Inside the cost dynamics of European green steel production

Low emission flat steel remains significantly more expensive to produce in Europe than its blast furnace equivalent, but the cost differential is set to shrink over the next decade. Rising regulatory costs under EU ETS are set to be the main driver improving competitiveness of electric-arc-furnaces (EAFs), complemented by continued technological maturity.

Cost dynamics vary significantly across technologies

Different production pathways have markedly different cost structures, facing unique cost exposures and long-term dynamics.

Capital expenditure

Capital expenditure forms a significant component of EAF cost structures, as most facilities need to be newly built, compared with more minor operational refurbishments for existing blast furnaces. This account for 12-21% of total EAF production costs in 2026.

Raw material prices

While raw material costs currently account for the bulk of blast furnace production costs, this is set to change. Iron ore and coal inputs are expected to fall from 65% of total costs in 2026 to 46% by 2035, as regulatory costs rise significantly.

Although exposed to high-grade iron ore and scrap price volatility, EAFs offer more flexibility in feedstocks, using different combinations of pig iron, DRI and scrap. This enables producers to respond more effectively to changing market conditions and input prices.  

Energy costs

EAF-based steel production is more exposed to shocks from electricity prices, posing a challenge for European producers given the region’s significantly higher power prices compared with other regions. During periods of elevated electricity prices, power costs alone can account for up to 20% of total production costs for EAFs.

Hydrogen costs

Green hydrogen is another major cost factor for near-zero emissions flat steel production. A European EAF with an integrated hydrogen-based DRI facility, would see hydrogen accounting for nearly a one third of total cost today.  

Regional differences in green hydrogen, as well as access to low-emissions and affordable electricity, will therefore be crucial for establishing cost competitiveness in near-zero emission flat steel production. Scandinavia, the Middle East and Africa have already emerged as early low-cost hubs for hydrogen production, giving these regions a structural advantage in low-emission DRI/HBI production.

Regulatory costs will narrow cost differentials

For European steel production, the phase-out of free allowance under the EU ETS by 2034 will be the driving force behind cost convergence. The outsized impact on emission intensive BF-BOF production means that by 2035, EAFs fed by natural gas-based DRI may only have a 10% higher cost base. Pig‑iron‑fed EAFs also approach cost parity in the 2030s, with lower underlying production costs relative to DRI-fed EAFs but higher regulatory costs leaving them with marginally higher total costs.

This will play a pivotal role in shaping production cost profiles and can materially shift competitiveness across technologies. In Fastmarkets’ base ETS price scenario, ETS costs are projected to account for 34% of total domestic BF-BOF production costs by 2035, compared with just 3% for the lowest-emissions EAFs using hydrogen-based DRI. As a result, the competitiveness of blast furnace and other higher-emitting production routes becomes increasingly tied to European Union Allowance (EUA) prices.

Scenario analysis highlights how strongly carbon prices could reshape the market. In Fastmarkets’ low ETS price scenario, the cost gap between domestic BF-BOF production and hydrogen-DRI-based EAFs remains wide at 41% by 2035. Under a high ETS price scenario, however, the gap narrows sharply to just 7%, underscoring how regulatory costs could fundamentally shift competitive dynamics in Europe’s steel sector.

For more information on the EU ETS reform, and how they will affect the EU steel industry, read here.

Technological maturity to support low-emission production

As an emerging technology, EAFs using hydrogen-based DRI are expected to mature over the next decade, with average base production costs (excluding regulatory costs) expected to remain broadly flat. This is driven primarily by falling hydrogen costs as infrastructure scales and new facilities come online, while rising high-grade iron ore and prime scrap prices partially offset these gains, resulting in a broadly neutral overall effect.

Blast furnace base production costs (excluding regulatory costs), increases 11% by 2035 in comparison, reflecting significantly higher raw material input costs, with limited scope for technological and efficiency improvements to push down operational costs.