Transformation paths for the German steel industry

The assignment

The steel industry is a commodity industry situated at the beginning of value chains. Their products are used as inputs in many other sectors, for example in the automotive, mechanical engineering or construction industries. Using the blast furnace converter route, which is the technology traditionally used until now, the production of primary steel results in considerable carbon dioxide emissions.

Both Germany and the EU seek to gradually reduce greenhouse gas emissions (GHG emissions) in all areas of the economy. Germany should achieve zero net GHG emissions from 2045, and by 2050 this should be the case for the whole EU. Germany’s steel industry is thus faced with the task of achieving GHG neutrality in the coming decades. For this purpose, it will be necessary to switch the production of primary steel to the so-called direct hydrogen reduction process. The study for the German Steel Federation calculates how this transformation can be accomplished in two scenarios.

Our approach

With the help of scenario calculations, we examine the climate-political framework conditions under which the transformation of the steel industry in Germany can succeed. By successful transformation we mean that by the end of the transition phase the production of primary steel should be completely GHG-neutral, with no loss to production volumes or employment because of the transformation.
The two scenarios were created using the agent-based LABS simulation model:

1. In the transformation scenario, companies will receive public subsidies for investment into the new plants for the conversion to direct hydrogen reduction and their operation, which will compensate for the additional costs compared to the conventional process. In addition, free emission allowances will continue to be allocated for the old plants during the transition.
2. In the stress scenario, the free EU emission certificates for the steel industry will be phased out by 2035. In a first variant of this scenario, it is also considered that there is no effective carbon border adjustment mechanism (CBAM) on imports from third countries that ensures a cost-parity for emission-intensive products in the European internal market. This is the worst-case scenario. An effective CBAM is assumed in a second variant.

Core results

In order to achieve Germany’s and the EU's climate goals, the steel industry plans to switch the primary steel route to low-GHG and in the future GHG-free hydrogen-based production processes. The simulation calculations show that if companies are not assisted, the decarbonisation of the steel industry in Europe and Germany is not feasible as the production costs of the low-emission production processes in the primary steel route are currently and in the mid-term significantly higher than those of conventional processes.

Even in a scenario where the CBAM provides (emission) cost parity on the basis of conventional production between domestic and foreign countries, around 20 percent of domestic production would be eliminated – even with government subsidies. In addition to the temporary continuation of free emission allowances, a government grant of 50 percent for capital expenditure would be almost sufficient for the complete changeover to the hydrogen direct reduction method. In the case of ongoing operation costs, a subsidy of 100 percent is required if the companies concerned are to remain permanently on the market.

Links and downloads

The study and further information can be found on the German Steel Federation website:

Study "Transformation Paths for the Steel Industry in Germany" (PDF, in German)

Results at a glance (PDF, in German)

WV Stahl press release (PDF, in German)

Project team

Jan Limbers, Dr Michael Böhmer