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German steelmakers are beset with problems. Sluggish demand, rising Chinese imports and falling prices are depressing their current performance. The sector’s green transformation, instead of offering a brighter future, poses another threat to their long-term competitive position.
For evidence of this tightening steel trap, look no further than Thyssenkrupp. It is embroiled in the complex carve-out of its steel unit, in which Czech entrepreneur Daniel Křetínský has bought a 20 per cent stake and is in talks over a further 30 per cent. The unit is performing poorly: operating profits nearly halved in the third quarter. It faces overcapacity as its core German automaker client base loses market share. Thyssenkrupp is involved in a tussle with the steel unit’s management over how much of a dowry to provide it.
Meanwhile, Thyssenkrupp Steel has undertaken to switch from coal to renewable hydrogen. This is a costly proposition.
The capex involved in converting plants is manageable, perhaps $800mn for a 2mn tonne direct reduction (DRI) plant according to analysis by Rafal Malinowski of the Energy Transitions Commission, which works out at $43 per tonne of steel produced. The real problem is the cost of green hydrogen needed to feed the DRI plant. Price discovery for Thyssenkrupp is ongoing: it has put out a tender for green hydrogen supply. But a ballpark figure for the energy required to make one tonne of steel might be $450. Plug in the cost of ore, labour and everything else the plant needs — at some $380 per tonne — plus capital amortisation, and you get a cost of steel of $870/tonne.
Thyssenkrupp has been awarded €2bn in capex and opex support to plug the gap with the cost of making dirty steel, which is today $580 per tonne according to Tom Zhang at Barclays, rising to perhaps $730 per tonne by 2035. Over time, too, the “green premium” should shrink as carbon prices continue to rise and hydrogen production technologies scale up.
But the more pertinent comparison should not be with Europe’s dirty steel, with which the continent’s green version will eventually become competitive. It should be with green steel produced in areas of the world that benefit from cheaper renewables, such as the Middle East.
The move from using near-field coal to faraway renewables puts German steelmakers at a long-term, structural disadvantage. After all, moving steel across the water will always be cheaper than shipping hydrogen. Such a gap cannot easily be plugged. While decarbonisation, employment and strategic independence may be desirable political objectives, “forever” subsidies will prove a high cost to pay.