OCDE - Navigating the Steel Transition amid Global Excess Capacity de 2026

OECD Science, Technology and Industry Policy Papers Navigating the Steel Transition amid Global Excess Capacity No. 194NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY  1

NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY © OECD 2026

OECD Science, Technology and Industry Policy Papers

Navigating the Steel Transition amid Global Excess Capacity

PUBE2  NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY

NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY © OECD 2026

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Abstract 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

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 lowemission 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.

Keywords: excess capacity, steel industry, industrial decarbonisation, low carbon, transit ion, industrial restructuring.

JEL codes: H25 ; O25; Q554  NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY

NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY © OECD 2026

Acknowledgements The study was prepared by Michele Rimini, Danhak Gu and Adrien Corneille from the OECD Steel Secretariat, under the supervision of Anthony de Carvalho, Head of the OECD Steel Unit, and Stephan Raes, Head of the OECD Structural and Industry Policy Division. This study was prepared as part of the OECD Steel Committee’s 2025 -2026 Programme of Work and Budget. The authors are grateful to the members and delegations of the OECD Steel Committee for their valuable comments and feedback on earlier drafts of the paper. Their careful review, cons tructive contributions, and continued engagement were instrumental in strengthening the an alysis and findings presented in this study.NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY  5

NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY © OECD 2026

Table of contents Disclaimer 2 Abstract 3 Acknowledgements 4 Executive summary 7 1 Introduction 9

NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY © OECD 2026

Table of contents Disclaimer 2 Abstract 3 Acknowledgements 4 Executive summary 7 1 Introduction 9 2 Excess capacity and low emission capacity developments 10 The visible impact on capacity developments 10 3 Excess capacity as a hindrance to the transition 18 The profitability channel 18 The price channel 25 4 Transition policies as levers to address excess capacity 28 Transition policy instruments and their capacity implications 28 Transition policies as levers to address excess capacity 32 References 37 Notes 44

FIGURES Figure 1. Unabated emission intensive closures and additions 11 Figure 2. Emission intensive Foreign Direct Investments 12 Figure 3. Low emission capacity developments by technology route 2025-2027 13 Figure 4. DRI developments by region 2025-2027 14 Figure 5. Ongoing and suspended low-emission projects as of Q2 2025 15 Figure 6. EAF additions by region 17 Figure 7. The profitability channel 20 Figure 8. Operating and net margins falling in 2023-24 20 Figure 9. From profitability to cash flow generation (2000–2023) 21 Figure 10. Distribution of cash flow generation, OECD vs non-OECD economies 23 Figure 11. Tighter credit conditions and lower debt exposure 23 Figure 12. Business R&D expenditure in the iron and steel sector 246  NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY

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Figure 13. Steel Hot Rolled Coils prices 2021-2025 25 Figure 14. Relative green premia across regions 27

TABLES Table 1. Estimates of the green steel premium 26 Table 2. Transition policy instruments and their capacity implications 32

BOXES

Figure 13. Steel Hot Rolled Coils prices 2021-2025 25 Figure 14. Relative green premia across regions 27

TABLES Table 1. Estimates of the green steel premium 26 Table 2. Transition policy instruments and their capacity implications 32

BOXES Box 1. Suspended low emission projects 15 Box 2. From Profitability to Investment Capacity: The Role of EBITDA, OCF, and FCF 22NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY  7

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Executive summary The global steel industry is at a crossroads, facing the two interconnected challenges of addressing excess capacity and preparing for a low-emissions future. Many companies have set emiss ion neutrality targets, in line with international agreements, and have started to invest in the build-up of low emission steelmaking capacity. The most recent data show that 19 million metric tonnes (mmt) of low-emission capacity, in its various forms, is expected to come online between 2025 and 2027. In particular for the DRI-E AF route, this represents only a fraction of the observed expansion which seems mostly driv en by structural factors rather than transition objectives. The build-up of low-emission capacity is taking place against a background of ever-increasing excess capacity, which is expected to rise from 601 mmt in 2024 to 721 mmt by 2027 . Pervasive levels of subsidisation in non-market economies and the resulting exces s capacity affect the pace at which low emission capacity adjustments take place. By keeping ineffici ent firms alive, excess capacity slows down the necessary decrease in emission-intensive assets and leads to the build-up of new emission intensive assets. In addition, excess capacity increasingly manifests through cross-border dynamics, as foreign direct investments contribute to the relocation of emissi on-intensive capacity rather than its orderly exit. It also puts projects aimed at lowering emission in existing capacity at risk and leads to the postponement

emission intensive assets. In addition, excess capacity increasingly manifests through cross-border dynamics, as foreign direct investments contribute to the relocation of emissi on-intensive capacity rather than its orderly exit. It also puts projects aimed at lowering emission in existing capacity at risk and leads to the postponement of near zero emission projects. Indeed, several announced projects, corresponding to 19% of th e total expected low-emission pipeline by 2027, were put on hold amid global excess capacity, high energy prices and regulatory uncertainty. At the same time, the continuous growth of emission-i ntensive capacities in emerging and developing economies, fuelled by foreign direct investment, hampers the achiev ement of global emission neutrality targets. Excess capacity impairs the ability of companies to conduct the necessary r esearch and development activities, invest in the deployment of low emission technologies at commercial scale, and hinders the development of markets for low emission products. It does so through its impact on prices and profitability. As excess capacity squeezes profit margins, it affects firms’ internal cash generation and raises borrowing costs. Excess capacity also increases earnings’ volatility. Indeed, OECD data shows that steel firms have experienced a moderation of their internal cash generation capacity, with cash flow and opera ting cash flow margins treading below and around 5% in 2022-23. In practice, steel firms generate e nough liquidity to maintain existing assets but have insufficient headroom for major capital or transition projects without external financing, in a context of increasing borrowing costs also due to excess capacity. By dampening steel prices, excess capacity also affects the potential demand for lo w emission steel products, as it increases relative prices. Based on cost differentials between conventional and low emission steel, the drop in steel prices between 2021 and 2025 raised the relative premium of a low emiss ion steel product by 8 percentage points (from 17% to 25%) in Europe, with similar trends in most regions of the

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Addressing excess capacity in a swift and decisive manner becomes thus an i mportant lever for accelerating the transition to cleaner production, as it can help firms rega ining the necessary headroom for investments in new technology and correct price distortions that hinder the adoption of low emission products. Policies to promote the adoption of clean technologies can play an important role in shaping capacity outcomes when properly designed, as they can create clear boundaries for what type of capacity can enter or remain in the system. But their ability to help address global excess capac ity depends on where thes e policies apply. In excess capacity economies, such policies only alleviate the pro blem if they prevent new emission-intensive buildouts and trigger the exit of inefficient plants. Likewise, it is key that policies in these economies do not encourage net expansion of capacity. In market-based economies pol icies to promote the adoption of clean technologies at the border can act as market filters, insofar as they address carbon leakage and prevent the influx of emission-intensive subsidised steel imports. Yet these filters face a growing challenge: China’s rapid state supported expansi on of low emission capacity such as EAF and H2-DRI, risks enabling producers to meet emission-related req uirements while still benefitting from significant non-market advantages. This could weaken the effectiveness of these filters, as emission/carbon pricing compliant but market distorted products could inc reasingly displace market-based low emission steel. More broadly, China’s extensive use of transitionoriented subsidies, risks triggering a new wave of excess capacity, this time in low emission form. This highlights the need for coherent international approaches that ensure transition incentives truly reduce global excess capacity rather than s imply reshaping its technological profile. The scale and potential impact of this new wave of government suppo rt to low emission capacity additions warrant deeper analysis to understand the implications for future global excess

that ensure transition incentives truly reduce global excess capacity rather than s imply reshaping its technological profile. The scale and potential impact of this new wave of government suppo rt to low emission capacity additions warrant deeper analysis to understand the implications for future global excess capacity dynamics.NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY  9

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The global steel industry is at a crossroads, facing the two interconnected challenges of addressing excess capacity and preparing for a low-emission future. Navigating these challenges requi res firms to manage their assets to shield from the negative effects of excess capacity and adjust to re gulatory changes, new opportunities and challenges emerging from the transition. At the same time, policy makers require a strong evidence base to be able to identify and make informed choices on the potential trade-offs that addressing these challenges may entail (OECD, 2025[1]). OECD research shows that excess capacity continues to rise, placing downward pressure on steel prices and industry profitability and thus complicating efforts to transition towards lowemission production methods. By depressing profit margins (GFSEC, 2024 [2]), it impairs companies to perform research and development activities and invest in low emission solutions. Both activities are essential for the sector to achieve its emission goals by mid-century. On the other hand, the transition is likely to exert pressures on the exit of emission intensive facilities, for example through stricter emission standards, carbon pricing and border carbon adjustments, th at may eventually undermine the viability of such plants and lead to their closures ( Climate Club, 2025 [3]). With most of the current excess capacity, and future growth in capacity relying on emission intensive processes (e.g. more than 90% of China’s steel production is based on the BF-BOF production route), the phase out of emission intensive plants can help alleviate excess capacity pressures and restore part of the industry’s financial viability. At the same time, excess capacity, carbon leakage and c arbon lock-in concerns would

(e.g. more than 90% of China’s steel production is based on the BF-BOF production route), the phase out of emission intensive plants can help alleviate excess capacity pressures and restore part of the industry’s financial viability. At the same time, excess capacity, carbon leakage and c arbon lock-in concerns would seem to be putting on hold a few cross-border investment projects in the SEA region , in particular in Malaysia, showing another potential channel by which transition could help address exc ess capacity. Objectives, contributions and policy questions As countries are grappling with the disruptions in global steel markets resulting from the current surge in excess capacity, they are also requested to think strategically on how to ensure tha t their steel industries will be ready for a low-emission future. In light of the profound structural changes on industries, workers and communities that addressing these two interconnected challenges entails, a greater understanding of how addressing excess capacity can help transition and vice-versa consti tutes an essential tool for better policy design, as well as an important bridge between different influential policy communities for the longterm sustainability of the steel sector. To do so, this report introduces a novel perspective on how excess capacity interacts with transition efforts. While previous studies have focused on capacity trends or transition policies mostly in isolation, this report will integrate both elements, addressing the following key policy questions: • How do global capacity developments align with the timing of investment and retir ement of emissions-intensive facilities? • What role does excess capacity play in shaping the financial feasibility of transiti on investments? • To what extent are regulatory pressures influencing capacity outcomes, particularly in relation to emission-intensive assets? 1 Introduction10  NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY

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This section examines capacity developments from the perspective of the low emission transition, and how they are affected by record high levels of excess capacity. Companies can rely on several technology choices to reduce emissions from curren t levels. Consistent

This section examines capacity developments from the perspective of the low emission transition, and how they are affected by record high levels of excess capacity. Companies can rely on several technology choices to reduce emissions from curren t levels. Consistent with previous OECD studies (OECD, 2024 [4]), low carbon capacity developments are classified by the potential for emission reduction associated with the employed technologies: Inter im technologies for emission reduction which include energy efficiency, H2 injection in BF and smelting BOF; Near-zero emission compatible technologies which include CCUS, H2 DRI EAF, scrap based EAF, and elec trolysis. The deployment of these technologies can have different implications for capacity developments as they lead to three main categories of capacity adjustments that lower emissions: 1) decrease emission-intensive capacity, 2) lower emissions from existing capacity, and 3) increase near-zero emission c apacity. The first category corresponds to the closures of emission-intensive assets such as BF/BOF, which reduce emissions and reduce capacity. Upgrading BF/BOF with emission reduction tec hnologies such as CCUS or injecting H2 in the blast furnace belong to the second category where emissions are reduced and capacity remains unchanged, while greenfield projects associated with near-zero emiss ion compatible technologies such as H2-DRI-EAF fall in the third category and lead to a net i ncrease in capacity. The replacement of BF/BOF assets with less emission intensive technologies such as scrap-based EAF or H2DRI-EAF can lead to variations in assets capacity and corresponds to both category 1 and 3. Pervasive levels of subsidisation in non-market economies and the resulting exces s capacity affect the pace at which low emission capacity adjustments take place. By maintaining inefficient firms alive, excess capacity slows down the necessary decrease in emission-intensive assets and leads to the build-up of new emission intensive assets. It also puts projects aimed at lowering emission in existing capacity at risk and leads to the postponement of near zero emission projects. The visible impact on capacity developments The visible effects of the transition on steelmaking capacity are mainly driven by low-emission projects that

emission intensive assets. It also puts projects aimed at lowering emission in existing capacity at risk and leads to the postponement of near zero emission projects. The visible impact on capacity developments The visible effects of the transition on steelmaking capacity are mainly driven by low-emission projects that add or remove production capacity. To date, this primarily involves the expansion of DRI –EAF and scrapbased EAF facilities, accompanied by the gradual retirement of corresponding BF/BOF assets. In contrast, low-emission projects based on other breakthrough technologies have not yet translated into full-scale capacity developments. Decreasing (or increasing) emission intensive capacity In the context of growing overcapacity, the closure of emission-intensive facilities, i n particular in excess capacity economies is a welcomed development for both transition and level-playing field purposes. OECD data shows that between 2025 and 2027, 25.8 mmt of BF/BOF capacities are expected to be wi thdrawn 2 Excess capacity and low emission capacity developmentsNAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY  11

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from the market, most of which in China (15.6 mmtaccounting for 60% of closures over the considered period). However, the rationale for these capacity closures varies, and seems to be mostly related to deteriorating market conditions rather than carbon considerations. As an illustration, only 6.9 mmt of BOF closures (27%) in the OECD dataset are associated to the buildup of a corresponding EAF in the same location, suggesting that transition considerations currently play a smaller role in the decision of closing facilities. The rate of closure of emission-intensive assets is affected by the underlying caus es of excess capacity, subsidies and pervasive levels of government interventions that keep inefficient firms alive. Absent such support, the pace at which closure of emission-intensive plants would likely increase (Rimini et al., 2020[5]). At the same time, capacity additions along the BF/BOF route are continui ng at a steady rate. OECD data

support, the pace at which closure of emission-intensive plants would likely increase (Rimini et al., 2020[5]). At the same time, capacity additions along the BF/BOF route are continui ng at a steady rate. OECD data shows that by 2027, 62.1 mmt of BF/BOF capacity is expected to come online, the m ajority of which are expected to be built in China and India. Figure 1. Unabated emission intensive closures and additions

Source: OECD elaborations on OECD capacity data.

Moreover, the analysis of the pipeline of BF/BOF projects over a longer time hori zon, would seem to hint to the emergence of a new phenomenon of emission offshoring, where the closure of emi ssion-intensive assets in the national jurisdiction is accompanied by extensive foreign direct investments (FDIs) that builds BF/BOF assets in emerging and developing markets. As illustrated in Figure 2, this seems to be particularly the case of Chinese FDIs, which, in contrast to FDIs from other countries, focus on building BF/BOF rather than EAF or DRI assets. The situation is particularly pronounced in ASEAN, wher e around 60 mmt of the foreseen capacity expansions are the result of Chinese investment. The build-up of these capacities is problematic both from an excess capacity and transition prospective. With respect the latter, building new emission intensive capacities locks emiss ion intensive production methods for the decades to come, in contrast with international climate agreements and national climate commitments. In both cases, the root causes of excess capacity, subsidies and government i ntervention, are key drivers of the increase in emission-intensive assets, beyond what would be dictated by market forces alone. BF/BOF closures by type transition to EAF

Outright closure -40 -30 -20 -10 0 10 20 30 40 50 60 70 Commissioning Withdrawal mmt Global BF/BOF additions and closures12  NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY

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Figure 2. Emission intensive Foreign Direct Investments

Source: OECD elaborations on OECD capacity data.

Increasing near zero compatible emission capacity OECD projections indicate that the total amount of DRI ironmaking capacity expected to com e online by 2027, either already underway or planned, amounts to 67.5 mmt. When the DRI shaft is built jointly with a new EAF furnace it directly increases steelmaking capacity, the case, for example, of the 30.7 mmt of DRIEAF additions in Figure 3 (representing approximately a third of total EAF additions). In some instances, announced DRI projects are not related to any new EAF projects, but may be indicative of future increases in DRI-EAF steelmaking capacity if these are greenfield projects (i.e. in a location where steelmaking assets do not exist), corresponding to 36.9 mmt. In some other instances, the build-up DRI ironmaking capacity is intended to feed existing EAF furnaces, which would seem to be the case for 6.9 mmt of DRI projects1. In most cases the discrepancies between DRI ironmaking and EAF steelmaking additions would seem to be a question of timing, where companies decide to build or expand DRI and EAF facilities at the time that is most suitable to their business needs. As a result, when looking at steelmaking capacity developments, DRI based additi ons account for 30.7 mmt. In comparison, the amount of BF-BOF and scrap-based EAF capacity expected to come online over the same period is 62.1 mmt and 61.7 mmt respectively. In relative terms, this means that a fifth of

mmt. In comparison, the amount of BF-BOF and scrap-based EAF capacity expected to come online over the same period is 62.1 mmt and 61.7 mmt respectively. In relative terms, this means that a fifth of steelmaking capacity additions by 2027 are DRI. Interestingly, DRI additions roughl y correspond to BF/BOF phase outs (25.8 mmt). Yet, when analysing churn at the company-level or at the country level, the correspondence between phase in and phase outs is minimal, suggesting that the build-up of DRI based capacity is not necessarily the result of a decision to transition to cleaner forms of production, but it is rather driven by comparative advantages and other market considerations, as in the case of the closures of emission-intensive BF/BOF assets.NAVIGATING THE STEEL TRANSITION AMID GLOBAL EXCESS CAPACITY  13

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Figure 3. Low emission capacity developments by technology route 2025-2027

Note: DRI capacity additions only include announced DRI projects that are lacking a corresponding EAF project announcement for steelmaking.

In these cases, companies may have delayed the announcement of a corresponding EAF (darker color) or intend to channel DRI outputs to existing EAFs (pattern color).

Source: OECD elaborations on OECD capacity data.

This apparent disconnection may be partially explained by the geographical distribution of planned DRI assets, which are mainly concentrated in the Middle East and North Africa (MENA) region, Iran, and SouthEast Asia, suggesting that the main driver for DRI developments is the expectation of stron ger demand in the future. On the other hand, several DRI developments in Europe located in existing sites s uggest that some companies are planning an upgrade of their existing capacity fleet to low emi ssion production methods. Indeed, when looking at the distribution of underway and planned DRI projects ac ross regions, both ironmaking only and steelmaking, Iran accounts for the lion’s share of additions (39%), followed by the EU

some companies are planning an upgrade of their existing capacity fleet to low emi ssion production methods. Indeed, when looking at the distribution of underway and planned DRI projects ac ross regions, both ironmaking only and steelmaking, Iran accounts for the lion’s share of additions (39%), followed by the EU (22%) and the MENA region (17%). This is particularly reflected in the DRI ironm aking pipeline, which, in many cases, anticipates future steelmaking capacity, where Iran leads with 16 mmt of planned ironmaking capacity to be built between 2025 and 2027 (Figure 4). The regional analysis is also useful to better assess whether DRI projects are driven by market considerations and or transition objectives and whether these projects can be considered near-zero emission compatible. Indeed, the build-up of DRI ironmaking capacity does not constitute a low-emission capacity development per se, especially when the DRI equipment uses coal as a reductant, as in the case of rotary klin facilities. These technologies cannot be considered near-zero emission compatible, as they are comparatively of smaller scale and cannot easily be transformed into gas/H2 based DRI shafts without signific ant changes

(MIDREX, 2010[6]) (OECD