China's electric-arc furnace (EAF) steelmakers are witnessing a significant increase in production, the fastest in over two years, driven by improved profit margins and a seasonal rise in construction demand. This development presents a rare opportunity for the lower-carbon segment of the steel industry, which continues to face challenges from oversupply and weak consumption linked to the property market.
Recent industry data indicates that the average capacity utilization among 94 independent EAF mills reached 61.2% during the week of March 27 to April 2, marking the highest level since January 2024 and the fifth consecutive week of growth. This rebound is noteworthy as EAF steel has historically struggled to gain traction in China, despite government support for cleaner production methods. The EAF process primarily utilizes scrap metal rather than iron ore and coking coal, resulting in a lower carbon footprint compared to the traditional blast furnace-basic oxygen furnace method that predominates in the country.
For Chinese steel mills, the current situation is not solely about environmental considerations; economic factors play a crucial role as well. Rising prices for finished steel and stable demand for construction materials have enabled some EAF operators to resume or increase production rates after a prolonged period of financial strain caused by high electricity costs and inconsistent scrap supply. Reports from late February highlighted that warmer weather and the resumption of construction activities typically bolster steel demand in March, while temporary production restrictions in northern blast-furnace regions have also contributed to firmer futures prices.
Despite these positive developments for EAF mills, the overall steel market in China remains challenging. Official and consultancy data indicate that crude steel production in 2025 fell to 960.1 million tonnes, a decrease of 4.4% from 2024 and the first time output has dipped below one billion tonnes since 2019. This decline reflects Beijing's managed efforts to address overcapacity, but it also highlights weaker domestic demand and the ongoing impact of the property market downturn. Forecasts suggest that steel demand may decline further in 2026, indicating that EAF mills are recovering within a contracting market rather than benefiting from a widespread industrial upturn.
This complex landscape underscores the Chinese government's push for structural changes in the steel industry. In March, the National Development and Reform Commission reiterated its commitment to curbing excess capacity in steel and other heavy industries in a systematic manner. The EAF process aligns with this policy direction due to its reliance on recycled materials and reduced dependence on imported iron ore. However, steelmakers remain primarily focused on profit margins, often reverting to production methods that best align with raw material costs and local energy prices when profitability declines.
The environmental rationale for expanding EAF production remains compelling. Reports from the previous year indicated that China aimed to increase the share of EAF steel in crude steel production to 15% by 2025 and 20% by the end of the decade, yet the actual share has stagnated around 10%. A review by the Centre for Research on Energy and Clean Air in 2025 suggested that failing to meet the 15% target could result in over 160 million tonnes of additional carbon dioxide emissions compared to a more robust transition to cleaner steelmaking. High electricity costs, unreliable scrap supplies, and financial pressures have hindered many EAF operators from advancing.
Additionally, China's steel industry faces external pressures related to trade. While domestic demand has weakened, exports surged to a record 119.02 million tonnes in 2025, reflecting a 7.5% increase from the previous year. This rise in exports has helped maintain production levels but has also led to increased international complaints regarding low-cost supplies and heightened risks of trade barriers. For EAF producers, this situation presents a dual-edged sword: strong export markets can bolster domestic steel prices and improve economic conditions for mills, yet any escalation in trade restrictions could adversely affect the entire sector, including the environmentally conscious producers that are beginning to regain their footing.
2026-04-07
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