Understanding and assessing transition plans for steel companies is important because, while the market capitalisation of steel companies is relatively small, 1% of MSCI ACWI, their contribution to the real economy through material services is unmatched. As governments and companies commit to net-zero targets by 2050 to align with Paris climate goals, sectors such as steel will be an integral part of the transition. Steel production contributes 7-9% of global C02 emissions2, with European emissions from steel accounting for 6%. While steel demand is expected to grow in the coming decades, reduction in emissions intensity from primary steel has plateaued. European steel companies face increasing regulation with a more effective carbon pricing signal as allowances are phased out of the Emissions Trading Scheme and a potential Carbon Border Adjustment Mechanism is introduced. There is also an opportunity for de-commoditisation of steel and end markets to develop for zero carbon steel products.Industry Tracker has published its first report on the steel sector. With focus on 10 of the largest primary steel producing companies in Europe, the aim is to provide an in-depth assessment of how these companies are positioned to action transition plans to net-zero. Companies are scored on an 'absolute' basis over 13 metrics covering three elements of the TCFD framework: Transition Risks, Transition Opportunities, and Governance and Strategy. These form a final ranking which serves to indicate exposure to the financial impacts of transition.Summary ScoreSSAB - 73ArcelorMittal - 66Voestalpine - 60Salzgitter - 59Tata - 59ThyssenKrupp - 54Evraz - 43Severstal - 36Metinvest - 35Erdemir - 30In analysis Industry Tracker has looked at the solutions available for steel companies to transition by evaluating how locked-in they are to existing carbon intensive assets, the timing of the shift needed to invest in new technologies, and the economics of transitioning to a near zero steelmaking route. Transition Readiness for Net Zero⦁\tThere is very little room to extend the life of primary steel production through blast furnace technology within the European steel sector - of the ten companies analysed only a quarter of sector emissions budget remains.⦁\tMost investment windows have already begun and most end before 2030. This reflects a serious urgency for European steel companies to develop and deploy alternative approaches to blast furnace based steelmaking.⦁\tThere is growing evidence that leading companies in this space are developing technologies that are transformative and could realise near zero carbon transition routes for primary steel production.⦁\tSix companies are developing low carbon process innovations considered to be transformative - SSAB ranks first with its fossil free hydrogen technology HYBRIT with ArcelorMittal second with a portfolio of low carbon solutions.⦁\tFive companies are investing in hydrogen based direct reduction, the most favoured near zero emissions innovation , and seven companies are investing in projects to secure hydrogen supply.⦁\tCurrent balance sheets and free cash flow yields cannot support the cost of the transition to green hydrogen steelmaking, which is estimated at USD 4-34 billon depending on asset base size. Companies will need subsidies, direct public funding and partnerships.⦁\tTarget setting to align with net zero pathways shows a similar pattern across the group with ambitious emissions reductions post 2030. Detailed transition planning remains at an early stage at SSAB and ArcelorMittalTransition risks⦁\tThere is very little room to extend the life of blast furnaces. Over the ten companies analysed, only a quarter of emissions budget remains. This assumes an average blast furnace life extension of 17.5 years. Remaining budget ranges between 12% and 36% assuming 20 and 15 years respectively.⦁\tOf the companies with the largest share of their 2050 emissions budget remaining, only two, ArcelorMittal and Evraz, have more than the global average for blast furnace-based steel production.⦁\tMost investment windows have already begun and most end before 2030. This reflects a serious urgency for European steel companies to develop and deploy alternative approaches to blast furnace based steelmaking.⦁\tJust two companies, ArcelorMittal and Metinvest, have room to reline more than 1 blast furnace. This is largely a function of them owning more blast furnaces, which reduces the influence that one furnace has on their total emissions budget.⦁\tFive companies, Tata Steel, Metinvest, Evraz, Severstal, and ArcelorMittal, must decide within the next 5 years whether to lock themselves into European capital assets of high transition risk.⦁\tSSAB has a clear cost advantage when it comes to the HDR route. This is due to the relatively low cost of onshore wind in Sweden.⦁\tSSAB, Salzgitter and ThyssenKrupp have 100% of their primary steel capacity located in countries with fully available national hydrogen strategies⦁\tAll blast furnaces operated by Tata Steel, Salzgitter, and ThyssenKrupp reside in countries with potentially direct future access to carbon storage capacity. This is also the case for a small fraction of ArcelorMittal's capacity, while all remaining blast furnaces are located elsewhere.Transition opportunities⦁\tEuropean steel companies have begun to develop the low-carbon innovations required to significantly reduce the sector's emissions and align with net zero pathways. More innovative companies will begin commercialising these technologies in the next decade, but significant investment will be required.⦁\tSix companies are developing low-carbon steelmaking technologies considered to be "transformative" within their European operations. 34% of companies' top 10 innovations are assessed as being transformative whilst 66% are radical.⦁\tFive companies are developing hydrogen based DRI-EAF (HDR-EAF) production routes, potentially reducing emissions to near zero. SSAB's HBYRIT project will reduce emissions by 98% compared to the traditional BF-BOF route, whilst ArcelorMittal has announced multiple investments to transform BF-BOF plants to HDR-EAF.⦁\tFive companies are investing in CCUS-related innovations, many of which produce fuel and chemicals sector inputs, such as ArcelorMittal's Carbalyst® technology and ThyssenKrupp's Carbon2Chem partnership.⦁\tSix companies have secured public funding for projects to support developing and scaling early-stage technologies, covering on average 44% of project costs. Public sector support will be key to the deployment of alternative low-carbon steelmaking.⦁\tSeven companies are involved in projects developing "blue" or "green" hydrogen production, indicating that companies are seeking to secure the volumes of hydrogen required to scale up hydrogen based steelmaking.⦁\tAt 0.5%, research and development spend as a percentage of net sales is relatively low for a sector that needs to invest in low-carbon innovation.⦁\tDemand for low-carbon steel is set to be led by the automotive industry, with increasing demand from construction and renewable energy sectors. Voestalpine, Tata Steel, ThyssenKrupp and Severstal have the highest exposure to these markets.Climate governance and strategy⦁\tMost companies have strong enough ambitions with six, SSAB, ArcelorMittal, Salzgitter, ThyssenKrupp, Voestalpine, and Tata Steel, all aiming for net-zero or near-zero emissions by 2050.⦁\tSSAB stands alone as the most ambitions company by steeply reducing emissions after 2032 and reaching net zero emissions in 2045.⦁\tEight companies have publicly disclosed emissions reduction targets - ArcelorMittal, Voestalpine, Tata Steel Europe and Salzgitter have all made commitments to become net zero, climate neutral, or carbon neutral by 2050.⦁\tCompanies have advanced in their scenario planning, with seven companies conducting scenario analysis to assess climate impacts on business models whilst more advanced companies use these to inform decarbonisation strategies and guide low-carbon investment.⦁\tWhile six companies have been regulated for their Scope 1 emissions from European facilities within the ETS, free allowances have significantly diminished incentives to make deep emission reductions.⦁\tSix companies use an internal carbon price as part of their decision making processes. ArcelorMittal, SSAB, Voestalpine and ThyssenKrupp all use carbon prices that are aligned with EU ETS allowances, which have doubled since 2019.⦁\tCompanies based in the CIS region such as Severstal and Evraz and Erdemir in Turkey lag behind their European counterparts in governance metrics such as scenario planning, target setting and climate related remuneration.⦁\tSix companies disclose some form of climate related remuneration, but this is not well developed and no companies show any evidence of long term climate related remuneration incentives.Emissions from Primary Steel in Europe (MtCO2)ArcelorMittal - 88.5, 22 BFsEvraz - 23.6, 5 BFsSeverstal - 22.3, 5 BFsTata Steel - 19.3, 4 BFsErdemir - 17.5, 6 BFsMetinvest - 15.9, 11 BFsThyssenKrupp - 14.2, 6 BFsVoestalpine - 11.2, 5 BFsSSAB - 9.1, 5 BFsSalzgitter - 10.4, 4 BFsIndustry Tracker was launched by the Investor Watch Group in 2021 whose founders created the Carbon Tracker and Planet Tracker Initiatives alongside Carole Ferguson who moved over from CDP where she led the award winning Investor Research Team. Industry Tracker was created to address a gap in the market for independent in-depth research and analysis on industrial sectors that are critical to economies and that will be a key component of the pathway to achieving net zero emissions. Industry Tracker is not an investment advisor and makes no representation regarding the advisability of investing in any particular company or investment fund or other vehicle.