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Stainless green: the need for collaboration with lead markets

Are EU imports from 3rd countries a challenge for Central and Eastern European producers?

During the race towards the 2050 net zero targets, the steel industry in the Visegrad countries (Czechia, Hungary, Poland, Slovakia) faces a threat of losing to its increasing global competition. Carbon pricing applied to imports from outside the EU should create an equal level playing field. Yet, uncertainty about decarbonisation technology availability, final product price and offtake of green steel looms large. Sectoral pathways and policy interventions could offer a solution.

Steel is a global product with well-integrated supply chains whose lead markets include construction, automotive industries, and mechanical engineering. The iron and steel industries are responsible for 7-9 per cent of greenhouse gas (GHG) emissions globally.
In the EU, these emissions are subject to the Emissions Trading System (EU ETS), where the iron and steel industries benefit from the free allocation of emission allowances. The mechanism brings an additional income source to steel producers.

From 2026 onwards, however, the free allocations will be phased out, as the carbon border adjustment mechanism (CBAM) phases in. While it creates a level playing field for the EU market participants, steel exports to third countries are at risk. Further export evaluation will be needed before 2026.

What’s more, most steel makers also own or operate power plants to produce heat and power for the steel production process. These energy production entities already see a massive shortage of free allocation.

The low proportion of transportation costs in the final price of steel products enables long-distance transport from price-competitive regions. Hence, the global competition may raise concerns about the future of European producers. Since 2016, the EU has become a net importer of final steel products, and the trend is intensified annually.

While China has emerged as the most prominent steel player in recent years by influencing the global market with its domestic oversupply, the EU primarily relies on steel supplies from Turkey, India, South Korea and pre-war Russia and Ukraine.

In the V4 countries, five major steel producers lead the market, with several mid and small-sized companies complementing the iron and steel final products market. Overall, they add 3 per cent of total GHG emissions and less than 1 per cent of gross value added and employment in V4.

The industry achieves relatively low profitability and yet high energy- and emissions-intensity, which necessitates significant capital expenditure investments into novel technologies which are far from economic and far from operations at scale. At the same time, there is only one investment cycle to reach 2050 climate neutrality.

We highlight several deep-decarbonisation technologies, including carbon capture and storage, hydrogen-based direct reduction and electrification, for the iron and steel industries in the ISFC’s Sustainable Investment Roadmap and the hot-off-the-press Czech policy and financing roadmap for the hard-to-abate industries.

However, to make the transition successful for V4 producers, carbon pricing should be complemented with policies that will incentivise the low-carbon steel offtake. There are three critical areas where policies and lead market strategies could go a long way.

First, sectoral regulations and construction and building materials standards may increase the demand for low-carbon products regardless of the procurement type. Second, the lead markets can apply “green” procurement rules to lower their carbon footprint and position themselves as early adopters of sustainable practices. Third, policies regulating public procurement might set mandatory rules pushing the low-carbon materials offtake.
Granted, introducing new rules for steel products, and applying novel technologies to achieve low-carbon production will increase the unit production costs. While the iron and steel industries foresee massive investment needs, the price tags for a new flat or a car produced with low-carbon steel might witness only a small price change. Still, there are limits to what price increases can be absorbed by the customers, as price rises affect product competitiveness.

Sectoral strategy pathways in the V4 region would be beneficial. They would counter the uncertainty the iron and steel industries face. Without such pathways, there is no clear outlook for low-carbon steel demand through private and public procurement and end-use in construction and automotive.

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