China’s steel sector invests USD 100 billion in coal

China currently produces more than 1 billion tons of crude steel annually, which is more than half of the world’s steel production. The dominance of the coal-based blast furnaces-basic oxygen furnace (BF–BOF) method in the Chinese steel sector, along with its large scale, presents significant challenges for decarbonisation efforts. Coal is burned to strip oxygen from the iron ore and this process generates substantial carbon emissions. The low carbon transition of the Chinese steel sector is essential for China’s carbon neutrality target by 2060, as well as for decarbonising the global steel sector. Deep decarbonisation would require substantial investments in zero-emission steelmaking technologies, as well as the early retirement of carbon-intensive facilities yet the sector’s persistent overcapacity and thin profitability is complicating the transition to cleaner steelmaking methods.

The Center for Research on Energy and Clean Air (CREA)’s latest briefing on the steel sector in China reveals that China’s crude steel output has declined since 2021 due to output control by the government and the decline in downstream demand. However, new investments in iron and steelmaking capacity have so far not adjusted to the new reality. The expansion of the Chinese steel industry demonstrates a close correlation with the nation’s economic development. Excessive investments have persistently inundated the industry, transforming the customary cyclical and short-term overcapacity situation into a protracted and persistent overcapacity issue, referred to as structural overcapacity.

The consequences of this overcapacity significantly impact the sector’s profitability because steel firms find it challenging to operate sustainably at levels below approximately 80% capacity utilisation.

There is an urgent need to align investments in new production capacity in the steel sector with the goal of peaking and reducing CO2 emissions before 2025.

1 August 2023

Xinyi Shen, Researcher, CREA; Lauri Myllyvirta, Lead Analyst, CREA

China