EU Green Steel Transformation – why, what, and how?

Enabling profitable growth for EU steel producers 

EU steel producers need to transform to become climate-neutral and less dependent on coal, whilst ensuring future growth. New opportunities associated with almost climate-neutral “green steel” offer a promising way forward. Due to rising EU CO2eq costs and related policy changes aimed at decarbonizing the economy, demand for green steel is set to experience rapid growth, whilst conventional grey steel demand is expected to see a strong decline.

To produce green steel, the use of direct reduction technology with green H2 is the favoured solution of the EU steel industry. We highlight key factors that EU steel producers should evaluate when considering their pathway to decarbonization. We then derive three key levers that will enable EU steel producers to drive this historical green transformation forward and secure profitable growth, namely business operating model, financial drivers, and green steel pricing.

1. EU steel producers need to modernize to become climate-neutral and less dependent on coal, whilst ensuring future growth: green steel offers a promising way forward

EU steel producers face four key challenges: Firstly, the EU steel industry has the ambition to cut CO2eq (eq = equivalent) by at least 30% by 2030 vs. 2018 and achieve climate neutrality by 2050. Similarly, key EU steel customers are increasingly demanding green steel to fulfil their own climate neutrality goals, e.g., in Construction, Automotive, Mechanical Engineering, and Metalware. Secondly, and a consequence of increasing green steel demand, EU steel producers need to become less dependent on coal, for which prices are expected to stay significantly above the levels seen before the onset of the Ukrainian war. Thirdly, and coincidentally, EU steel producers will need to replace a significant amount of their key existing iron and steelmaking assets: It is estimated that at least ~70% of existing EU grey steel capacities will reach their end-of-life by 2030.2  Fourth, EU steel market growth is expected to continue stagnating until 2050, increasing the pressure to even maintain market shares, as well as to offer the market substantial differentiation.

To master these challenges, EU steel producers are starting to progressively shift their current production towards green steel. Green steel is effectively climate neutral and neither coal nor gas are necessary. It can be produced at the same quality and in the same quantities as grey steel. Overall, it offers a rapidly growing and innovative margin pool in line with key end-customer ambitions. Of course, such a value chain transformation cannot be tackled alone, but needs multiple stakeholders: producers, customers, suppliers (equipment, raw materials), governments (regulation/industry protection, public funding), investors, as well as other partners along the value chain to join forces and pull together in one direction.

2. Rising EU CO2eq costs push green steel demand and erode grey steel business

On the one hand, the EU steel industry produced ~153 Mt of crude steel in 2021, supporting ~0.33 million direct and ~2.5 million indirect jobs.3 4 Growth, however, is expected to continue stagnating at about 1% p.a. until 2050. The industry is in fact even expected to shrink until at least 2023 due to the Russian invasion of Ukraine. To even maintain market share in such a sharply competitive market, steel producers need to differentiate. 

On the other hand, the EU steel industry in 2021 has produced ~228 MtCO2eq, accounting for ~6% of EU CO2eq emissions. This came at a price: for ~44 MtCO2eq (~24% of ~185 MtCO2eq direct emissions), the EU steel industry had to buy allowances of the EU-ETS (Emissions Trading Scheme) for ~60 €/tCO2eq, yielding a total CO2eq cost of ~2.6 bn€ in 2021, i.e., ~2% of the EU steel industry revenue of ~125 bn€ (the remaining ~76% of direct CO2eq were free allowances).5

The business-as-usual situation would be expected to become much worse for grey steel by 2035: assuming no CO2eq decrease in the production process, direct CO2eq would grow in line with the grey steel market to ~200 MtCO2eq. Moreover, free allowances are expected to decline by at least ~2.2% p.a. and to end at the latest by around 2035, after phase 4 of the EU-ETS. Likewise, CO2eq prices are expected to rise to ~100-150 €/tCO2eq by about 2035. This would yield total CO2eq costs to be at least ~26 bn€ - about a tenfold increase to 2021.6

Due to their currently relatively small levels, CO2eq emission costs have mostly been simply passed through by steel producers to customers.7 As of 2021, ~84% were in four key steel consuming sectors in 2021: Construction (~37%), Automotive and Other Transport (~18%), Mechanical Engineering (~15%), and Metalware (~14%).8  For these sectors, steel constitutes typically anywhere between ~23% (for construction of a mid-sized steel hall warehouse) and more than ~90% (for metal products) of their CO2eq footprints. Since all steel consuming sectors have at least moderate climate neutrality goals, with many companies having signed up for Science Based Targets that cover Scope 3 emissions, they will require green steel as a key enabler sooner or later.

And the EU steel industry is indeed transforming, with green steel production capacity in 2030 expected to reach ~20% of the EU steel market, and almost all major EU steel producers are already aiming to participate.9 This poses an existential threat for grey steel producers. Over the next years, towards 2030, the forecasted strongly increasing CO2eq costs for grey steel cannot be expected to be passed through to customers sufficiently for steel producers to remain profitable. Most key customers are expected to choose green over grey steel, even at significant price premiums, all else being equal.10 In a stagnating steel market, this means predatory competition, as green replaces grey steel step by step. If anything, grey steel will only be sold with insufficient or no CO2eq cost pass-through, making it immediately unprofitable. As a result, investments into further grey steel production assets in the EU are not only at risk of becoming stranded assets and consuming capital, but also pose existential risks for a steel producers’ overall business.

3. Direct reduction with green H2 is the favoured solution of the EU steel industry

Global steel production is split between so-called primary and secondary routes. While the primary route is defined through transformation of iron ore via a Blast Furnace (BF), the secondary route consists of recycling, melting, and processing of scrap through an Electric Arc Furnace (EAF). To reduce CO2eq emissions, shifting a higher share of global capacity to the less energy intensive secondary production route, could offer a solution. However, as EU secondary production will be constrained by the limited availability of the necessary prime scrap as ferrous feed, decarbonizing the primary production route remains key to achieving a net zero scenario by 2050. Despite ~85% of EU steel being recycled, limitations in its quality mean that most steel produced by secondary production is used in lower-quality steel applications. Significant investments in the handling and sorting of recycled steel would be needed to increase the current ~50% of scrap used as a steelmaking input.

Today’s primary steel production is defined through the conventional BF route, transforming iron ore into molten iron, utilizing high quality coke as a reduction agent. The molten iron produced passes through a Basic Oxygen Furnace (BOF), cleansing impurities from the material and creating liquid steel for downstream casting, rolling, and finishing. ~80% of CO2eq arise at the BF stage and can be reduced either through CCSU (Carbon Capture, Storage and Utilization) or truly abated by switching to a H2-based DRI route (direct reduced iron), utilizing green H2 as the primary energy source instead of coke. Since the potential storage or conversion of CO2eq into low carbon chemicals requires large supplies of energy, CO2eq capture rates are limited (~50-80%), and emissions are (only) prevented from polluting the atmosphere rather than eliminated. CCSU must, therefore, be critically compared with other key available technologies, although some steelmakers are already establishing projects to explore the viability of CCSU technology.11

Given these limited options to decarbonize, almost all EU steel players have recently announced gradual plant-transformation strategies, for example, replacing parts of their existing BF-BOF assets with DRI-based capacities. In the H2-DRI-EAF route, iron ore can be reduced to DRI pellets using green H2 generated by electrolysis (~58 kg/t DRI). The pellets are then fed into an EAF to produce crude steel for further downstream processing. This approach yields a ~95-100% CO2eq reduction compared to grey steel, delivering the same product quality and quantity and with much larger independence from fossil fuel markets than the BF-BOF route. 

An alternative approach is to use a H2-DRI-SAF-BOF route, where DRI pellets are melted in a Submerged Arc Furnace (SAF) prior to being used in a BOF. This alternative route enables steel producers to benefit from using their existing BOF steelmaking assets and is less sensitive to the quality of iron ore used as feedstock in the DRI process. Even when initially using natural gas instead of insufficiently available green H2 in the DRI process, emissions can already be reduced by up to ~70%. This allows for a switch from natural gas to green H2 over time, in line with green H2 production and infrastructure ramp-up. It should be noted, that “green” typically excludes H2 powered through nuclear electricity for most key steel consumers.

The levers for steel producers to realize this solution are the business operating model, financial drivers, and pricing

Based on our work with steel producers, industrial steel consumers, energy suppliers, and the public sector in developing H2-DRI-EAF/SAF routes, and replacing grey steel capacities, we see three key levers for steel producers to master the green steel transformation: The business operating model, financial drivers, and pricing.  

Business operating model

Since the H2-DRI-EAF/SAF route requires new production facilities and a steady supply of green H2, the key business operating model decisions are regarding partnerships to leverage synergies and share risks, value chain integration to optimize make-or-buy decisions, plant configuration and capacity to meet customer demands, and location to secure H2 supply at reasonable cost. 

• Partnership: The first decision set of the steel producer to realize the H2-DRI-EAF/SAF transformation is whether to produce green steel alone or with partners, such as industrial players, mining companies, or energy producers. Potential synergies may arise regarding access to raw materials, speed of knowledge development, transport, general risk-sharing, or take-off agreements and market access. Partnerships, however, can also create potential risks regarding quality, price, and supply logistics. Moreover, public funding support (see below) may be limited.

• Value chain integration: The second decision set is at which level of value chain integration production is realized. In principle, the necessary DRI could be procured externally and fed, in the form of compacted DRI: HBI – “Hot briquetted Iron”, designed for safer long-distance shipping and ease of handling and storage. However, as the first H2-based merchant HBI plants globally (i.e., capacity for external commercialization) are only planned from 2025 onwards, most EU steel producers plan to produce DRI themselves, also leveraging energy and process efficiencies from “hot feeding” DRI into either the EAF or SAF units.

• Plant configuration and capacity: Subject to producer and customer green steel ambitions, downstream processing capacities, access to high grade iron ore, and green H2 supply, the size of the designed DRI plant needs to be carefully evaluated, with a currently typical market average of around 2–5 Mtpa. The choice between H2-DRI-EAF and H2-DRI-SAF-BOF is depending for example on existing plant configuration, the steel grades, and products to be produced. Whilst replacing a conventional BOF unit through a (proven) EAF unit might be the optimal set-up within a greenfield approach, integrating an SAF unit into the existing BOF route has value in reducing potential downstream production cycle time conflicts and retrofitting issues. 

• Location and green H2 procurement: The fourth decision set is where to establish the DRI plant and how to procure the green H2 needed. Whilst Swedish greenfield start-up steel producer H2 Green Steel has opted for a fully integrated “H2 to Steel” approach, leveraging extremely low renewable energy costs, for other EU brownfield plants, proprietary green H2 capacities might be hard to produce at cost parity. Even given the current EU efforts in building up a ~20 Mt green H2 backbone by 2030.12 Since green merchant H2 will also remain scarce until 2030 – even at very high prices – a brownfield player might also think about partnerships and joint ventures in low-cost regions to secure green H2 supply. In such a scenario, different set-ups are possible, ranging from an integrated offshore approach, building proprietary electrolyser capacity in favourable regions such as the Middle East, to a co-island set-up in which only the proprietary DRI plant is outsourced.

Financial drivers

Expenditures for new production facilities and green H2 need to be managed, and public support should be leveraged.

Building the new DRI-based assets will require significant CAPEX and OPEX, estimated at ~190 €/t crude steel (tCS) in total: ~40 €/tCS p.a. specific CAPEX to build an average DRI plant, and ~150 €/tCS p.a. of additional OPEX compared to BF-BOF production. 

Green H2: Green H2 is expected to make up ~40-50% of the total OPEX of green steel production for an average EU-based DRI-plant in 2030. This is due to a substantial expected H2 supply gap in the EU, despite EU efforts to build a hydrogen backbone. Therefore, green H2 purchase agreements play a key role. 

Public support: While CO2eq costs are a key driver for making grey steel unprofitable, public support for green steel through EU trade and industry policy, as well as public funding is also substantial – in addition to national measures. For example, the EU CBAM (Carbon Border Adjustment Mechanism) is set to impose similar CO2eq costs on otherwise cheaper grey steel importers from 2026, increasingly replacing free EU-ETS CO2eq allowances. Moreover, the EU green steel market will be subject to increasing market development activities, such as standardisation, certification, or public green steel procurement (e.g., in the EU Sustainable Product Initiative and the revision of the EU Energy Performance of Buildings Directive).13 14 Regarding public funding of green steel, the IPCEI (Important Project of Common European Interest) process, for example, identifies projects worthy of special funding needs and examines alignment with competitive regulation and state aid, with a recent strong focus on hydrogen.15 Green steel is already among them, and further potential remains.16


The expected high excess demand and similar quality of green steel compared to grey steel opens up the possibility of new pricing power for EU steel producers and their customers. Since green steel carries additional production costs and presents a new value proposition compared to grey steel, a value-based rather than traditional cost-based pricing approach is recommended. A green price premium must be sufficient to cover for higher production cost of ~190 €/tCS, as outlined above, but also capitalize on the customer “green value-added”, as well as grey steel with CO2eq cost pass-through, incl. potential imperfections of industry protection through CBAM.

An exemplary premium of around ~250 €/tCS should cover both OPEX and specific CAPEX, as well as quality margin. According to our estimates, such premium would only lead to a <~3% price increase for important products in all mentioned key EU steel customer segments. As a substantial H2 cost reduction is expected from 2030 onwards, the long-term price premium could move with overall OPEX development, further increasing market attractiveness, while maintaining a valuable margin opportunity. 


The EU steel industry is really staring into the abyss. Grey steel will no longer be a profitable business model. In contrast, green steel promises many benefits, even beyond saving CO2eq emissions.  The technological path of H2-based direct reduction is ready to be taken, both for green- and brownfield players. By customizing the business operating model, understanding and mitigating financial risks, and by seizing opportunities – including public support and the realization of the substantial green premium potential - EU green steel can become a truly sustainable business model.

This article was written by Dr. Andrew Zoyrk, Deloitte Global Metals Sector Leader, and Dr. Benedikt Meyer-Bretschneider, Manager for Energy Transition and Sustainability at Monitor Deloitte.

EUROFER: Low-CO2 emissions projects in the EU steel industry, May 2022.
Agora Energiewende: Global Steel at Crossroads, November 2021.
EUROFER: European Steel in Figures, June 2022.
European Commission: EU climate targets: how to decarbonize the steel industry, June 2022.
EUROFER: Low Carbon Roadmap Pathways to a CO2-neutral European Steel Industry, November 2019.
EUROFER: EU ETS revision: benchmarks and CBAM free allocation phase out - Impact assessment on the EU steel industry, November 2021.
EUROFER: Can the steel industry pass through carbon costs without losing market shares?, January 2016.
EUROFER: European Steel in Figures, June 2022.
Green Steel Tracker: (retrieved on 21 December 2022)
10 Fast Markets: ‘Green steel’ premiums to become commonplace within the next decade, June 2022.
11 See, e.g., 3D DMX Demonstration in Dunkirk: : (retrieved on 21 December 2022)
12 European Hydrogen Backbone: (retrieved on 21 December 2022)
13 EU Sustainable Products Initiative: (retrieved on 21 December 2022)
14 (retrieved on 21 December 2022)
15 Communication from the Commission Criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest 2021/C 528/02, Document 52021XC1230(02) (retrieved on 21 December 2022)
16 IPCEI Hy2Tech press release: (retrieved on 21 December 2022)


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