- Excess capacity to pressure prices, profitability, low-CO2 investments
- Planned BF-BOF capacity additions expected to far exceed closures
The OECD has cautioned that a sharp increase in global steel overcapacity could undermine the industry’s transition to low-emission production pathways. In its latest report, ‘Navigating the Steel Transition amid Global Excess Capacity’, the organisation estimates that worldwide excess steelmaking capacity will expand from 601 million tonnes (mnt) in 2024 to 721 mnt by 2027, creating conditions that may weaken producers’ ability to finance decarbonisation projects.
According to the report, persistent oversupply continues to weigh on steel prices and profitability, while also increasing financing costs for steelmakers. Government support mechanisms that keep inefficient and emission-intensive facilities operational can delay the retirement of older assets and slow the pace of industry restructuring.
BF-BOF additions to exceed capacity retirements
The report highlights that approximately 25.8 mnt of blast furnace-basic oxygen furnace (BF-BOF) capacity is expected to be retired globally between 2025 and 2027. China alone accounts for around 15.6 mnt of these closures, representing nearly 60% of the total.
However, these reductions are expected to be more than offset by the addition of 62.1 mnt of new BF-BOF capacity, largely concentrated in China and India. The OECD observed that only 6.9 mnt of the identified BOF closures are linked to replacement with electric arc furnace (EAF) facilities at the same sites. This suggests that market pressures and weak economics, rather than decarbonisation-driven restructuring, remain the primary reason for many plant closures.
The report also pointed to growing Chinese investment overseas, particularly in Southeast Asia, as a factor that could prolong the use of carbon-intensive steelmaking routes. Around 60 mnt of planned capacity expansion in ASEAN countries is reportedly associated with Chinese investment.
Expansion of DRI-EAF not always driven by emissions goals
While lower-emission steelmaking routes are expanding, the OECD stressed that capacity additions do not automatically translate into decarbonisation progress.
Between 2025 and 2027, around 30.7 mnt of DRI-EAF capacity and 61.7 mnt of scrap-based EAF capacity are expected to come online globally. However, many of these projects are being driven by factors such as raw material availability, energy economics and anticipated demand growth rather than explicit climate objectives.
Of the DRI-EAF projects scheduled for commissioning by 2027, the OECD estimates that only about 19 mnt can be directly linked to low-emission steelmaking ambitions. The organisation emphasised that DRI production cannot be considered inherently low-carbon, particularly when coal-based technologies are used. Even natural gas-based DRI projects will require a clear pathway toward hydrogen adoption to achieve near-zero-emission steel production.
Investment challenges delaying low-emission projects
The report noted that weak market conditions are already affecting the rollout of cleaner steelmaking technologies. As of Q2 2025, low-emission steel projects representing 15.5 mnt of announced capacity had either been postponed or suspended.
Projects involving BF-BOF to EAF conversions recorded the highest delay rate at 27%, followed by hydrogen-based DRI projects at 18% and carbon capture, utilisation and storage (CCUS) initiatives at 15%.
The OECD explained that lower profitability reduces the availability of internal funding, while earnings volatility and higher financing costs make it more difficult for companies to secure external capital for large-scale decarbonisation investments.
Lower steel prices widen green steel premium
The organisation also highlighted the impact of declining conventional steel prices on the competitiveness of low-emission steel products.
Using an estimated production cost gap of around $160/t between conventional BF-BOF steel and green hydrogen-based DRI-EAF steel in Europe, the OECD found that the relative green steel premium increased from 17% to 25% between 2022 and 2025 as hot rolled coil prices declined.
Similar trends were observed in other major steel-producing regions, with the implied premium rising from 16% to 22% in China and from 15% to 22% in Japan. According to the OECD, this dynamic can discourage buyers from adopting low-emission steel products even when the underlying production cost differential remains unchanged.
Capacity reduction key to successful transition
The OECD concluded that decarbonisation policies must be accompanied by effective capacity rationalisation to avoid creating a new wave of oversupply through subsidised investments in cleaner technologies.
The report recommends combining transition support measures with mandatory capacity closures, stricter replacement requirements and the removal of market-distorting subsidies in regions contributing to global oversupply.It added that carbon-related market access measures may help safeguard investments in cleaner steelmaking, although subsidised low-emission imports could still pose competitive challenges.
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