German steel production capacity faces a fundamental competitiveness crisis as energy costs reach €9.35 per kilogram for green hydrogen—nearly four times higher than conventional production methods—forcing major producers to abandon decarbonization plans despite €5 billion in government support allocated between 2022-2024. Chancellor Friedrich Merz’s call for a “robust” steel strategy emerges as ArcelorMittal’s decision to drop green steel conversion at two German plants exposes the widening gap between climate ambitions and economic realities in Europe’s largest steel-producing economy.
The German steel sector’s predicament reflects broader European challenges where Chinese overcapacity, elevated energy costs, and US trade barriers converge to undermine industrial competitiveness. Germany’s potential demand for 850,000 tonnes of green hydrogen annually by 2030 represents a significant market opportunity, yet current pricing structures make such transitions economically unviable without sustained government intervention that exceeds existing support mechanisms.
Energy Cost Structure and Competitive Disadvantage
German green hydrogen costs reached €14.50 per kilogram in mid-December 2024 before declining to €9.35 per kilogram by March 2025, yet these levels remain prohibitively expensive for steel production applications where cost competitiveness determines market viability. ThyssenKrupp Steel’s decision to pause green hydrogen procurement tender highlights how energy pricing undermines industrial decarbonization strategies even when subsidies partially offset transition costs.
The energy intensity of steel production creates amplified exposure to electricity price differentials that favor regions with lower-cost renewable energy or conventional generation. German industrial electricity prices significantly exceed global averages, creating structural disadvantages that policy interventions have not adequately addressed through existing frameworks.
Production cost analysis indicates that hydrogen-based steel production requires sustained energy costs below €3-4 per kilogram to achieve near-term competitiveness with conventional blast furnace operations. Current German pricing exceeds this threshold by factors of 2-3, suggesting fundamental market structure issues rather than temporary fluctuations that could resolve through scaling effects.
Market Dynamics and Chinese Competition
China’s steel production dominance creates pricing pressure that German producers cannot match through efficiency improvements alone. Chinese manufacturers benefit from integrated supply chains, lower labor costs, and government support mechanisms that enable sustained below-cost pricing in global markets. This competitive environment forces European producers to focus on specialty products and value-added applications where Chinese competition remains limited.
ArcelorMittal’s 58 million tonnes annual crude steel production positions the company as the world’s second-largest producer behind China Baowu Group, yet European operations face margin pressure that limits investment in transition technologies. The company’s abandonment of German green steel projects indicates that even major producers with substantial resources cannot justify transition investments under current market conditions.
Global steel demand outside China is projected to grow 3-4% annually, providing market expansion opportunities that could support premium pricing for green steel products. However, demand development requires established supply chains and cost competitiveness that current production economics cannot deliver within projected timelines.
Policy Framework Limitations and Support Mechanisms
Germany’s €5 billion steel decarbonization funding represents substantial government commitment, yet allocation mechanisms may not address core competitiveness challenges that prevent project implementation. ArcelorMittal’s decision despite receiving €1.3 billion in subsidies suggests that financial support alone cannot overcome structural cost disadvantages without corresponding energy market reforms.
Public procurement policies requiring climate criteria for steel purchases could create domestic demand for green steel products at premium pricing. However, such approaches risk increasing infrastructure costs and may face competitive challenges from international suppliers not subject to similar requirements. The CEO Alliance for Climate and Economy’s advocacy for binding procurement criteria recognizes market creation needs while potentially creating cost burdens for public projects.
Vice Chancellor Lars Klingbeil’s calls for steel summits reflect policy coordination challenges where multiple agencies and stakeholders must align on industrial strategy approaches. The complexity of steel decarbonization requires coordination between energy policy, industrial development, trade policy, and climate objectives that traditional sectoral approaches cannot adequately address.
Technology Development and Implementation Challenges
Hydrogen-based steel production technologies remain in early development stages with Technology Readiness Levels below 6 for plasma and electrolysis-based processes. These emerging technologies offer CO2 reduction potential exceeding 95% but require sustained research and development investment with uncertain commercial timelines. German steel producers face decisions about technology pathways while current approaches remain economically unproven.
Direct reduction using hydrogen presents more mature technology options but requires a reliable, cost-competitive hydrogen supply that current market conditions cannot provide. The chicken-and-egg relationship between hydrogen production scaling and industrial demand creates coordination challenges that individual companies cannot resolve through independent investment decisions.
Integration of renewable energy with steel production creates operational complexity requiring grid stability, energy storage, and production scheduling coordination. These technical challenges increase capital requirements and operational risks that add to overall transition costs while potentially reducing production flexibility compared to conventional operations.
Trade Policy and Market Access Issues
US steel tariffs create additional market access challenges for German producers seeking to recover transition investment costs through premium pricing in high-value markets. The exclusion of steel from recent EU-US trade agreements maintains uncertainty about long-term market access that affects investment planning for capital-intensive decarbonization projects.
Quota arrangements under discussion between Germany and the US could provide limited market access for exports without excessive tariffs, yet negotiated volumes may not justify transition investments requiring sustained market development. Trade policy uncertainty compounds domestic competitiveness challenges by limiting export market opportunities that could support higher production costs.
The interaction between climate policies, trade measures, and industrial competitiveness creates complex policy environments where environmental objectives may conflict with trade and economic development priorities. Resolution requires coordinated approaches that address competitiveness concerns while maintaining climate commitments.
Strategic Implications and Industrial Future
Germany’s steel industry employs approximately 85,000 workers across integrated operations that support broader manufacturing sectors, including automotive, machinery, and construction. The loss of domestic steel capacity would create supply chain vulnerabilities and industrial ecosystem disruption, extending beyond direct employment impacts.
The strategic importance of steel production for national security and industrial resilience creates policy imperatives that may justify sustained government support even when market conditions do not support commercial viability. However, such approaches require long-term commitment and substantial resources that may not achieve intended competitiveness outcomes.
Alternative strategies, including blue steel production using natural gas with carbon capture, may offer interim solutions while green hydrogen costs decline. These approaches provide emission reductions while maintaining cost competitiveness, though they require different technology investments and policy support mechanisms than pure green steel pathways.
