Price on Trade: OECD highlights steel industry in crisis, Trump and tariffs to the rescue?

As the statement issued by the Committee chair highlighted, many of the warning signs of a global steel crisis are flashing. Demand is contracting, excess capacity is rising, and prices are falling. At the same time, subsidies are being handed out at historic levels and exports of unfairly traded steel products are flooding international markets.

China is a big part of the problem, with steel subsidies that are more than 10 times higher than OECD countries. European steel trade group Eurofer found that between the costs of decarbonization (including with hydrogen) and massive import pressures without adequate trade protection, the European Union’s policies are going to necessarily result in substantial capacity reductions. This is not just a European problem, either, as shown by the fact that the last major steel mill in Chile was closed recently due to Chinese dumping.

Notably, the Committee discussed how addressing these market distortions is necessary to support efforts worldwide to decarbonize steel production. But those conversations too often failed to see the forest through the trees. As several presenters illustrated, on its current trajectory, the global steel industry is not going to meet 2050 emissions targets.

This is especially true in China and India, which comprise the majority of global steel production and carbon emissions. However, since those countries have not made 2050 commitments, any global 2050 emissions target is little more than a joke. Further, rather than focusing on proven approaches and maximizing the use of the best decarbonization agent – steel scrap (recycled steel) – as we are doing in the United States, many G-20 governments seem overly focused on chasing moonshots.

Hydrogen-based steelmaking is an expensive pipe dream

In this regard, the Committee heard several presentations on hydrogen steelmaking, which were largely met with whispers on the sidelines of the room that such projects are not economically feasible on a large scale. In fact, one presentation analyzing government projects made clear that policymakers are not paying enough attention to circularity policies.

What do I mean by “circularity”? Think of things like better scrap collection, sorting, and advancing decopperization processes. All of that allows us to produce more scrap and pseudo-prime scrap. While scrap may not be the answer for the entire world, it can be the best (and most readily applicable) solution for the United States, Europe, Japan, and China.

With this being the case, why are several groups arguing for dual emissions standards and sliding scale approaches for defining near-zero steel emissions levels? As we have noted previously, dual standards and sliding scales erase the emissions advantage of scrap-based steel production. They can even penalize it as a decarbonization pathway. What is the goal here? Why are integrated producers and their allies advancing policies that oppress a meaningful percentage of the industry and our best chance at economically viable reductions in carbon?

Market-driven decarb solutions favor scrap

Cynically, it appears that the highest polluters accounting for most of the world’s steel production want to discourage scrap use so that their competitors cannot win. However, under that scenario, nobody wins – and long-term emissions targets are certainly not met. Instead, maybe it is time for NGOs and governments to focus on maximizing what is readily achievable, rather than look for non-economically viable longshots and wishful breakthrough technologies.

The truth is that too many nominally green steel policies have stifled scrap-based steelmaking. Governments are interfering with market forces and are actively discouraging the use of scrap in steel production. They do this by restricting global scrap flows, applying emissions and environmental standards that deter recycling, and subsidizing the construction and maintenance of blast furnaces. This makes little sense to us.

Equally confusing is the fact that so much attention is being given to hydrogen and other decarbonization routes that do not offer the same realistic reductions in emissions as electric furnace and scrap-based steelmaking. For example, for all the hype surrounding hydrogen, whether it is used as a fuel or as a reducing agent, hydrogen-based steelmaking remains incredibly expensive and economically unsustainable for private parties or governments. And it is a largely unproven and impractical pathway to reducing emissions.

Hydrogen’s dirty secret: AI means rapidly rising energy demand

The energy needed for each ton of hydrogen-based production far exceeds the electricity requirements for electric furnaces using scrap and the minimum amounts of direct-reduced iron (DRI) that may be required. Unless hydrogen-based technologies are coupled with a massive expansion in zero-emissions electricity production, steel made with hydrogen will not be any greener than steel made in an electric furnace without it. Especially in a world of data centers and AI technologies that are exponentially increasing energy demand, chasing a hydrogen moonshot for steel increasingly looks like a mirage.

What the steel industry really needs is the right market environment to allow for greater market-based investments in decarbonization. We saw this during the first Trump administration, where increased tariff protections encouraged $20 billion in US low-emissions steel investments. The market overwhelmingly chose investments in recycling- and scrap-based electric furnace production. While this was not President Trump’s intention, it did not need to be. Companies responded to market forces by investing heavily in low emissions steelmaking.

In contrast, the well-intentioned industrial policy of the Biden administration has yet to show a similar impact on steel decarbonization in the US. At the moment, creating and enhancing an environment where adequate returns are possible (and letting market participants choose technologies) seems to have yielded superior results.

Trump transition update

Turning to the Trump transition, we note that recent announcements regarding the president-elect’s Cabinet nominees drive home the reality that tariffs and other aggressive trade actions are forthcoming. Strong tariffs will likely be the Trump administration’s preferred policy tool to address the rising subsidies, overcapacity, and unfair trade highlighted above.

The nomination of Howard Lutnick as the Secretary of Commerce is particularly notable. Lutnick has frequently advocated for the broad use of strategic tariffs. Lutnick’s nomination also signals a potentially larger role for the Commerce Department in establishing the trade and industrial policy of the second Trump administration.

During President Trump’s first term, trade policy was largely run through the much more streamlined Office of the US Trade Representative (USTR). At the time of writing, President-elect Trump has yet to nominate a US Trade Representative or Secretary of the Treasury for his second term. Who fills these roles and their relationships with other senior officials will go a long way towards determining US trade policy for the next four years.

US ITC nominations

Additionally, in the waning hours of the Biden administration, the president announced two nominees for the US International Trade Commission (ITC) – Jim Coughlan and Halie Craig. Craig, a Republican nominee, is of particular interest. She openly opposes President Trump’s positions on trade. For instance, in a 2021 article, Craig said the following about the Trump administration’s trade policies:

In 2018, then-US President Donald Trump infamously tweeted that “trade wars are good, and easy to win.” They’re not, of course, as we’ve seen over the past four years….

In a dramatic departure from free market conservative orthodoxy, Trump’s administration inflicted numerous trade wounds on Americans, including by raising tariffs on Chinese goods to an average of 19.3%, slapping so-called “national security” tariffs on steel and aluminum from virtually every US trading partner, withdrawing the United States as a signatory to the Trans-Pacific Partnership (TPP), renegotiating the North American Free Trade Agreement (NAFTA) with provisions that restrict trade, hamstringing the primary enforcement body of the World Trade Organization (WTO), and enacting a host of other antitrade policies. The result? Increased costs for US consumers, lost jobs, multi-billion dollar “trade aid” bailouts, and measurable US disengagement from the global economy.

Other than Craig’s mentor, former Senator Pat Toomey (R., Pa.), it is hard to imagine a Republican more opposed to Trump on tariffs, import relief, and trade policy. Given the short amount of time before the new Congress, it is unlikely that either of these nominations will be able to proceed through the Senate before they automatically expire at the beginning of the new Congress. Regardless, it will be interesting to see how this plays out.

Editor’s note

This is an opinion column. The views in this article are those of experienced trade attorneys on issues of relevance to the current steel market. They do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com