News Room - Steel Industry

As we near the end of 2025, China’s enormous steel sector stands at a critical juncture. As the world’s largest producer, accounting for more than half of global steel output, China’s ability to decarbonize this sector will determine not only whether it meets its 2060 net zero target goal, but also whether the larger global steel industry can reach net zero by mid-century.

Yet despite China’s 2060 net zero target and its most recent climate commitments, targeting a 7- 10% fall from peak emissions by 2035, the transition to lower-carbon steelmaking, including replacing coal as an iron-reducing agent and shifting from high-carbon blast furnaces/basic oxygen furnaces (BF-BOF) toward electric arc furnaces (EAF) powered by renewable energy, is falling short.

In 2022, China’s Ministry of Industry and Information Technology (MIIT) announced that by 2025, 15% of steel output should come from EAFs, up from 9%. However, with less than two months to go in 2025, that target looks out of reach. According to the think tank Centre for Research on Energy & Clean Air, EAF’s share of steel output in the first half of 2025 stands at 10%, significantly below the end-year target. This is not surprising given EAF utilization rates have declined over the past five years from 61% to 49%, compared with a rise in BF-BOF utilization rates from 80% to 90% over the same timeframe.

Three structural challenges explain China’s slow EAF uptake

First, to remain cost competitive relative to BF-BOFs, EAFs depend on cheap and reliable power. However, Chinese steel industrial electricity tariffs often exceed those of other industrial consumers. In addition, provinces with abundant renewables face grid bottlenecks, meaning that low-carbon electricity is not consistently available at scale.

Second, scrap supply for EAFs is inconsistent. China’s scrap recycling ecosystem remains fragmented, and while volumes are rising, the logistics and collection systems are uneven across regions. At the same time, EAF steelmakers compete with BF-BOF steelmakers for limited scrap supplies. Without a steady feedstock of scrap, EAF operators face both input shortages and price volatility.

Finally, broad steel overcapacity severely limits incentives to decarbonize. China’s steel sector remains oversupplied with capacity exceeding 1.1 billion tons against weaker domestic demand. Given BF-BOF steelmaking is more cost competitive to EAF steelmaking, industrial overcapacity encourages low-cost, high-emission BF-BOF steel production over lower-emission EAF steel production.

Emerging Foundations for Green Steel

Despite these headwinds, the broader enabling environment for greener steel may be shifting. China’s renewable energy build-out has surpassed expectations, reaching the national 2030 target seven years early, and power-market reforms, direct PPAs, and renewable consumption mandates may gradually improve the availability of low-carbon electricity to EAFs. China has also become the world leader in hydrogen production, which is a key replacement for coke as a reducing agent in the green steelmaking process. Also, major state-owned producers such as Baowu, HBIS, and Ansteel have launched hydrogen-direct reduction iron (H₂-DRI) pilot projects, indicative of corporate interests to scale up production of green steel. There are also signs of early demand pull, as automotive and real-estate companies begin procuring low-carbon steel, even if volumes remain small. At the policy level, carbon accounting requirements, green finance frameworks, and the inclusion of steel in China’s emissions trading scheme foreshadow a regulatory environment in which high-emission steel production may become disadvantageous over time.

Finally, and perhaps most significantly, Chinese policymakers understand that steel decarbonization cannot exist in isolation from broader steel capacity rationalization. The recently released China Steel Industry Growth Plan (2025–2026) is indicative of this, and reframes decarbonization within a broader push for structural reform to address overcapacity, low product-mix competitiveness, input price volatility, aging assets, and international trade and carbon barriers. This recognition is not limited to Chinese policy makers; Malaysia’s government has also issued a National Steel Roadmap that recognizes the importance of tackling greening steel as part of a larger context of industry renewal.

However, any good plan will become moot if it cannot be financed, and some believe that China’s growing transition finance market is well-placed to support industrial decarbonization, and there is merit to this view: China has excelled at channeling finance to green sectors such as renewable energy, EVs, and battery manufacturing. Yet for non-green hard-to-abate sectors such as steel, which require industrial transformation, the practical role of transition finance is still developing. National standards for transition finance are still forthcoming, and most activity to date has occurred through provincial pilots. For example, Hebei, China’s largest steel province, has issued the most developed guidelines, calling for steel companies to prepare verified transition plans, for third-party evaluators to assess credibility, and for banks to provide differentiated lending based on compliance. However, these guidelines are at a draft stage and lack teeth.

In the absence of binding guidance, the actual volumes of labelled “transition finance” flowing specifically into green steel is tiny; Chinese steelmakers represent only around 0.1% of total Chinese green loans and green bonds issuances. This reflects a broader reality, that with respect to the legacy asset-heavy steel sector, financing its industrial transition will unlikely occur solely through climate-focused financial instruments, but rather through an all- encompassing industrial financing approach involving a variety stakeholders and financing tools, such as policy banks, central bank refinancing windows, provincial subsidies, and public-private investment platforms. Albeit with some important differences, this all-encompassing model has broadly underpinned the scale-up of other heavy industries in China such as renewable energy and electric vehicles.

Thus, China’s ability to accelerate green steel production will depend on whether elements such as capacity rationalization, power-market reform, hydrogen deployment, credible transition plans, demand-side commitments, and financing support begin to align. None alone is sufficient; each reinforces the others. With early indications of China’s upcoming 15^th Five Year Plan showing increased focus on upgrading traditional industries, the next five years look to be pivotal in shifting China’s steel sector to a low-carbon pathway.