CSIS report on China steel industry, Part 1: Steelmaking overcapacity and emissions prompt circular economy approach.
In the first of a two-part look at China’s steel industry, we detail the analysis of Jane Nakano — Senior Fellow at the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) — who details the Chinese State’s policies that are designed to steer the industry towards sustainability.
China’s steel industry, the world’s largest by production capacity, is grappling with significant challenges that have far-reaching implications for the global construction sector, says a leading sustainability analyst.
Jane Nakano, Senior Fellow at the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS), shares insights into the complex issues facing the industry and the potential solutions being implemented.
She points out that the steel industry in China – which plays a crucial role in the country’s economic development – is facing a dual challenge of overcapacity and high greenhouse gas (GHG) emissions.
Nakano explains that overcapacity is “exacerbated by weakened domestic demand”, as well as by intensifying price competition in the global market and “trade friction with other global steel exporters”.
This situation, she adds, is further complicated by China’s commitments to achieving peak carbon emissions by 2030 and carbon neutrality by 2060.
She identifies two recent domestic policies as potential solutions to address these challenges: the Special Action Plan for Energy Conservation and Carbon Reduction in the Steel Industry and the nation’s China-wide Trade-in Program.
China steel industry ‘in feedback loop’
Nakano suggests these policies are “creating a feedback loop by connecting the upstream and downstream in the steel sector”, and that they form a “nascent circular economy framework for the steel industry” – one in which “strong synergy exists between the measures for rapid adoption of low-carbon production methods and those for expanding green sectors, such as electric vehicles and renewable energy, as an outlet for the excess steel supply”.
The Special Action Plan was launched by the Chinese government in May 2024, with the objective to reduce carbon dioxide emissions by approximately 53 million tons between 2024 and 2025.
It seeks to achieve this in two ways: by strengthening capacity regulation and output management, and transitioning to Electric Arc Furnaces (EAFs), to replace blast furnace-converter steelmaking.
EAF technology relies primarily on scrap steel as the main feedstock, reducing emissions by up to 70% per ton of steel produced compared to blast furnace technology.
Nakano notes that “the goal is to increase the share of EAF-produced steel from 10% today to 15% by 2025, premised on securing sufficient scrap steel as their key feedstock.”
State programme to stimulate demand and recycling
Launched in March, the National Trade-in Programme aims to stimulate domestic demand and support economic recovery. The programme consists of three areas of measures:
- Accelerating equipment upgrades in key industries
- Promoting the trade-ins of consumer goods
- Improving the recycling of old traded-in equipment and consumer goods
The Trade-in Program, says Nakano, plays a dual role in the steel industry.
“On one hand it aims to incentivise the recycling of scrap steel through large-scale trade-ins of old equipment and consumer goods,” she says. “And on the other hand it stimulates demand for new and more sustainable goods, providing a market for excess steel produced by the industry.”
Nakano says Chinese experts estimate that the initiative could generate as much as 1 trillion yuan (approximately $141 billion) in market demand, while encouraging sustainable transformation across various sectors.
Addressing steel overcapacity and decarbonisation
Nakano observes that when considered together, the Chinese state’s two sets of measures “form a complementary system that ties the steel industry’s upstream and downstream processes”.
She also says that “while no official document or statement appears to discuss whether or how these two were intended to interact, they seem to have created a circular economy framework that addresses both overcapacity and decarbonisation”.
Nakano adds: “In the upstream, the Trade-in Program seeks to ensure the availability of scrap steel from recycled and dismantled vehicles and other consumer goods.
“This helps to boost scrap supplies, which are essential for the transition to EAF steelmaking. As scrap supply increases, the steel industry can expand EAF capacity, allowing it to successfully phase out carbon-intensive blast furnaces.”
She continues: “In the downstream, the Trade-in Program can stimulate demand for steel products through large-scale equipment upgrades and consumer goods trade-ins.”
Nakano notes, too, that by creating new demand for steel – particularly in green sectors such as electric vehicles – the programme “can create an outlet for the surplus”.
“This demand stimulation, working in tandem with stricter capacity regulation and output management driven by the Special Action Plan,” she says, “creates opportunities for the production of more resource-efficient and lower-carbon steel.
CSIS report on China steel industry, Part 2: Why steelmaking in China is stuck in over-capacity mode and what the Chinese state is doing about this.
In the second of a two-part look at China’s steel industry, we detail the analysis of Jane Nakano — Senior Fellow at the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) — who probes the complex issues facing the industry and the State’s solutions
It is no secret that China’s steel industry has been in over-capacity mode for some time. Nakano argues that this appears to be “structural in nature”, and that it is “characterised by a domestic demand peak due to a persistent downturn in the real estate market and a slowdown in infrastructure investment”.
She adds: “This has left the industry struggling with overcapacity, as emerging sectors such as EVs have not been able to fill the gap, despite their rapid growth as a demand source.”
As a result, Nakano says steel producers have been forced to look for alternative outlets for their excess output.
“China has placed increasing pressure on exports to make up for subdued domestic consumption,” she explains. “Although export prices are now close to their lowest since 2016, which indicates price reductions have been employed to boost export volumes.”
This approach, she continues, has led to “trade frictions” with other global steel producer countries, characterised by tariffs and anti-dumping measures against Chinese steel exports since 2023.
China GHG concerns and international pressure
In terms of sustainability, China’s steel industry is the second-largest source of carbon emissions in the country, due to its reliance on traditional blast furnace production methods, which are energy-intensive.
Nakano observes that overcapacity is driving more exports amid weak domestic demand and that carbon emissions “persist even if the economic return from steel production is diminishing”.
She feels this situation is not only hindering China’s decarbonisation goals but also makes its steel industry increasingly vulnerable to global climate pressure and attendant trade measures.
One such measure, she says, is the Carbon Border Adjustment Mechanism (CBAM) introduced by the European Union.
According to Chinese industry estimates cited by Nakano, the CBAM will increase the costs of Chinese steel exports to the European Union by 4-6% from 2026, and by as much as 49% by 2034, as free carbon allowances are phased out.
“These measures could significantly impact China’s ability to address overcapacity through exports,” she says.
Circular economy ‘to address dual challenges’
Nakano argues that solving the overcapacity challenge is tied to addressing the emissions challenge. She says this dual challenge “requires a holistic solution that aligns output control with cleaner steelmaking processes”, and adds that “the framework of circular economy may provide the right approach to tackle these issues”.
Under its 14th Five-Year Plan on Circular Economy (2021–2025), China has begun paving the way for increased resource efficiency, including in the iron and steel sector.
While a comprehensive circular economy strategy for the steel sector is yet been to be established, Nakano notes that the introduction of several key policies has “effectively created a framework that mirrors circular economy principles”.
China’s energy conservation and carbon reduction plan
During the first half of 2024, China made progress in controlling its steel output and expanding Electric Arc Furnaces (EAFs) technology, to replace blast furnace-converter steelmaking.
EAF relies primarily on scrap steel as the main feedstock, reducing emissions by up to 70% per ton of steel produced compared to blast furnace technology.
Nakano notes that “the goal is to increase the share of EAF-produced steel from 10% today to 15% by 2025, premised on securing sufficient scrap steel as their key feedstock.”
Nakano notes that a July report highlighted China’s provincial governments approved 7.1 million tons of new annual steelmaking capacity, all of which were EAF projects. This, she says, “marked the first time that no new coal-based steel projects were approved on a half-year basis since 2020”, when the Chinese government announced its carbon goals.
However, she says challenges remain in the implementation of these sustainability policies, pointing out that in August, the Ministry of Industry and Information Technology (MIIT) announced the immediate suspension of all proposals to replace outdated or environmentally harmful blast furnaces with EAF.
“Capacity replacement projects have suffered from noncompliance by local enterprises, who would in fact reactivate decommissioned capacity or fabricate capacity that did not previously exist,” she says.
China’s automobile sector and the circular economy
On a brighter note, she cites China’s automobile sector as a positive example of how the circular economy framework can work well.
Auto manufacturing consumes 6-7% of China’s steel output, with steel accounting for over 70% of the materials used in car making.
“The Trade-in Program has played a critical role in stimulating both the supply of scrap steel and the demand for low-carbon steel products in this sector,” she says.
On the supply side, targeted measures have enhanced scrap steel supply, and streamlined the recycling process, and bolster the supply chain for scrap steel.
Nakano notes that “within the first six months, the number of applications for scrap-vehicle recovery exceeded 680,000. Nationwide, scrap-vehicle recovery reached 3.6 million units between January and July 2024, up 37.4% year on year.”
On the demand side, meanwhile, Nakano points to how the government has stimulated the market with a series of subsidies for new clean EVs and the trade-ins of internal combustion engine vehicles.
“These incentives expanded sales of clean energy vehicles rose by 33.1% in the first half of 2024, while trade-ins accounted for 40–50% of daily orders at major retailers,” she says.
China steelmakers adapting to circular economy
Some of China’s major steelmakers are already adapting to the circular economy approach, she adds. Baosteel, China’s state-owned company and the largest steelmaker in the world, holds a significant share of the domestic automotive steel market.
Nakano reports that “according to the company, it has developed ultra-low-carbon cold-rolled and hot-dip-galvanised products for automotive use in order to adapt to the low-carbon transition.”
Similarly, she says Ansteel Group, another state-owned steelmaker and a major global enterprise, has been investing in EAF technology and scrap steel recycling. Nakano concludes by stating,
“These innovative products using scrap and EAF processes are said to reduce carbon emissions by over 60%, contributing to the steelmakers’ decarbonisation commitments and demonstrating the potential of the circular economy approach in addressing the dual challenges facing China’s steel industry,” says Nakano.
