Analytics group S&P Global says: “China’s steel sector faces another year of sluggish domestic demand and narrowing options to ease the pain via exports.” At the same time, steel spreads are stabilizing in China in a sign that the industry is “gradually adjusting to downcycle conditions.” Chinese steelmakers have the compulsion to use the export window to dispose of the considerable steel surplus caused by high production though in decline since 2020 when it peaked at 1.065 billion tonnes and disappointing domestic demand. But exports are to become increasingly challenging in the face of rising protectionism.

Is there finally a hope that Beijing will be earnest in restructuring its steel industry in a way that will achieve the twin objectives of aligning capacity and production to principally domestic requirements and the national carbon emission targets. Significantly for the first time, China’s National Development and Reform Commission has recently recommended to the National People’s Congress in Beijing the restructuring of the steel industry through output reduction that should result in domestic steel prices improvement, end big volume export compulsion and eliminate trade frictions.

The Commission has said in a report: “We will introduce policies and measures for resolving structural problems in key industries… through industrial regulation and upgrading.” Even while experts say that China will be required to go for a “radical” shedding in capacity and production to improve the sector’s profitability, Beijing is yet to give any specifics on cuts. Whatever that may be, 2024 might have been the last year that China produced a billion tonne of steel.

The fact remains that whatever steel capacity China has shed since 2016 is just not enough either to strike a balance between global demand and supply and comply with its own steel related carbon emission reduction target. Besides phasing out the ageing, low productive and polluting mills, Beijing has mandated no fresh capacity building, except for capacity replacement by way of modernisation. In this context, the Centre for Research on Energy and Clean Air (CREA) wants China to phase out at least 200m tonne coal-based blast furnace capacity over a five-year period. That is about 15% of the country’s steelmaking capacity or equal to total capacity of the European Union.

Low domestic demand plus urgency to curb CO2 emission have left Beijing with no alternative to framing policies to bring capacity in alignment with market requirements. Restrictions at home and also pressure from a number of countries in Asia and Africa for investment in industry and infrastructure have led Chinese steelmakers to progressively step up cross-border investments. Such Chinese investment remains focused in ASEAN and some other Asian countries. According to one report, China alone accounts for over 60% of global “total cross-border investment in new steelmaking capacity taking place around the world.”

In spite of surpluses leading China in particular to be an aggressive seller of steel in the world market, new steel capacity is coming up in ASEAN, the Middle East and India. India, which remains the world’s second largest producer with production up smartly by 6.3% to 149.6m tonnes, is a unique case of fast rising domestic consumption driving new capacity creation by leading steel groups, including Tata Steel, JSW, ArcelorMittal Nippon Steel India and government owned SAIL. Indian steel capacity advanced from 109.137m tonnes in 2019-20 to 144.299m tonnes in 2023-24 and capacity utilization during this period rose to a healthy 81%, which is marginally higher than 80 % ideal use recommended by Organisation for Economic Cooperation and Development (OECD).

In sync with capacity growth, Indian steel use rose to 136.291m tonnes in 2023-24 from 100.171m tonnes in 2019-20. The country’s steel demand, according to industry officials, should continue to grow at a conservative 6% CAGR through 2026-27. Capacity across the OECD area saw a fall as the gains in North America and Turkiye were more than offset by declines in the EU and Japan. Steel is responsible for CO2 emissions between 7% and 9% and this makes it imperative to develop a global response to the environmental challenge posed by one industry, according to Dr Edwin Basson, director general of World Steel Association.

A major source of steel related pollution is production through blast furnace-basic oxygen furnace (BF-BOF) route, which has a share of around 70%of global steel output. Pollution emerging from this route is to a large extent due to the use of metallurgical coal from which coke is made as a reductant in BF. As it would be the case, despite its CO2 intensity, most of the new investments proposed in Asia will be in BF-BOF plants. WSA informs the other regions where new steelmaking capacity is emerging, investments are, however, in relatively environment friendly electric arc furnaces (EAFs).

WSA says: “Of the new investments announced over the next three years, more than half are now in the relatively low emitting EAF plants, while 42% is in BF-BOF plants.” From exploring ways to replace metallurgical coal by hydrogen to migrating to electricity derived from renewable sources moving away from burning thermal coal, the steel industry is seeing a green transition. (IPA Service)