A region in crisis

The European Union has lost more than 1 million metric tons of primary aluminum and 3.3 million metric tons of steel capacity as energy woes continue, according to Davis Index estimates. With energy costs accounting for 23 percent to 30 percent of the total cost of production, the rising prices have hit the European metal industry. Producers, unable to pass on the increased costs to end users amid weak demand, are facing an existential crisis, the European Steel Association, Eurofer, says. 

Eurofer’s market outlook for steel, released in October 2022, states that total demand for that year could decline by 3.5 percent, while it projects a possible decline of 1.9 percent in 2023, making it doubly painful for mills. 

The recycling industry also continues to face the brunt of a growing energy crisis. At the Brussels-based Bureau of International Recycling (BIR) convention held in October of last year in Dubai, United Arab Emirates, participants suggested that business was affected by weakened macroeconomic parameters arising from COVID-19 supply chain disruptions and geopolitical tensions between Russia and Ukraine that escalated into war.

The EU’s economic growth expectations for the second half of 2022 have dampened despite the year beginning on a positive note and with hopes of a revival. High inflation has decreased disposable income for households, and economic activity is estimated to contract into the first quarter of 2023. By spring, inflation gradually could relax its grip on the economy, giving way to growth. Still, powerful headwinds will hold back demand and keep gross domestic product (GDP) growth at a mere 0.3 percent in 2023 in the EU and euro area, according to European Commission’s (EC) autumn 2022 economic forecast. The forecast predicts 2024 economic growth will be 1.6 percent in the EU and 1.5 percent in the euro area.  

Providing his insights on the macroeconomic factors affecting scrap at the BIR conference, Murat Bayram, managing director of European Metal Recycling (EMR), based in the U.K., said the scale of inflation previously was underestimated. Bayram noted the fungibility of margins for recyclers would depend on the rate of inflation they were facing. Interest rates are rising, affecting cash flows in households and businesses. Bayram cited Germany, where he lives, as an example, saying interest rates for homebuyers, which were close to 2 percent, have increased to more than 3 percent, affecting order books for private builders. This will have a ripple effect on demolition activity in a market already dealing with a shortage of some scrap grades.

A cry for help

Scrap metal associations have responded to the rise in energy prices in a unified voice, urging national governments and global legislators for financial aid to help the recycling industry.

In a public letter, the BIR notes that small to medium enterprises, or SMEs, are dealing with an enormous burden of energy costs that are threatening the future of the industry. Moreover, ongoing labor shortages and dwindling yard infeed quantities also are proving to be a challenge for recyclers.

German recycling associations, such as the Federal Association of German Steel Recycling, the Federal Association of Waste Disposal, the Association of German Metal Dealers and Recyclers, the Federation of the German Waste, Water and Raw Materials Management and the Association of German Metal Dealers and Recyclers, demanded their sector be included in the list of those eligible for energy subsidies. The groups argued that the recycling industry makes energy-efficient raw materials available through collecting, sorting and processing. The organizations urged that the German government reinstate the recycling industry as a sector eligible for state assistance and ensure it is provided with the appropriate financial opportunities.

The European Recycling Industries’ Confederation (EuRIC) strengthens their case, saying that, compared with the extraction of raw materials, recycling significantly reduces CO2 emissions and energy use. EuRIC President Olivier François says rising energy prices already are undoing the scant gains made by recycling businesses, especially SMEs. Thus, it is imperative for the government to aid the sector.

At the same time, the European Commission suggests cutting back electricity use by at least 5 percent during specific peak price periods. It suggests that member states work for a minimum 10 percent decrease in overall electricity demand through the end of March and recommends a temporary revenue cap on inframarginal electricity producers and capping infrastructure revenue at 180 euros per megawatt hour.

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Energy crisis hits green steel manufacturing efforts

A report from McKinsey & Co., New York, says rising natural gas and electricity prices in Europe and supply disruptions call for steel mills to reconsider their decarbonization efforts.

Flat steelmakers in the region plan to gradually phase out coking coal-based blast furnaces (BFs), replacing them with direct-reduced iron (DRI) plants. Over 16 DRI plants have been announced in Europe, with a total capacity of 25 million metric tons per year. These plants are to be powered by natural gas and process ore into pig iron in an electric arc furnace (EAF) or a submerged arc furnace. Subsequently, a basic oxygen furnace (BOF) will produce flat steel.

The Russia-Ukraine war, however, has dampened plans, largely because of the extended supply disruptions for natural gas. Germany depends on Russian natural gas for 65 percent of its requirements. The warring country is responsible for 35 percent of the supply in Europe. These countries are, therefore, staring at a potential supply limitation amid interrupted exports.

The McKinsey report also highlights four potential steel industry responses as it continues efforts to curb carbon emissions. The first is the extension of BF lifespans and delayed investments in DRI plants. McKinsey says it also believes that the transition to green hydrogen could be faster from the beginning, forgoing the use of natural gas. The third option could be shifting the investment toward carbon capture and storage for decarbonization, while the fourth scenario would entail moving toward secondary steel from primary steel. European steelmakers could invest in scrap-fed EAFs, marking a decline in primary steelmaking capacity in Europe.

Mayuri Phadnis is the Europe editor at Davis Index and can be reached at mayuri.phadnis@davisindex.com. Sovit Biswal is an aluminum analyst at Davis Index and can be reached at sovit.biswal@davisindex.com. Keren Beya is an analyst at Davis Index and can be reached at keren.beya@davisindex.com.