next) will negatively impact EU steel competitiveness and result in more restructuring and downsizing. This hit to competitiveness will, in turn, increase the challenges facing Europe’s ambitious steel de-carbonisation plans.

The steel industry is responsible for about 8% of the world's carbon emissions but has a different impact on a regional basis, accounting for ~5.5% of emissions in the EU to ~15% in China. Despite Europe's relatively low carbon emission number, the EU aims at cutting emissions by one-third by 2030 at an estimated cost of €85Bn (US$85Bn).

Technology switch has a role to play. Blast Furnaces (BFs) using iron ore and coking coal produce approximately 1.6-2t of CO2 per tonne of steel compared to 0.5t for an electric arc furnace (EAF) using only scrap. However, recycled steel does not provide adequate quality standards for some flat products and ‘pure metallics’ such as directly reduced iron (DRI) must be added. As such, carbon emissions of an EAF using a 50% DRI charge would are ~1t of CO2 per tonne of steel.

Switching from BFs to EAFs & DRI may appear as a solution but the sector also needs to see electricity generated from renewable sources and DRI to move away from the use of natural gas as a reductor. The long-term objective is to use ‘green hydrogen’ as a DRI reductor (e.g., hydrogen generated by renewable energy) but the time frame for commercial production of ‘green hydrogen’ remains uncertain. In the meantime, most production will be of ’grey hydrogen’ produced with natural gas. ‘Blue hydrogen’ (which also uses natural gas but with processes for capturing and storing CO2) may improve things in the medium term, but this is not yet commercially available.

Acknowledging the costs incurred by the European steel industry, the EU is planning to introduce protection measures through the implementation of a carbon border adjustment mechanism (CBAM), an import tax designed to corral other countries into tackling climate change. Imports from low-cost, high emissions-producing countries would be taxed according to their emissions.

If the current energy crisis endures longer than expected, the European steel industry is likely to see accelerated decline in competitiveness, downsizing and rising imports, depending on demand. It is against this negative backdrop that the need to make large investments required to replace BF with EAFs and to build the necessary DRI operations must be contextualised. Will the investment come?

Although Project Blue believes that steel industry de-carbonisation will eventually happen, the current situation represents another challenge for ‘green steel’ and may delay its implementation.

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