In 2024, China's crude steel production remains above 1 billion tons, while consumption falls to 892 million tons, a year-on-year decrease of 5.4%. Therefore, even if steel demand declines, overcapacity still exists. Although both production and consumption may have peaked, carbon intensity remains relatively high due to the dominance of the coal-dependent blast furnace-converter (BF-BOF) production process. At the company level, factors such as green steel premiums and international tariffs are putting pressure on profit margins, which may hinder low-carbon investment, cause financial losses or even more serious challenges, and ultimately slow down the industry's transition to a low-carbon future.
To advance China's carbon peak and carbon neutrality goals, China has introduced a series of policies to strengthen the construction of a carbon dual control system. The government has also launched the "Special Action Plan for Energy Conservation and Carbon Reduction in the Steel Industry", setting clear goals for 2025, such as improving energy efficiency, increasing the use of scrap steel, and increasing the proportion of electric furnace steelmaking. During the 2025 Two Sessions, the National Development and Reform Commission listed "continuously regulating crude steel production, promoting capacity reduction and structural adjustment" as the key tasks of the 2025 National Economic and Social Development Plan. In addition, China has explicitly supported hydrogen metallurgy and announced a detailed implementation plan to promote the construction of upstream and downstream demonstration projects in the "green electricity-green hydrogen-pure hydrogen metallurgy" value chain and promote integrated decarbonization of the steel industry.
2025 is indeed an important year, as it is the final year of China's 14th Five-Year Plan and a key year for the steel industry's decarbonization transformation, preparing for the release of the 15th Five-Year Plan. At present, steel capacity replacement is still on hold, and the steel industry has just been included in China's national emissions trading system. The steel industry is gradually getting rid of the high-carbon model and entering a new era, a low-carbon era with both opportunities and challenges.
Green hydrogen and renewable energy are decisive advantages for China's steel decarbonization
China's global leadership in green steel production, especially low-carbon hydrogen metallurgy, is due to its significant advantages in green hydrogen and renewable energy.
In the context of steel decarbonization, electric arc furnaces are important infrastructure for low-carbon steel production, while scrap steel, renewable energy and green hydrogen are key resources to help steel production get rid of coal-based emissions and achieve a comprehensive low-carbon transformation.
These elements together support two key low-carbon steel manufacturing processes: scrap-based electric arc furnaces (often referred to as "short processes" in China) and hydrogen-based electric arc furnace direct reduced iron (H₂DRI - EAF). These processes can achieve near-zero carbon emissions in steel production.
- Decarburization effect of electric arc furnace: short process and hydrogen direct reduction electric arc furnace
Replacing coal with electricity can significantly reduce emissions. One way is to melt scrap steel, eliminating the coal-intensive ironmaking process. Another is to use hydrogen instead of coal to extract oxygen from iron ore. Emissions fall further if the electricity needed for these processes comes from renewable energy.
Although the Chinese government is implementing policies to guide the steel industry in a more sustainable direction, its EAF capacity remains a relatively low proportion of domestic steel companies.
According to Global Energy Monitor (GEM), China's EAF capacity accounts for about 14% of total steel capacity by January 2024, far below the global average of 31%. In addition, China's EAF capacity utilization rate is relatively low, resulting in EAF steel production accounting for only about 10%, compared to the global average of 28.6%. At the time of writing, China is suspending its steel capacity replacement plan, and the details of the future development of EAF are unclear. However, with the official establishment of the Electric Arc Furnace Steelmaking Branch of the China Iron and Steel Association, EAF is likely to play a greater role in China's low-carbon steel development.
- Resources, production capacity and development of scrap steel, green hydrogen and renewable energy
China still has great potential in scrap steel utilization. In 2023, China consumed about 214 million tons of scrap steel, but only about 30% was used for mini-process steelmaking, with limited decarbonization benefits. In terms of resource distribution and supply and demand dynamics, China's scrap steel is close to a balanced state. However, differences in resource supply and demand between regions have led to the cross-regional flow of scrap steel, increased logistics costs, and to some extent hindered the rapid development of mini-process steelmaking.
In terms of policy, China is supporting the efficient and high-quality use of scrap steel resources, expanding imports of recycled steel, and striving to achieve the goal of 300 million tons of scrap steel use by the end of 2025.
On the other hand, green hydrogen and renewable energy have unique competitive advantages. China's abundant wind and solar resources provide a solid foundation for the growing renewable energy industry, which in turn supports the production of green hydrogen through electrolysis. China currently leads the world in both renewable energy capacity and hydrogen electrolysis installations. Unlike scrap steel, renewable energy and hydrogen production can be scaled up domestically without relying on external markets.
As production expands, the production cost and price of green hydrogen are expected to become more competitive. In addition, both industries benefit from strong policy support. The recently issued "Implementation Plan for Accelerating the Industrial Application of Clean and Low-Carbon Hydrogen Energy" encourages the development of an integrated value chain of "green electricity-green hydrogen-pure hydrogen metallurgy". This initiative not only accelerates the development of green hydrogen and renewable energy, but also strengthens the industrial connection between hydrogen, renewable energy and steel. For example, Zhangjuan Technology Co., Ltd., a subsidiary of Hesteel Group, has begun to move in this direction, using Zhangjiakou's abundant renewable energy resources to build the Yantongshan distributed photovoltaic project. The company also plans to develop green power direct supply, green hydrogen production and green energy storage projects this year.
This marks an important step for Hesteel towards achieving near-zero carbon hydrogen metallurgy using completely green hydrogen, and also enhances China's confidence in the scale-up and commercialization of low-carbon hydrogen metallurgy.
Suggestion
1. Make the electric arc furnace the core of steel decarbonization
Both mini-process steelmaking and hydrogen direct reduction electric arc furnace steelmaking processes rely on electric arc furnaces. Guiding the phased retirement of blast furnace-converter or replacing blast furnace-converter capacity with electric arc furnaces is a practical solution to resolve overcapacity, optimize China's steel production structure and promote carbon emission reduction. Although capacity replacement work is currently suspended, we expect future policies to support electric arc furnaces. We also recommend that steel companies increase the utilization rate of electric arc furnaces to promote production growth and help China achieve its goal of electric arc furnace steel accounting for 15% of total steel production by the end of 2025.
2. Improve the economic feasibility of short processes
One of the main challenges facing the development of mini-steel in China is the limited supply and high cost of scrap steel. As global attention to mini-steel continues to increase, scrap steel may become a strategic resource whose price is affected by fluctuations in supply and demand. In order to improve the economic viability and international competitiveness of mini-steel production in China, we need to establish an efficient scrap steel recycling system, optimize the allocation of scrap steel resources across the country, and reduce logistics costs. We also hope that new policies can provide subsidies or incentives for mini-steel and scrap steel, so that Chinese companies can reduce carbon emissions while maintaining competitiveness.
3. Actively deploy hydrogen direct reduction iron furnaces to maintain China's global leading position in green steel
Green hydrogen and renewable energy are key advantages for China to achieve decarbonization of steel production. Given China's vast territory, it is crucial to effectively integrate green hydrogen and renewable energy with downstream steel companies.
Improving the efficiency of hydrogen storage and transportation, improving the efficiency of renewable energy storage and grid transmission, and establishing long-term green power purchase agreements between renewable energy companies and steel companies will strengthen their connection with the steel industry, maximize carbon emission reduction benefits, and support steel companies to gradually develop diversified innovative low-carbon development models such as "renewable energy + energy storage + green hydrogen".
At the same time, we suggest supporting qualified regions and steel companies to develop green electricity self-production and green hydrogen projects, create an integrated industrial chain demonstration zone of "green electricity-green hydrogen-pure hydrogen metallurgy", and promote regional low-carbon development.
Ensure a stable supply of high-grade iron ore and accelerate the utilization of low-grade ore.
High-grade iron ore (about 67% iron content) is required to produce hydrogen-reduced iron, but China's domestic supply of such ore is limited and it relies heavily on imports. Given the current geopolitical uncertainties and supply chain risks, China must ensure a stable supply of iron ore and diversify its import sources. In addition, investment in low-grade ore utilization technology will reduce dependence on imports, improve resource efficiency, and enhance production autonomy.
In summary, both the mini-process and high-pressure direct-fired electric arc furnace low-carbon steelmaking methods can achieve significant decarbonization. China has provided varying degrees of incentives and guidance for the four key elements supporting these processes - electric arc furnaces, scrap steel, green hydrogen and renewable energy. Given China's current policy and market environment, electric arc furnaces will become the mainstream method for decarbonizing steel in the future. At the same time, the advantages of green hydrogen and renewable energy in resource availability and policy support make them safer and more cost-effective green steel production solutions than the mini-process in the long run. This puts China in a leading position in the global green steel race.