The
low-carbon steel production aimed at by most steel producers globally will be
positive for the longer-term competitiveness of these companies. However,
decarbonisation carries risks due to uncertainty regarding technologies,
regulatory frameworks and funding, says Fitch Ratings.
The impact on operations
will be limited in the next 3-4 years, as the technological shift will come
after 2030.
Steelmakers will likely
need to rely on governments’ participation in the form of direct funding and
adjustment of regulatory frameworks to accomplish the green transition. This is
because the steel industry is cyclical and volatile, and producers’ cash flows
materially fluctuate during the economic cycle, Fitch says.
“In normalised conditions
steel producers’ margins are relatively low. For example, in Europe median
Ebitda margins have historically been around 3%. We also anticipate that the
steel market will normalise from recent peaks over the next two to three years,
returning profitability to normal,” the credit rating agency observes in a report
seen by Kallanish.
“However, part of the
investments assigned for carbon transformation may be viewed as part of a
normal modernisation capex cycle when, for example, old blast furnaces are
replaced by new ones or more likely by EAF-DRI facilities,” it adds.
The estimated 10-50%
additional cost to produce green steel may severely affect producers’ margins.
“However, we expect costs to continue to be reduced due to continuous
operational improvements. In addition, a shift to new facilities will reduce
maintenance costs. We expect that green steel will also be priced at a premium
to carbon steel, mitigating cost pressures,” Fitch says.
The spike in energy prices
will support the viability of decarbonisation and accelerate the transition to
low-carbon production.
US steelmakers are better
positioned to absorb the pressure decarbonisation investments put on leverage
given their high reliance on scrap or DRI-based EAFs as their current
production route.
“The need to decarbonise
will be increased by rising carbon costs or the introduction of carbon costs
across the globe, and high energy costs. Therefore, a shift to renewables and
emissions reduction will also be a necessity to underpin longer-term
competitiveness and achieve more sustainable positions on cost curves in the
long-term,” Fitch concludes.