The German steel industry at a critical turning point: When state rescue attempts ignore market logic

Billions for steel: Experts warn of Germany's fatal subsidy mistake

The German steel industry is in an unprecedented crisis, triggered not only by external shocks but also by a long series of political missteps. What is currently happening at the Chancellery during so-called steel summits is less a strategic solution than a desperate attempt to mask structural flaws with subsidies. At the heart of this dilemma lies a fundamental ideological failure: Germany has systematically weakened its key industry only to now have to rescue it at enormous expense with massive financial resources.

The current situation of the steel industry highlights a deeper systemic problem in German economic policy. While the government pushed for a rapid and complete transition to a purely green economy, the steel industry was treated as a burden on climate goals rather than as a strategic pillar of economic independence. This short-sighted perspective proved disastrous, because steel production is not simply a replaceable capacity, but a key raw material supporting at least four million jobs in downstream industries.

Crude steel production in Germany plummeted by almost twelve percent to 17.1 million tons in the first half of 2025, reaching levels comparable to the 2009 financial crisis. These figures are not the result of normal economic fluctuations, but rather a symptom of a deeper structural crisis. The blast furnace-converter route, the traditional coal-based production route, was particularly hard hit, with a decline of around fifteen percent. Even the supposedly more modern electric arc furnace steel production, which relies on scrap steel and electricity, is becoming increasingly less important, and this decline is occurring from an already low base.

The triple pressure: energy, competition, and transformation

The German steel industry is facing unprecedented pressure from three different, mutually reinforcing directions. The first pressure comes from the energy sector. Electricity prices in Germany for industrial consumers are currently as high as eighteen cents per kilowatt-hour, many times higher than what is paid in competing countries. While the federal government is now planning an industrial electricity price of a maximum of five cents per kilowatt-hour, this measure is at best a treatment of the symptoms without addressing the underlying energy policy. The planned industrial electricity price is intended to benefit approximately two thousand companies and would cost the budget around 1.5 billion euros annually, but amounts to only half of a company's annual electricity consumption and is limited in time.

The second pressure comes from the global market. China has built up a massive steel production, which, due to weaker domestic demand and US tariffs, is increasingly being diverted to Europe. China currently produces massive surpluses of around 300 million tons per year and pushes these onto the global market with overt and covert state subsidies. At the same time, European demand for steel is stagnating, while Asian countries are continuously increasing their production. According to OECD forecasts, global steel production is expected to increase by about 6.7 percent by the end of 2027, with the largest increases again coming from China, India, and other Asian countries. China alone could produce the annual output of Thyssenkrupp, Germany's largest steelmaker, roughly three dozen times over with its annual surpluses.

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The third and most structural pressure stems from the necessary transformation to low-carbon production. Here, the paradox of Germany's energy transition becomes most apparent: producing green steel requires massive amounts of green electricity and green hydrogen. However, both are extremely expensive or even unavailable in Germany under current conditions. The direct reduction method using hydrogen, considered a promising process for low-carbon steel production, requires approximately 47 kilowatt-hours of electricity to produce one kilogram of hydrogen, taking into account efficiency losses in the electrolyzers. At German electricity prices, this makes green steel an economically unviable product for the international market, despite billions in subsidies.

With the tkH₂Steel project, Thyssenkrupp has attempted to establish the first direct reduction plants with innovative smelters at its Duisburg plant site starting in 2027, which could prevent up to 3.5 million tons of CO₂ emissions annually. The company has already received substantial financial support from the state and federal governments for this project. However, the structural problem is also evident here: even these state-of-the-art plants will not be internationally competitive as long as electricity costs remain as they are.

The failure of political strategy

Federal Economics Minister Katherina Reiche announced that talks with the European Commission regarding the industrial electricity price are in their final stages and that its introduction is planned for January 1, 2026. However, this does not address the fundamental problem. Expert Stefan Kooths from the Kiel Institute for the World Economy characterizes the planned measures as a backward-looking subsidy policy that merely builds a dam, is not economically viable, and will inevitably burst sooner or later. The flaw lies in German energy policy, which continues to rely exclusively on renewable energies, while other countries maintain at least one conventional energy source to compensate for the fluctuations in renewables.

ING-Diba's chief economist, Carsten Brzeski, succinctly summarizes the central paradox: First, the steel industry was systematically weakened, and now it is to be expensively rescued. A complete transition to a purely green economy simply doesn't work, at least not without massive losses in competitiveness and significant structural adjustments in other sectors. In fact, this fundamental truth was long ignored in German politics, with the result that the weakness of industry is now becoming a consequence.

The promising approaches and their limitations

It is not without reason that six German states submitted concrete demands ahead of the steel summit: They are calling for punitive tariffs on steel imports, a limit on steel imports to Europe by the EU Commission, an industrial electricity price, and the mandatory use of green steel in state infrastructure projects. The EU Commission has indeed reacted by intending to reduce the quotas for duty-free steel imports from approximately 36.6 million tons to 18.3 million tons and to double the tariffs to fifty percent, compared to the previous twenty-five percent.

Marie Jaroni, the new CEO of Thyssenkrupp Steel Europe, emphasizes the need for the steel summit to produce concrete results. She calls for higher tariffs on steel imports from China and a maximum industrial electricity price of five cents per kilowatt-hour. She also points out that the billions of euros the government is investing through its infrastructure package should be tied to the requirement that steel from the EU be used as the primary raw material. This is a sensible proposal that could at least stabilize short-term demand.

At the same time, an important option is for the government to mandate the use of green steel for infrastructure projects. This CO₂-neutral steel is produced in Germany and could therefore at least secure a guaranteed sales volume. The challenge, however, lies in the fact that despite billions in subsidies, this steel is far too expensive for the international market. While a domestic-only purchase guarantee would create jobs, it doesn't solve the core problem that the industry is not globally competitive.

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The strategic level: European trade policy

Both Saarland's Minister-President Anke Rehlinger and CDU General Secretary Carsten Linnemann support the EU Commission's plans to limit steel imports into the single market. This demonstrates that there is a political consensus that protective tariffs are necessary to safeguard European industry from dumping imports.

The European Commission has already taken historic steps by departing from its traditional free trade ideology and implementing protectionist measures.

However, the limitations quickly become apparent: The US imposes 50 percent tariffs on European steel, a reaction to Trump's protectionist trade policies. An additional EU tariff on steel imports could lead to further trade repercussions. Finance Minister Lars Klingbeil is also calling for a complete halt to all steel imports from Russia to protect domestic industry. Currently, steel slabs produced in Russia and processed in the EU are exempt from sanctions.

The labor market argument: More than economic efficiencies

An often overlooked dimension of this crisis is its social consequences. According to a new study by economists at the University of Mannheim, supported by the Hans Böckler Foundation, the German economy faces up to fifty billion euros in annual lost value creation if it were to experience a global steel shock without domestic steel production. This scenario involves a situation in which major steel exporters like China would drastically reduce their exports to Europe due to geopolitical conflicts or supply chain problems.

The consequences for the labor market are even more drastic. The German steel industry employs approximately 80,000 people, 42 percent of whom are over 50 years old. Should steel production be relocated abroad, at least 30,000 jobs would be acutely threatened, leading to a more difficult reintegration into the labor market. These losses would be largely concentrated geographically in five locations: Bremen, Duisburg, Eisenhüttenstadt, Saarland, and Salzgitter. The indirect employment impact is even more dramatic: Industries that use steel as a raw material employ around four million people in Germany, representing two-thirds of all industrial jobs.

Historical experience with industrial restructuring in the US and the UK shows that a large proportion of affected workers cannot be reintegrated into the labor market on an equal footing after job loss. This would have significant social and political consequences. Economic policies that lead to the deindustrialization of certain regions could, in the long term, result in substantial political shifts, particularly in the affected regions.

The capacity gap: A fatal oversight

A particularly worrying sign for the medium-term future of the German steel industry is the capacity gap in green steel production. According to calculations by researchers in Mannheim, there is a glaring gap: the future demand for 20 million tons of primary steel annually is met by a planned production capacity of only 8 million tons. This is due, among other things, to the cancellation of ArcelorMittal's investment plans in Bremen and Eisenhüttenstadt, as well as Thyssenkrupp's currently inadequate plans in Duisburg.

Germany therefore needs a rapid expansion of its green steel production capacity. The direct reduction plants that Germany needs are technically feasible. The H₂-Steel project has already investigated how this technology can be further developed, initially using hydrogen-rich gases as an interim solution, and later entirely with green hydrogen. The process is flexible and can be operated with varying proportions of hydrogen. However, the technology is not yet mature enough to be used in existing plants, and investments in new production facilities are far from being made to the necessary extent.

Direct reduction offers further advantages: it is compatible with a large part of the existing infrastructure, because direct reduction initially produces sponge iron, which is then melted down and processed using the same technology employed for liquid pig iron from a conventional blast furnace. Since the DR process allows for the flexible use of various gases, it decouples steel production to some extent from the hydrogen market. Thus, production is not entirely dependent on green hydrogen, but can react flexibly.

A critical perspective on the political intentions

Stefan Kooths, Director of Economic Research for Business Cycles and Growth at the Kiel Institute for the World Economy, views the planned measures far more critically than as a mere PR stunt. Economic policy has consistently failed with such backward-looking subsidies. These subsidies represent an attempt to preserve structures that have developed over time. Structural change is happening anyway, but the government funds are simply building a dam that is not viable from a market economy perspective and will inevitably burst sooner or later.

Kooths is particularly critical of Germany's fundamental energy policy. He believes it is facing a catastrophic future, as Germany continues to rely solely on renewable energies, while other countries maintain at least one conventional energy source to compensate for fluctuations in renewables. This will result in a massive competitive disadvantage, especially for energy-intensive industries, and the steel summit will do nothing to change that. The summit itself will thus become a mere PR event unless the fundamental energy policy is reformed simultaneously.

The dilemma with China and the USA

An additional element of complexity arises from the geopolitical tensions between the US and China. Trump's tariff policy towards China is leading China to increasingly direct its steel production to Europe. The fifty percent tariffs on European steel destined for the US are part of a larger trade conflict that is disrupting the global steel industry. The EU must therefore try to find a middle ground with its own tariffs that protects European industry without provoking massive retaliation.

The negotiations are extremely delicate balancing acts. On the one hand, the EU must protect its industry from dumping imports; on the other hand, trade wars, which ultimately harm everyone, must be avoided. This makes the steel summit discussions a test of the European trade policy's ability to shape policy in an increasingly fragmented global economy.

The reality behind political promises

The current situation of the German steel industry is characterized by a profound mismatch between political promises and real economic constraints. While the five-cent industrial electricity price may provide short-term relief, it does not alter the fundamental fact that green steel is not competitive in Germany under current conditions. EU tariffs can reduce import pressure, but they cannot compensate for lower production costs in other countries.

The attempt to save the steel industry through maintenance subsidies ultimately amounts to compensating for private capital allocation errors with public funds. This is not only expensive but also distorts market mechanisms, leading to further problems in the long run. A truly efficient approach would be to reform the foundations of energy policy and create electricity prices that allow the industry to be competitive without permanent subsidies.

The inconvenient truth

The German steel industry faces a genuine transformation challenge that cannot be solved solely through subsidies and tariffs. The sector needs stable, globally competitive electricity prices, a clear strategy for transitioning to climate-neutral processes, and political reliability that enables long-term investments. Currently, policymakers are attempting to address a structural problem by treating the symptoms in the short term.

The steel summit at the Chancellery is a necessary sign of political attention, but without fundamental changes in energy policy and without honest debates about the limits of a purely green economy, it will ultimately be ineffective. Germany must decide whether it wants to maintain a competitive steel industry or whether it is prepared to abandon this key strategic sector. This decision will not be made through summits and subsidies, but through far-reaching structural reforms in energy and economic policy.

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