Green steel at a crossroads: the challenges of electric steel production in Europe

Electric steel mills in Europe

Steel is a unique material. It is the most widely used metal in the world because it is strong, durable and recyclable, making it the perfect material for everything from skyscrapers to electric vehicles and solar panels.

Last year, over 1.8 billion tonnes of crude steel were produced worldwide. It is foreseeable that this figure will increase as the world heads towards a more sustainable future.

But how can these quantities of steel be produced cost-effectively?

European steel producers are facing major challenges: There is a consensus that the steel industry must reduce its emissions. The decarbonisation of the steel industry is being driven by stricter emissions regulations. Europe has set the agenda for emissions reductions through both the reduction of Scope 1 CO2 allowances, known as EU Allowances (EUAs), and the introduction of the Carbon Border Adjustment Mechanism (CBAM).

The EU steel industry has set itself the goal of reducing its CO2eq emissions by at least 30% by 2030 compared to 2018 and becoming climate neutral by 2050. However, growth in the EU steel market is expected to stagnate until 2050, increasing the pressure on steel producers to maintain their market share.

But European steel producers will not only need to replace a significant proportion of their existing iron and steel production facilities, they will also need to meet the demand for green steel as major steel customers in the EU, including those in the construction, automotive and engineering sectors, look to meet their own carbon neutrality targets.

"Interest in green steel has grown strongly not only in Europe but also in the US," says the financial report of Swedish steel producer SSAB.

According to Fastmarkets, however, most business is conducted directly between steel manufacturers and end users, mainly in the automotive industry. Small and medium-sized traders and steel service centres are not yet prepared to pay the premium on green steel as they consider it too high.

Green steel from the electric steel mill

The electric steel route is the fastest way to produce virtually emission-free steel, provided that green electricity is used. Electric steel mills are environmentally friendly, but require large quantities of scrap steel and access to affordable electricity. Difficulties in sourcing scrap in sufficient quantities are likely to increase in the future, as the share of scrap-based electric steel production is forecast to rise from around 20 % today to over 35 % in 2050.

Demand for scrap is expected to almost double by 2050, according to a report by UK Steel. However, the World Steel Association assumes that the amount of old scrap will also more than double from 445 million tonnes today to around 900 million tonnes in 2050. But not all of this will be available for the electric steel route. A good third of this scrap will be used in primary steel production, i.e. in direct reduction (DRI) and as cooling scrap in the remaining BOF (Basic Oxygen Furnace) converters.

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The price of green steel

The expected growth in electric steel production over the next few decades will entail considerable investment in new electric steel plants.

However, progress in decarbonisation comes at a price.

Steel producers in Europe also fear that the rising costs of retrofitting their plants or buying emissions trading certificates will make them uncompetitive with imports.

The EU's Carbon Border Adjustment Mechanism (CBAM) was introduced to level the playing field between foreign and domestic producers and to protect European steel producers. Steel imports are therefore subject to a surcharge that represents the difference between the European carbon costs and the costs on the domestic market. However, Asian suppliers are already looking for alternative options. China is the largest steel producer in the world and is therefore heavily affected by the changing emissions standards, as the majority of Chinese production takes place in traditional blast furnaces.

The conclusion of the latest working group meeting of the European traders' association Eurometal was: "Fearing the impact of CBAM, some large customers (1st tiers) are looking for external alternatives outside European borders and are opting to import finished steel products to circumvent the regulation".

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Energy costs as a key factor

Electric steel production is energy-intensive, with energy consumption consisting mainly of electrical energy. In Europe, and particularly in Germany, energy costs have risen significantly in recent years, largely due to high electricity prices. The increase in grid fees and the reduction of energy subsidies, such as the recently abolished energy rebate for large consumers in the Netherlands, have also contributed to an increase in costs.

Steel production and processing are traditionally very energy-intensive and the production of millions of tonnes of steel per year consumes large amounts of energy. With steel producers' electricity costs accounting for between 20% and 180% of their gross value added, as UK Steel points out, high electricity prices have a clear detrimental effect on profits, investment and long-term sustainability in the steel sector.

Georgsmarienhütte Holding GmbH (GMH) took the electric steel route 30 years ago. Today, GMH uses almost exclusively high-quality steel scrap, which leads to climate and environmental cost savings of more than half a billion euros per year. However, the electric steelworks is now facing an existential problem: the costs of this exemplary production method are practically no longer economically viable in Germany.

Dr Alexander Becker, CEO of Georgsmarienhütte Holding GmbH, refers to the significant rise in electricity prices caused by the politically driven radical restructuring of the German electricity market. He told Handelsblatt: "The energy-intensive industries with 850,000 jobs have no future in a country with the world's highest electricity prices. The relocation of industrial investments to regions with lower costs has long since begun and will certainly continue at an accelerated pace following the latest developments."

Weak demand combined with high and internationally uncompetitive electricity prices have therefore pushed steel production in Germany to a historically low level in 2023. According to the German Steel Federation (WS), production volumes in the German steel industry fell to their lowest level in 14 years last year. Electrical steel production was hit particularly hard. With a drop of around 11 per cent, it even fell below the low point reached during the financial market crisis.

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Kerstin Maria Rippel, Managing Director of the German Steel Federation, comments on the latest figures: "The annual balance sheet for steel production in Germany clearly shows that the situation for the steel industry - and the electric steel route in particular - is very serious. There is still an urgent need for political action here: most acutely with the still uncompetitive electricity costs, which are higher than ever before with the doubling of transmission grid charges since the beginning of the year."

Key factor: energy sources

The challenges of the green transformation are considerable. The transition requires not only huge investments in new technologies and infrastructure, but also a reliable supply of green hydrogen and renewable energies. The quantities required for large-scale electrolysis to produce green hydrogen are enormous. According to estimates by the European steel association Eurofer, the additional energy requirement in 2050 will amount to around 400 TWh of CO2-free electricity - around seven times what the sector currently purchases. Access to renewable energy sources is a challenge in Europe due to insufficient capacity and the high cost of renewable energy.

The supply of sufficient green hydrogen and the associated costs are therefore key issues in the debate about the future competitiveness of the European steel industry.

Politics as a key factor

Politics plays a decisive role in the success of the transformation, as consistent and supportive regulation is essential for the competitiveness of the industry and the success of the transformation. The steel industry continuously emphasises the urgency of solving the energy issue. This includes the need to reduce electricity costs for energy-intensive industries such as steel production and to take appropriate policy measures to regulate the cost of renewable energy and grid charges. Uncertainties and constant changes in energy and climate policy make long-term investment decisions difficult and lead to increased costs.

In international comparison, the German steel industry is also facing strong import pressure, particularly from regions with less stringent environmental regulations. This not only threatens the future of the industry, but also Germany's ambitions to play a leading role in green steel production.

Outlook

Investments by European steel manufacturers are now focussed on replacing blast furnace technologies with climate-friendly production methods. However, green energy and hydrogen are not currently easy to procure or economically viable. This is a fundamental issue that has yet to be resolved - although the EU has made significant funding available to enable the gradual transition.

The explosion in the cost of electric steel production poses significant economic and technological challenges for the industry. European steel producers are also competing with countries such as China and the USA, which offer more favourable energy prices and less stringent environmental regulations. This significantly impairs the competitiveness of European producers. Long-term solutions require both technological innovation and political support to make the electric steel route efficient and sustainable. The industry urgently needs clear and reliable framework conditions as well as political support in order to manage this change and realise the vision of climate-neutral, competitive "Green Steel Made in Germany".