China’s steel industry, the world’s largest by production capacity, plays a pivotal role in the country’s economic development. However, this sector faces a complex set of internal and external challenges, such as overcapacity and high greenhouse gas emissions. Overcapacity is exacerbated by weakened domestic demand, intensifying price competition in the global market, and trade friction with other global steel exporters. Meanwhile, China’s commitments to achieving peak carbon emissions by 2030 and carbon neutrality by 2060 are complicated by emissions from steelmaking.
Two recent policies merit close examination for their potential to help address the dual challenge of overcapacity and high emissions. The Special Action Plan for Energy Conservation and Carbon Reduction in the Steel Industry and the national Trade-in Program appear to be creating a feedback loop by connecting the upstream and downstream in the steel sector. The two policies in effect form a nascent circular economy framework for the steel industry, where 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.
Why Overcapacity and High Emissions Are Inseparable
Overcapacity is not a new challenge for China’s steel industry. For example, the massive government stimulus to ward off the 2008–2009 financial crisis fueled the expansion in steel production capacity, resulting in a production glut by the mid-2010s. More recently, the government stimulus program to aid the Covid-19-inflicted economy led to an investment boom, expanding the country’s steel production capacity again. Unlike past episodes of overcapacity, the current challenge seems structural in nature, characterized by a domestic demand peak, due to a persistent downturn in the real estate market and a slowdown in infrastructure investment. This demand decline has left the industry grappling with overcapacity, where emerging sectors such as electric vehicles have not been able to fill the gap, despite their rapid growth as a demand source.
Consequently, steel producers have looked for alternative outlets for their excess output. China has placed increasing pressure on exports to make up for subdued domestic consumption, although the export prices are now close to their lowest since 2016, indicating that price reductions have been employed to boost export volumes. This approach invited trade frictions with other global steel producer countries, as exemplified by a new round of tariffs and anti-dumping measures against Chinese steel exports since 2023.
China’s steel exports have come under intense scrutiny for high carbon intensity, too. The steel industry is the second-largest source of the country’s carbon emissions, primarily due to its reliance on traditional blast furnace production methods, which are energy intensive. As overcapacity is driving more exports amid weak domestic demand, carbon emissions persist even if the economic return from steel production is diminishing. Steel overcapacity is therefore not just an economic issue. It is an emissions issue that hinders China’s decarbonization goals, making its steel industry increasingly vulnerable to global climate pressure and attendant trade measures, such as the Carbon Border Adjustment Mechanism by the European Union (CBAM). According to Chinese industry estimates, the CBAM will increase the costs of Chinese steel exports to the European Union by 4–6 percent from 2026, and by as much as 49 percent by 2034, as free carbon allowances are phased out. Such measures would erode China’s ability to address overcapacity through exports.
The Circular Economy Solution: How the Two Policies Could Work Together
Solving the overcapacity challenge is inextricably linked to addressing the emissions challenge. This dual challenge requires a holistic solution that aligns output control with cleaner steelmaking processes. Addressing the challenge through the framework of circular economy may just be the right approach.
Under the 14th Five-Year Plan (14FYP) on Circular Economy (2021–2025), China has begun paving the way for increased resource efficiency, including iron and steel. While China has not yet established a comprehensive circular economy strategy for its steel sector, the introduction of several key policies has effectively created a framework that mirrors circular economy principles. In particular, the following two policies form the backbone of the circular economy approach: (1) the Special Action Plan for Energy Conservation and Carbon Reduction in the Steel Industry (Special Action Plan) and (2) the national program of promoting large-scale equipment upgrades and trade-ins of old consumer goods (Trade-in Program).
An Overview of the Special Action Plan and the Trade-in Program
In late May, the Chinese government issued the Special Action Plan for Energy Conservation and Carbon Reduction in the Steel Industry. Formulated to realize the country’s emissions reduction targets during the 14FYP period, the plan has set its objective to reduce carbon dioxide (CO2) emissions by approximately 53 million tons between 2024 and 2025, through two key efforts:
- Strengthening capacity regulation and output management: This involves eliminating outdated capacity, prohibiting the addition of new steel capacity under the guise of mechanical processing or casting, and strictly controlling the output of crude steel.
- Transitioning to Electric Arc Furnaces (EAFs): The plan emphasizes the development of EAF technology to replace blast furnace-converter steelmaking. The goal is to increase the share of EAF-produced steel from 10 percent today to 15 percent by 2025, premised on securing sufficient scrap steel as their key feedstock.
Currently, China’s steel industry is heavily reliant on blast furnace technology, which uses iron ore, coal, and coke as primary inputs. These resources account for around 90 percent of the industry’s energy consumption. In comparison, the EAF approach primarily relies on scrap steel as the main feedstock, hence reducing emissions by up to 70 percent per ton of steel produced. According to one Helsinki-based think tank analysis, if EAF achieved a 15 percent share while steel production declined by 1 percent between 2024 and 2025, China’s steel industry emissions could decline by 3 percent. This would translate into the CO2 emissions level in 2025 being more than 200 million tons lower than the emissions peak in 2020.
In essence, the Special Action Plan’s objective is to replace the blast furnace with EAF as much as possible while controlling total output. However, the plan’s success hinges on a stable and sufficient supply of scrap steel to support the rapid expansion of EAF capacity. This is where the Trade-in Program becomes critical.
Launched in March, the Trade-in Program aims to unleash domestic demand and support economic recovery. The focus on domestic demand may mirror the national-level desire to expand domestic demand, as China has come to see overreliance on the global market as a source of economic and strategic vulnerabilities in light of the deteriorating geopolitical environment.
The Trade-in Program consists of three pillars of measures:
- Accelerate equipment upgrades in key industries, including steel, petrochemicals, nonferrous metals, and electronics.
- Promote the trade-ins of consumer goods, with a focus on vehicles, home appliances, and home renovation supplies.
- Improve the recycling of old traded-in equipment and consumer goods to support the reuse of resources and promote remanufacturing capacities.
The Trade-in Program plays a dual role in the steel industry. On the one hand, it aims to incentivize the recycling of scrap steel through large-scale trade-ins of old equipment and consumer goods like vehicles and appliances. On the other hand, it stimulates demand for new and more sustainable goods, providing a market for excess steel produced by industry. A group of Chinese experts estimates that this initiative could generate over 1 trillion yuan (approximately $140 billion) in market demand while encouraging sustainable transformation across various sectors.
Synergistically Addressing Overcapacity and Decarbonization
When considered together, the Special Action Plan and the Trade-in Program form a complementary system in which they theoretically tie the steel industry’s upstream and downstream processes. 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 decarbonization.
In the upstream, the Trade-in Program seeks to ensure the availability of scrap steel from recycled and dismantled vehicles and other consumer goods. Supported by strong policy measures, this program 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.
In the downstream, the Trade-in Program can stimulate demand for steel products through large-scale equipment upgrades and consumer goods trade-ins. By creating new demand for steel, particularly in green sectors such as electric vehicles, the program can create an outlet for the surplus. Working in tandem with stricter capacity regulation and output management driven by the Special Action Plan, this demand stimulation creates opportunities for the production of more resource-efficient and lower-carbon steel, thereby helping China to address the dual challenge.
