BRUSSELS, Oct. 22, 2026 – European steel producers are confronting simultaneous pressures from carbon pricing, weak industrial consumption and international competition, while changes to the EU emissions-market framework introduce a further variable into long-term investment planning.
According to EUROFER, EU crude steel production fell to a record 125.8 million tonnes in 2025. The association’s October 1 assessment forecasts apparent steel consumption growth of just 0.1% in 2026, accelerating to 2.3% in 2027. Meanwhile, EU steel exports to non-EU markets declined by 20% in the first half of 2026, highlighting the challenges facing European producers in international markets as well as within the EU.
EU carbon-market changes affect long-term cost expectations
On October 20, EU negotiators reached a provisional agreement to increase the invalidation threshold under the Market Stability Reserve (MSR) from 400 million to 700 million carbon allowances. Announced the following day, the agreement would retain a larger volume of permits as a potential long-term buffer but would not immediately increase the supply of allowances available through auctions.
Steelmakers remain exposed to EU Emissions Trading System (EU ETS) costs that depend on production technology, output volumes and applicable free allocation. The economics differ significantly between integrated blast-furnace operations and electric-arc-furnace production.
Integrated blast furnace-basic oxygen furnace facilities generate direct emissions through iron ore reduction and the conversion of hot metal into steel. Electric-arc furnaces can operate with different direct-emissions profiles and rely heavily on scrap or direct-reduced iron, but their operating costs are more sensitive to electricity prices and raw-material availability. Comparisons of emissions performance therefore need to account for production routes, product categories and system boundaries rather than relying on national electricity-grid averages.
CBAM certificate prices and free allocation shape steel costs
The EU’s Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase on January 1, 2026, covering selected iron and steel products. The published certificate price for the third quarter of 2026 is €82.32 per tonne of CO₂ equivalent. Certificate requirements are calculated using verified or default emissions, subject to applicable free-allocation and other adjustments.
EU steel producers continue to pay EU ETS-related carbon costs. CBAM is intended to reduce the competitive disparity between domestic production and covered imports, rather than compensate manufacturers for all energy expenses or guarantee sufficient demand for their products.
The phase-out of free allocation remains a central factor in plant-level economics. Under legislation currently in force, the applicable CBAM factor declines from 97.5% in 2026 to 90% in 2028 and 51.5% in 2030, before free allocation is completely removed in 2034.
A separate European Commission proposal published in July 2026 would slow this reduction, including a proposed CBAM factor of 59% in 2030 and an extension of the phase-out period to 2038. These proposed changes provide an alternative scenario for financial and investment planning but have not yet become enacted legislation.
Downstream imports widen the competitive challenge
Competition is not limited to imported steel entering the EU market as coils, sections or other covered products. European manufacturers also face competition from finished goods produced abroad using steel that may not itself be subject to CBAM when the finished product enters the EU.
The proposed expansion of CBAM to downstream products in 2028 is intended to address this potential coverage gap. Steel producers generally favour broader product coverage, while machinery and automotive industry groups have raised concerns about additional costs and administrative requirements. A final list of downstream products under the Combined Nomenclature (CN) has not been agreed.
Import figures also require careful interpretation. EUROFER reported that steel imports fell by 5% in the first half of 2026, following unusually high shipments in late 2025. The decline cannot be attributed to CBAM alone, as inventory adjustments, weaker demand, safeguard measures, sanctions, energy prices and freight costs may also have influenced trade flows.
Assessments must additionally distinguish between flat steel, long products, finished steel and semi-finished materials, since these categories face different market conditions and competitive pressures.
Production technology and investment financing carry different risks
Investment decisions in the European steel industry require lenders to assess carbon exposure alongside iron ore and scrap prices, electricity costs, hydrogen or natural gas availability, engineering expenditure and the security of future sales. Direct-reduced iron production, electric-arc furnaces and carbon capture involve different infrastructure requirements and capital-cost assumptions.
Higher expected carbon prices can improve the relative economics of lower-emission production. However, weak margins and uncertain sales volumes can still undermine project viability, even where a technology offers lower emissions intensity.
Product characteristics and end markets further influence commercial performance. Automotive flat steel faces different quality requirements from reinforcing bar or heavy plate used in infrastructure projects. Even when a mill achieves a higher quoted selling price, its ability to pass on costs may remain limited if customers can switch to alternative suppliers that meet their qualification requirements.
Capacity utilisation is another important determinant of profitability. A recovery in construction or vehicle manufacturing can have a greater near-term effect on earnings before interest, taxes, depreciation and amortisation (EBITDA) than a modest change in European Union Allowance (EUA) prices, particularly when producers are struggling to cover fixed operating costs.
Lenders assess carbon exposure alongside production volumes
Financial models for steel investments need to separate changes in selling prices, production volumes and manufacturing routes. At an integrated steelworks, lower output may reduce total emissions while increasing fixed costs per tonne. Converting to a lower-carbon furnace can reduce emissions intensity but also increase depreciation and financing expenses.
Banks assessing industrial transition projects need to examine the credibility of engineering and construction plans alongside evidence that customers are prepared to contract for the resulting production. CBAM may reduce part of the competitive disadvantage associated with imported steel, but it does not guarantee a premium for lower-carbon products or eliminate the commercial risks arising from a delayed industrial recovery.
Serbian and Turkish steelmakers, like producers within the EU, must demonstrate credible installation-level emissions data to maintain access to demanding European customers. For European mills, investment decisions therefore depend on whether cleaner production can secure a price premium or sufficient contracted volumes to recover the required capital expenditure.
The provisional agreement on the EU allowance reserve changes one element of the industry’s long-term risk profile, while weak demand and global steel overcapacity remain unresolved pressures.
