The iron and steel industry is facing significant changes, with requirements to reduce greenhouse gas emissions, increased geopolitical uncertainty and lower steel consumption in China.
Transformation of the production systems in the iron and steel industry, with coal being gradually phased out as a reducing agent, is a necessity for achieving the global climate goals. Regional energy conditions will become increasingly important in future production systems.
The sector is also affected by structural changes in China’s demand for steel and in technological development, creating both opportunities and challenges in the value chains.
Three important overall trends are crystallising:
• Transition for a reduced climate footprint
• Reduced steel consumption intensity in China
• An increased focus on supply risks and geopolitics
Over the past year, profitability in the iron and steel industry has fallen as a result of lower steel consumption. In China, demand for steel has decreased since 2020
and stocks of iron ore have increased as production has been maintained. The result was weaker profitability and an oversupply of iron ore globally in 2024. Parallel to this development, exports of steel to other markets have increased.
The European steel industry is under pressure, with weak profitability and a large need for investment to meet the requirements for lower greenhouse gas emissions. Energy costs are a particularly big challenge, not least in comparison with other regions. Europe’s dependence on imported gas, which is now largely being replaced by expensive liquefied natural gas (LNG) from the United States, has contributed to higher energy prices – thereby weakening the competitiveness of European industry.
The current economic downturn and weaker demand for steel in key sectors such as construction and the automotive industry have also exacerbated the situation, affecting both profitability and investment opportunities for the industry.
The premium for high-grade iron ore is expected to increase. Direct reduction, which is the technology most ready to replace the blast furnace process and reduce emissions of carbon dioxide, places higher demands on the iron raw material.
The transition to steel production in electric arc furnaces will drive demand for high-grade iron ore, sponge iron (HBI/DRI) and scrap. When the steel industry will make major investment decisions is a complex issue that involves factors such as the available technology, access to fossil-free energy and iron raw material, and finally demand for fossil-free products. With the transition in the industry, demand for high-grade iron ore that can be used in the direct reduction process is therefore expected to increase. A limited supply of scrap and high-quality iron ore is increasing competition for resources. At the same time, companies in some developing countries are continuing to invest in blast furnaces, slowing down the global transition.
In Europe, blast furnace production is expected to decrease gradually, over time being replaced by direct reduction processes and electric arc furnaces.
The EU’s Emissions Trading System, in which the free allocation of emission allowances is to be phased out by 2035, is expected to increase the production cost of systems with emissions when the actual emissions have to be paid for. When the free allowances are phased out, a Carbon Border Adjustment Mechanism (CBAM) will be introduced to protect European industry by making imports from countries with lower climate requirements more expensive. However, these carbon tariffs will not be enough to protect the competitiveness of the sector. Access to fossil-free, cost-effective energy and new technology are critical for the transformation of the steel industry. Increasing regionalisation may also lead to more protectionism, which risks making the transition more expensive. If fossil-free energy is not expanded to a sufficient extent, the EU’s climate goals may become difficult to achieve. There is a risk that steel-consuming industry will move to regions where energy prices are lower and climate requirements less stringent.
In the longer term, demand for high-quality iron raw material, especially highly upgraded products such as pellets and sponge iron, is expected to continue to increase.
The continued transition is expected to entail higher production costs and require significant investments.
The need to reduce emissions is increasing for climate reasons, but the cost of emissions is also expected to increase sharply as a result of emission allowances in the EU gradually becoming more expensive. This will lead to significantly higher costs for blast furnace-based steel production.
There is also uncertainty concerning how costs will develop and concerning the expansion of solutions such as hydrogen and carbon capture and storage (CCS), which may affect the pace of transition. The availability of high-quality iron ore and scrap may be a limiting factor. Steel companies are expected to build pollution management into their processes, resulting in increased investments compared with conventional processes. At the same time, global factors such as the supply of iron ore and other raw materials, energy supply and regionalisation will be significant for the market’s development.
Regionalisation means that value chains are increasingly being built within geographical or political blocs, which may create new opportunities for European players to develop regional collaborations and secure the supply of raw materials.
Europe has the potential to lead the development of a market for fossil-free steel, but this requires coordinated action and significant investments in renewable energy production and infrastructure.
