China’s steel industry, a cornerstone of its economy and a major contributor to global carbon emissions, is at a critical juncture following the government’s suspension of new steel production projects. This pause, aimed at controlling overcapacity, raises questions about the nation’s ability to balance industrial growth with its ambitious decarbonization goals. As policies like capacity replacement are reassessed, the future of green technologies such as electric arc furnaces hangs in the balance, highlighting the challenges and opportunities of transitioning one of China’s most carbon-intensive sectors toward sustainability.

China’s ongoing journey toward environmental sustainability has hit a critical juncture with the recent suspension of new steel production projects. This pause underscores the dual challenge of controlling overcapacity while advancing decarbonization—a cornerstone of the nation’s environmental goals.

On August 23, 2023, China’s Ministry of Industry and Information Technology (MIIT) announced a halt to new steelmaking projects, pending a review of the capacity replacement policy. This policy, first introduced in 2014, aimed to phase out older, high-emission facilities and cap overcapacity in sectors like steel, cement, and aluminum. However, despite these efforts, crude steel production has continued to climb, fueling concerns about its environmental impact. The steel industry alone contributes approximately 15% of China’s carbon emissions, making its transformation a priority for the nation’s green transition.

While the suspension may temporarily curb overcapacity, it risks impeding essential decarbonization initiatives, such as adopting electric arc furnaces (EAFs). EAFs, which produce steel with significantly lower carbon emissions than traditional methods, represent a critical pathway for the industry to meet China’s climate goals. The pause raises questions about how China can balance industrial growth with its environmental commitments.

Hebei: A Case Study in Steel Industry Modernisation

Hebei province, China’s steel powerhouse, offers valuable insights into the impact of the capacity replacement policy and the implications of its suspension. Known as the heart of China’s steel industry, Hebei accounted for 21% of the nation’s crude steel output in 2023, producing 210 million tonnes. Driven by stringent national policies, the province has been at the forefront of efforts to consolidate and modernize steel production.

Over the past decade, Hebei’s steel industry has undergone significant restructuring. The number of steel companies in the province has plummeted from 123 in 2011 to just 39 today, with the top 10 producers now accounting for 70% of its production capacity. Modernization efforts have also led to impressive environmental achievements. By March 2024, 37 of Hebei’s steel companies held A-grade ecological ratings and 38 facilities met national green standards, positioning the province as a leader in sustainable steel production.

Yet, despite these advances, Hebei’s crude steel output has continued to rise, exposing the limitations of the capacity replacement policy. While outdated facilities have been retired and replaced with more efficient ones, the introduction of new technologies has paradoxically enabled increased production without formally exceeding capacity limits. Furthermore, some retired facilities were already idle, meaning their closure did little to offset the operational output of new projects.

Structural Challenges and Policy Gaps

The disconnect between intended capacity reductions and actual output highlights structural challenges within China’s steel sector. Factors such as inconsistent data reporting, flawed local appraisals, and weak enforcement of penalties have undermined the effectiveness of the capacity replacement policy. For example, some steel plants have circumvented regulations by overstating the retirement of idle facilities or misrepresenting their capacity replacement ratios.

Moreover, technological upgrades, while reducing emissions per tonne of steel, have not fully offset the environmental cost of increased production. This has complicated efforts to align policy goals with the realities of industry dynamics.

Decarbonisation at a Crossroads

The suspension of the capacity replacement policy leaves China’s steel industry at a critical crossroads. On the one hand, it provides an opportunity to reassess and strengthen regulations to better control overcapacity and emissions. On the other, it risks delaying the adoption of low-carbon technologies like EAFs, which are essential for the sector’s decarbonization.

The case of Hebei highlights the delicate balance required to achieve both industrial growth and environmental sustainability. As China reviews its policies, the focus must shift from merely replacing capacity to fundamentally transforming how steel is produced. This will involve not only stricter enforcement of regulations but also greater investment in green technologies and clearer coordination across governmental departments.

Ultimately, the steel industry’s ability to adapt will serve as a litmus test for China’s broader green transition. As the nation works to meet its ambitious climate targets, its success in decarbonizing one of its most carbon-intensive industries will be critical. The suspension of steel projects signals a moment of reflection—and a chance to refine strategies to ensure a greener, more sustainable future.

Impact of Suspending Capacity Replacement on China’s Steel Industry

The suspension of capacity replacement policies in China’s steel sector marks a pivotal moment in the industry’s evolution. While it aims to curb overcapacity in the short term, the broader consequences—especially for decarbonization efforts—could be significant. The steel industry is grappling with a sluggish market, falling profits, and rising pressure to transition to greener production methods, making the suspension both timely and fraught with challenges.

Short-Term Gains, Long-Term Concerns

China’s steel market has faced declining prices for four consecutive years, with profits now approaching zero, according to Bloomberg New Energy Finance. Persisting capacity growth risks exacerbating oversupply and intensifying competition. By halting capacity replacement, the government can temporarily slow the industry’s expansion, providing relief from these pressures.

However, this move also stalls crucial decarbonization efforts, particularly the adoption of electric arc furnaces (EAFs). Unlike traditional blast furnaces, which rely on coal to smelt iron ore, EAFs use scrap steel and electricity, significantly lowering carbon emissions. Policies introduced since 2022 have sought to increase EAF adoption, aiming for 15% of total production by 2025, up from 10% in 2023. Yet, the suspension disrupts this momentum by preventing businesses from replacing outdated facilities with EAFs.

Despite this, the short-term impact on emissions may be minimal since most new capacity still relies on the blast furnace process. The real concern lies in the long-term implications of meeting China’s climate goals.

Steel’s Decarbonisation: A Pressing Priority

The urgency of decarbonizing the steel industry cannot be overstated. Steel production accounts for a substantial share of China’s carbon emissions, and the sector’s transformation is vital for achieving national climate commitments. However, current market conditions and industry inertia present significant hurdles.

Falling demand, driven by a sluggish real-estate market, has pushed many steel companies to pivot toward higher-value products like precision machinery components and automotive materials. While this diversification improves profitability, it does not necessarily align with the low-carbon transition required for the industry. The lack of market demand for green steel, coupled with its higher production costs, further dampens companies’ willingness to invest in sustainable technologies.

Although government policies have set ambitious decarbonization targets, the transition remains slow. Companies need clearer incentives and market signals to accelerate their adoption of green practices.

Policy Reform: A Path Forward

The suspension of capacity replacement policies should not be prolonged. Instead, the government must introduce updated measures that prioritize the low-carbon transformation of the steel industry. Key recommendations include:

Halting Approvals for New Blast Furnaces: Existing blast furnace capacity is sufficient to meet domestic demand, and further approvals risk creating stranded assets and undermining decarbonization efforts.

Facilitating Green Technology Adoption: Reducing barriers to implementing low-carbon smelting technologies, such as EAFs, would encourage faster uptake across the sector.

Integrating Steel into the National Carbon Market: A draft work plan released by the Ministry of Ecology and Environment in September aims to bring steel under carbon market controls by the end of 2024. This framework will push companies to replace high-carbon equipment and comply with pollution and emission reduction goals.

Historically, pauses in capacity replacement policies have led to challenges. For instance, a previous suspension lasting 18 months left some companies struggling to meet ultra-low emission retrofit requirements. A similar outcome could occur now unless the government provides a clear and actionable roadmap for the transition.

Balancing Economic and Environmental Goals

China’s steel industry stands at a crossroads. Balancing the need for economic stability with environmental sustainability is no easy task. However, a prolonged pause in capacity replacement risks slowing the sector’s decarbonization and sending mixed signals to industry players. By implementing forward-looking policies and creating a market environment that rewards green innovation, China can ensure that its steel industry contributes meaningfully to its broader climate goals.

The stakes are high, and the window for action is narrow. If handled correctly, this moment of transition could propel China’s steel sector into a new era of sustainable growth, setting a global benchmark for balancing industrial progress with environmental responsibility.