Hot metal, cold economics - the unravelling of German steel

Dear Reader,

It’s something of a cliché to call the car industry the backbone of the German economy. But is that really true? One could argue that another sector is even more fundamental.

Without steel, Germany could not build houses, cars, or the machines — from cranes to turbines — that it exports across the world. Around four million people work in steel-intensive industries, roughly two-thirds of the country’s industrial workforce. And now, as Germany rearms in response to Russian expansionism, steel is again a vital ingredient — this time in the tanks and armoured vehicles needed for modern defence.

Companies such as ThyssenKrupp in Duisburg and Salzgitter AG have supplied high-grade steel to German industry for over a century. For decades they managed to produce some of the cleanest steel in the world at competitive prices.

Today, however, the industry — like much of German heavy manufacturing — faces a deep crisis that threatens its existence. Steel output fell by 12 percent in the first half of this year and remains about 20 percent below pre-energy-crisis levels. German producers now account for just two percent of global steel production.

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The causes are familiar. Producing steel in Germany has become ever more expensive. Traditional blast-furnace operations are hit with carbon levies because of their high CO₂ emissions, while newer electric-arc furnaces suffer from soaring electricity prices in the wake of the ban on Russian energy imports.

At the same time, cheap imports from China and India are flooding global markets. India continues to build carbon-heavy furnaces, and China has only just begun to expand its own CO₂-pricing system. The situation has worsened since the United States imposed tariffs on foreign steel, pushing Asian exporters to redirect shipments to Europe instead.

During Olaf Scholz’s traffic-light coalition, Berlin sought to propel the industry into a green future with generous subsidies for hydrogen-powered furnaces. In theory, these plants could produce carbon-neutral steel. The problem? “Green” hydrogen is prohibitively expensive to make in Germany, and importing it depends on a market and infrastructure that barely exist.

Salzgitter AG took up the offer, investing €2.5 billion — including €1 billion in state aid — to replace one of its blast furnaces with a hydrogen unit. But ArcelorMittal, the Indian-Luxembourg group, declined a €1.3 billion subsidy, arguing that even with government support, the numbers would not add up.

Since ArcelorMittal’s rejection in July, Berlin has been on high alert over the sector’s future. The Wirtschaftsvereinigung Stahl lobby group has called for tariffs on Chinese imports. “This isn’t protectionism,” insisted its head Gunnar Groebler, “it’s about creating a level playing field.” Meanwhile, the SPD has floated the idea of the state taking equity stakes in steelmakers — a striking break with Germany’s free-market orthodoxy.

What’s the reaction been?

This week, the government made two major moves suggesting it may meet the industry’s key demands. First, it announced a subsidised electricity price for energy-intensive industries. The state will cover more than a third of heavy manufacturers’ power bills — a measure expected to cost taxpayers billions annually but long demanded by the steel sector.

Second, a “steel summit” is being held at the Chancellery, where Friedrich Merz will meet executives to discuss possible measures on Thursday. Ahead of the meeting, several key politicians signalled support for tariffs on non-EU imports and a ban on Russian steel. “We must prioritise steel made here for critical sectors like infrastructure and automobiles,” said Vice-Chancellor Lars Klingbeil (SPD).

Carsten Linnemann, the CDU’s secretary-general, also backed tariffs, arguing that Chinese producers “undercut prices by up to 50 percent and destroy our companies.”

Photo by Joost Cu on Unsplash

What comes next?

Critics on the right accuse Merz of abandoning his principles. When the Scholz government proposed similar fixed electricity prices, the CDU dismissed them as “subsidy-itis.” The Neue Zürcher Zeitung argues he was right the first time: fixing prices, it says, merely “treats the symptoms of Germany’s real illness — its dysfunctional Energiewende.”

The Frankfurter Allgemeine Zeitung agrees, warning that neither tariffs nor subsidised power will do more than “give the industry a few moments to breathe.” Only structural reform, not isolationism, can restore competitiveness, the conservative daily argues.

The Greens, by contrast, may feel vindicated. They unsuccessfully pushed for a similar power-price cap last year, claiming that the measure was necessary as a “bridge” while Germany rolls out renewable energies. Yet EU rules mean the new subsidy can last only three years — a short window for steelmakers to retool their production and achieve climate-neutral steel at globally competitive prices.

Berlin will also need to convince the EU to endorse tariffs on Chinese steel. That shouldn’t be too hard - the European Commission endorsed the idea of raising tariffs last month.

The German Review’s take

It’s hard to see the logic of making German steel producers pay carbon levies in a global market where buyers can simply import “dirty” steel from China or India. Yet imposing tariffs on Asian imports is hardly a visionary alternative.

For a country so allergic to the name the orange one’s name, Germany’s planned response has been remarkably Trumpian. As economists never tire of pointing out, tariffs ultimately raise costs for domestic consumers. If carmakers are forced to buy expensive German steel, they too will pass those costs on — hardly helpful as they fight Chinese rivals for global market share.

Conservative commentators are probably right when they say that fixing electricity prices is a mark of desperation. But, what other options are on the table? A country that shuts down its own nuclear reactors after a tsunami hit a coastline on the other side of the globe hasn’t exactly left itself with the best hand.

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Last week’s poll: Is Germany dangerously over-reliant on Chinese materials?

• Yes - 88%

• No - 12%

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Members’ corner

In the 1960s, faced with anti-Semites publishing screeds that blamed Jews for the Holocaust, Germany made denial of Nazi crimes illegal. Yet several recent cases raise questions over whether interpretations of that law have gone too far. In one instance, an activist who compared Israeli actions in Gaza to the Holocaust was found guilty; in another, a Green lawmaker who complained that his party were “the new Jews” was fined €4,000. I traced the history of Germany’s so-called sedition law and examined why case numbers have surged in recent years.

When Friedrich Merz remarked that Germany had a problem in its Stadtbild (cityscape) that could only be addressed by deporting more asylum seekers, he sparked one of the most emotional debates of the year. Critics accused him of racism; supporters said he had finally voiced what the “silent majority” were thinking. In this piece, I reflect on my own observations of Germany’s changing Stadtbild in an attempt to find some middle ground in the debate.

Coming up: After Rachel Stern found herself without reception… and without shoes, trying to make her way through the mud in one of Germany’s infamous Funklöcher, she went back there to ask why the country still can’t provide comprehensive mobile phone coverage — even on the outskirts of Berlin.

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