Steel chief: Industrial policy ‘needs the support of Barroso’

Gordon Moffat.JPG

This article is part of our special report Europe’s Industry : Halting the Decline.

SPECIAL REPORT / European Union leaders are in broad agreement over the need to encourage manufacturing industries. But walking the talk will require reforms at EU level – on energy, climate and trade – that require clearer support from European Commission President José Manuel Barroso, argues Gordon Moffat, from the Eurofer steel association.

Gordon Moffat is Director General of Eurofer, the European steel industry association. He was speaking to EURACTIV's Publisher Frédéric Simon.

Antonio Tajani, the EU commissioner in charge of enterprise and industry, presented a communication in October to promote the re-industrialisation of Europe. How convincing did you think it was?

He deserves credit and he deserves support for tackling issues that are difficult for industry. He’s stated clearly in his communication that industry is a core activity, central for growth and central for valuable jobs. The manufacturing industry is extremely important. Steel, he said, is essential for the manufacturing value chains and it’s a core industry. So from our perspective he’s saying all the right things.

He has support from the member states – the Competitiveness Council has confirmed that. He has the support of the Parliament because in the present economic context supporting industry can only be a good thing in terms of employment and bringing the economy forward.

The proof of the pudding will be in the eating. How much support will he get from Barroso? This is the key point. And I’ve told him this bluntly in the various roundtables we’ve had already. It’s laudable that he’s looking at policies which from our perspective, are destructive, are badly constructed and have to be changed.

Which ones?

Climate, in particular. Energy, as well. Trade – we need some modifications, more dynamism. We need some that is more proactive, defensive of industry, European interests, rather than simply looking at the academic purity of the WTO rules and the need for Europe to be first in class.

I think they need to do something along the lines of what the Americans, the Indians and the others do. Everyone else is defending their interests in a way that is far more proactive.

Do you really believe it is Barroso’s support that Tajani needs to get this through? Is it not also the member states?

There are two steps there. One is Barroso. If he wants to first move the institution, and the policies are developed in the institution, they are owned by the institution – climate, energy and trade in particular – then he needs the support of Barroso.

Now I’m not convinced yet that Barroso is on board on this. Barroso is key. Imagine: he’s in negotiations with Hedegaard, with Oettinger, and with his colleagues. They own these policies. Are they going to move, are they going to adjust for Tajani? Not unless he has the support of the President. So we have to see first if Barroso is prepared to put his reputation on the line.

Do you mean rolling back some of those policies?

They can be rolled back, or they can be adjusted, but they have to be more sensible. I’m thinking of climate policy for instance, where they’ve included process industries, such as ours, in the ETS, which is not designed for process industries. Our emissions, which have reduced by 50% by the way since the 1970s, are an inevitable part of the manufacturing process. If you want steel, CO2 is a byproduct of it.

Our aim is to reduce that as much as possible but by imposing limitations on us, by failing to provide full free allowances, by failing to provide compensation for the electricity prices which arise from the ETS, they are exacerbating the problem, making it more difficult for the industry to adjust, to invest in order to find the technologies which are necessary.

Now, there’s no sign yet that Barroso will help him, but he should, because I think you have to admire his courage. He has at least stepped up and said that these policies have to be addressed.

90% of the cost of the ETS is being borne by 40% of the economy, which is manufacturing industry. It would be far more efficient, and sensible, if the burden of moving towards a low-carbon economy was being covered by the whole economy.

With a carbon tax for example?

I don’t know if a carbon tax is the right way forward. It’s one option which should be examined. But the idea that you can simply load the burden onto the most productive part of the economy without consequences, particularly now, is a nonsense.

Look at the carbon price. You can see the ETS is not working because they have an ex-ante system which doesn’t take into account the movement in the economy. Therefore with the economic crisis we’ve seen a 40-50% drop in output of some sectors, such as ours. Therefore there’s been a surplus of allowances. So the carbon price is low. Now, that’s a market mechanism and that is what the ETS was designed to be.

However, to then say, oh we don’t like the price so we’re going to set aside, confiscate – backloading is confiscating by another word – these are simply interferences in what was always presented as a market system.

But do you agree that the price of carbon is too low?

Too low? It reflects the working of the system.

You seem to be happy with a low carbon price…

For us, the burden is meeting the target, minus 20%. If you have a high carbon price, it simply makes meeting that target harder, that’s all. It makes it more expensive, more difficult to invest. Having a high carbon price will not incentivise us to do more because we have in front of us for 2020 the minus 20% carbon reduction target.

Looking forward, do you support the discussions looking CO2 targets for 2030, 2050?

Yes, if they can be done on the basis of technology. There is no point in having targets going up to 80 to 95% by 2050 unless you have the technology to meet those targets.

Let me ask you the question: what will happen if we don’t have the technology to reduce further, beyond 2020? What is DG climate suggesting? That we leave? You cannot have targets which are utopian without technical bases. You have to have a bottom-up approach, a sectoral approach, which is not so bureaucratically simple as the present system but something which reflects the realities on the ground.

A recent Commission report with the Joint Research Centre states that clearly: we don’t have the technology to reduce further beyond 2020. We can only go to minus 20 and even then some companies will have difficulty with that, and at enormous cost.

But the idea that we can move beyond is frankly impossible, and this is one of the things which we’ve asked Tajani to do in his exercise. First of all look at the present situation, up to 2020, stop this constant attempt to increase the target to minus 25, minus 30%. 2020 is tomorrow in investment terms. Already it’s extremely difficult for our industry to meet the 2020 target. It comes at huge cost. Stop trying to tighten the system through linear degression by 1.74% per year. Stop trying to increase the carbon price – that simply makes it more difficult. We will meet the minus 20 target, because we are obliged to do so.

But at what cost, in terms of industrial production staying in Europe? Would that mean that some factories would have to close down?

Yes, because in terms of our competitiveness, the cost impact is enormous. The failure to provide a full, achievable benchmark for hot metal costs us, we estimate, up to 2020 €6 billion.

And the cost in jobs then?

And the cost in jobs. We have in addition the cost of the system itself. We have a system of free allowances but you get free allowances based on benchmarks. So further down the tail end there are producers who get less free allowances so therefore must buy on the market. That’s a cost.

For us we estimate the total cost of the ETS as it is at the moment is between €11 to 15 billion. This affects directly our competitiveness compared to the rest of the world, who don’t have these costs.

You saw the announcements already last year – Florange, Liège and many closures in Italy, in Spain, in Germany also.

Is that helping you in making the point to the Commission?

Yes, it is. It comes at the confluence of the economic crisis, which is bearing down on the steel industry anyway, and the huge disadvantages imposed upon us by policy people here in Europe. That makes it much more difficult for the industry here in Europe to adjust to the economic crisis.

If we were in the same situation as the US or China, India or the other major producers who do not have these costs, then we would be able to adjust much more easily, and therefore perhaps the impact on jobs would be less.

If that is the situation going up to 2020, with the minus 20% carbon reduction target, imagine the situation going up to 2050 where we're talking about minus 30, minus 40, up to minus 80 to 95% carbon reduction targets….

Now, we say the ambition to go towards a low-carbon future is fine, we all share it. But you’ve got to have the technology to do it! And we simply do not have the technology to do it – this has been confirmed by the Commission itself, by DG Research.

Do you see CCS as the key technology that would enable it?

We are looking at a series of 7 types of technology for different types of steel making, ranging from hydrolysis to top-gas recycling linked to CCS, which was at Florange.

CCS is a technology which is unproven. And I would remind you that the 2050 roadmap published by the Commission is a technology-free zone. The only technology mentioned in that is CCS. But CCS is unproven! There are no plants currently in operation for CCS and there’s been huge popular resistance to any proposals. Nobody wants the pipeline, nobody wants the sink for carbon and we don’t have the technical expertise yet to know whether CCS will work.

Florange would have been top-gas recycling at the blast furnace – which would perhaps reduce by 10% the emissions of steel making – linked with CCS, which would have allowed us to perhaps reduce emissions by 80%.

But it’s all theoretical at the moment, even going forward to 2030. At the earliest 2030 there would be a potential, but even then you have to prove that the technology works.

The Greens resist fracking as it’s a potential pollutant and yet they don’t seem to resist CCS, which nobody knows the consequences of.

Tajani’s communication on industrial policy seemed to break from the Commission ‘dogma’, which is to remain technology neutral. Do you welcome this? Should the Commission pick and choose winners?

Yes, I think absolutely. They should try to identify those technologies that will work. I mean support for a broad range of technologies. But once you have that broad range there are bound to be some that are more feasible than others.

But what I really admire Tajani for is the fact that he seems to have broken this idea that there is consensus on climate and energy and trade policy. He has stated in the college of commissioners that we cannot have new targets. He opposes new targets absolutely unless they are technology-based. He’s identified that the energy prices in Europe are too high.

And that’s down to CO2 regulations in your view?

Partly. There are a whole series of elements. In terms of the electricity market, there’s a 200% differential between electricity prices here and in the United States. Now the justification that comes out of DG Energy is a lack of a single market in Europe, a lack of interconnectivity, a lack of trans-frontier competition.

That’s true. But the other factor which is important is that there are no long term contracts in Europe; we price on marginal pricing, rather than have regulated markets like our competitors.

But all these existed years ago, nothing has changed. What has changed – and you have to ask why there as been such an explosion in electricity prices – is because in the second trading period of the ETS, the power companies were able to pass on the theoretical price of carbon permits, even though they themselves did not have to pay for them because all permits were free in the second trading period.

But in accounting terms, because there was a theoretical price there, they were able to pass on these costs and made huge windfall profits. The auctioning, which is coming in now as from 1 January – 100% on the power sector – was partly to address that problem, to avoid that they take this huge windfall profit. But the impact will be a massive increase in power prices.

So we’ve had already huge increases over the last few years because of that. But we’re going to have a huge increase on top of it. I think the Commission itself has stated that they expect up to 2020 price increases of between 35 and 50% on top of what we have.

In addition to that, you have the distortions caused by the renewables – the green levies and various subsidies for renewables – and their integration into the grid, which is an extra cost. So it is a massive amount of additional cost.

What do you think should be done to tackle rising electricity prices? Should liberalisation be pursued more forcefully? But then, the Commission is faced with resistance from the member states…

There’s a problem with monopolies, or quasi-monopolies, with isolated national markets with dominant producers, a failure to provide for longer-term contracts, which is really a problem for DG competition who say they are protecting us.

The question we put to DG competition is 'who you're trying to protect? And from what?' If industry and the consumers want longer term contracts, why shouldn't they have them? So this is a question for the Commission.

The other problems are the green levies, the renewables, the effects of the ETS. And there they have to do more to compensate the energy-intensive industries because they are the ones who bear the brunt.

We cannot pass on price increases. The reason the power producers were able in the second trading period to pass on these theoretical price increases and make windfall profits if because they can – energy is not transportable. We cannot pass on unilaterally price increases which result from higher costs in energy.

Whether they can do something about that, I don't know but that game comes to Barroso. Barroso has to support Tajani in all of these fields if we are going to see any movement.

And we are not suggesting any dismantlement of the ETS. We're not suggesting abandoning the climate policy as such. But there has to be a more intelligent way of going forward.

We need an abandonment of the one-size-fits-all policy. We have to recognise that, post-2020, we must take account of the situation of individual industries and taking account of their ability.

So going for sectoral approaches within the ETS?

Yes absolutely, there has to be a way to do that. We cannot have fixed targets which are common for all – targets should be based on technology. We have to look at different systems whether it is the ETS, whether it is an exemption from the ETS, massive support for research and development.

But we cannot have a situation where we have a target of minus 30 or minus 40% and go say 'let's go for it' without considering what the impact would be. If you're interested in jobs, if you want to keep an industrial base, then you have to do that.

Lakshmi Mittal has said he was quite optimistic about the prospects for manufacturing in the US because of falling energy prices due to the shale gas revolution. What is your take?

It's quite astonishing the impact that it's had, I think we're going to see the re-industrialisation of the United States. We're seeing already seeing transfers of production from Europe to the United States, it's already clear in the petrochemical sector. And it's also happening in the steel industry.

Do you see shale gas as a potential silver bullet for Europe's industry as well?

Yes, I think it is.

There are technical challenges as far as shale gas is concerned, that is for sure. There are environmental issues which have to be resolved, the United States are perhaps better placed to exploit shale gas because of where it is located, outside population centers, whereas in Europe, which does have shale gas, it's more complicated because it is closer to population centers, we are more concentrated with our population.

But when you look at the effect on prices, they've gone from 12 dollars per unit of gas to 2. Whereas we are at 12 in Europe. And the petrochemical industry which has already moved – is beginning to move – en masse simply cannot compete.

Whereas the impact on us will be slightly less because it is less direct, nonetheless there is an impact, clearly. We'll face huge competition from Russia, from the United States

And you can see already, Voestalpine has just invested a DRI direct reduction plant in the United States which will allow it to make crude steel there using cheap gas and then export it to Europe. That's a clear sign of the shift which you will begin to see. You won't see a sudden cliff where industries jump off – at least I hope not. But you can see already that the de-industrialsation has begun in Europe. The aluminium industry is already beginning to shift, the petrochemical industry as I mentioned.

Steel – nobody in Europe is investing in new capacity, no-one. Since 1952 and the ECSC Treaty, this is the first time ever that we're being told that we cannot increase capacity. And it's a fact, it is impossible under the ETS as it stands to increase capacity. Now, steel is essential for the manufacturing value chains. If any part of that chain breaks, then our experience is that you will see large part of manufacturing lost.

The Commission will argue that the ETS should act as an incentive for driving investments in greener technologies, which are supposed to make the industry more competitive in the long term…  

This is entirely false, I think experience on the ground demonstrates that. First of all these green jobs – what are these green jobs? I have a green job already! In fact, our steel industry here in Europe is the world leader in terms of environmental controls and in terms of CO2 emissions. Therefore forcing the industries in Europe to move elsewhere where the standards are lower, where the emissions are higher, means that in environmental terms, the ETS is a negative, it's not a positive.

I don't know what are these green jobs, they seem to be very marginal at best – windmills, renewable energy… An energy source which requires subsidy is not to me an alternative.

The argument is that this is supposed to be a transition period where adjustments are being made….

Being paid by whom? And to what end? I haven't yet seen a positive result as far as I am concerned. It seems to me that the people who are benefitting most from the ETS are financial services, they are the ones who are pushing for this. I mean, the ETS in itself is not a bad idea if it is properly constructed and implemented.

How can it be better constructed from the point of view of the steel industry, in contrast with chemicals or other energy-intensive sectors?

In general terms, firstly. The ETS should have covered the whole economy, not just 40%. It should have covered transport, construction, etc. This was foreseen but of course construction – improvements in energy-efficiency of buildings – has been resisted by the member states because it was too expensive. In terms of transport, it has taken longer to implement than it should have done. That's the first thing.

Second thing is, they should have taken the reference year in terms of steel of the Kyoto agreement, which is 1990. Instead, they took f 2005 using the spurious argument that they didn't have the statistics from the new member states and therefore they had to take 2005 as the basis.

Now, by coincidence we in the steel industry reduced our emissions between 1990 and 2005 by 21%. And the target for reduction in the ETS based on 2005 is 21%. So we're actually being asked to reduce our emissions by 42%, not by 20%.

Third thing, the benchmark for hot metal (we have several benchmarks but the key one is the hot metal). There, they were required by the directive to provide the best performers – the top 10% of the sector – with 100% free allowances. And that, they didn't do – it's short by 7% which has a huge impact on the best performers.

You say the Commission was required under the ETS directive to provide the 10% best performers with 100% free allowances but that it didn't happen. Why did it not happen and is there still scope for it to happen later on?

It didn't happen because part of our emissions are captured as heat and re-used for producing electricity. Now there is a provision in the directive – article 10.a.1 – which says no electricity can be subject to free allowances apart from electricity produced using recovered waste gases. And it is precisely that point where the Commission has failed to implement the directive correctly. Because they have refused to take into account the fact that 7% of our waste gases are re-used for the production of electricity. This is en environmentally-friendly activity, we re-use those gases because they're hot for heat and the generation of electricity.

Now, this was known by the member states and the Commission at the time when they were being developed. DG Climate ignored it even though we told them. Now, that has meant that there is a shortfall for the industry. It's a bad signal which has a huge financial impact and it will impact on jobs also. So, it could have been adjusted at the time, they failed to do so, so we went to the European court. It has been attacked on a national level first and it will then move to the European court. So we hope that by 2014, we can have a decision. Of course there is no guarantee.

But by then, things will have moved on…

Yes, but if we catch early enough, the Commission will have to adjust the number of allowances.

And in the meantime, the industry is still faced with a tough environment, factory closures, and international competition. Can steelmaking in Europe ever survive this crisis, even with technology breakthroughs? In that context, how do you see the industry in ten years time?

You have to bear in mind that Europe and Japan technical leaders in the industry worldwide. Technologies will have to be developed to meet the challenge of climate targets. But these technologies have to be economically viable. We cannot apply new technologies which would make our production uncompetitive. Nobody would develop an expensive technology simply to meet a climate target if it means they cannot keep their market – there is no point, it would be short-lived.

In terms of cost, excluding the disadvantages from being in Europe – so climate and energy legislation – our cost basis is the same as China's. China has no natural advantage. And if you exclude subsidisation on their side, we're on a level playing field. They import their raw materials the same was as we do, they import most of their iron ore. They have coal but so do we. They have lower labour costs but, you know, steel is no longer a labour-intensive industry. They have millions working in the steel industry in China, we have 200,000. So labour cost is not a significant disadvantage. Labour inflexibility on the local level is a difficulty.

What about the technological edge of Europe's steel industry?

It is an advantage and it will remain, I am convinced of that. Nobody goes to China for hi-tech products. In fact China comes to us for hi-tech steels. If you're doing hi-level engeneering applications where you need specific steels, specific types of products, you go to Europe or Japan, you don't go to China.

Is that the future of steel in Europe, some sort of niche hi-end market, which would be very much smaller?

That's where the core advantage is, and that has been the case for many years already. But there will always be production of more commercial steels in Europe because we have manufacturing value chains which rely on proximite sources of supply, which require good quality material – even if it is lower grade, it is still good quality material – they have security of supply which is part of the value chain. And nobody, very few industries, would rely on China for their steel requirements. You could not do that in terms of geography, in terms of security of supply, and in terms of quality.

We have a very large construction sector in Europe. The construction sector uses some products which are generally lower cost products than the major flat products. These do not support high transport costs very well. So you tend to find construction products near construction markets. On flat products, we have massive engineering sectors in Europe and these will continue to be supplied. So there will be a mix of the two.

And some downsizing?

There will of course have to be that, it is happening already. But that's part of a normal adjustment process, but I don't think it should be accelerated by policies which are put in place unilaterally by Europe and which are uniquely damaging for industry, and which are not being applied elsewhere. And also, these are policies which are having little or no effect on the perceived problems of climate. We have a unilateral climate policy which is imposing massive costs on industry and which is perhaps even counter-productive because it is forcing industries to move to other zones.

Energy, the price differentials where gas is 300% higher than elsewhere and electricity 200% higher – this is not sustainable in the long term. You can perhaps live with peaks but not in the long term.

So these are specifics which are coming directly from policy and which have to be addressed. But if we were to amend these policies, improve them, alleviate the disadvantages which are being caused by them, then I don't see any reason why the European steel industry would be unable to compete with industries elsewhere, quite the contrary in fact. And if shale gas comes on in a way which is sustainable, then I think that could transform the energy picture of Europe.

Now of course countries will begin to look at climate policies as well but none of them are looking at the policies that are implemented in Europe. Look at Australia. It has an ETS but the target is minus 5%, very unambitious, so you can't really use this as a comparison. But it is an ETS that covers almost the whole of their economy. And they provide full free allowances for their industry to compensate for the rise in electricity prices, which Europe don't. So they put everything in place to make sure that their industry can meet targets but is not damaged in terms of international competitiveness. That's the type of thing that the Commission should have done.

We have the impression sometimes with the Commission that it is punitive. Because we've been talking to those people in DG climate, energy, environment and elsewhere about these problems for years. And I said to Tajani: 'We're dealing with closed minds'. We're dealing with people who have developed this policy. We're dealing with people for whom the policy is much more important than the industries which are affected. They are almost fanatical in some respect. And that is really damaging.

And now there is a tightening of the ETS coming, with the backloading proposal…

Backloading I think is a disgrace. The example I gave to DG Climate when I heard of this was: what would happen to your colleagues in DG Competition if we were getting together to withhold our power of production so that prices would go up? And yet, they seem to think it's acceptable for them to do so! I think it's outrageous, it's a disgrace…

Ok, they have a problem with the carbon price, I understand they believe it acts as a disincentive. But the way round that is to have an ex-post system. They have an ex-ante system that doesn't take account of economic fluctuations and that's something to think about post-2020 – an ex-post system rather than an ex-ante system.

The economic downturn cost us significantly more than the backloading but this just comes on top. It's almost as if they say 'you have free allowances, you've banked them', which is allowed by the way, the Commission itself proposed it in the system.

And now they're acting as if we were some sort of type of robber barons because we have gone through a situation where 40% to 50% of our production has been reduced, which is a cost to us, but we have these free allowances which are hidden away somewhere. This is complete nonsense! It doesn't compensate in any way for the lost production and the drop in prices. It is just an element of the system which they developed and which is not reflective of reality.

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