Steel sector concerns remain post CBAM implementation
6 November 2023 | By Ranjana von Wendland
The steel sector’s concerns regarding the implementation of the transitional phase of the European Union's Carbon Border Adjustment Mechanism (CBAM) remain intact, one month after its implementation, with many participants saying it puts a wrench in their plans.
“We are in the same position as a month ago; the concerns raised previously have not been addressed. The implications of CBAM on the supply chain and how it impacts business across borders is still mired with confusion,” a steel importer said.
The 2024-2026 transitional phase will see all steel producers, importers and exporters required to report both their direct and indirect emissions.
While there is some leg room in the transitional phase as it functions as a trial period and will help the EU gather all data on embedded emissions, the reporting of embedded emissions is proving tricky for many importers.
“There is clearly a great likelihood of making errors while reporting embedded emissions. Suppliers are not always transparent in giving full details, also checking the accuracy of information is tricky," an importer from Europe said.
"For example, the default value of Chinese basic oxygen furnace (BOF) mills can be set close to 3t of co2/t of steel, but this is not the standard. Also, reporting on default values also ends by the end of next year," they added.
The EU's finished steel imports in January-August stood at 21 mt, compared with 25 mt in the same time last year, according to McCloskey data.
The top five exporting countries – India, South Korea, Taiwan, China and Vietnam together made up 52% of total EU finished steel imports in the eight months. These countries were also the major exporters in the same period last year.
Meanwhile, the Turkish steel industry anticipates an extra cost of 9% in steel exports to the EU, while importers from India and China see their increase in double digits, considering majority of steel mills in the latter are BOF based.
“Companies make long-term investment decisions, so the additional costs of CBAM are important to them. For steel companies exporting to the EU, CBAM could tip the investment economics in favour of an EAF rather than a BOF, or possibly even bring carbon capture, usage and storage (CCUS) into play. Understanding CBAM and the price drivers for European carbon becomes crucial.” Dan Maleski, CBAM lead at London based Redshaw Advisors said.
There are also concerns from several small importers in the EU and UK as they will need more help with manpower to deal with the EU paperwork.
“Large importers in the EU and UK can easily hire more people but it's not easy for smaller importers, especially at a time when steel is already under pressure. The EU can offer more support to small businesses with CBAM,” an importer from England said.
Some market participants also noted that the EU's information dissemination through webinars has also been lacking. So far, seven webinars on CBAM across industries have been organised as per the Commission’s website.
The issue of CBAM mirroring the current EU Emissions Trading Scheme (ETS) was also brought up by the majority of the importers. Most said there will be no secondary market and they will have to simply sell the unused certificates.
EU officials have stated that CBAM will mirror the ETS in the sense that the system is based on the purchase of certificates by importers. The price of the certificate will be calculated depending on the weekly average auction price of the EU ETS allowances in EUR/t of carbon equivalents emitted.
EU carbon prices closed at EUR77.50/t on 6 November, slightly down from EUR80.00/t a year ago, according to ICE data. Market participants expect EU carbon prices to stay closer or higher than the EUR100.00/t mark in the coming few years as the European Commission decreases free allocations for industries from 2026.
The transitional phase of CBAM kicked in from 1 October with the first reporting period for importers ending 31 January 2024. The transitional registry is accessed through the National Competent Authority (NCA) of the Member State in which the importer is established, according to the EU.
Products covered under CBAM for the steel sector include pig iron and DRI/HBI, semi-finished steel, slab, billet, some fabricated steel products, screws, nuts, bolts and other similar articles of iron and steel. Ferroalloys and scrap have been exempted.
Exporters voice concerns
Exporters from India noted that for now they have accepted the CBAM reporting standards as it is still in the transitional phase but are hoping for greater clarity on the default value of emissions.
“The EU’s proposed carbon tax on imports is ill-conceived and would become a death knell for its manufacturing sector," Indian commerce and industry minister Piyush Goyal told local media in early November
The minister said that India is developing its own carbon tax mechanism. China’s Iron and Steel Association also reported in early November that CBAM is a barrier to their exports and will increase export costs.
Margins at Chinese mills have been under pressure for more than a year, with rebar margins at -$56.00/t in October, down from -$44.28/t at the same point of last year, according to McCloskey data.
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