Steel Trap

Decarbonization of the industry is important to achieve China’s dual carbon peaking and neutrality goals. Since 2021, China has put forward a series of policies encouraging reductions in energy consumption and emissions, and the adoption of new technology and more efficient processes in steelmaking.　

According to 2022 figures from the World Steel Association, China’s steel sector emits about 1.8 billion tons of CO2, around 15 percent of overall emissions.　

In August 2024, China suspended its policy for steel capacity swaps, meaning that to control total production capacity, if a new steel plant is built, an old one with the same or more capacity must be closed. The policy started in 2015 in a bid to address overcapacity. Even though the policy was not designed for carbon reduction, it had an effect due to more efficient plants with modern technology coming online.　

The suspension is expected to be followed by new policies to better guide the industry’s green transition, as there is more demand for low-carbon and zero-carbon steel products due to China’s emissions reduction goals.　

Steel companies still face challenges in balancing revenue and production, particularly at a time when the entire industry is facing a downturn. More efforts need to be made in boosting demand for low-carbon steel and green financing to help steel companies reduce the costs of transition, interviewed analysts said.

In an annual steel demand report published in December 2024, the China Metallurgical Industry Planning and Research Institute (MPI) predicted that domestic demand for steel will drop by 4.4 percent and 1.5 percent in 2024 and 2025, to 863 million tons and 850 million tons respectively.

　

In 2020, demand reached 995 million tons, but then decreased year-on-year. The same year, output of crude steel surpassed 1 billion tons for the first time. The Ministry of Industry and Information Technology (MIIT) proposed to reduce crude steel production around China’s “dual carbon” goals – to peak carbon emissions by 2030 and reach carbon neutrality by 2060. Annual production capacity, currently standing at 1.3 to 1.4 billion tons, has caused a glut, meaning there is room to cut output.　

Cutting steel production will reduce carbon emissions. According to the Energy Foundation, the steel industry is expected to halve emissions by 2035. Decreased demand should account for one-third of this cut, the biggest proportion. Meanwhile, there are concerns over how the capacity swap policy can be used to promote a transformation in steelmaking processes, which is crucial to achieve the dual carbon goals.　

“When the capacity replacement policy was introduced in 2015, its primary goal was not carbon reduction. However, through replacing old equipment for new, transformation and upgrading, and optimizing production capacity, the policy has contributed to carbon reduction in the industry,” Qian Wentao, senior program officer of the Industry Program at the Energy Foundation, told NewsChina.　

Lin Zixin, another senior program officer at the Energy Foundation’s Industry Program, told NewsChina that the steel industry is paying close attention to whether the government will issue stricter policies, and how this will encourage the industry to upgrade. If the capacity swap policy fails to improve the production process and the industry relies on using old blast furnace technology when it builds new plants, it will lock-in carbon emissions for 15-20 years. This will make it challenging to achieve the carbon reduction goals.　

According to the Energy Foundation, in addition to demand reductions, improving steelmaking will greatly decrease emissions, potentially by up to 30 percent before 2030.　

Steel is made in two main ways. Traditional steelmaking uses a process known as blast furnace-basic oxygen furnace (BF-BOF), which involves smelting pig iron in a blast furnace, then adding scrap iron. Coke serves as both a reducing agent and the primary heat source in the blast furnace.　

World Steel Association data shows that in 2023, producing one ton of crude steel in this way emitted 2.32 tons of CO2, while steelmaking accounts for 7-9 percent of global CO2 emissions.　

The second is the electric arc furnace (EAF) process, which does not use coke. It produces new steel mostly from recycled scrap, pig iron or direct reduced iron, also known as sponge iron, using electric current as a heating agent.

While in some countries electric arc furnaces now produce most steel, in China, the proportion of EAF steel is relatively low, at around 10 percent, according to Qian Wentao. Between 2001 and 2022, the proportion of EAF steel in other countries rose from 37 percent to 50 percent. In 2022, the MIIT released a guideline ordering the proportion of EAF steel in total crude steel production to rise to 15 percent by 2025.　

Qian noted raising the proportion of EAF steel that can achieve significant emissions reductions. “The capacity replacement policy could be a crucial tool,” he said.　

On January 15, standards for methods to calculate the carbon footprint of steel products were announced by the MIIT and other agencies. On February 28, the Electric Arc Furnace Steel Branch of the China Iron and Steel Association (CISA) was set up. Luo Tiejun, vice executive director, stressed at the launch ceremony that leveraging the full potential of EAF steel is “essential” to effectively addressing challenges of “a downward cycle in demand and intensified constraints on decarbonization and low-carbon development,” according to the English edition of CISA’s website.　

Changes in the market are already forcing steel companies to make lower-emitting products.　

The MPI predicted construction industry demand for steel in 2024 would be 458 million tons, accounting for over half of total industrial demand for steel. But according to data released in January by the China Iron and Steel Association, the construction industry’s demand for steel actually dropped to 50 percent in 2024, while steel demand in manufacturing rose to the same level.　

The decline in real estate has had a marked effect on overall steel consumption. There are high hopes that increased demand in new energy fields will offset the decline.　

“Due to the ‘dual carbon’ goals, demand has increased in the new energy vehicle industry. Other emerging industries with potential include electricity investment, wind power and solar energy,” Lin said. “Steel companies, particularly the ones that invested a lot in terms of energy conservation and carbon reduction, are trying to diversify, hoping to find high value-added niche markets and optimize their product portfolio.”

Zhao Mingnan, chief engineer of the China Automotive Carbon Digital Technology Center, said that automotive steel boasts higher value-added than construction steel, especially as new energy cars are heavier than combustion vehicles, which increases the risk if they are involved in collisions. “To enhance safety, some key components of the vehicle, such as the battery tray, need to be made from high-strength steel or even ultra-high-strength steel,” Zhao said.　

At the same time, China’s automakers are facing pressure to reduce their carbon footprint due to green trade barriers such as the EU’s Carbon Border Adjustment Mechanism (CBAM), a policy that charges fees for imported goods based on the amount of pollution created in producing them. It multiplies the amount of steel used in a vehicle by the corresponding carbon emission factor to calculate the tax amount that should be paid.　

The CBAM, which will come into force in 2026, is currently in an interim phase.　

Zhao noted that by improving energy efficiency in traditional steelmaking processes, steel companies can save energy and reduce carbon emissions, but it has a limited effect on lowering the carbon footprint of a single car. Automakers are pinning their hopes on steelmakers lowering emissions by adopting hydrogen-based metallurgy and EAF steelmaking.　

In mid-December 2024, HBIS Group, a major steelmaker in China, put into use the world’s first hydrogen-based production line for automotive steel sheets. Based in Zhangjiakou, Hebei Province, it has an annual capacity of 1.5 million tons, and collaborates with Sinopec in the green hydrogen energy chain. HBIS is working with foreign and domestic automakers, including BMW and Mercedes-Benz from Germany and Great Wall Motors from China. Compared to the BF-BOF process, this project achieves a carbon reduction rate of over 70 percent. The ultimate goal is a near-zero carbon emission EAF steel-making process.　

A person close to HBIS Group told NewsChina that HBIS invested in hydrogen-based metallurgy because it has deep insight into the forefront of market demand. But it remains challenging for some steel companies to see the changes in market needs, making it difficult for them to make corresponding investments.　

Shi Huien from the China Steel Development Research Institute, a government-backed institution that researches the domestic metallurgical industry, told NewsChina that some steel customers, especially automakers, set carbon-reduction goals every year for low-carbon or zero-carbon products. Some steelmakers plan to replace all their basic oxygen furnaces with electric arc furnaces because automakers are demanding low-carbon steel and threatening they will turn to other suppliers.

“The main obstacle to the widespread use of low-carbon automotive steel is the price. Automakers want the price to be the same as or only slightly higher than conventional steel. However, transforming steel companies requires investment, which inevitably drives up prices and creates a green premium. Meanwhile, automakers are under great pressure to reduce costs,” Zhao said.　

“Steel doesn’t account for too much in the cost of automaking, around 5,000 yuan (US$685) per vehicle. But due to the current stiff competition among automakers, especially ones with a big output, increasing the per vehicle cost by 5 yuan (US$0.7) requires approval from the board of directors at some companies,” Zhao said.　

Replacing blast furnaces with electric arc and hydrogen technology comes at a significant cost.　

A climate action report by China Baowu Steel Group, one of the world’s biggest steelmakers, said it invested 1.89 billion yuan (US$259m) in hydrogen-based furnace technology in 2021, which produces 1 million tons of steel, just 2 percent of its annual output. The cost to transform all its plants would run to 94.5 billion yuan (US$13b), based on these figures.　

The cost of green hydrogen is another barrier. According to the Energy Research Institute, hydrogen produced via green electricity and water electrolysis costs about twice that of hydrogen produced using fossil fuels.　

The cost of scrap steel, electricity and particularly green electricity all contribute to the high cost of using EAF technology to produce steel, which is why China is still dominated by blast furnace technology.　

“In some countries, EAF steel accounts for 30-60 percent of total production. In 2022, when the MIIT released the guideline to boost the steel industry, EAF steel cost 200-300 yuan (US$27-41) more per ton,” a man from a private steel company said on condition of anonymity.　

Shi Huien said that as coke and coal prices have declined it costs even less to make blast furnace steel, while the end product of both processes costs about the same. This means the value of low-carbon production is not reflected in the pricing.　

Zhao believes that if a steel company can lower costs and reduce emissions, it will certainly gain more market share. But there is a disconnect between producers and customers. Steel companies want their green products to get a higher green premium while their customers hope for the opposite. “The tug of war will continue,” Zhao said.　

Steel companies could prioritize stable demand over higher prices, according to industry experts.　

“Producing low-carbon products no doubt increases cost, particularly in the initial stages of transformation, which needs customers to share the pressure and cost of carbon reduction. But few downstream companies are able to bear the green premium. The actions of big companies that are pioneers in purchasing low-carbon steel need to be expanded,” Lin Zixin said.　

An added complication is the lack of domestic and international certification standards, which makes it harder for companies to identify the amount of carbon reduction levels of steel products. “This uncertainty in turn makes it difficult for steel companies to make investment decisions for the transition,” Lin said.　

Besides market recognition, other tools including carbon markets and green financing could be used to help steel companies absorb and decrease the cost of the transition.　

In December 2024, the Institute of Public and Environmental Affairs, a Beijing-based non-profit organization on environment research, published a report on carbon reduction along the automobile and steel and aluminum supply chain. It recommended a range of measures to increase the costs of high-carbon materials, such as taxes, and incorporating key raw materials such as steel and aluminum into the carbon emission trading market.　

The report also suggests financial institutions and investors use tools like green financing to support automobile and steel and aluminum companies to scale up advanced technologies.　

In September 2024, the Ministry of Ecology and Environment released a draft guideline that aims to incorporate the cement, steel and aluminum industries into the national carbon emission trading market. This means emissions will become part of a company’s production costs, which should drive down the cost of low-carbon steel.　

“It’s crucial for steel companies to enhance their carbon management. No matter if it’s because of inclusion in carbon market management, complying with international trade rules like the CBAM or securing downstream recognition and procurement of low-carbon steel, or to obtain green financial support, they will all need to disclose their carbon emissions,” Lin Zixin said.