Prices and policies: Forging the green steel market

As the world pivots toward a sustainable future, the steel industry finds itself at a critical crossroads.

While steel trade flows are global, the emergence of a "green steel" premium has been uneven – and regional – with disparities across Europe, Asia and the Americas.

Europe is first mover

Demand for low-carbon emission steel is being driven by end-users such as the automotive, offshore wind and construction industries, as well as by regulatory pressures within the EU.

While apparent steel demand is expected to drop 1.3% year over year in 2024, according to European steel association Eurofer, there is steady demand for lower carbon emission steel in long-term contracts, albeit at low trading volumes.

The European steel industry is counting on low carbon emission steel being its unique selling point amid cost-competitive imports of conventional steel and high production costs.

While some decarbonization project timelines have been pushed back, the Europeans remain steadfast in pushing ahead to change the currently heavy CO2-emitting blast furnace production process.

According to the World Steel Association, the blast furnace route is accounting for around 60%-70% of production in Europe and the majority of mills are in the process of switching to the low-carbon emission production route of electric arc furnaces. Nearly all European mills already offer a low-carbon emission product equivalent in addition to their "gray steel."

The EU's Carbon Border Adjustment Mechanism is expected to boost demand for low-carbon emission steel. From January 1, 2026, a levy on emissions will need to be paid on the CO2 emission intensity of steel imports to the EU. This means the higher the carbon emission intensity of the steel imported, the higher the tax value to be paid. European steelmakers hope that buyers will turn to domestic European suppliers for low-carbon emission steel as imported conventional steel with higher emissions would become too expensive.

The current pricing landscape for European carbon accounted steel, however, suggests that if buyers don't have to purchase a carbon-emission reduced steel, they won't.

This year has been economically difficult across the supply chain in Europe, with spot prices of conventional steel dropping. The Platts hot-rolled coil ex-works Ruhr price decreased Eur205/mt from its 2024 peak at Eur765/mt January 30 to November 2024. Platts is part of S&P Global Commodity Insights.

With underlying steel demand weak and conventional steel prices struggling, the appetite to pay a premium for a carbon-accounted steel has decreased. The Platts HRC carbon-accounted steel premium (CASP), launched May 2, 2023, dropped significantly from its 2024 high at Eur140/mt February 2 to Eur50/mt in the beginning of November.

The Platts carbon-accounted long steel premiums launched September 11, 2024, saw a downward trend as well. The European Rebar CASP fell from Eur92.5/mt to Eur50/mt and the Medium Sections CASP decreased from Eur70/mt to Eur50/mt from September to November.

Asia's premium market is forming

Even though 2024 demand for low-carbon emission steel has been declining on the spot market in Europe, demand for CO2-reduced steel products in Asia remains more lackluster amid uneven decarbonization efforts. Progress has been slower than in Europe because there is no formal regulation mandating a transition to low-emission steelmaking or the use of low-emission steel.

Most of Asia's steelmaking capacity is blast furnace-based, accounting for around 90% of output in China, 73% of output in Japan, 69% in South Korea and 46% in India, according to World Steel. With many of the region's blast furnaces at an early stage in their life cycles, it is unlikely that they would be phased out soon, and so many of the decarbonization efforts are based on the continued use of this production route.

Companies exporting steel to the EU may also produce low-carbon steel to comply with CBAM. But by and large, with the general lack of government regulation and incentives to encourage the consumption of low-carbon steel, cost competitiveness remains the most pressing concern of most end-users in the region.

Discussion about a premium for low-carbon steel is therefore sporadic and case-specific, and is generally quoted at above $100/mt across different products, with previous small volumes for green steel plate premiums heard ranging between $300- $500/mt as well.

In China, while the production costs for low-carbon steel are usually Yuan1,000/mt ($140/mt) higher, the willingness to pay a premium is capped at $20/ mt as of September 2024. The resistance to higher premiums discourages mills from scaling up low carbon steel production.

Overall, the path to decarbonization in the Asian steel sector is fraught with challenges, requiring significant investment and regulatory support to ensure the transition to sustainable practices is both feasible and economically viable.

No premium uptake in the US

With electric arc furnace steelmaking already the dominant production route in the US, accounting for 70% of the country's production, a green premium has yet to emerge. However, US steelmakers are undergoing capital projects to lower their carbon footprint.

So-called US mini-mills, which are EAF mills, are focusing on bringing their CO2 emission levels below $0.80/mtCO2e per metric ton of steel and are committed to achieve greenhouse gas emissions reduction toward net zero by 2050.

The EAFs have yet to see premiums but have gained market share from US blast furnace producers serving the auto industry. Some blast furnace steelmakers have tested and prepared certain furnaces for hydrogen use but, due to current costs versus flat steel prices, the market is not yet willing to pay a premium for lower-emission blast furnace produced steel with hydrogen.

Brazil is emerging as a potential first mover in South America. Steelmaker ArcelorMittal Brasil has been offering its low-carbon emission rebar since 2022, projecting a tenfold increase in sales in 2024. The company made its first sale of low-carbon flat steel early in 2024. Currently, these rebars sell at a premium of around 3%-5% over traditional CA50 rebars, with the potential for pricing dynamics to evolve as market share grows.

Similar to other regions, key drivers include a growing market demand for sustainable construction materials and regulations pushing for lower emissions. Some automakers like Volvo have also signaled the aim to work with low-carbon steels at their production sites in Brazil.

Despite Brazil generating 93% of its electricity from renewable sources, the steel industry's path to complete decarbonization remains challenging and requires expedited government support. Access to competitively priced natural gas is also crucial for growth, according to the National Steel Association, Aço Brasil, particularly for the direct reduced iron production method that can significantly reduce carbon emissions.

However, with natural gas prices in Brazil averaging around $17/MMBtu – much higher than $6.5/MMBtu in the US and Mexico and $3.9/MMBtu in Argentina – there is a pressing need for a sustainable energy strategy, as the daily demand for natural gas in Brazilian mills is projected to rise from 5 million cu m (in 2023/24?) to 19 million cu m by 2030.

Looking ahead

Although the uptake of a green premium for lower CO2 emission steel is varying vastly across the world, the energy transition and need for decarbonization will continue even if a premium cannot yet be achieved and is slower than initially expected.

Europe's journey has already started amid more progressive regulatory climate targets, although slowed down by a weak economy. CBAM is expected to increase the appetite for lower emission steel in Europe and outside with Asia preparing to tap into it.

The US has the advantage of widespread EAF production but lacks the regulatory pressure of Europe, while Brazil is currently looking to become the driver of South America with first sales with a premium achieved.

For the moment, green premiums are limited to finished steel products, but market participants say that more upstream products such as direct-reduced iron or pig iron will also soon enter the lower emission premium market with a more intensified focus on raw materials to limit emissions across the entire production chain.

With Adriana Carvalho, Keith Tan, Joanne Ju, Jia Hui Tan and Nick Ruggiero.

This article first appeared in the December 2024 edition of the Commodity Insights magazine.