High energy prices coupled with a market glut of cheap exports have created a perfect storm for a European steel industry that was already on the rocks. Some degree of state support will be necessary – but should be calibrated to ensure that the industry undertakes the structural changes needed to decarbonise.
The industry is finally in the EU policy spotlight after both the Clean Industrial Deal and the Steel and Metals Action Plan (SMAP), published in March, designated steel as a “strategic” sector. The new steel plan rightly acknowledges that electrification and circularity are key to the sector’s transition and reducing costs, but falls short of delivering a comprehensive, ambitious path to climate neutrality.
The plan also relies too heavily on state aid, which is being used to patch up weak market and regulatory signals rather than address actual market failures.
Steel production is responsible for 5.7% of the EU’s greenhouse gas emissions: more than aviation and shipping combined. As with every other sector in the age of climate breakdown, change has been on the horizon for years. Now the moment of truth has arrived, with around 63% of the industry’s coal-powered blast furnace fleet facing retirement before 2035.
Replacing these furnaces with more circular, less carbon- and energy-intensive alternatives is crucial if we are to stay within planetary boundaries, including staying within 1.5° Celsius of global warming. This will require major investment – €32.6 bn a year of additional capital investment across the board for all industrial sectors by 2030 – but we are not starting from scratch.
The steel sector has already gorged on a taxpayer-funded buffet including €11.3 billion of free carbon allowance allocations under the Emissions Trading System (ETS) in 2023, of which €3.8 billion went to ArcelorMittal. The industry has also benefited from indirect compensation costs, lower electricity levies, and direct state aid of almost €9 billion from EU states between 2022-24.
This money was made available to facilitate the transition from heavily polluting blast furnaces to cleaner means of steel production, but the industry has been stalling its green projects. This in turn is slowing down the transformation and sapping the momentum of pioneering clean steel projects.
As the EU’s Clean Industrial Deal confirms, competitiveness and decarbonisation go hand-in-hand; jeopardising one inevitably puts the other at risk.
A European response is essential. EU countries have constrained budgets, scarce resources and different fiscal capacities. While Germany has poured €7bn directly into its steel sector, several companies in central and eastern European countries are yet to plan their transitions.
We can only hope that the path they choose does not exacerbate inequalities or leave regions with fewer economic resources to deal with the dire social consequences that would accompany plant closures.
Creating competitiveness
As the saying goes, every crisis is also an opportunity, and this one offers the EU a chance to leapfrog its competitors. We could start by asking whether all steel industry incumbents – including the many not strapped for cash – deserve more public funds lavished on them through state aid, given the private finance they have access to.
If the use of taxpayers’ money does not maximise visible public benefits, it will feed cynicism that bad faith actors can exploit. This is especially the case when major companies are prioritising shareholder windfalls over investments, while at the same time calling for more public funding through, for example, the Antwerp declaration.
At the same time, EU steel production fell by 10% in 2022 to 136.7 million tonnes and slid to 126 million tonnes in 2023. Nearly 100,000 steelworkers’ jobs have been lost since 2010 and more layoffs are expected soon. If this is perceived as the fruit of a “clean energy transition” that benefits no one but shareholders, it will weaken support for the Green Deal.
Green funds are not there to stuff the pockets of dirty energy investors. Mandatory social and environmental measures must be a precondition for future public funding instruments. Companies receiving public aid should meet a public interest test of not evading their tax payments or relocating their activities to countries outside the EU with lower standards.
Excessive profits should be capped, through for example a profit-sharing mechanism similar to the US Chips Act. A temporary ban or limit on dividend payments and share buybacks could also be considered when certain conditions are met. This would help to ensure that profits are reinvested in company operations, innovation, and workforce benefits.
Public transformation plans at local plants could increase energy and resource efficiency and shift processes towards fossil fuel phase-out, by urgently switching to renewable energy sources among other things.
Of course, companies should comply with minimum social and labour standards and collective bargaining agreements and support the upskilling and reskilling of workers. They should also place a renewed emphasis on funding for policies that enhance circularity, mitigate energy use and reduce reliance on raw materials.
Making every euro of taxpayers’ money count for public benefit should inspire the Commission as it revises the state aid framework to support the Clean Industrial Deal.
The transition is not cheap but we cannot say that the money is not there. What is needed now is the political will to push through change in a transparent, inclusive and redistributive manner, and an industrial willingness to accept that business as usual will not save the sector, nor make it competitive in the long term.
Sometimes transformation is painful. But that is the price of survival, and it is the challenge that the steel industry urgently has to meet.
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