- New carbon regulations will increase production costs
- Stricter capacity swaps will limit long-term supply
Mysteel Global: In 2026, stricter supply-side policies and rules relating to carbon reduction announced by China’s central government will require the country’s steel sector to be more conscientious in observing the new regulations.
Although in the short-term, the impact of these on market prices should be limited, new rules governing the “swapping” of old upstream capacity for new, for example, are seen as reducing steel availability in the longer term. Similarly, those aimed at shrinking the industry’s carbon footprint will raise production costs for all mills, with larger, well-funded steelmakers being rewarded with stronger profitability over time, Mysteel argues in a recent analysis report.
In March 2025, China officially included three new industries — cement, aluminium, and steel — into its national carbon emission trading scheme (ETS), the country’s national carbon market. The ETS, launched in July 2021, is part of China’s broader strategy to meet its dual goals of carbon peak by 2030 and carbon neutrality by 2060, Mysteel Global notes.
This year marks the first year for the newly-added industries to comply with the ETS regulations, meaning that the carbon allowances allocated to enterprises should be sufficient to meet their production needs. Only a few steelmakers, for example, will have the need to buy extra allowances. So any rise in their production costs should be minimal and the need to offset these in higher finished steel prices similarly small, the report noted.
But in the longer term, as the ETS scheme takes hold and the regulations are strengthened, the proportion of paid carbon allowances will increase over time, raising carbon costs and making this an important factor affecting steel production expenses. This would inevitably raise finished steel production costs and provide firmer support for steel prices from the cost side, the analysis points out.
In addition, as carbon costs will account for a larger proportion in steel prices, steelmakers that play leading roles in ‘green’ transformation and adopt advanced production techniques will enjoy higher profitability from steel sales, the report highlighted. On the other hand, mills lacking the funds to modernise their works to meet carbon-reduction goals or to purchase carbon credits will face a tougher future.
Similarly, though more recently, on 18 May, China’s Ministry of Industry and Information Technology issued a revised version of its steel ‘capacity swap’ guidelines, introducing stricter replacement requirements, more targeted policy incentives, and stronger oversight mechanisms.
Under the scheme launched over a decade ago, steel mills seeking to introduce new iron- or steelmaking capacity are required to phase out old facilities of at least the same productive capacity in operation at the time — either capacity that the mill already owns or capacity it has “purchased” from other steelmakers.
Under the new rules announced last week, the nationwide replacement ratio for both ironmaking and steelmaking capacity must now be no less than 1.5:1, while the ratio for projects involving mergers and acquisitions has been raised to no less than 1.25:1.
The guidelines also introduce a two-year transition period for capacity replacements between different companies. After the transition period, capacity transfers will only be allowed through substantive mergers and acquisitions.
Mysteel’s report suggests that the new steel capacity swap rules focus more on preventing the industry from adding more capacity instead of forcing enterprises to cut current output. As a result, any substantive reduction in steel output will still take several years and won’t influence steel prices much in the near term, it argues.
But in the years ahead, the policy would accelerate the elimination of outdated steel capacity, effectively cutting steel supply and promoting the structural upgrade of finished steel products. This would provide stronger support to finished steel prices from the supply side, the report noted.
Note: This article has been written in accordance with a content exchange agreement between Mysteel Global and BigMint.
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