Green steel – will US buyers ultimately pay the price?
Understanding the cost of decarbonization and its impact on steel prices and raw material costs
The pressure to reduce CO2 emissions is mounting for carbon-intensive industries, while scientists warn that we may be running out of time.
The steel industry is a significant contributor to global emissions, but there is currently no formal pricing mechanism for green steel like there is for aluminium. However, could this all be about to change as the United States government prioritize lowering CO2 emissions to meet environmental objectives?
Demand for green steel is growing, especially from the end-use market, with automakers advocating for decarbonization and green steel. But is the idea of paying more for green steel one step to far for US buyers?
Watch the full video ‘Green steel premiums: the US perspective’ with North America steel editor Thorsten Schier to learn more.
Steel production in the US typically emits less CO2 than other nations. High usage of electric-arc furnaces (EAFs) in steel production and the vast scrap availability in the US steel market keeps emissions low.
Will US buyers pay more for green steel?
Steel prices in the US have risen by more than 200% since March 2020, with buyers paying record-high prices for finished steels. Capacity issues alongside other market factors keep steel prices high, and despite previous forecasts, this price rally could last long into 2022.
Another costly consideration for buyers and producers seeking trade with the US is import tariffs imposed on steel products. These tariffs make it harder for foreign steel to enter the US market, restricting potential trade opportunities. However, current plans to resolve US/EU trade issues have sparked optimism amongst market participants.
In the current landscape of uncertainty, price inflation, and trade tensions brewing, the appetite for additional costs in the form of a green steel premium may be premature.
Potential pricing mechanisms for green steel
There are a few pricing mechanisms that have been discussed to support the green steel transition. The most popular include:
- Green steel premiums, similar to those in place for aluminium. This style of premium allocates an additional charge on materials that are deemed to be the greener alternative.
- The introduction of steel surcharges to offset any additional carbon reducing charges that steelmakers may incur. This additional charge gets added to the buyers costs rather than in the form of a separate premium. Surcharges already exist for some raw material pricing or pass-through costs such as energy.
- Discretionary pricing where steel producers and buyers can privately negotiate higher pricing on greener goods.
In Europe, the appetite for a green steel premium is further along than in the US market. European steel companies have already started to journey down this road – selling green steel for higher prices. For instance, ArcelorMittal and Ovako offered the first certified “green steel” products earlier this year, anticipating demand of 600,000 tonnes by 2022.
The US market, on the other hand, is not quite there. Buyers are currently less enthusiastic about paying more for green steel than their European counterparts. This lack of enthusiasm is partly because buyers are already paying record more for steel products in North America and other Americas markets. Soaring steel prices have led to some US buyers paying up to 4x more than they did a year ago. Recent market conditions have seen US HRC prices continue to soar, averaging $600 per tonne above European HRC prices and $1,000 per tonne above Chinese HRC prices in July through to August.
Raw material prices driving up production costs Growing demand for greener steel production will intensify the need for clean scrap, potentially pushing up prime scrap prices. Prime scrap, also known as industrial scrap, is a crucial ingredient of green steelmaking. Prime scrap is a clean material primarily derived from the automotive manufacturing process and can be put straight back into the furnace to create new steel with a very low carbon footprint.
Automakers are the champions of green steel and could be a beacon for change as leading companies like Mercedes-Benz commit to using green steel in production by 2025. Not only are automotive manufacturers demanding greener steel from suppliers, but they are also huge generators of prime scrap meaning they have a vested interest on both sides of this debate.
Decarbonization is here to stay, and the steel industry must adapt to support the transition. Steel producers must collectively increase their consumption of clean scrap such as our Fastmarkets No 1 Busheling to significantly lower CO2 emission over the coming years. This growth in consumption will increase scrap demand not only in the US but globally, impacting trade flows and production costs.
Steelmakers in the US continue to experience astronomical margins, but this could all change with growing demand for prime scrap. We could start to see green raw material prices soar, closing the gap between production costs and sell prices hitting the bottom line.
Will there be a standardized green steel premium in the future?
The US steel industry has a significant carbon advantage, emitting less carbon than other major steel-producing regions. The American edge, along with the current landscape of record high steel prices and bountiful margins, makes it unlikely that we will see a green steel premium introduced anytime soon.
However, the market is changing and will adapt quickly to public opinion driven by governmental policy, climate change advocates, and science. The cost of green steel will rise, and until a standardized green steel pricing mechanism emerges, uncertainty in this space will remain the only constant.
Decarbonization complicates an already complex marketplace. Our latest analysis, The true price of green steel, looks into the ripple effects of overhauling the market on the steelmaking process and supply base.