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CBAM and the phase out of free allowances in the EU ETS will drive further tightness in the market for high-grade iron ore. It rewards better ore in blast furnaces now and in DRI-EAFs as free allocation ends, while shifting steelmaking towards DRI-EAF, a route that depends on DR-grade ore, which makes up only about 4% of global supply.
CBAM will tighten the market for high-grade iron ore in two ways. Firstly, lower-grade ore creates more slag, needs more flux and raises emissions for both BF-BOF and DRI-EAF steel. CBAM charges for those extra emissions, with costs increasing as free allocation is phased out.
The second, larger channel comes through the market shifts CBAM will drive. CBAM pushes steelmaking towards gas-based direct reduced iron and electric arc furnace (DRI-EAF) production, a route that depends on DR-grade ore for reasons beyond carbon costs. Fastmarkets modelled a gas-based DRI-EAF producer supplying Europe. Switching from 67.5% iron (Fe) pellets to 65% Fe pellets adds about €41 per tonne of hot-rolled coil (HRC) in 2026 before carbon, mostly in iron lost to slag.
Supply is not keeping pace. Ore above about 67% Fe makes up only around 4% of global supply, while European EAF capacity is set to nearly quadruple by 2030. As more DRI-EAF producers compete for that small pool, the cost of falling back on lower grades, rising to about €85 per tonne of HRC by 2035, will increasingly set the premium for DR-grade ore.
Blast furnaces pay the higher carbon cost today, EAFs by 2035
For blast furnace exporters, the CBAM cost of lower-grade ore is currently higher than for EAF. The blast furnace melts gangue into slag, and making that slag takes extra flux and coke. On Fastmarkets’ modelling, moving from 67.5% to 65% Fe pellets adds about 25 kg of CO₂ per tonne of HRC on the BF-BOF route.
Unlike the DRI route, the blast furnace gets almost no offsetting deduction. Its deduction depends mainly on the hot metal used, and because a blast furnace loses little iron to slag, it needs about the same amount of hot metal whatever the ore grade. Every extra kilogram of CO₂ from slag-making is therefore charged. That puts the additional CBAM cost of lower-grade ore at about €2 per tonne of HRC in 2026, €3 per tonne in 2030 and €7 per tonne in 2035. Cargill’s Colin Wang made the same point at Iron Ore Decoded, linking lower coke use to lower CBAM costs for Chinese exporters.
For DRI-EAF producers, the CBAM cost of lower-grade ore is only about €1 per tonne of HRC in 2026. This is not because lower-grade ore leaves emissions unchanged. It is because of how the CBAM benchmark works. Importers pay for embedded emissions minus a deduction that mirrors the free allocation EU producers still receive. For DRI-EAF steel, that deduction is set by benchmarks for each input, including DRI and iron ore pellets. Lower-grade ore means more DRI and more pellets go into each tonne of steel, so the deduction grows along with emissions. With 97.5% of the benchmark still deducted in 2026, the larger deduction offsets most of the extra emissions. The extra EAF power does not count either, because electricity is outside CBAM’s scope for steel.
That changes as free allocation is phased out. Under the proposed ETS reform, the deducted share falls to about 60% in 2030 and to 15% from 2034, so the deduction masks a shrinking share of the extra emissions. Those emissions are roughly twice as large as on the blast furnace route. Unlike the blast furnace, the EAF loses iron to its slag as iron oxide, and each extra tonne of DRI needed to replace it carries the emissions of the natural gas used to make it. At Fastmarkets’ forecast carbon prices, the CBAM cost of lower-grade ore for DRI-EAF steel rises to about €3 per tonne in 2030 and about €13 per tonne by 2035. That overtakes the blast furnace penalty in the early 2030s and ends well above its €7 per tonne. Even then, it is a fraction of the cost of iron lost to slag.
Verification decides whether better ore counts at all
None of the carbon cost difference applies without verified installation data. Exporters who declare on default values face mark-ups of 10% in 2026, 20% in 2027 and 30% from 2028, and some defaults are punitive: 3.167 t of CO₂ per tonne for Chinese slab, against a BF-BOF benchmark of 1.3701. That gap is far larger than anything ore grade can change. A mill declaring on defaults gains no CBAM advantage from buying better ore, because its feed does not enter the calculation. Verification is therefore the first decision and ore quality the second.
Policy could also move the timing. If the Commission’s July 2026 proposal to extend the phase-out of free allocation to 2038 is not adopted, current law would end free allocation entirely by 2034, bringing forward the point at which EAFs overtake blast furnaces. Its planned 2027 report on bringing indirect emissions from iron and steel into CBAM matters more for ore grade. If EAF electricity were included, the extra power needed to melt lower-grade DRI would also add to the CBAM bill.
CBAM favours DRI-EAF, which depends on DR-grade ore
CBAM’s larger effect on ore demand comes through the choice of route. DRI-EAF steel carries far lower embedded emissions than BF-BOF steel, so as free allocation ends it faces a much smaller CBAM bill on exports to Europe. EU mills face the same incentive as free allocation is withdrawn under the EU ETS.
The shift is already under way. European EAF-based HRC capacity is set to rise from 5 Mt per year in 2025 to more than 19 Mt per year by 2030 on projects under construction or at final investment decision, with scope for 50 Mt per year by 2035. That would take EAFs from about 6% to close to half of European HRC capacity. Flat-product EAFs need virgin iron units such as DRI to dilute residuals in scrap, and DRI plants typically need feed with combined silica and alumina below roughly 3–3.5%. Each new tonne of DRI-EAF capacity is therefore new demand for DR-grade ore.
On this route, ore grade matters mainly for reasons that have nothing to do with carbon. A DRI shaft furnace removes oxygen from the pellet but not its silica and alumina. These impurities end up in the EAF as slag, and the slag carries iron away with it. Fastmarkets’ modelling shows that moving from 67.5% to 65% Fe pellets raises slag from about 283 kg to 450 kg per tonne of HRC, and iron lost to slag from about 94 kg to 150 kg. Replacing that iron means buying and melting more DRI, and the extra slag needs more lime and dolomite to flux it.
In 2026, that adds around €41 per tonne of HRC. Iron lost to slag accounts for about €22, extra lime and dolomite about €9 and extra EAF power about €10. By 2035, the total rises to about €85 per tonne, as DRI and flux prices increase. CBAM adds another layer which increases switching costs by 2% in 2026 and 15% by 2035.
The comparison is an illustrative sensitivity between DR-grade and BF-grade pellets. A 65% Fe pellet is typically BF grade, with about 5–6% silica and alumina, above the 3–3.5% a shaft furnace normally accepts. A DRI plant would rarely run on it alone. The model also leaves out shaft furnace penalties such as lower metallisation and clustering, so the figure is likely conservative.
DR-grade supply is not keeping up
Ore above about 67% Fe makes up only around 4% of global supply, and new DR-grade additions are limited. Champion Iron produced its first DR-quality ore at Bloom Lake in June, grading up to 69% Fe with silica and alumina below 1.2%, and placed part of its initial output under contract before the first cargo sailed. Vale and Jinnan’s Sohar concentrator, due by mid-2027, will turn 18 million t/y of low-grade ore into 12.6 million t/y of concentrate for DR pellets and briquettes.
The largest new source of high-grade ore does not ease this. Simandou, at 65–66% Fe, adds high-grade blast furnace feed but falls short of DR specifications. Shipments reached about 70,000 t/day by June and have already narrowed the spread between 65% and 61% Fe ore. That relief is confined to blast furnace grades. No comparable wave of DR-grade supply is in sight.
As more EAFs compete for a small pool of DR-grade ore, the cost of falling back on lower grades will increasingly set the premium buyers are willing to pay for high-grade pellets. On Fastmarkets’ modelling, that cost is around €41 per tonne of steel today, rising to about €85 by 2035. CBAM widens the premium in two ways: by adding DRI-EAF tonnes that need DR-grade ore, and by raising the carbon cost of falling back on lower grades, from about €1 to about €13 per tonne.
What it means for buyers, producers and miners
For buyers, ore now has three sources of value. The first is value-in-use through yield, flux and power, which dominates today. The second is a CBAM cost that falls on blast furnace exporters first and on DRI-EAF producers from the early 2030s. The third is verification, which decides whether the CBAM part counts at all.
For DRI-EAF producers, the low CBAM cost of lower-grade ore in 2026 is temporary. It disappears as free allocation is phased out, which also affects EU mills under the EU ETS. Long-term pellet contracts should be priced on 2030s costs, and DR-grade volumes secured before new EAF capacity tightens the market. For blast furnace exporters, better ore cuts the certificate bill from the first year, but only once emissions are verified.
For miners, the carbon case for quality shifts over time. Today it is strongest with blast furnace mills, which already pay for certificates covering the extra emissions from slag-making from lower-grade ore. By 2035, gas-based DRI-EAF producers will face the largest carbon penalty from lower-grade ore, and they will account for a growing share of steel production. Supplying verified emissions data with pellets will add to their value, because pellet emissions count towards the embedded emissions of the DRI and steel made from them.
The biggest prize sits at the low-emissions end. On a gas-based DRI plant, natural gas drives most of the footprint, so ore grade is a small part of the total. As producers move to hydrogen and cleaner power, the extra slag, flux and DRI from lower-grade ore become a larger share of what is left. Fastmarkets expects the value captured by hydrogen-based DRI suppliers in Europe to rise from about €4 per tonne in 2029 to more than €50 per tonne by 2035, concentrated in HRC sold into the lowest emissions bands. For these producers, ore grade can decide which band a product falls into, and so whether the green premium is earned at all. The cleaner the reductant, the more the gangue matters.
This short article series provides regular insight into the evolving European market under the EU ETS and CBAM. Drawing on our CBAM Analytics, the series assesses how policy changes and market dynamics are reshaping costs, competitiveness and EU trade flows. For a fuller view of how decarbonisation, CBAM and the EU ETS are transforming the market, contact carbonsupport@fastmarkets.com.
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