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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.
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.
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).
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:
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:
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.
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.
These policies have the potential to form an ecosystem where supply-side and demand-side measures work in tandem. If they succeed, the increase in scrap steel supply driven by the Trade-in Program will directly support the expansion of EAF capacity, which is driven by the Special Action Plan, enabling the industry to meet its decarbonization targets. Simultaneously, the demand-side stimulus from trade-ins can expand a market for surplus steel, complementing the supply-side measures outlined in the Special Action Plan, thereby helping to reduce overcapacity. But have these policies interacted to constitute a circular economy approach in practice?
During the first half of 2024, China appears to have controlled its steel output and expanded EAF steelmaking. A July report highlighted that provincial governments approved 7.1 million tons of new annual steelmaking capacity, all of which were EAF projects. This marked the first time that no new coal-based steel projects were approved on a half-year basis since 2020 when the Chinese government announced the “dual carbon goals” of peaking carbon emissions by 2030 and reaching carbon neutrality by 2060.
Additionally, China’s cumulative crude steel output during the same timeframe experienced a 1.1 percent year-on-year decline. While this figure may appear insubstantial, it marks the first extended period post-pandemic where China’s cumulative year-on-year output growth remained negative. This potentially suggests a durable shift in the steelmaking trajectory, possibly marking an end to new investments in blast furnace capacity. The synchronized movement between the cumulative year-on-year growth rate of fixed-asset investment in China’s steel sector and that of crude steel output seems to corroborate this observation (Figure 2).
However, the Ministry of Industry and Information Technology (MIIT) made a surprising announcement in August to immediately suspend all proposals to replace outdated or environmentally harmful blast furnaces with EAF. According to an industry insider, capacity replacement projects have suffered from noncompliance by local enterprises, who would in fact reactivate decommissioned capacity or fabricate capacity that did not previously exist. The MIIT decision therefore aims to provide policymakers with time to reassess the regulatory framework and close the loopholes to prevent and eradicate the noncompliant capacity replacement.
In tandem with the Special Action Plan, the Trade-in Program has played a critical role in stimulating both the supply of scrap steel and the demand for low-carbon steel products. The automobile sector shows how this circular economy framework has materialized in practice. Auto manufacturing consumes6–7 percent of China’s steel output, while steel accounts for over 70 percent of the materials used in car making. In 2024, the demand for automotive steel is projected to reach 48.4 million tons, with production growth rates of 2–3 percent for various vehicle types.
Two weeks after the program launch in March, the Ministry of Commerce and 13 other ministries rolled out specific measures to ensure its swift implementation. On the demand side, the ministries introduced a range of subsidies for new clean energy vehicles, such as battery electric vehicles, and the trade-ins of internal combustion engine vehicles. Urban bus companies received an average of 60,000 yuan per bus to upgrade to renewable energy–based buses, where funding came from the central and local governments. For consumer trade-ins, the national government allocated 150 billion yuan in special government bonds to support vehicle purchases, raising the subsidy for purchasing clean energy–based passenger vehicles to 20,000 yuan, while lowering the down payment ratio for car loans. These incentives markedly expanded consumer demand for automobiles. The sales of clean energy vehicles rose by 33.1 percent in the first half of 2024, while trade-ins accounted for 40–50 percent of daily orders at major retailers.
On the supply side, the government introduced targeted measures to enhance scrap steel supply, streamline the recycling process, and bolster the supply chain for scrap steel. Multiple ministries issued detailed guidelines on subsidy scopes and standards for vehicle scrappage and dismantling, depending on the type and age of the vehicles. Key scrap recycling projects received direct investment support from the central government, enabling enterprises to expand their operations into downstream sectors such as EAF steelmaking and the manufacturing of nonferrous metals and components.
These measures have already facilitated scrap-vehicle recovery. Within the first six months, the number of applications for scrap-vehicle recovery exceeded 680,000. Nationwide, scrap-vehicle recovery reached 3.6 million units between January and July 2024, up 37.4 percent year on year. Government support, such as subsidies and tax deductions for scrap sales, has reduced operational costs, rendering the recycling business more economically viable.
The automobile sector presents another insight into whether and how the circular economy approach could be viable in the steelmaking industry. Some actions by China’s major steelmakers provide an encouraging sign. For example, Baosteel, China’s state-owned company and the largest steelmaker in the world, holds a significant share of the domestic automotive steel market. According to the company, it has developedultra-low-carbon cold-rolled and hot-dip-galvanized products for automotive use in order to adapt to the low-carbon transition. These innovative products using scrap and EAF processes are said to reduce carbon emissions by over 60 percent, contributing to Baosteel’s decarbonization commitments, as exemplified by its 2021 roadmap to reduce steelmaking carbon emissions by 30 percent between 2020 and 2035.
Similarly, Ansteel Group, another state-owned steelmaker and a major global enterprise, has made significant strides in the production of low-carbon automaking steel. The company announced in 2024 that it has successfully achieved stable mass production of long-process automotive steel, which reduces carbon emissions by 30 percent.
The examples of Baosteel and Ansteel suggest that the circular economy has a real-world applicability in China’s steel industry even while continued commitment from both the government and industry stakeholders is essential if China’s steel sector is to successfully address its dual challenge of carbon emissions and overcapacity. Meanwhile, a key question to Western policymakers is what this development may mean for China’s prospect of becoming a competitive exporter of low-carbon steel. The answer would have a significant implication for the future of global steel trade as much as climate mitigation.
Jane Nakano is a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Claire Zhao is a former intern with the Energy Security and Climate Change Program at CSIS.
