Steel industry weighs the costs as CBAM transition period begins

Steel market participants gathered at the Nordics regional meeting of steel distributors’ association Eurometal in Copenhagen, Denmark on Thursday October 5, where key discussion topics were how the EU’s Carbon Border Adjustment Mechanism (CBAM) will operate and the risks importers face once it reaches final implementation

Fastmarkets explores the lingering concerns now that the transition period has begun.

CBAM declarations and certificates

The CBAM transitional period began on October 1. Buyers of imported goods will now have to submit CBAM declarations for the fourth quarter of 2023 by January 31, 2024.

The CBAM declaration should contain the following: total quantity of each type of goods imported in the previous calendar year, total embedded emissions associated with the imported goods, total number of CBAM certificates to be transferred for surrender and copies of verification reports issued by the accredited verifier.

CBAM certificates must be submitted by buyers of imported steel by May 31, 2024, and the number of those certificates should correspond to the level of declared emissions.

The number of CBAM certificates at the end of each quarter should be equal to at least 80% of the embedded emissions of imported goods since the beginning of the year.

The price of the certificates will be calculated by the European Commission on a weekly basis, based on the average price of the closing EU Emission Trading System (ETS) carbon dioxide (CO2) allowances for each week.

Steel market participants expressed concerns over the unpredictability of carbon emissions costs, and lack of clarity on how many certificates will be needed for each importer to cover the purchased goods.

“In theory we could sell unused [CBAM] certificates afterwards, but the price for carbon allowances under EU ETS is highly volatile, and the fact that the buyer doesn’t know exactly how many certificates will be needed makes importing even more risky and will push costs up,” a trading source said.

“Smaller distributors, steel service centers, simply wouldn’t be able to afford importing steel. So they will need to switch to domestic suppliers and maybe purchase imported steel [from] big companies who are able to hedge risks,” a second trading source in Europe said.

Buyers to rely on emissions declarations or use default values

Another concern for steel importers is the inability to check the accuracy of CO2 emissions information for purchased goods provided by sellers.

“In the transitional period, that’s quite obvious that the quality of the information that’s going to be reported in CBAM throughout the first three to five reporting periods is going to be abysmal and might have nothing in common with the actual emissions,” Daniel Maryjosz, manager at PwC, said during a presentation at Euometal’s Nordics meeting.

During the transitional phase of CBAM (until December 31, 2025), the Commission is likely to overlook some inaccuracies, and some simplifications are likely to be applied. From the start of the final implementation period (January 1, 2026), European buyers will have two main options to verify the CO2 emissions content in purchased goods.

The first option is for information in each CBAM declaration to be audited by an entity called a “verifier.” To achieve that, new entities will need to be set up, Fastmarkets understands.

“The new branch of entities is going to be launched once the transitional period ends. New entities are going to verify every single CBAM declaration that’s going to be submitted,” Maryjosz said.

Non-EU producers will be able to register their installations (steelmaking capacities in case of steel goods) with the CBAM authority, that’s going to be set up at the Commission level. Once that installation is audited, verified and accredited by the Commission’s authority, the supplier will not have to do it again.

“Basically, the CBAM declarant that purchased goods [from a] verified producer will not have to verify the [CO2 emissions] from that specific installation again,” Maryjosz said.

The second option is if the supplier is unable to provide information on the CO2 emissions in goods sold into the EU. Buyers will be forced to use the default CO2 values the Commission reports. Those values will likely not be clear at the point of purchasing imported goods, which poses a major risk for European buyers.

Another potential problem with the default CO2 values is that they could be defined at much higher levels than the actual emission values from the specific countries, according to sources familiar with the matter.

“For instance, 1 tonne of blast furnace-produced steel from China has 2-2.1 tonnes of CO2 emissions. However, if the supplier is not able to provide any report or documentation supporting this information, the Commission is going to use the default values set at 3 tonnes of CO2 per 1 tonne of steel,” Maryjosz said.

That means that instead of purchasing two carbon certificates the buyer would need to purchase three certificates to cover the emissions.

It will be possible to use in CBAM declarations the information on the carbon emissions that are provided by institutions in non-EU countries, should they have any.

For example, if the steel supplier to the EU pays carbon tax in their home country, than this information can be taken from the reporting authority in that country. It would only be possible to do so without any supporting documentation until the end of 2024.

From 2025, the Commission is expected to set up a more or less unified process to get the information on carbon emissions from non-EU suppliers, or will settle those emissions using default values.

Risk of outsourcing high-value added goods outside the EU

For steel products, the EU already has a number of trade restrictions, including anti-dumping measures for certain products, safeguard measures, and now the CBAM.

And while steel imported into the EU to produce finished goods is subject to CBAM regulations, those same products – such as cars and white goods – can be imported directly without falling under the scope of CBAM.

Steel market participants are therefore worried about the leakage of high-value added production outside the over-regulated European market.

“Instead of bringing the steel coil from Asia and processing it in the EU, we buy the ready tailor-made steel structure without quota, without the anti-dumping and CBAM. That means that all this added value for Europe is gone,” Fernando Espada, president of Eurometal, said.

The CBAM was initially designed to offset the additional costs the EU mills have to bear because of the fact that they need to buy CO2 allowances and prevent carbon leakage, while products built with CBAM-covered goods were not really taken into account.

That issue is not currently being addressed by the Commission.

To keep up with the green steel discussion and to follow the critical developments in green steel pricing and low carbon steel production, visit our Green Steel Spotlight page.

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