China’s Steel Industry Restructuring: Compensation Scheme for Plant Closures
China's steel industry, the largest in the world, is facing a significant transformation as the government pushes for the closure of outdated and inefficient steel plants. The government’s overarching aim is to reduce overcapacity, which has plagued the industry for years, and move towards more environmentally sustainable and energy-efficient production methods.
In response to this push, the China Iron and Steel Association (CISA) has started consultations with steelmakers in early 2025 to devise a compensation scheme for the plants that will be closed. These consultations are expected to be a key part of the government’s larger plan to restructure the sector, cut production, and tackle issues of overcapacity.
Government's Push for Reducing Steel Production
In March 2025, the National Commission for Development and Reform (NDRC) announced that China would restructure its steel industry as part of efforts to reduce carbon emissions and address environmental concerns. While specific details on the restructuring plan were sparse, sources speculated that it might involve significant cuts in production, possibly by 50 million metric tons annually.
The Chinese government has been heavily focused on curbing overproduction and improving the environmental footprint of industries like steel manufacturing, which has been a significant contributor to air pollution and carbon emissions. This restructuring is part of China’s larger green transition strategy, aligning with international environmental goals such as the Paris Agreement.
Decline in Chinese Steel Production
The restructuring plan coincides with a reduction in China’s steel production in recent years. In the first two months of 2025, China’s steel output declined by 1.5% compared to the same period in 2024, totaling 166.3 million metric tons. This drop in production came as a surprise to many analysts, who had anticipated an increase, fueled by higher exports.
Moreover, in 2024, China produced 1.005 billion metric tons of steel, representing a 1.7% year-on-year reduction. This marked the lowest steel production level in the last five years, and it was widely speculated that 2024 would be the final year in which China’s steel production exceeds the 1 billion metric ton threshold. This downward trend points to the gradual shift towards more sustainable and higher-quality production methods, in line with the government’s plans.
Details of the Compensation Scheme
As part of the restructuring efforts, the government is encouraging the closure of older, inefficient mills that do not meet the latest standards in production efficiency and environmental regulations. The closure of these plants is expected to impact a significant portion of China’s steelmaking capacity, particularly older blast furnaces and mills that use outdated technologies.
To ease the transition for companies affected by these closures, CISA has initiated consultations with Chinese steelmakers to design a compensation scheme. However, the specifics of this scheme remain unclear, and questions around the following points still need to be addressed:
1. Who will fund the compensation?
There is no clear answer as to whether the government will fund the compensation or if steel companies themselves will bear some of the costs. The scale of the compensation package and who will be responsible for it will likely be a point of contention during ongoing discussions.
2. How will compensation be structured?
It is unclear how the compensation will be distributed, whether it will be a one-time payout or structured as a long-term incentive or investment to help companies modernize their operations. The government and steelmakers will need to balance the financial feasibility of such a scheme with the sector's sustainability goals.
3. Timeline and Implementation:
The timing of plant closures and the full rollout of the compensation scheme are still being debated. Given the complex nature of the restructuring, it may take several years to fully implement the closures and compensation measures.
Impact on China’s Steelmakers
China’s steel industry has long faced challenges related to overcapacity, especially as the government has cracked down on pollution and inefficiency. The closures of outdated plants will reduce the total steelmaking capacity, but in turn, the industry will focus more on high-end, advanced steel products that can help reduce energy consumption and emissions.
1. Industry Consolidation:
The restructuring is expected to lead to industry consolidation, with smaller, less competitive players likely being absorbed by larger companies or forced to shut down. This could lead to a more concentrated market with fewer, larger steelmakers that can meet new environmental and production efficiency standards.
2. Economic Impacts:
The closure of steel plants will have significant short-term economic consequences. Many workers in these outdated mills may lose their jobs, and some regions that depend heavily on steel production could experience economic downturns. The compensation scheme aims to mitigate these effects, but some communities may still face challenges.
3. Focus on Innovation:
Steelmakers in China will be pushed to adopt new, more energy-efficient production methods. The government has already been encouraging investment in newer technologies such as electric arc furnaces (EAF) that use scrap steel rather than virgin iron ore, which is a more energy-efficient process. These innovations will likely be accelerated as the restructuring plan progresses.
4. Global Supply Chain Impact:
China is the world’s largest producer of steel, and any significant reduction in output will impact global steel markets. This could lead to a tightening of steel supplies, particularly in regions that rely on China as a key supplier. Prices may rise, especially for high-quality steel products, while global competitors may look to ramp up production to take advantage of potential supply shortages.
Shift in Steel Demand
The shift towards more environmentally sustainable production practices comes at a time when global demand for steel remains strong, particularly in sectors such as construction, automotive, and infrastructure. The focus of China’s steelmakers will likely shift toward producing higher-quality steel for these sectors, which can demand premium pricing.
Conclusion of the Transition
The closure of outdated steel plants in China and the compensation scheme associated with this restructuring represents a bold step towards cleaner, more sustainable steel production. While the immediate future of the steel industry in China may involve challenges related to workforce reductions and plant closures, the long-term impact is expected to improve the sector’s overall efficiency and environmental footprint.
This shift could also create significant ripple effects in global steel markets, particularly if production cuts are large enough to influence global steel prices. The industry and governments alike will need to navigate these challenges carefully to ensure a smooth transition to a more sustainable steel economy.
Key Takeaways:
• The China Iron and Steel Association (CISA) is working with steelmakers to create a compensation scheme for the closure of outdated steel mills.
• The National Commission for Development and Reform (NDRC) has announced plans to reduce steel production by 50 million metric tons annually as part of a broader effort to cut overcapacity and meet environmental goals.
• China’s steel production fell by 1.5% in the first two months of 2025, totaling 166.3 million metric tons, with a 1.7% decline in total production in 2024.
• The shift towards closing older plants will likely lead to industry consolidation, with larger, more efficient mills taking over the market share of smaller, outdated mills.
• The compensation scheme will provide financial support to companies affected by closures, although details about its structure and funding remain unclear.
• Global steel markets may face supply shortages and higher prices as China reduces production, especially if the country cuts production by over 50 million metric tons.
• The restructuring plan is part of China’s broader green transition, aimed at improving energy efficiency and reducing emissions in the steel industry.
