China’s industry ministry has revealed new rules on replacing steel production capacity. The changes, which end a nearly two-year suspension of new approvals, represent the most significant overhaul of the policy since 2021.
National steel policy has, since 2014, sought to control overall capacity and encourage upgrades by requiring the retirement of older capacity before new facilities can be built.
The revised measures, announced on 18 May, mean even more capacity must be retired before new capacity is added. They also tighten eligibility requirements and place new restrictions on the use of dormant capacity.
The changes come at a pivotal moment for China’s steel industry. After a decade of restructuring and upgrading, the sector is facing slower demand growth, weak profitability and mounting pressure to reduce emissions. Steelmaking remains responsible for around 16% of national carbon emissions and is one of the toughest industries to decarbonise.
The latest reforms, therefore, raise a broader question: can a policy originally designed to manage capacity also help accelerate the steel sector’s low-carbon transition?
A decade of steel policy evolution
China’s capacity replacement has evolved over the past decade from a mechanism to manage industrial capacity into a broader policy tool supporting industrial upgrade, environmental improvement, and, increasingly, decarbonisation.
The mechanism emerged from two major policy priorities that took shape in 2013. That is, efforts to tackle severe industrial overcapacity and a growing national campaign to improve air quality.
When the first steel capacity replacement rules were introduced, in 2014, they required an amount of existing capacity – ideally older and more polluting assets – to be shuttered before new capacity could be built. In key air-pollution control regions, the ratio was 1.25 tonnes retired for every 1 tonne added. Everywhere else it was 1:1.
Over the following decade, the policy evolved alongside China’s environmental and climate ambitions. The 2017 revision, for the first time, introduced preferential treatment for replacements with electric arc furnace (EAF) steelmaking. These are less polluting and less carbon-intensive than the blast furnace-basic oxygen furnace (BF-BOF) route, which today still accounts for around 90% of Chinese steel production.
Following China’s 2020 pledge to peak its carbon emissions before 2030 and be carbon neutral before 2060, the 2021 revision incorporated more explicit climate objectives. It further tightened replacement requirements in an expanded group of air-pollution control regions. It also included even stronger support for EAF steelmaking and emerging low-carbon technologies, such as hydrogen-based steelmaking.
The latest 2026 revision goes further still. It generally requires 1.5 tonnes of existing capacity to be retired before a tonne of new capacity can proceed, up from 1.25. It excludes the counting of long-idled capacity as a replaceable asset; restricts the transfer and trading of capacity quotas across regions and companies; and provides more explicit support for EAF and hydrogen-based steelmaking. These changes reflect growing concerns about the quality and credibility of capacity reduction, as well as the need to create space for lower-carbon steelmaking.
The evolution of approved projects under the capacity replacement mechanism illustrates both the policy’s achievements and its limitations. Between 2017 and 2024, approved replacement plans included approximately 400 million tonnes of new blast furnace capacity, 318 million tonnes of new BOF capacity and 128 million tonnes of new EAF capacity. Although the share of EAF projects increased over time, BF-BOF projects continued to dominate approved capacity additions. This shows the continued dominance of coal-based production.
Approval volumes declined significantly after peaking in 2017-2019, reflecting weaker steel demand, tighter regulatory controls and the completion of a major cycle of capacity renewal. The suspension of new capacity replacement approvals in August 2024 further contributed to the exceptionally low approval volumes recorded that year.
At the same time, the composition of new projects gradually shifted. Following China’s carbon peaking and neutrality pledges, EAF projects accounted for a growing share of approved steelmaking capacity, while a small number of hydrogen-based and other non-blast-furnace technologies also began to emerge.
Yet the policy’s contribution to decarbonisation remained more limited than its role in modernising production assets. This distinction, between industrial upgrading and decarbonisation, lies at the heart of the debate over the capacity replacement policy.
Upgrades did not equal decarbonisation
Why didn’t the gradual greening of the capacity replacement policy translate into deep emissions reductions? The impact was constrained by the structure of China’s steel industry and the incentives facing policymakers and producers.
Most new capacity launched since the policy’s inception has continued to rely on the blast furnace-BOF route. Although newer facilities are generally more energy efficient and less polluting than what they replace, they still depend heavily on coal. Replacing an older blast furnace with a newer one can reduce emissions intensity, but it does little to reduce dependence on coal.
A second challenge lies in the relationship between capacity and output. Some replacement projects retired facilities that had been underused, or even idle for years. Newer plants were often more productive than the assets they replaced. Therefore nominal capacity reductions did not always translate into lower production or emissions.
The policy also reflected competing priorities among stakeholders. While the central government increasingly viewed capacity replacement as a tool for pollution control and decarbonisation, local governments often prioritised investment and employment. Meanwhile, steel companies focused on maintaining competitiveness. These incentives were aligned around industrial upgrading but were less consistent in permanently retiring capacity or accelerating the deployment of low-carbon technologies.
As a result, capacity replacement proved more effective at modernising facilities than did driving structural decarbonisation.
Why were the rules tightened in 2026?
The 2026 revision, issued after a nearly two-year suspension of new approvals, reflects both lessons from a decade of policy implementation and the changing realities facing China’s steel industry.
After a decade of restructuring and upgrading, the sector is entering a period of weakening demand, thin margins, and rising trade frictions linked to record-high steel exports. At the same time, pressure to reduce carbon emissions continues to grow as China advances its climate commitments.
In this new environment, policymakers are increasingly concerned not only with how capacity is upgraded, but also with whether existing capacity can exit the system in a credible and orderly way.
One priority for the policy’s revision was to improve the credibility of capacity reduction. As well as upping the standard capacity replacement ratio to 1:1.5, the new rules also exclude long-idled facilities from replacement calculations; it has become harder for companies to use inactive assets to secure approvals.
The revised framework also tightens restrictions on the buying and selling of retirement quotas between regions and companies. This is to prevent replacement quotas becoming detached from actual production activity, and to ensure capacity exits are genuine rather than merely administrative.
At the same time, the 2026 policy provides more explicit support for lower-carbon technologies, offering clearer guidance for hydrogen-based steelmaking technologies. This reflects recent industrial experience: over the past three years, large-scale hydrogen metallurgy projects have moved beyond the pilot stage and begun generating operational experience. These include Baowu’s demonstration project in Zhanjiang, Guangdong province, and HBIS’s Zhangxuan project in Hebei province.
It remains too early to assess how far the new rules will reshape investment decisions. While the revised policy sends a clearer signal of support for deploying lower-carbon technologies, new investment in ironmaking and steelmaking remains subdued amid weak market conditions.
Nearly a month after the revised rules came into effect, no entirely new capacity replacement plans have been announced. The only one so far was issued by Shandong’s provincial industry authority. It is related to a project that had already completed public consultation before approvals were suspended in 2024 and is now progressing through the final stages of the administrative process.
Likewise, new project activity remains limited. Apart from a new EAF project in Yunnan province, which began construction in March, few new ironmaking or steelmaking production projects have broken ground so far in 2026.
Can new rules accelerate steel decarbonisation?
The revised capacity replacement framework could help create more favourable conditions for steel decarbonisation.
The tightened capacity-reduction requirements and restricted eligibility of idle assets make it more difficult for high-carbon capacity to remain in the system indefinitely. Clearer support for EAF and hydrogen-based steelmaking also sends a stronger signal about the direction of future investment.
Yet capacity policy alone is unlikely to drive a rapid transition. The steel sector continues to face weak demand, low profitability and uncertainty over future investment returns. Low-carbon technologies remain more expensive than conventional options, while demand for green steel is still limited.
This helps explain why progress has been slower than policymakers had initially hoped. Despite years of policy support, EAF steel’s share of crude steel production has remained around 10% in recent years, well below the 15% target set for 2025. The challenge is no longer simply technological, but increasingly one of economic viability and scale.
China has already introduced hydrogen development strategies and policies to encourage its use in industries, including steelmaking. Although large-scale deployment remains in its early stages, the projects led by Baowu and HBIS are in operation, while a growing number of pilot and demonstration projects are exploring different hydrogen-based steelmaking pathways.
Ultimately, capacity replacement is likely to play a supporting rather than decisive role in the sector’s transition. The expansion of China’s national carbon market, the development of green steel standards and certification systems, and new efforts to green industrial supply chains may prove just as important in creating demand for green steel.
In 2025, China’s State-owned Assets Supervision and Administration Commission (SASAC) issued guidelines encouraging central-state-owned enterprises to build green and low-carbon supply chains. Such green procurement can help reduce the commercial risks associated with low-carbon investments by providing more stable demand signals for suppliers, including steel producers, as Yang Li of the Institute for Global Decarbonization Progress, a Beijing-based think-tank, recently observed.
Viewed in this context, the 2026 reforms are best understood not as a standalone solution, but as part of a broader shift in China’s steel transition. Research estimates that around 350 million tonnes of blast furnace capacity may need to be retired by 2030 to support the sector’s decarbonisation pathway. Whether that transition can be achieved will depend not only on stricter capacity management but also on the development of technologies, markets and policy incentives that enable lower-carbon steelmaking to scale.
