May 23, 2014 / 1:00 PM / 3 years ago

Future of EU steel hangs in balance of next European Commission

5 Min Read

* Industry goals must be put on par with climate targets

* Brussels has 4 years left to stem 'industrial massacre'

* Steelmakers will at best maintain margins for next few yrs

By Maytaal Angel

LONDON, May 23 (Reuters) - The European steel industry continues to face severe challenges, with recent moves by Brussels to stem the region's industrial decline and temper its own climate goals welcome, but not enough to secure and strengthen the sector's future.

Over-supplied, energy-intensive industries like steel were decimated by the 2008 financial crisis, especially in Europe, and steel executives say that despite an improved economic and political backdrop, the sector's future hangs in the balance of the next European Commission.

"We are for the first time beginning to see a change in the basic position of European politics, a more open position, but we do not have too much time for further discussion. The next four years will be decisive for the European steel industry," Voestalpine CEO Wolfgang Eder told Reuters at the European Steel Day conference in Brussels last week.

Eder explained that if the next European Commission, which will be in power for five years, puts industrial growth targets on a par with energy and climate goals, then the industry will survive and prosper. If not, it will be too late.

The Commission says it is working to help industry and has an aspirational target that 20 percent of EU gross domestic product should come from the sector by 2020, versus around 15 percent at present.[ID

Still, Brussels is engaged in a constant tug of war between industrial and climate objectives, and there are many industry executives investing outside the EU, nervous as to which camp will hold sway in the next Commission that runs to 2020.

"The mid-term assessment of the 2020 strategy had a clear result - the goals we achieved were the climate goals and the goals we didn't achieve were the economic goals so this is what we need to change," said Markus Beyrer director general of industry lobby BusinessEurope at the conference.

Even with Europe's return to growth this year, steel demand is still down by about a quarter versus pre-financial crisis levels, with some 60,000 jobs lost and just 170 million tonnes of steel produced last year versus 210 million in 2007.

Many even believe that part if not most of this pre-crisis contraction in jobs and output is terminal, at least for the foreseeable future.

Without Pricing Power

Over-capacity is still at about 30-40 million tonnes as EU governments by and large oppose plant shutdowns in a sector that indirectly employs million of Europeans, leaving steelmakers with little to no pricing power.

Of equal concern is the fact that energy costs, which account for 20-40 percent of the cost of making steel, are spiralling, in part because Europe leads the world in the amount of green taxes it imposes on carbon emitters.

On average, gas prices in the EU are about four times those of the U.S., while electricity costs are more than double.

"It's unlikely European steelmakers will be able to do much more than maintain their margins over the next few years and that's on a percentage basis, meaning the actual dollar margin may go down," said Michael Flitton, analyst at Citigroup.

He explained that without pricing power, the steel price depends by and large on prices of raw materials like iron ore .IO62-CNI=SI, which are down some 25 percent in the year to date, leaving the average price of European steel .HRC-NED=SI not far off last year's 3-1/2 year lows.

Still this gloom comes at an ostensibly upbeat time for the European steel industry.

Industry lobby Eurofer expects demand for steel to grow almost 3.5 percent this year - the first growth in two years, while top steelmakers recently boasted a slew of upbeat earnings.

And crucially for the steel industry, a new sense of pragmatism has emerged in Brussels regarding climate goals.

In January, the European Commission - the bloc's executive - proposed less stringent long term climate and energy targets than in the past, because of tough economic conditions and the need to curb rising energy costs.

The Commission has since set an October deadline to agree the targets. It will meanwhile hold three meetings this summer on how to ensure its industries can compete in global markets while still meeting emission goals.

"I very strongly believe that industrial policy has to be a core agenda for the EU. I give and the European parliament gives whole hearted support to a new emphasis on industrial policy," said Reinhard Bütikofer, co-chair of the European Green Party at last week's steel conference in Brussels.

While this sentiment marks a welcome change of heart in Brussels, steelmakers are awaiting more concrete measures to level the playing field, and reverse what Industry Commissioner Antonio Tajani has called an "industrial massacre".

Reporting by Maytaal Angel; editing by Susan Thomas

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