The steel industry in Emerging Europe is staring at mounting costs as it must contend with paying for the greenhouse gas (GHG) emissions it creates.
The industry has warned this would make steel 100% more expensive to make, and that current EU and governmental support and policies are unable to support the investment required by its ambitious targets of decarbonising steelmaking and becoming carbon neutral by 2050.
For steel manufacturers in Emerging Europe that export to the EU, the immediate challenge is the carbon price that the EU is setting through its Carbon Border Adjustment Mechanism (CBAM). This will require steel imports into the EU to be liable to pay a carbon price equivalent to the current EU Emissions Trading Scheme (ETS).
Steelmakers in Russian, Ukraine and Turkey face a big hit to their costs and potentially revenues, but with Brussels not yet publishing full details of the scheme, which is scheduled to be fully up and running by 2026, there is still much uncertainty and complaints about unfairness and a sloping playing field.
100% rise in costs
Pursuing a road map to a low or carbon-neutral European steel industry will only happen with fundamental changes to technology, the cost structure and electricity consumption, the Eurofer, the European Steel Association, said in a position paper.
The trade body is of the view that the European steel industry could achieve carbon emissions cuts of between 80-95% by 2050, but only under the right conditions and through new technological pathways.
This will come at a major cost, with total costs of production forecast to rise by 35-100% per tonne of steel by 2050.
European steelmakers need to invest €50bn if they are to reduce their CO2 emissions by 55% by 2030 compared to 1990 levels and progress towards climate neutrality by 2050, Eurofer said.
However, they could only do this if current carbon trading schemes, such as the free allocation of EU ETS allowances, continue after 2026.
The EU now intends to reduce and abandon such free allowances from 2026 when the new CBAM goes fully online.
Steelmakers view this as a major threat to their business model, raising their business costs and threatening to hinder investment in greener technology.
The industry could require 400 TWh of CO2-free electricity in 2050, about seven times what the sector purchases currently.
At most risk is Russia, whose steel giants such as NLMK, EVRAZ, Severstal, MMK, Matalloinvest and Mechel face major costs from global carbon prices, such as the EU’s CBAM, especially as they do not need to reduce emissions greatly to meet Russia’s emissions commitments.
For steel alone, a price of €60 per tonne would cost $780-800mn per year for Russia’s steel exports to Europe, which stand at 13mn tonnes per year (tpy) and are worth $7bn, Russian Industry and Trade Deputy Minister Viktor Evtukhov said in November 2020.
Russian reaction to the EU’s CBAM proposals in July was fairly negative, with Russian steelmakers association Russkaya Stal accusing the new system of being unfair and a threatening to imbalance the market.
Russkaya Stal warned that the CBAM could be a barrier to trading with the EU, and that it would probably result in an appeal to the WTO.
However, the spectre of the CBAM, and possibly other carbon pricing mechanisms worldwide, could spur more investment in decarbonisation in Russia.
In terms of costs, Russkaya Stal said it was too early to make any calculations, but VTB said in a recent briefing that if Russia’s major CO2 producers had to pay for their CO2 at EU prices, then steelmakers could lose up 35-30% of their EBITDA. For power generators, this rises to 100%.
A key issue is that there is no carbon price in Russia, meaning that Russian steel exporters will face the full cost of any CBAM allowances.
The EU has proposed that any domestic carbon taxes could be offset against CBAM allowances.
However, the Russian’s CO2 strategy draft, published on August 25, did mention the possibility of CO2 payments.
The Energy Ministry said it expected the legislation on low-carbon certificates to be approved in the autumn.
"The Ministry for Economic Development’s statement that the low-carbon, long-term development in Russia has to have an indicative CO2 price is a step towards getting a grasp on carbon trading in Russia," VTB Capital (VTBC) commented on August 25.
Russia manufactured 71.9mn tonnes of steel in 2019, according to the World Steel Association, while its biggest producer NLMK produced 15.61mn tonnes.
NLMK said it was aiming to reduce emissions by 3.5% to 1.91 tonnes of CO2 per tonne of steel by 2023, compared with 1.98 in 2019.
This would mean that it produced 30.9mn tonnes of CO2 in 2019. Using a similar intensity for the sector as a whole, this puts Russian steel emissions at 142mn tonnes in 2019.
This compares with 2.6bn tonnes of CO2 for the global steel sector, according to the International Energy Agency (IEA).
Russia aims to reduce its CO2 emissions to 46% below 1990 levels. However, this represents keeping emissions at about current levels and does not require any major reductions.
The Economy Ministry’s CO2 strategy draft sees the emissions of GHG declining by 25% between 2019 to 2050. mostly due to natural absorption by forests and swamps.
All steelmakers are investing in green steel technology. Severstal is looking at developing CCS and hydrogen, and aims to reduce its emissions by 3% by 2023 on 2020 levels.
NLMK said in June 2021 that a $3.4bn investment in new low-carbon steel technology, called hot briquetted iron (HBI), ought to meet tight EU market rules.
Put simply, Russia’s steelmakers are major polluters, and need to make investment quickly if they are to contend with the advance of carbon taxes and protect their revenues.
However, with no final information about how exactly the CBAM will work, the country’s steelmakers are still at the guessing stage.
Turkey produced 33.7mn tonnes of steel in 2019, of which 12.2mn tonnes was exported to the EU, according to data from the World Steel Association and the EBRD. These exports were worth $7.7bn per year between 2017 and 2019. In 2020, exports grew by 6% to 35.8mn tonnes.
Depending on the CBAM rules that the EU adopts, the CBAM system could cost Turkey’s steel exporters up to an estimated €450mn per year by 2036, leading to loss of competitiveness of up to 10.8%.
Alternatively, the CBAM system could add 11% to the price of Turkish steel, according to data from the EBRD’s Round Table on Climate Change and Sustainable Transition.
In the wider context, the CBAM is going to cost Turkey’s whole manufacturing sector, including steel, cement and chemicals, an additional €1.08bn per year, according to the Turkish Industry and Business Association (TUSIAD).
However, the country’s recent steel export dynamics have shown a move away from the EU as exports market.
Since 2018, the Turkish steel industry has been struggling with customs barriers, rising customs duties and quotas imposed by the US and the EU.
In March 2018, the US subjected all countries to 25% additional duties on steel imports, and this was doubled for Turkey in August 2018 amid the Pastor Brunson row.
Although the additional duties for Turkey were removed and reduced back to 25% in May 2019, Turkey’s steel exports to the US in 2019 decreased to almost one-fifth of the previous year’s volume.
In recent years, the EU has accounted for 50% of Turkey’s foreign steel exports. After the arrival of all of these quota measures and customs duties, the share of the Turkish steel industry’s exports to the EU and the US in total decreased to 35%.
The Far East, Southeast Asia, Africa and South America have recently become alternative markets for the Turkish steel industry.
In technical terms, Turkey’s relatively low-carbon emitting steel industry may not be hit by the CBAM as much as other countries.
Turkey, the biggest exporter of steel to Europe, may gain one clear advantage under the new CBAM system.
The EU is still clarifying if indirect emissions from power usage will be covered by CBAM, meaning the Turkish steel industry – which heavily uses furnaces that emit solely through their electricity usage – will be less affected.
The country currently does not have a carbon price, although there are voluntary schemes.
However, a recent briefing from the European Council on Foreign Relations highlighted how the EU's Green Deal could foster better relations between Brussels and Ankara.
Relations could improve if the EU helps Turkey to adjust to the European Green Deal and the climate challenge more broadly.
Turkey seems well placed to handle the CBAM, given its cleaner steelmaking technology and its ability to find new exports markets worldwide. However, as the biggest exporter of steel to the EU, it cannot avoid taking a hit to its revenues.
Finally, Ukraine is also exposed to the EU’s carbon price, particularly as its steelmaking is dirty and often outdated.
It manufactured 20.8mn tonnes of steel in 2019, World Steel Association figures state, but has set a derisory carbon price of just UAH10.0 ($0.40) per tonne, one of the lowest in the world.
Ukrainian steelmakers will need to invest $25bn in order to meet the EU’s new low-carbon standards, analysts at GMK Centre said in July.
Yuriy Ryzhenkov, CEO of Ukraine’s biggest steel concern Metinvest, said at a recent forum: “Metinvest is developing a detailed roadmap to reduce CO2 emissions ... We are very careful in working out each step that will eventually lead our production to carbon neutrality, because such a large-scale transformation should not harm the sustainability of our business.”
Over the next three years, Interpipe, the Dnipro-based steel pipe and railway wheel manufacturer, is also planning to invest $100mn in carbon reducing projects, Denys Morozov, first deputy director general of Interpipe, announced at the GMK forum.
The crucial issue is that Ukraine’s steelmaking is especially dirty, with 23% of output using open-hearth technology.
Morozov said the share of steel produced by electrometallurgy, a low-carbon method, “does not exceed 5%”.
By contrast, electrometallurgy shares are higher elsewhere: the Middle East, 94%; Mexico, 83%; the US, 71%; Turkey, 69%; India, 56%; Canada, 46%; and the EU, 42%.
Ukraine has a 2050 Green Energy Transition Concept, which aims to meet the objectives of the European Green Deal. However, it admits that the country can only become climate neutral by 2070.
The country’s GDP to energy and carbon consumption ratios are still extremely high compared with not only those of OECD members (three times greater) but also neighbouring Eastern European countries, the concept said.
Ukraine’s dirty technology means that it is particularly exposed to the CBAM system.
The country’s iron and steel producers could face a 15% rise in the cost of their products, the GMK Centre warned, while fertiliser faces an 18% increase and electricity 40%. Overall, 33% of the country’s exports to the EU could be affected.
Meanwhile, the steel industry faces two technical choices to reduce its emissions, Eurofer said in its road map.
The first, so-called smart carbon usage (SCU) would see the use of carbon capture technology to reduce emissions in the production process. This could be done by either carbon capture and storage (CCS) or carbon capture and usage (CCU).
The second route is carbon direct avoidance (CDU), which seeks to use hydrogen and renewable energy during the steelmaking process.
One example of this is using hydrogen instead of coal, such as at Hybrit’s pilot project in Sweden, which uses hydrogen and renewable electricity to make so-called green steel.
It delivered its first batch of green steel in August 2021, and aims to launch commercial production in 2026.
This represents a major overhaul in the sector’s business model, and would require a 95% reduction in CO2 emissions compared to 1990 levels.
With the steel industry fearing a 100% rise in production costs to reach net zero and having to contend with paying for the carbon dioxide it produces through such schemes as the CBAM, it must still play a waiting game to work out exactly it will be forced to pay a carbon price.
Meanwhile, it must invest in cleaner steelmaking technology and harness new energy sources such as hydrogen and renewables energy.
Mckinsey said in a report that 14% of steel companies’ potential value is at risk if they are unable to decrease their environmental impact.
While steelmakers face rising costs and falling revenues, Mckinsey warned that while the technology exists to decarbonise steel, any targets depend on enough renewables energy and hydrogen and the availability of capital. But perhaps most important is the willingness of the customer to value carbon-reduced/neutral products and to pay for decarbonisation.