COMMODITIES 2025: European steel faces decarbonization hurdles, sluggish demand

The steel industry is poised to move up in the political agenda of various European nations in 2025 as governments begin addressing production and job cuts.

European countries must develop concrete solutions to transition the industry toward low-carbon production; failure to do so could result in a diminished manufacturing sector and a precarious political landscape.

The market has deteriorated significantly in recent months, with the European steel sector facing a lull characterized by minimal trading activity and falling prices.

"The European steel industry has never been so challenged, caught between decarbonization costs and the fallout from severe overcapacity, particularly from China, which has led to a surge in low-cost, heavily subsidized, and CO2-intensive imports," Thyssenkrupp told S&P Global Commodity Insights.

Since the financial crisis, European steel production has declined by nearly one-third and employment has dropped by 25%.

Demand has not rebounded to pre-COVID-19 levels, and combined with high energy costs and rising imports, steelmakers' profit margins have shrunk, threatening their viability and capacity for reinvestment.

EUROFER highlighted that steel production in the EU has sharply declined since 2018 to 126 million mt in 2023. Imports now account for 27% of the EU market, further undermining domestic production, while capacity utilization has dropped to a concerning 60%.

Adolfo Aiello, deputy director general of EUROFER for Climate and Energy, remarked that the challenge has shifted from securing funding for low-carbon transformation to operationalizing projects amid high energy costs and ineffective trade safeguards.

"The conditions when many low-carbon projects were designed have changed dramatically, with geopolitical tensions, continued increase of excess capacities and soaring energy prices creating a challenging environment," he said.

Recent announcements from European steelmakers indicate a postponement of investments in low-carbon steel projects due to tough market conditions. The economic slowdown, particularly in the automotive and construction sectors, has hurt demand for decarbonized steel products.

In total, around 60 low-carbon steel projects are underway in the EU, but their growth will depend largely on the availability of affordable renewable energy for electric-arc furnaces and green hydrogen production.

Companies like Stegra, Hydnum, and Blastr Green Steel AS are planning to build new greenfield DRI-EAF steel mills in Sweden, Spain and Finland. Nordic-based mills are at an advantage thanks to their proximity to DR-grade iron ore operations, green hydrogen and later production starts and in relative smaller tonnages.

For companies already established that are working to change their route, production is more complicated as they have to deal with a gloomy market and address productions cuts, job losses and low margins.

ArcelorMittal, Europe's largest steelmaker, has delayed final investment decisions on its DRI-EAF projects in several countries and on its 2030 carbon reduction targets.

"We need an effective carbon border adjustment mechanism and stronger trade defense measures to enhance our business case," an ArcelorMittal spokesperson said. "We await details on the European Commission's Steel and Metals Action Plan, as these multi-billion-dollar investments will shape our future."

Thyssenkrupp reaffirmed its commitment to green transformation and climate-neutral steel production but emphasized that investment decisions are contingent on economic conditions.

"The economic and political conditions that need to be taken into account do not relate to the continued operation of the two blast furnaces 1 and 2, but to the second transformation step," thyssenkrupp said. "This depends on the market conditions prevailing at that time, our customers' requirements for a CO2-reduced product and the funding conditions for a further technological step to replace the blast furnace technology.

"What is clear is that our steel production should be carbon neutral by 2045 at the latest," it said. "After the decommissioning of blast furnaces 8 and 9, another blast furnace is the next to be shut down."

Kerstin Maria Rippel, CEO of the German Steel Association, expressed concern over the industry's survival amid rising energy costs and "unfair" competition from China.

"To navigate this crisis, we need coherent industrial policies from both Berlin and Brussels that ensure a reliable long-term perspective," she said.

Looking ahead, establishing leading markets for CO2-reduced products is crucial for both German and European competitiveness. Thyssenkrupp and other steelmakers have called on the European Commission to deliver a robust steel action plan.

The EU must also revise rules that make hydrogen production in Europe more expensive as part of the Clean Industrial Deal.

"Germany's hydrogen strategy is lagging, with only 3% of announced electrolysis projects reaching final investment decisions," Rippel said, highlighting the slow progress in developing a hydrogen backbone and the unclear financing of the grid.

Although with all the issues underlined there are expectations for the low carbon market to pick up.

"Northern EU HRC prices are expected to rise over the next decade due to rising carbon costs and regulatory pressure in the EU, which are pushing steelmakers to adopt lower carbon yet higher cost production methods", Evan Millard, S&P Commodity Insights' Metals and Mining research analyst.

As a consequence, in May 2023, Commodity Insights launched the first ever daily carbon-accounted steel premium assessment, reflecting the differential for HRC sales with total accounted carbon emissions of 2.1 mt of CO2 or less for every metric ton of steel produced, and weekly price assessments for European carbon-accounted rebar and carbon-accounted medium sections were launched Sept. 11, 2024, the first carbon-accounted assessments for long steel.