US Section 232: Trump runs countercurrent to global steel's decarbonization drive

The US is taking steps to boost crude steel output as a result of this week's imposition of Section 232 import tariffs on steel and aluminum – measures that could potentially block some 28 million mt of steel imports and boost local steel production by up to 19.5 million mt.

This likely means burning more coal, bringing back on stream up to 5 million mt of idled coke plant capacity to fuel blast furnaces, and greater usage of pollutant lower grade taconite Minnesota and Michigan iron ore which requires more carbon usage, according to analysts at Wood Mackenzie and SP Angel.

In short, more carbon emissions and greater energy consumption, including by the "cleaner" electric arc furnace sector which accounts for two-thirds of US steelmaking, running countercurrent to moves in other major steelmaking regions to trim excess capacity and decarbonize.

Scale economies should be achieved and domestic market share won: World Steel Association director general Edwin Basson has said that 232 could be a "golden opportunity" for the US steel industry to regain global competitiveness.

US Steel has already announced the restart of a 1.2 million st/year blast furnace at Granite City, Illinois, while Nucor has announced a $240 million investment in a 350,000 st/year EAF-based "micro mill" in Frostproof, Florida.

"We expect a lot of EAFs could increase capacity, and aluminum facilities coming back would increase energy usage," said Matthew Preston, a research director with Woodmac in the US, while noting this will still represent a comparatively small part of overall US energy consumption. Iron ore imports from Brazil should rise, while US coking coal exports could decrease "very slightly," he said.

The aim is to increase average capacity working levels at US mills from 74% in 2017 -- when crude steel production was 89.9 million net tons -- to between 80% and 90% of a total capacity estimated by the US steelmakers association AISI at 121.6 million net tons last year.

But a boost of this type only makes economic sense for producers so long as the US does not have a nationwide carbon market requiring CO2 emitters to pay a price for the right to produce and pollute.

Integrated steelmaking produces around two tons of CO2 for every ton of steel made.  As such, the 232 initiative could encourage "carbon leakage" as investors favor capacity expansion in the US over nations with effective carbon markets.

In the US, there is no federal-level carbon market, only regional carbon markets in California -- a system linked with Canadian provinces -- and in a separate group of nine Northeast states (the Regional Greenhouse Gas Initiative).

More steel output via Section 232 thus has a double cost: higher steel prices in a protected US market, and, potentially, worse air quality.

By contrast, steelmaking in the European Union, where carbon markets are most developed, is subject to a cost equation in which the carbon price is an integral part, with the top 10% most efficient producers, emissions-wise, able to qualify for full free allocation of carbon allowances (or permits to pollute).

EU INCENTIVE FOR LOW-CARBON STEELMAKING

Under legislation expected to take effect in April or May, the EU's Market Stability Reserve mechanism will result in a significant tightening of auctioned allowance volumes, meaning that emissions-intensive industries, including metals producers, will have a stronger incentive to invest in lower CO2 production technologies -- including fossil fuel-free hydrogen-based steelmaking as being developed by SSAB, LKAB, and Vattenfall -- to maintain a competitive edge in a decarbonizing economy.

China, the world's largest steelmaker, has made clear its commitment to decarbonization following acute atmospheric pollution problems. It is setting up a nationwide carbon market, following seven pilot emissions cap-and-trade systems at the city and provincial level since 2013.

Beijing's latest policies work on the premise that importing raw materials to produce steel or aluminum that is later exported does not make sense in the "green" world: exporting steel is equivalent to exporting pollution, in the same way that exporting aluminum is equivalent to exporting energy.

China may reduce steel exports this year by an estimated 20 million mt, after a 32 million mt drop in 2017 from 2016's 108.4 million mt, "not because of Trump speech or tariffs, but because they want to breathe better and see blue skies," says Jose Carlos Martins of Brazilian consultancy Neelix.