China's Strategic Shift in Steel Exports and Its Global Implications

China’s steel sector is undergoing a pivotal transformation in 2025, driven by overcapacity reduction policies, export diversification, and global trade tensions. For investors, this presents a complex landscape of opportunities and risks. The Chinese government has outlined a plan to cut steel production from 2025 to 2026, aiming to address a 250 million-tonne overcapacity crisis by 2035 [1]. While production cuts are expected to stabilize domestic markets, the sector’s reliance on exports—surging 9.2% in H1 2025 to 58.147 million metric tons—highlights its vulnerability to geopolitical and economic shifts [2].

Overcapacity and Policy-Driven Adjustments

China’s steel industry has long grappled with overproduction, exacerbated by state subsidies ten times higher than OECD countries, which distort global competition [3]. The 3.1% decline in crude steel production in the first seven months of 2025 signals early success in curbing excess supply [1]. However, the real estate sector’s 8% projected drop in steel consumption underscores the need for export-driven strategies [6]. Beijing’s push to redirect exports to Southeast Asia and the Middle East has mitigated some pressures, but anti-dumping measures and tariffs from Vietnam and the EU remain significant hurdles [2].

Export Diversification and Technological Upgrades

To counter trade barriers, Chinese steelmakers are pivoting to high-value-added products and semi-finished steel exports. Semi-finished exports surged 320% year-on-year in the first seven months of 2025, with Indonesia, Turkey, and Saudi Arabia as key markets [1]. This shift aligns with the “Made in China 2025” initiative, which emphasizes technological innovation. For instance, Shougang Group has implemented AI-powered systems, boosting production efficiency by 20% and reducing defects by 35% [4]. Such upgrades position Chinese firms to compete in high-tech manufacturing, though profitability remains fragile, with an average net profit margin of 0.71% in 2024 [4].

Geopolitical and Financial Risks

The U.S. and EU have escalated tariffs on Chinese steel, creating volatility in trade dynamics. A 2025 tariff rollback provided temporary relief but underscored the sector’s exposure to protectionist policies [4]. For major players like Baowu Steel Group, the path forward includes partnerships with global firms (e.g., BHP) to develop low-carbon technologies, such as hydrogen-based steelmaking [2]. However, Baowu’s credit rating downgrade to B2 in April 2025 reflects lingering financial uncertainties, despite a 7.4% rise in first-half 2025 net profits [3].

Investment Viability and Long-Term Outlook

Investors must weigh China’s strategic investments in green steel against systemic risks. While electric arc furnace (EAF) production is projected to grow, it remains a small fraction of total output, with decarbonization progress lagging [5]. The OECD warns that planned capacity expansions in China and India could exacerbate global overcapacity, further depressing prices and profitability [6]. Yet, firms prioritizing operational efficiency and high-value products—such as Baowu’s focus on specialty steel—may outperform peers in the long term [2].

Conclusion

China’s steel sector stands at a crossroads, balancing overcapacity reduction, export diversification, and decarbonization. While policy-driven adjustments and technological upgrades offer hope for long-term resilience, investors must remain cautious about geopolitical risks, subsidy dependencies, and the slow transition to sustainable practices. For those willing to navigate these challenges, the sector’s strategic repositioning could yield opportunities in high-tech and green steel markets.

Source:
[1] Document shows China wants to reduce steel production and prune overcapacity [https://energynews.oedigital.com/mining/2025/08/28/document-shows-china-wants-to-reduce-steel-production-and-prune-overcapacity]
[2] China's Steel Exports Surge 9.2% in H1 2025 [https://discoveryalert.com.au/news/chinas-steel-export-h1-2025-analysis-market-impact/]
[3] OECD Steel Outlook 2025 [https://www.oecd.org/en/publications/2025/05/oecd-steel-outlook-2025_bf2b6109.html]
[4] Chinese companies embrace AI-driven industrial upgrades [https://english.news.cn/20250705/ab92c1e3a735410a988cc0d9f06f335b/c.html]
[5] China's steel industry at critical crossroads of overcapacity [https://www.woodmac.com/press-releases/china-steel-overcapacity/]
[6] China's Steel Overcapacity Crisis: A Global Industry Crossroads [https://www.ainvest.com/news/china-steel-overcapacity-crisis-global-industry-crossroads-2507/]