CRU: The Real Cost of CO2 to European Steel

26 July 2019

In recent months we have seen British Steel in the UK go into administration and ArcelorMittal make cutbacks to European production targets. The profitability of the steel industry globally has fallen from high levels in 2017 and 2018, but the European steel industry faces added pressure from CO2 costs under the EU Emissions Trading Scheme (EU ETS) and this is at least partly to blame for recent decisions.

Between 2013 and 2017 the EU ETS carbon allowance price (EUA) averaged less than €6 /tCO2 and its impact on marginal costs and steel mill operating decisions was manageable, if not negligible, particularly in the high profit environment of the last two years. However, since early-2018, the CO2 price has risen to €26 /tCO2 (i.e. equivalent $29 /tCO2). The net impacts on the steel industry are partially offset by free allocations. However, the policy rules on this are tightening up, increasingly requiring producers to purchase permits to cover emissions from their production. (a trend outlined here).

The bottom line is the EU ETS is now having a significant impact on marginal costs in the steel industry and, therefore, available markets. Coupled with the very high pellet premium, to which the European industry is exposed to a greater degree than other regions, the high CO2 price is now constraining the operating capacity that is accessible to European steel players. This constraint on capacity utilisation is undermining the underlying cost structure of large integrated mills and this will impact on their long-term viability. Expected higher CO2 prices and increasingly lower free allocations will accelerate this effect.

Why the CO2 price matters more now than ever

The chart below shows clearly why the CO2 price matters more today than it has done over the last five years or so. This chart shows the CO2 price in Europe since 2016 overlaid with the profitability of the European steel industry over the same time period and demonstrates a very clear transition in 2018 Q4.

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