ASSESSMENT OF CUMULATIVE COST IMPACT FOR THE STEEL INDUSTRY FINAL REPORT CONTRACTOR Centre for European Policy Studies Prof. Dr. Andrea Renda (Project Coordinator) Prof. Dr. Jacques Pelkmans Federica Mustilli Prof. Christian Egenhofer Federico Infelise Andrei Marcu Wijnand Stoefs Dr. Lorna Schrefler Jonas Teusch Dr. Giacomo Luchetta Julian Wieczorkiewicz Dr. Felice Simonelli Alessandro Fumagalli Dr. Diego Valiante PARTNER Economisti Associati Roberto Zavatta Enrico Giannotti Giulia Maria Stecchi Done in Brussels, 10 June 2013 SPECIFIC CONTRACT NO. SI2.648823 30-CE-0558235/00-06 IMPLEMENTING THE FRAMEWORK CONTRACT NO ENTR/2008/006 LOT 4 DISCLAIMER The information and views set out in this study are those of the authors and do not necessarily reflect the official opinion of the Commission. The Commission does not guarantee the accuracy of the data included in this study. Neither the Commission nor any person acting on the Commission’s behalf may be held responsible for the use which may be made of the information contained therein. Page 2 of 259 TABLE OF CONTENTS 1 THE COMPETITIVENESS OF THE EU STEEL INDUSTRY 26 1.1 Methodology and data source 26 1.2 Production costs for flat products 28 1.2.1 Production cost differential for HRC and CRC 31 1.2.2 Costs for raw materials, electricity, and gas 32 1.2.3 Breakdown of production costs per tonne 36 1.3 Production costs for long products 37 1.3.1 Production cost differential for wire rods 40 1.3.2 Costs for raw materials, electricity, and gas 41 1.3.3 Breakdown of production costs per tonne 43 2 CUMULATIVE COST ASSESSMENT 45 2.1 Cumulative costs of EU regulation 46 2.1.1 Cumulative costs of EU rules in 2012 49 2.1.2 Typical cumulative cost of EU regulation in a ―typical year‖ 51 2.2 Production costs and margins of the EU steel industry 52 2.2.1 Production costs and margins of the EU steel industry in 2012 52 2.2.2 Margins of the EU steel industry between 2002 and 2011 54 2.3 The impact of cumulative regulatory costs 55 3 A METHODOLOGY FOR THE ASSESSMENT OF CUMULATIVE COSTS ON THE STEEL INDUSTRY 63 3.1 The framework of the study 63 3.2 The object of analysis: the cost structure 66 3.3 Assessment or regulatory costs 68 3.4 The selection of typical facilities 70 3.5 The scope of the study: the policy areas 71 4 THE ECONOMIC AND TECHNICAL ANALYSIS OF THE STEEL INDUSTRY 77 4.1 The industry value chain 77 4.1.1 The steel industry value chain and production technologies 77 4.1.2 The upstream and downstream value chain 81 4.2 The economics of steel 85 4.2.1 Players 85 4.2.2 High capital requirements and fixed costs 86 4.2.3 Scale economies and minimum efficient scale 87 4.2.4 Product substitutability 88 Page 3 of 259 4.2.5 Barriers to entry and barriers to exit 88 4.2.6 Intra-sectoral competitive dynamics 89 4.3 The European Steel Market 90 4.3.1 Industry definition 90 4.3.2 Supply 91 4.3.3 Demand 102 4.4 International trade of steel 107 4.4.1 World production and trade flows 107 4.4.2 EU trade flows 110 5 GENERAL POLICIES 115 6 FINANCIAL MARKETS (COMMODITY DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS) 123 6.1 Markets in Financial Instruments Directive and Regulation (MiFID and MiFIR) 124 6.2 The European Market Infrastructure Regulation (EMIR) 126 6.3 Market Abuse Regulation and Directive 128 7 CLIMATE CHANGE 129 7.1.1 What is the EU ETS 129 7.1.2 Phase 1 (2005 – 2007) 130 7.1.3 Phase 2 (2008 – 2012) 130 7.1.4 Phase 3 (2012 – 2020) 130 7.1.5 Scope of the study 131 7.2 Costs 132 7.2.1 Compliance or direct costs 132 7.2.2 Indirect costs 132 7.2.3 Administrative costs 132 7.3 Quantification of Cumulative Costs 133 7.3.1 Results 137 8 COMPETITION POLICY 148 8.1 State aid and the steel industry 148 8.1.1 The regime of state aid in the EU 148 8.1.2 State aid rules for the steel industry 150 8.1.3 State aid granted to the steel industry between 2002 and 2012 in the EU 154 8.2 Antitrust law and the steel sector 158 8.2.1 Antitrust law in the EU: agreements/concerted practices, abuse of dominant positions, and merger control 158 Page 4 of 259 8.2.2 Agreements, abuses of dominant position, and notified mergers in the steel industry between 2002 and 2012 in the EU 159 8.2.3 Long-term contracts for electricity 161 9 ENERGY POLICY 165 9.1 Comparison of electricity prices 165 9.1.1 Fundamentals of electricity price formation 166 9.1.2 International comparison of industrial electricity prices 168 9.1.3 Intra-EU comparison of industrial electricity prices 170 9.2 Comparison of natural gas prices for industry 176 9.3 Impact of EU regulation 177 9.3.1 Third Energy Market Package 177 9.3.2 Renewables 181 9.3.3 Energy Infrastructures 183 9.3.4 Energy Efficiency 184 9.3.5 Energy Taxation 185 10 ENVIRONMENTAL POLICY 186 10.1 Introduction 186 10.2 Review of relevant legislation 186 10.2.1 Prevention and control of industrial emissions 186 10.2.2 Waste Prevention and Recycling 189 10.2.3 Other Environmental Policy Measures 191 10.3 Assessment of Compliance Costs 193 10.3.1 Introduction 193 10.3.2 Investment Costs 193 10.3.3 Financial Costs 199 10.3.4 Operating Costs 200 10.3.5 Compliance Costs related to EU Legislation 202 10.4 Assessment of Administrative Costs 204 10.4.1 Introduction 204 10.4.2 Estimate of Administrative Costs 205 10.5 Assessment of Indirect Costs 208 11 TRADE POLICY 210 11.1.1 Trade Defence Instruments: their impact on the EU Economy 211 11.1.2 Chinese subsidies to the steel industry 225 11.1.3 The Generalised Scheme of Preferences (GSP) 230 12 PRODUCT POLICY 232 12.1 Introduction 232 12.2 Review of Relevant Legislation 233 Page 5 of 259 12.2.1 Eco-Labeling and Eco-Design 233 12.2.2 Green Public Procurement 234 12.2.3 Life-Cycle Assessment Methodologies 236 12.2.4 Chemical Products 237 12.2.5 Construction Products 239 12.3 Assessment of Compliance Costs 240 12.3.1 Introduction 240 12.3.2 Compliance Costs Linked to the REACH Regulation 240 12.3.3 Compliance Costs Linked to the Construction Products Regulation 242 12.4 Assessment of Administrative Costs 243 12.4.1 Introduction 243 12.4.2 Administrative Costs Linked to the REACH Regulation 243 12.5 Assessment of Indirect Costs 247 12.5.1 Introduction 247 Page 6 of 259 LIST OF TABLES TABLE 1 PROTOTYPICAL PLANTS ........................................................................................................................... 26 TABLE 2 COST DIFFERENTIAL BETWEEN EU STEEL MAKERS AND LEAST COST PRODUCERS IN ABSOLUTE VALUE FOR HRCS ($ 2012) .......................................................................................................................................... 32 TABLE 3 COST DIFFERENTIAL BETWEEN EU STEEL MAKERS AND LEAST COST PRODUCERS IN ABSOLUTE VALUE FOR CRCS ($ 2012) ........................................................................................................................................... 32 TABLE 4 COST DIFFERENTIAL BETWEEN EU STEEL MAKERS AND LEAST COST PRODUCERS FOR WIRE ROD ($ 2012) ................................................................................................................................................................... 41 TABLE 5 CUMULATIVE REGULATORY COSTS IN 2012 (€/TONNE) ........................................................................... 50 TABLE 6 CUMULATIVE REGULATORY COSTS IN A TYPICAL YEAR (€/TONNE) ........................................................... 51 TABLE 7 CUMULATIVE REGULATORY COSTS IN A TYPICAL YEAR – NON-TECHNOLOGY SPECIFIC PLANT (€/TONNE) 52 TABLE 8 PRODUCTION COSTS AND MARGINS OF THE EU STEEL INDUSTRY (2012 - €/TONNE) .............................. 54 TABLE 9 MARGINS OF THE EU STEEL INDUSTRY (% OVER MARKET PRICE) ............................................................ 54 TABLE 10 MARGINS OF THE EU STEEL INDUSTRY (€/TONNE AT CONSTANT 2012 PRICES)..................................... 55 TABLE 11 THE IMPACT OF CUMULATIVE REGULATORY COSTS – 2012 ..................................................................... 55 TABLE 12 THE IMPACT OF TYPICAL CUMULATIVE REGULATORY COSTS – 2002 – 2012 .......................................... 58 TABLE 13 THE IMPACT OF CUMULATIVE REGULATORY COSTS ON COST DIFFERENTIALS – 2012 ............................. 60 TABLE 14 LIST OF LEGISLATION IN SCOPE OF THE STUDY ....................................................................................... 72 TABLE 15 OPERATION MODELS OF STEEL INTERMEDIARIES IN THE EU ................................................................ 84 TABLE 16 LARGEST STEEL COMPANIES ................................................................................................................ 86 TABLE 17 PRODUCTION OF IRON AND STEEL, NACE REV.2.0 CLASSIFICATION ..................................................... 90 TABLE 18 NUMBER OF PERSONS EMPLOYED IN THE EU IRON AND STEEL INDUSTRY -NACEREV.2 24.1 .............. 102 TABLE 19 EU27 EXPORTS, IMPORTS AND NET POSITIONS IN IRON AND STEEL BY SELECTED DESTINATION COUNTRIES - 2001 AND 2012 (THOUSAND TONNES) ...................................................................................112 TABLE 20: AVERAGE YEARLY PRICES PER TON OF CO2 (€) ................................................................................. 134 TABLE 21: EMISSIONS AND ALLOCATIONS (TONNES OF CO2) ............................................................................... 138 TABLE 22: DIRECT COSTS (€ MLN) ..................................................................................................................... 139 TABLE 23: DIRECT COSTS PER TONNE PRODUCED (€/TONNE) ............................................................................