China's 2026 steel capacity rules: tighter replacement ratios and support for green steelmaking to accelerate decarbonization

China's Ministry of Industry and Information Technology released revised steel capacity replacement rules in May 2026, ending a nearly two-year suspension of new approvals. The new rules require 1.5 tonnes of existing capacity to be retired for every 1 tonne of new capacity, up from 1.25 tonnes. They also exclude long-idled facilities from replacement calculations and restrict the trading of capacity quotas across regions and companies. The policy provides clearer support for electric arc furnace (EAF) and hydrogen-based steelmaking technologies. The steel sector accounts for about 16% of China's national carbon emissions. While earlier capacity replacement policies were effective at modernizing facilities, they did not drive deep decarbonization because most new capacity continued to rely on coal-based blast furnace routes. The 2026 revision aims to address this by making capacity reductions more credible and creating favorable conditions for lower-carbon production methods. Large-scale hydrogen metallurgy projects have moved beyond pilot stages, with Baowu's demonstration project providing operational experience. The changes come as China's steel industry faces slower demand growth, weak profitability, and rising trade frictions linked to record-high exports. The revised rules reflect a shift from managing capacity for industrial upgrade to using it as a tool for structural decarbonization. Whether the policy can accelerate the green transition will depend on enforcement and the pace at which companies adopt EAF and hydrogen-based routes.