The iron and steel industry is the pillar industry of China's industry, accounting for about 5% of China's GDP.The steel industry in China is characterized by its broad scope, high industrial interconnectedness, and significant consumption driving force, playing a vital role in economic development, social progress, and employment stability. China's steel industry also holds substantial global influence, contributing to about half of the world's total steel production. However, the current Chinese steel industry predominantly relies on long processes with high carbon emission intensity, with crude steel production capacity accounting for around 90%. Faced with the dual pressures of carbon neutrality commitments and overcapacity reduction, the Chinese steel industry is confronted with severe challenges.

Presently, the carbon emissions from the Chinese steel industry represent approximately 15% of the country's total carbon emissions, making it the highest carbon-emitting manufacturing sector. Globally, an estimated 1.8 billion tons of steel are produced and utilized annually, with nearly 50% of this production occurring in mainland China. Consequently, the carbon emissions from the Chinese steel industry constitute around 50% of the total global carbon emissions from the steel industry. According to McKinsey's calculations, to limit the global average temperature increase to no more than 1.5°C by the end of this century, the Chinese steel industry must reduce emissions by nearly 100% by 2050. This ambitious target poses significant challenges, necessitating a collaborative effort across various interconnected areas such as steel consumption, production, technology, and supply to advance the transition to zero carbon emissions.

Carbon Neutral Transition Path for China's Steel Industry

Considering the overall costs, technological maturity, and resource availability, we believe that reducing demand, improving energy efficiency, and accelerating the adoption of technologies such as steel scrap recycling, carbon capture, utilization, and storage (CCUS), and hydrogen direct reduction ironmaking (H2-DRI-EAF) are crucial strategies for achieving carbon neutrality in the Chinese steel industry. Based on this, we have developed emission reduction pathways for the Chinese steel industry from 2020 to 2030 and 2050 (refer to Figure 1).

Demand curtailment in the business-as-usual scenario (A) is projected to contribute about 35% of CO2 reductions by 2050. Influences on apparent demand for steel come from three sources: new demand, replacement demand and inventory changes. As urbanization and construction slow down (see Figure 2), new demand for steel will be lower than in previous years. In addition, the improvement of material efficiency in the construction industry (e.g., the use of high-strength steel), and the breakthrough of new alternative materials will also further reduce the replacement demand for steel. With the further deepening of domestic supply-side reforms to de-stock, the reduction of high inventories of steel companies will also bring about a decline in apparent demand. Looking ahead, if the steel industry is included in China's carbon pricing system (specifically including charging, taxing, and emissions trading on carbon emissions from steel companies), it will likely drive steel demand down further. At the same time, with the European Union Emissions Trading System (EU ETS) and other international carbon pricing system to accelerate the progress of China's steel exports will face greater challenges, but also to the "low-carbon steel and iron products" will bring new market opportunities. Coupled with domestic efforts to control the benign development of iron and steel production capacity, China's iron and steel production capacity will maintain domestic demand, supplemented by exports. It is worth noting that the current analysis of emission reduction pathways is largely dependent on demand changes, which means that the pace of the carbon neutral transition will accelerate (or slow down) dramatically depending on demand. If companies are pursuing sustained green growth, they should make the best possible preparations for a carbon-neutral transition.

Enhancing energy efficiency (B) is a prudent measure with mature technology, offering a potential reduction of approximately 180 million tons of carbon dioxide emissions by 2050. It is projected to contribute to a 15% reduction in carbon dioxide emissions across the entire industry by 2050. The transformation towards energy efficiency is driven by three main factors:

Firstly, capacity upgrades and replacements. It is estimated that by 2030, there is a potential of around 20 million tons of carbon emissions reduction from the natural upgrade of small-scale blast furnaces and converters (annual capacity <100 million tons) to large-scale blast furnaces and converters (annual capacity >200 million tons), covering a total capacity of approximately 250 million tons.

Secondly, operational excellence. Steel enterprises consistently strive for operational excellence by continuously refining standards, enhancing standardized operational levels, decomposing key indicators, linking operational capabilities with performance, and improving operational processes. Over the past decade, the steel industry has achieved a 7.5% increase in energy efficiency. Benchmarking against the best energy efficiency levels in the industry, it is anticipated that energy efficiency improvements could reach 10%-15% over the next 30 years.

Thirdly, optimization of raw materials. Companies prioritize the use of high-quality raw materials in categories such as iron ore, coke, and flux due to carbon emissions reduction, thereby reducing the carbon intensity of long-process steel production.

Electric arc furnace + scrap steel (C) is a more prioritized, mature, and flexible approach. Sixty-six percent of carbon emissions in the steel manufacturing process come from the long-process (BF-BOF) blast furnace ironmaking process, while utilizing scrap steel allows for production using the lower carbon emissions electric arc furnace short process (EAF) and is more economically viable through carbon reduction with green electricity. With the expected increase in domestic scrap steel supply, it is projected that China's proportion of electric arc furnace steel will increase from the current approximately 10% to 15% by 2025, and the capacity for long-process scrap steel utilization may further improve. It is forecasted that by 2050, replacing long-process steelmaking with electric arc furnace + scrap steel could contribute to a 20% cumulative reduction in carbon dioxide emissions in the steel industry.