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The weak demand and oversupply in Asia has presented the push that steelmakers in the region needed to establish a low-carbon steel supply, especially with the EU’s Carbon Border Adjustment Mechanism’s (CBAM) January 31 reporting deadline drawing ever closer, market participants said.
This is compounded by the fact that other Western countries, namely the United States, are looking to launch similar policies.
“Steel producers in Asia are not slowing down [production, and] are looking to ramp up production so, we can expect the added capacity to outpace demand growth, especially during this period of post-pandemic recovery,” a Singapore-based trader said. “…the products have to go somewhere. Producers can export to Europe, but that means they would have to offer low-carbon products at competitive prices.”
The road to decarbonization in Asia has seen some breakthroughs, especially with policymakers committing to various climate goals and collaborating with public and private stakeholders to develop low-carbon technologies.
These investments have allowed steelmakers to explore commercially viable technologies and reliable sources of clean energy, namely scrap steel or natural gas-based direct reduced iron, or shift to electric arc furnace steelmaking, which is less carbon intensive compared with the blast furnace.
Demand for green steel is increasing steadily and the market is reacting to this, considering the number of investments in the pipeline, according to Fastmarkets senior analyst Paolo Frediani.
“CBAM will certainly provide a significant impulse [in developing a green steel supply chain], but while European regulation on steel emissions is extremely advanced, green steel premiums are largely supported by the fact that an expanding segment of end-users are working toward reducing their overall carbon footprint,” Frediani said. “While this drive is stronger in some regions than on others, it is becoming a global phenomenon.”
A source close to a Singapore-based producer said that the adoption of green steel is at its starting point, but interest has grown significantly in recent years, especially after lawmakers rolled out climate targets for carbon-intensive sectors.
This is especially for the automotive industry, which has seen significant growth in demand for green flat steel. But other steel consuming industries, namely construction, have yet to mimic this growth due to limited potential, traders told Fastmarkets.
“I believe the potential to further lower carbon emissions in production of long steel is limited,” a reroller based in the Philippines said, citing that the construction sector mostly utilizes long steel products, which is typically produced through scrap-based electric arc furnaces (EAF), the most sustainable means to produce steel at present.
Despite this, there is still demand for green steel in construction projects, with companies willing to pay for the product in the name of sustainability, according to an Indian producer source.
“Right now, it’s all for the branding. We haven’t seen real demand yet,” the source said.
This has ultimately signaled the start of green steel consumption in the construction sector and demand for the product is likely to increase, bringing premiums along with it, sources told Fastmarkets.
Additionally, with the leading decarbonization technology involving direct-reduced iron (DRI) in EAF steelmaking, production costs will likely rise in tandem with energy prices, sources said.
Fastmarkets’ weekly price assessment of its green steel import, differential to HRC index, cfr Vietnam, which calculates the price difference of flat-rolled green steel to the CFR Vietnam HRC index, Japan/South Korea/Taiwan, was $204-340 per tonne on Friday December 15, unchanged week on week.
Fastmarkets’ price assessment of its green steel base price, HRC cfr Vietnam, weekly inferred, which is calculated by adding new spreads to Fastmarkets’ Japan, Korea and Taiwan-origin HRC prices, was $824-965 per tonne on Friday, widening upward by $5 per tonne from $804-960 per tonne a week earlier.
However, market participants note that input costs remain a major hurdle for steelmakers in decarbonization, especially amid the economic slowdown post-pandemic.
Doing away with blast furnaces would be economically unfeasible for steel producers considering the current market conditions, even more so with the additional capital needed to transition to EAF steelmaking, sources said.
The Indian producer source said there is undoubtedly a wide range of low-carbon technologies on offer, which shows that steelmakers do not lack options.
“But what truly controls the appetite is demand. If demand is not there, people are not inclined to produce low-carbon products,” the Indian producer said.
Aside from costs, the first Singapore-based trader pointed out that there is also political pushback, especially from China against CBAM-style policies, which may affect sentiment in Southeast Asia.
Most recently, EU representatives at the 2023 United Nations Climate Change Conference, also called COP28, were confronted by strong resistance to the carbon tariff by their Chinese counterparts, who stated that China would set its climate targets “based on the country’s own pace of technological and economic development”.
China has committed to have its carbon emissions peak before 2030, and achieve carbon neutrality before 2060.
“China is the largest player in Asia and in the world, so it definitely sets the direction of the market. Steel prices in Southeast Asia is also influenced by demand in China, more so than in Europe,” a third Singapore-based trader said.
The trader added, “With governments in Asia pushing their own climate targets, I think steelmakers will increase their supply of low-carbon steel,” noting that this may lead to the decoupling of green steel prices from China.
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.