mbr environmental impact
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The cost of EU’s new environmental regulations on EU integrated producers out to 2021
Whitepapers
Whitepaper: MBR feature
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Across Europe – with the UK particularly affected, around 5,000 steel industry jobs alone were lost in October 2015. With the current impact of competitively priced imports, driven largely by Chinese exports which have exploded to around 110m tonnes this year, environmental legislation facing EU steelmakers is seen by many as a further burden to fall upon the industry over the coming years. .
This is another real threat to the 330,000 workers
in the steel sector, a headcount down 85,000 since
2008. According to Mr Axel Eggert, Director General of
EUROFER, “The EU needs to adapt trade, climate and
energy policies, in particular the review of the EU Emission
Trading Scheme, to keep our sector competitive. Best
performers in carbon leakage sectors like steel must not
be penalised by additional direct or indirect carbon costs
against extra-EU competitors”
It is against this context that Metal Bulletin Research (MBR)
has now published the highly topical research study
called “Impact of Environmental Policies on the Global
Steel Industry: Technical and Economic Performance
Assessment from the EU Perspective”*
Our new and independent study shows that the cost of
EU’s new environmental regulations could be as high as
€15/tonne on a crude steel basis for key EU integrated
producers out to 2021. Total cost of the carbon allowance
for the steelmakers will reach US$500 million by 2021.
These costs would represent 25-60% of average EBITDA
margins of the EU steel industry over the last few years.
This is significant as MBR’s continues to forecast global
overcapacity to feature out to 2020 from low-cost
emerging market steel producers. This casts doubts as
to whether the EU steel industry can really competitively
pass on any of these additional costs onto customers.
EU steel companies are competing more than ever before
on which are best positioned to adopt effective strategies
against the backdrop of even more environmental
pressure planned on EU steel mills. Our analysis shows
that EU steel companies have afforded to invest in
environment-related investments in profitable times. The
number of environmental initiatives translating into actual
investment projects skyrocketed in 2010-2011. However,
with steel prices and EBITDA margins declining since
then so have the total number of newly announced
environmental projects.
This has left some EU steel companies investing only
to assure their operations are merely compliant to EU
legislations, while others have progressed more and
manage to adopt a more holistic and forward looking
approach aimed at promoting long-term efficiency gains
beyond mere compliance. This has involved targeting
improvements to the efficiency of energy generation,
coking synthesis and the steelmaking process, switching
to less emissions-intensive fuel types etc.
ANAlysis
MBR feature: the cost of EU’s new environmental regulations could be as high as €15/tonne on a crude steel basis with the total cost for key EU integrated producers totalling US$ 500 million out to 2021
1 December 2015 - Roman Kucinskij, Research Analyst, Metal Bulletin Research
Europe/Americas/MENA [email protected] +44(0) 20 7779 8174 Asia [email protected] +61 3 5222 61543
Based on the results we have obtained from direct
interviews and field research at all the major EU steel
plants we have independently benchmarked and ranked
each of them in terms of key environmental performance
and sustainability indicators, including emission reduction,
capex dedicated to environmental programmes, age of
installations etc.
Our results point to Sweden’s SSAB, Austria’s voestalpine
and Germany’s Rogesa being the most decarbonisation-
adept steelmakers in the EU.
EU blast furnace producer environmental performance
ranking*
EU steelmaking CO2 footprint advancement to date
EU steelmaking companies are subject to environmental
regulation outlined in the New Industrial Emissions
Directive (2010/75/EU) and the Cleaner Ambient Air for
Europe Directive (2008/50/EC). In additional to ambient
air quality regulation, the EU has adopted the greenhouse
emissions trading scheme (EU ETS) (2003/87/EC) in 2003.
Consequently, the EU’s global share of greenhouse gas
emissions has been trending downwards since 2000. In
fact, during this period Europe and NAFTA were the only
two regions that managed to achieve a consistent and
considerable reduction of CO2 emissions.
EU blast furnace producer environmental performance ranking
Country Company Overall Ranking
Emission reduction*
Environmental CAPEX
Degree of innovation
Age of steelmaking installations
Various SSAB/Ruukki 1 2 5 1 5Austria voestalpine 2 1 3 2 7Germany Rogesa 3 7 4 4 1Various ArcelorMittal EU 4 3 2 5 6Germany Thyssen Krupp 5 4 8 3 3Italy Ilva 6 8 1 8 2Germany HKM 7 6 7 6 4Various TATA Steel EU 8 5 6 7 8
* actual achieved reduction in CO2 emission intensity 2008 vs 20141 - the best, 8 - the last among the peersSource: MBR
EU industrial emission legal acts
Europe/Americas/MENA [email protected] +44(0) 20 7779 8174 Asia [email protected] +61 3 5222 61544
Global carbon emissions vs. GDP, 1983-2013
Europe
MENAOther As ia
CIS
NAFTA
China
0
250
500
750
1,000
1,250
1,500
1,750
2,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Glo
bal c
rude
ste
el p
rodu
ctio
n, M
tonn
es
Tota
l CO
2 em
issi
ons,
MTo
nnes
Latin America India Africa Global crude steel production (RHS), Mtonnes
Source: MBR, various
Although the total share of steelmaking-related carbon
emissions in the EU total is relatively small, approximately
5%, it will be higher after taking into account associated
power generation and coking plant-related emissions,
which are reported separately in official EU data.
EU carbon emissions by polluting sector, 2008-2013
Similarly, European steelmaking-related average carbon
intensity, representing the amount of CO2 emission per
tonne of crude steel produced, and widely accepted as
the indicator of the emission related performance of
individual facilities, has also seen a marginal downward
trend between 2008 and 2015.
This can be partially explained by various decarbonisation
incentives adopted by the major integrated EU
steelmakers - detailed in the study, and to a lesser extent,
improved optimisation from using higher quality steel raw
material feeds. It should be noted, however, that countries
in which the bulk of steelmaking capacity uses electric
arc furnaces witnessed carbon intensity increasing on the
other hand. This is related to the widely adopted practice
of using lower-quality ferrous scrap (i.e. scrap with higher
impurities) as a primary steelmaking raw material.
Average steelmaking carbon intensity in Europe, 2008-2013
However, the more significant factor in explaining the
overall total decline in EU share of greenhouse gas
emissions thus far has been more from the direct
consequence of lacklustre growth rates in EU crude
steel production, rather than an effect of decarbonisation
efforts per se.
Crude steel production growth rate in Europe vs. rest of world, 2008-2014
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
2008 2009 2010 2011 2012 2013 2014
Europe ROW
Source: WSA
The substantial impact EU ETs Phase iii will have on
the EU steel industry
Our new study outlines the substantial impact EU ETS
Phase III is expected to have on the modernisation,
production and operational planning of the EU steel
industry out to 2020.
Coming into force in 2005 the EU ETS scheme was
designed to fight global warming and is the major pillar
of EU climate policy. Under the ‘cap and trade’ principle
within the EU ETS scheme, a maximum (cap) is set
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on the total amount of greenhouse gases that can be
emitted by all participating installations. ‘Allowances’ for
emissions are then auctioned off or allocated for free, and
can subsequently be traded. Installations must monitor
and report their CO2 emissions, ensuring they hand
in enough allowances to the authorities to cover their
emissions. If emission exceeds what is permitted by its
allowances, an installation must purchase allowances from
others. Conversely, if an installation has performed well at
reducing its emissions, it can sell its leftover credits. This
allows the system to find the most cost-effective ways
of reducing emissions without significant government
intervention.
The scheme has been divided into a number of “trading
periods”. The first ETS trading period lasted three years,
from January 2005 to December 2007. The second
trading period ran from January 2008 until December
2012, coinciding with the first commitment period of the
Kyoto Protocol.
Starting in January 2013, and spanning until December
2020, Phase III of ETS sees a turn to auctioning a majority
of permits rather than allocating freely to each EU state;
harmonisation of rules for the remaining allocations; and
the inclusion of other greenhouse gases, such as nitrous
oxide and per fluorocarbons.
The problem was attempts to set up a market-driven
and viable emission trading scheme largely failed to
materialise. Insufficient demand, caused by excessive free
allocations and slower than expected industrial output in
the aftermath of the 2008/2009 crisis resulted in the free-
market carbon auction price crashing to almost zero on a
number of occasions.
However, now with the tightening of EU emissions limits
as defined in Phase III of the EU Emissions Trading
Scheme (ETS) this is now expected to result in the total
national free carbon emission allocations balance for EU
member countries turning negative from 2016 onwards.
Estimated shortfall in free carbon emissions
allowances under EU ETS Phase III out to 2020
This should re-establish the functionality of the ETS
trading market, at the same time as prompting industrial
carbon emitters, including steelmakers, to incur additional
costs as a result of increasing carbon prices to source
additional carbon allocations on a free market to cover
this shortfall. We detail our carbon price forecasts within
the study out to 2020.
Key obstacles for the steel sector in terms of new
environmental regulations
A new international climate agreement to replace the
Kyoto protocol is expected to be finalised and signed
in Paris during the United Nations Climate Change
Conference in December 2015.
We understand that the new agreement is unlikely to
introduce sectorial environmental targets, owing to a
lack of incentive to co-ordinate joint efforts between the
existing members and newly signing countries alike.
The EU ETS review process is also not expected to
yield any considerable innovations from which the steel
sector could benefit, apart from certain positive gains
in supporting “carbon leakage” prevention as a political
compromise on behalf of EU commissions.
MBR expects steel mill profitability to remain the driving
force behind adopting and investing in new environment
and sustainability projects going forwards. However, this
also represents the EU steel industries single most critical
challenge in Metal Bulletin Research’s view out to 2020.
Europe/Americas/MENA [email protected] +44(0) 20 7779 8174 Asia [email protected] +61 3 5222 61546
Contrary to the belief of some members within EUROFER,
we do not expect a widespread gradual shift towards EAF
steelmaking in the EU over the long time, as a response
to the ramp up in carbon emission allowance costs. This is
likely to be the case due to:
l ample supply of highly competitive steelmaking
capacities in other regions expected going forward
l the anticipated tightening in the EU energy balance
due to shifting weight away from conventional power
generation and ever more to renewable energy
sources
l Despite some trade protectionist measures being
adopted to protect the EU steel industry from unfairly-
priced foreign imports, we do not expect wholesale
state interventionist support for the EU steel industry
As such, MBR believes that the net effect of upcoming
environmental costs will be to act as yet another factor,
in a series of factors that most likely will see the gradual
long-term transformation of the EU steel industry.
We expect the EU to increasingly move away from
upstream steelmaking, via the BF route, to more
re-rolling and steel processing operations of imported
semis to produce high-value steel products serving EU’s
automotive, engineering, construction, as well as other
niche sectors in a just-in-time manner.
Methodology and coverage
Metal Bulletin Research’s brand new independent strategic
forecast study called ‘Impact of Environmental Policies
on the Global Steel Industry: Technical and Economic
Performance Assessment from the EU Perspective’, has
just been published.
The research programme involved three month’s worth of
site visits, face-to-face and phone interviews with major EU
integrated steelmakers and associated industry bodies.
The study offers independent and exclusive data on
the impact of EU environmental policies on European
integrated steel producers performance, as well as a
forward outlook.
For the first time, the study provides apparent CO2
emissions by steelmaking process in 2014, historic
carbon emission released and carbon intensity statistics,
forecast effect of the reduction in free carbon emissions
allowances on carbon prices (€/t) from 2016 out to 2020,
analysis of the direct economic impact environmental
investment projects have had on the cost of crude steel
production at each major EU integrated steelmaking site.
The study also features a detailed technical database
detailing sintering, coking coal, DRI/HBI, blast furnace,
BOF, vacuum degassing and ladle facilities for each
selected EU plant.
Roman Kucinskij, a consultant with Metal Bulletin
Research, is one of the authors of the report. Any
questions please contact on :
[email protected] or + 44 (0) 827 7827 6421
To download a free complimentary review of the report
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Meet the EditorRoman Kucinskij
Having graduated from the University of Aberdeen with a M.Sc. in International Business Energy and Petroleum, Roman predominantly concentrated on MBR consultancy coverage of the global metals
& mining space. Furthermore, Roman is a MBA holder from the Vilnius Gediminas Technical University. Prior to joining MBR Roman worked as a research associate at the Australian Mineral Economics (AME) in Sydney and London covering CIS metals sector. From 2006 to 2009 Roman worked a Pan-Baltic Head of Marketing and Sales at Q-Vara, a leading investment company in Baltics. Roman is a native Russian speaker.
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