Navigating the Steel Transition amid Global Excess Capacity

The global steel industry is at a crossroads, facing the two interconnected challenges of addressing excess capacity and preparing for a low-emissions future. These two challenges are mutually reinforcing. Excess capacity affects the pace at which low-emission capacity adjustments take place, reduces companies’ ability to invest in low-emission capacity and R&D and alters market price signals. Conversely, policies promoting the adoption of low-emission technologies can help steer capacity towards more sustainable production when properly designed but also may trigger new waves of excess capacity if built in a way that displaces market-based low emission production without reducing overall capacity. Drawing on recent developments in the global steel sector, this paper examines the mechanisms through which excess capacity hampers the transition to low emission technologies. It finds that persistent overcapacity depresses steel prices, squeezes profit margins, increases earnings volatility and borrowing costs, and limits the availability of internal financing for technology deployment. Excess capacity also raises the relative price premium of low-emission steel products, weakening demand signals and delaying investment decisions. At the same time, subsidisation and capacity expansion in non-market economies risk perpetuating existing distortions and creating a new generation of excess capacity in low-emission forms.