BRUSSELS, Oct. 22, 2026 — European steel producers are dealing with carbon pricing, weak industrial consumption and international competition. Changes to the EU emissions-market framework are adding another factor to long-term investment planning.
According to EUROFER, EU crude steel output fell to a record 125.8 million tonnes in 2025. The association’s October 1 assessment projects apparent steel consumption growth of 0.1% in 2026, rising to 2.3% in 2027.
EU steel exports to non-EU markets declined by 20% in the first half of 2026. EUROFER linked the development to ongoing challenges for European producers both in international markets and within the EU.
Market Stability Reserve changes and EU ETS cost exposure
On October 20, EU negotiators reached a provisional agreement to raise the invalidation threshold under the Market Stability Reserve (MSR) from 400 million to 700 million carbon allowances. The agreement was announced on October 21 and would keep a larger volume of permits as a potential long-term buffer.
The same MSR deal would not immediately increase the supply of allowances available through auctions. Steelmakers therefore remain exposed to EU ETS costs that vary with production technology, output volumes and applicable free allocation.
The economics differ 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 have different direct-emissions profiles and often rely heavily on scrap or direct-reduced iron. Their operating costs are more sensitive to electricity prices and raw-material availability than integrated routes, and emissions comparisons need to reflect production routes, product categories and system boundaries rather than national grid averages.
CBAM certificate pricing and the phase-out of free allocation
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 rules and other adjustments. EUROFER said EU steel producers continue paying EU ETS-related carbon costs, while CBAM is designed to reduce competitive disparity for covered imports rather than compensate for all energy expenses or ensure demand for domestic output.
The phase-out of free allocation is a key element in plant-level economics under current legislation. The applicable CBAM factor is set to decline from 97.5% in 2026 to 90% in 2028 and 51.5% in 2030, before free allocation is removed completely in 2034.
A separate European Commission proposal published in July 2026 would slow this reduction. It includes a proposed CBAM factor of 59% in 2030 and an extension of the phase-out period to 2038, but these changes have not yet become enacted legislation.
Downstream coverage gaps and trade-flow interpretation
Competition for European producers extends beyond imported steel entering the EU as coils, sections or other covered products. Manufacturers also face competition from finished goods produced abroad using steel that may not be subject to CBAM when the finished product enters the EU.
The proposed expansion of CBAM to downstream products in 2028 aims to address this potential coverage gap. Steel producers generally support 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. EUROFER reported that steel imports fell by 5% in the first half of 2026 after unusually high shipments in late 2025.
The decline cannot be attributed solely to CBAM because inventory adjustments, weaker demand, safeguard measures, sanctions, energy prices and freight costs may also have affected trade flows. Assessments also need to distinguish between flat steel, long products, finished steel and semi-finished materials due to differing market conditions and competitive pressures.
Investment financing risks across production routes
Lenders assessing investment decisions in European steel need to evaluate carbon exposure alongside iron ore and scrap prices, electricity costs, hydrogen or natural gas availability, engineering expenditure and future sales security. Direct-reduced iron production, electric-arc furnaces and carbon capture each involve different infrastructure requirements and capital-cost assumptions.
Higher expected carbon prices can improve relative economics for lower-emission production routes. Weak margins and uncertain sales volumes can still undermine project viability even when a technology offers lower emissions intensity.
Commercial performance also depends on product characteristics and end markets. Automotive flat steel faces different quality requirements from reinforcing bar or heavy plate used in infrastructure projects.
Even if a mill achieves a higher quoted selling price, cost pass-through may be limited if customers can switch suppliers that meet qualification requirements. Capacity utilisation is another determinant of profitability, with construction or vehicle manufacturing recoveries potentially affecting EBITDA more quickly than modest changes in EUA prices when fixed operating costs are difficult to cover.
Lender models for transition projects and regional compliance data
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 may also raise depreciation and financing expenses. Banks evaluating industrial transition projects are expected to review engineering and construction plan credibility alongside evidence that customers will contract for resulting production.
CBAM may reduce part of the competitive disadvantage associated with imported steel but does not guarantee a premium for lower-carbon products or remove commercial risks linked to delayed industrial recovery. Serbian and Turkish steelmakers must demonstrate credible installation-level emissions data to maintain access to demanding European customers.
For European mills, investment decisions depend on whether cleaner production can secure a price premium or sufficient contracted volumes to recover 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 overcapacity remain unresolved pressures.