Analysis of the Impact of Carbon Emission Rights on the Steel Industry

Introduction

2024 is a pivotal year for the steel industry, as it grapples with declining demand from the real estate sector and broader economic challenges. Amidst these narratives, an understated event on September 10—Shougang Corporation’s announcement to transfer 148,716.9 tons of carbon emission rights—could signal a significant directional shift for the industry. This reflects a broader trend of adapting to new environmental regulations and market dynamics.

Overview of the Domestic Carbon Market

On July 30, a plan was issued to expedite the establishment of a dual carbon emission control system, integrating carbon emission indicators into national economic planning. Subsequently, on September 9, the Ministry of Ecology and Environment sought public feedback on a proposal to include the steel, cement, and electrolytic aluminum industries in the national carbon emission trading market. Currently, the carbon market consists of a mandatory trading market and a voluntary emission reduction market, with a focus on carbon dioxide (CO2) emissions from steel production.

The new carbon trading mechanism aims to shift the cost of carbon emissions from society to individual companies, making carbon emissions a tradable commodity. The “allocation plan” lays out methods for distributing emission quotas, which, if exceeded by companies, can be traded in the market, creating a revenue stream for those who manage to keep emissions below their quotas.

Insights from the European Carbon Market

Looking at the European carbon market, it transitioned from free allocation to an auction system over the years. Although recent geopolitical events and economic pressures have impacted prices, the EU carbon price remains above €60 per ton, reflecting a general upward trend as free allowances decrease.

Carbon Emission Rights as a Turning Point for the Steel Industry

Carbon emission rights could serve as a watershed moment for the steel industry, as the cost differences between various steel production methods may widen. Current CO2 emissions from steelmaking are significantly influenced by production methods. For instance, traditional methods can emit around 1.79 tons of CO2 per ton of steel, while short-process electric arc furnaces (EAFs) have a much lower emission rate of approximately 0.38 tons.

Given the current market price of carbon credits (around 120 yuan per ton), steel plants that exceed their carbon allowances will face higher costs, further accentuating the competitive advantage of more efficient, lower-emission processes.

Future Implications and Responses

As free carbon allowances decrease, carbon prices are expected to rise, intensifying the cost disparities between different production methods. Short-process EAFs, which primarily use scrap steel, may increasingly outperform traditional long-process methods, potentially leading to market exits for less efficient players.

Many steel companies are now formulating low-carbon action plans, but these require verification by international certification bodies to be effective. The transition to low-carbon hydrogen and electricity, along with carbon capture, utilization, and storage (CCUS) technologies, presents significant investment challenges. The willingness of downstream industries to pay premiums for “green steel” remains uncertain; without such support, some steel producers may find it untenable to continue operations under rising cost pressures.

Conclusion

In the long run, the cost advantages of short-process steelmaking and the rising costs associated with traditional methods will likely reshape the steel market dynamics. This could lead to a tighter squeeze on iron ore prices, as the industry adjusts to a new landscape defined by carbon pricing and regulatory pressures. As the industry evolves, only those companies that adapt effectively to these changes will thrive in the increasingly competitive market.