China's Steel Decarbonization: A New Era of EAF Expansion and Green Steel Opportunities

China's steel industry, the world's largest, is undergoing a seismic shift as it aligns with global decarbonization goals. By 2030, the country aims to transform its carbon-intensive blast furnace-basic oxygen furnace (BF-BOF) processes into a low-carbon future dominated by electric arc furnaces (EAFs) and hydrogen-based direct reduced iron (H2-DRI) technologies. This transition not only addresses domestic climate targets but also positions China as a potential leader in the global green steel market. For investors, the stakes are high, with both risks and opportunities emerging from policy-driven innovation, renewable energy integration, and supply chain reconfiguration.

The EAF Revolution: Policy Targets and Market Realities

China's EAF steel production currently accounts for 9–10% of total output, far below the 15% target for 2025 and 20% by 2030. While this growth trajectory is ambitious, it faces significant hurdles. The primary constraint is scrap steel availability. In 2024, China consumed 214 million tons of scrap, but only 30% was used in EAFs. To meet the 2025 target, the government is subsidizing scrap collection and proposing restrictions on scrap exports. However, even with these measures, the domestic scrap supply remains insufficient to sustain long-term EAF expansion.

The cost differential between EAF and BF-BOF production further complicates matters. EAF steel costs $625 per ton, compared to $575 for BF-BOF, creating a pricing gap that could persist until carbon pricing reaches $60 per ton—a threshold not yet achieved in China's nascent Emissions Trading Scheme (ETS). Despite these challenges, the National Development and Reform Commission (NDRC) has prioritized EAF development, closing inefficient facilities and incentivizing energy-efficient technologies. By 2025, 48 million tons of new EAF capacity are under construction, though 21 million tons of outdated capacity will be decommissioned, resulting in a net gain of 27 million tons.

Clean Energy Integration: A Dual Challenge

EAFs are inherently more compatible with renewable energy than BF-BOF processes, but China's grid remains heavily reliant on coal. Only 30–40% of steel production has access to green energy, creating a bottleneck for full decarbonization. The government's 14th Five-Year Plan aims to expand wind and solar capacity to 1,310 gigawatts by 2024, but grid connectivity and curtailment issues persist. For EAFs to operate on 100% renewable electricity, significant infrastructure upgrades and long-term power purchase agreements (PPAs) are required—areas where policy execution remains fragmented.

Hydrogen-based steelmaking offers a complementary solution. Projects like HBIS Group's H2-DRI-EAF plant in Zhangjiakou demonstrate the potential of green hydrogen to replace coal in iron production. However, hydrogen costs remain high at $2.4/kg by 2030, and scaling up electrolyser capacity to 2.5 gigawatts by 2024 will require sustained investment. The government's push for green hydrogen, coupled with automakers like BMW and Great Wall Motor securing low-carbon steel supply chains, is creating a virtuous cycle of demand and innovation.

Investment Risks and Rewards

The transition to green steel in China is not without risks. Policy uncertainty remains a key concern, as the 15th Five-Year Plan's emphasis on EAF expansion and carbon pricing is still evolving. Delays in implementing subsidies for EAF construction or green hydrogen could stall progress. Additionally, financial constraints in the steel sector—exacerbated by rising debt and liquidity challenges—may deter private investment.

Yet the opportunities are equally compelling. Strategic partnerships between Chinese steelmakers and international automakers (e.g., Baosteel and BMW) are driving demand for low-carbon steel, creating a market with global implications. Investors should also consider renewable energy firms supplying power to EAFs and hydrogen infrastructure providers, as these sectors are critical to the green steel value chain.

Global Implications and Strategic Recommendations

China's decarbonization efforts could redefine the global green steel market. By 2030, the country's EAF capacity could account for 20% of its steel output, potentially displacing imports of low-carbon steel from Europe and North America. For investors, this signals a need to prioritize companies with strong domestic partnerships and access to renewable energy.

1. Target EAF Technology Providers: Firms like Baosteel and HBIS Group are leading the charge in EAF expansion. Their ability to secure PPAs and integrate H2-DRI will be critical.
2. Invest in Hydrogen Infrastructure: Electrolyser manufacturers and green hydrogen producers stand to benefit from China's $4.5 billion green hydrogen projects.
3. Monitor Carbon Pricing Trends: As China's ETS expands, carbon prices could rise to $100/ton by 2030, incentivizing low-carbon production.

Conclusion

China's steel industry is at a crossroads. While the path to decarbonization is fraught with challenges—scrap shortages, grid limitations, and policy delays—the government's commitment to EAFs and hydrogen-based steelmaking is unwavering. For investors, the key lies in balancing risk with strategic foresight. By aligning with companies at the forefront of EAF innovation and clean energy integration, investors can capitalize on a market poised to shape the future of global steel. The green steel revolution is not just a domestic endeavor for China; it's a global opportunity waiting to be unlocked.