What’s happening? Europe is leading the charge in transforming its steel industry into a greener, more sustainable sector, according to Leadership Group for Industry Transition data. Across the continent, plans to construct nearly 50 new green and low-carbon steel projects by 2030 are under consideration, while the US has only two. Europe’s stringent, innovative carbon policies are catalysing this shift, including the Carbon Border Adjustment Mechanism (CBAM), a carbon dioxide emissions tariff on imports of certain goods which aims to prevent high-emissions overseas products from threatening the EU’s clean energy transition and undercutting domestically produced products. The CBAM came into effect on 1 October. By the end of the decade, Europe aims to source a quarter of its steel from low-carbon methods, ahead of the US’ 10%. (Wall Street Journal)

Why does this matter? Widely used across the transportation, construction, energy and infrastructure sectors, steel is one of the most ubiquitous materials and most valuable industries in the global economy. It also accounts for 7% of all man-made emissions – as such, steel’s decarbonisation is essential for achieving climate goals. Recent regulatory developments – particularly the EU’s CBAM policy and the Inflation Reduction Act (IRA) in the US – have increased investor focus on green steel as producers receive generous subsidies and incentives for low-carbon steel production in these regions. It’s also hoped that decarbonisation of the steel sector will provide a template for abating emissions in other highly polluting sectors.

European enthusiasm – Steel buyers are showing high enthusiasm in Europe – H2 Green Steel, a Swedish start-up, has agreed deals to supply green steel to IKEA, BMW, and Mercedes-Benz. The firm has attracted €5bn ($5.3bn) in private equity financing, including what could be the largest private placement in Europe this year, a €1.5bn investment to build the world’s first large-scale green steel plant in Boden, Sweden. It will reduce steel production emissions by 95% compared to traditional blast furnace methods and hold one of the world’s largest electrolysis plants for green hydrogen production on-site.

Fierce competition – While there are encouraging signs of investor enthusiasm in Europe, competition is fierce in the green steel space. For instance, the Biden administration has passed a raft of legislation that offers financial incentives for domestic, low-emissions production, including the IRA, the Infrastructure and Investments Jobs Act and the Buy American Act. The IRA could pose a significant challenge to European producers due to the generous subsidies offered by the US government for low-carbon steel production. 

EU response – However, the EU relaxed its state aid rules in March, which allowed every European national government to match the subsidies a European firm could receive if they moved operations to the US. Examples of this legislation in action are already appearing. In Germany, industrial conglomerate Thyssenkrupp will invest €3bn in a proposed green steel plant in Duisburg – a sum consisting of €2bn of EU-approved state subsidies. In addition, most US steel mills are powered by fossil fuels, so US imports could be taxed heavily as part of the EU’s new CBAM policy. While European production capacity is currently an issue, as an increasing number of steel producers replace their blast furnaces with electric arc furnaces powered by renewables, the price of green steel will fall as capacity scales – with the aforementioned 50 projects planned for the EU compared to just two in the US by 2030, the scale of European production may prove vital to driving down costs in the long-term.

A premium price – China also poses a risk to the European green steel industry. Producing half the world’s steel, 90% of Chinese steel production comes from highly polluting blast furnaces, which are also the most efficient and cost-effective option. H2’s green steel will come with a €150 premium, while SSAB expects to charge a €300 premium per tonne. Despite the premium price, the new CBAM mechanism will mitigate the allure of Chinese low-cost steel to some extent because of its high emissions production, which will incur a reciprocally high cost when imported into the EU, reducing Chinese steel’s ability to undercut EU stock.