Rising overseas competition for European green steel producers

European green steel production is advancing fast, driven by strong policy incentives, early capital investment and government funding. However, while Europe leads in announced and under-construction capacity for the low emissions steel production, competing regions enjoy significant cost advantages across multiple production pathways. The potential for low-cost hydrogen, natural gas, and affordable clean electricity in in the Middle East and North Africa (MENA) and Canada, position them as potential suppliers of competitively priced green steel and iron ore to Europe, subject to EU trade restrictions and quotas.

Europe to form the bulk of hydrogen-based capacity in the near-term, despite cost disadvantages

Europe is expected to account for the majority of EAF capacity fed by hydrogen-based DRI, although this could be using a mix of imported and integrated hydrogen-DRI.

Around 80% of global capacity is projected to come from European producers by 2030, reflecting the scale of projects already under construction or in the late stages of investment decisions. Large capital-intensive projects in Scandinavia (e.g. Stegra, Hybrit, and Blastr green steel) benefit from access to low-carbon electricity, government support, and regulatory cost advantages through the EU ETS.

The decarbonization shift in Europe, however, remains quite “painful” for steelmakers, despite state funding. Commercial viability of hydrogen-powered DRI remains in the centre of the discussion as switching to electric-arc furnaces (EAFs) and EAFs/DRIs implies a steep increase in electricity requirements.

Electricity prices in Europe remain significantly higher than in many other regions, with industrial rates often exceeding €100 per MWh – two to four times higher than in the United States and China. This is primarily driven by high natural gas prices, the European emission trading system (ETS), and a reliance on energy imports.

European hydrogen-based flat steel production is therefore structurally more expensive to produce than in some other regions. In 2030, the average MENA producer has 17% lower costs than its European counterpart, driven by lower labour, power, CAPEX and hydrogen costs.

Therefore, importing hot-briquetted iron (HBI) and DRI from origins such as the Middle East-North Africa region (MENA), where HBI/DRI production is more commercially viable, becomes one of the possible scenarios in coming years. This raises a fundamental question for green steel producers in Europe about where production should ultimately be located.

Hydrogen cost differentials underpin MENA competitiveness

Hydrogen costs are the largest driver of international competitiveness for EAFs fed by hydrogen-based DRI. Access to low-cost renewable energy allows producers in MENA to generate hydrogen at substantially lower cost than European facilities. In 2030, average hydrogen input costs in MENA are expected to be half that of a European facility, with this differential alone contributing 82% of the net cost differential between the two regions.

Additional factors reinforce MENA’s cost competitiveness, including lower labour costs (approximately 30%), and cheaper power (7%). Together, these structural advantages contribute to the 17% lower costs for MENA in 2030, when factoring in increased transport costs and revenue for European facilities from selling free allowances under the EU ETS. [1]

Middle east to maintain a strong position in gas-based DRI-EAF supply

Production from EAFs fed by Natural gas-based DRI in MENA remains structurally advantaged. Low-cost natural gas and competitive power prices translate into lower production costs, across both hydrogen and natural gas-based production routes. By 2030, MENA gas-DRI-EAF production costs are expected to be 31% lower than European equivalents, with lower MENA raw material costs contributing 43% towards this differential, and gas and power costs a further 25%.

This could result in a significant market share for MENA producers; despite EU tariffs and quotas, their cost advantages position them as a strong supplier to Europe over the decade.

[1] Although hydrogen, labour and power cost differentials appear to sum to more than 100%, these percentages each represent contributions to the net cost gap rather than standalone cost components. MENA producers also have areas where costs are higher than in Europe (e.g. transport costs), which offsets part of the total.

CBAM narrows, but does not eliminate cost gaps

CBAM significantly increases the delivered cost of high-emission steel into Europe, with low-emission producers facing smaller, but still notable, penalties. As a result, the policy partially levels the playing field with European producers. By 2035, MENA production costs for EAFs fed by natural gas-based DRI are expected to be 35% lower than those of a representative European-based producer, but the gap narrows to 24% once CBAM costs are applied. For European green steel producers, this remaining gap still presents a meaningful cost challenge against MENA competition.