OCDE - The drivers and impacts of subsidies to steel firms

THE DRIVERS AND

IMPACTS OF

SUBSIDIES

TO STEEL FIRMS

OECD SCIENCE, TECHNOLOGY

AND INDUSTRY POLICY PAPERS October 2025 No. 1842  THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

This paper was approved and declassified by written procedure by the Steel Committee on 15 July 2025 and prepared for publication by the OECD Secretariat. Note to Delegations: This document is also available on O.N.E Members & Partners under the reference code: DSTI/SC(2024)18/FINAL. This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

© OECD 2025

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THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

Steel-producing firms in partner economies – and particularly in the People’s Republic of China – receive substantially higher subsidies than their OECD counterparts. Typical Chinese firms receive five times more subsidies per unit of revenue than firms in other partner economies, and ten times more than firms in OECD Member countries. The subsidies covered in this study – namely cash grants, below -market borrowings (BMB), and corporate income tax concessions – are disproportionately directed towards firms with higher government ownership, larger size, and greater indebtedness. In partner economies, sustained annual grants of USD 1 million are associated with capacity increases ranging from 5 000 to 15 000 metric tonnes, while no such effect is observed for OECD countries. BMB also display countercyclical characteristics in partner economies, with intensified use during steel crises potentially preventing market-driven capacity adjustments. Outside of crises, a USD 1 million increase in BMB is associated with approximately 1 000 metric tonnes of additional capacity. These findings are based on firmlevel econometric analysis using the OECD MAGIC database, covering 47 major steel firms from 2005 to 2022. The results highlight a persistent asymmetry in subsidy practices across jurisdictions and underscore the risks posed by subsidy-driven excess capacity, calling for renewed policy dialogue on transparency, competitive neutrality, and effective subsidy frameworks.

47 major steel firms from 2005 to 2022. The results highlight a persistent asymmetry in subsidy practices across jurisdictions and underscore the risks posed by subsidy-driven excess capacity, calling for renewed policy dialogue on transparency, competitive neutrality, and effective subsidy frameworks.

Keywords: Steel industry; excess capacity; industrial subsidies; cash grants; tax rebates; government ownership; distortions; below-market finance JEL codes: H25 ; H32 ; L52 ; L61

Contact Fabien Mercier ( fabien.mercier@oecd.org).

Abstract4  THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

The Steel Committee’s Programme of Work and Budget (PWB) for 202 4-2025 has prioritised robust analytical studies on the impact of subsidies on the emissions of steel firms and on the competitiveness of international steel industries. Special thanks are thus extended to all Steel Committee members for their unwavering interest in the Secretariat’s analysis of subsidies to the steel sector , and for their persistence in advancing this work despite the challenges posed by often opaque, incomplete, and hardto-obtain data. This project was executed in close collaboration with the OECD Trade and Agriculture Directorate (TAD) and benefited significantly from the development of the Manufacturing Groups and Industrial Corporations (MAGIC) database . The expertise of TAD colleagues in estimating below -market borrowings – loans provided to steel firms on more favorable terms than a competitive market would allow – was invaluable. We especially thank Yuki Matsumoto and Jehan Sauvage for those contributions. The study was designed, conducted and drafted by Fabien Mercier of the Directorate for Science, Technology and Innovation (STI), with significant data input from Jehan Sauvage (TAD), Luciano Guia (STI), and Hélène Dernis (STI). Additional colleagues who provided feedback to th is study include Antoine Dechezleprêtre, Guy Lalanne, Anthony de Carvalho, Stephan Raes, Jens Lundsgaard and

(STI), and Hélène Dernis (STI). Additional colleagues who provided feedback to th is study include Antoine Dechezleprêtre, Guy Lalanne, Anthony de Carvalho, Stephan Raes, Jens Lundsgaard and Jerry Sheehan of STI. Their valuable comments, guidance, and careful review of earlier versions of the paper, along with their sustained interest, were instrumental.

Acknowledgement 5

THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

Table of contents Disclaimer 2 Abstract 3 Acknowledgement 4 Executive Summary 7 1 Introduction 9 2 Subsidies are pervasive but very unequally distributed across time, jurisdictions, and firms 10 Subsidies are pervasive and persistent and can be provided through various instruments 10 Subsidies have varied sharply over time 15 Subsidies are unequally used across jurisdictions 18 Subsidies are unequally distributed across firms 18 3 Subsidies to steel firms are driven by several factors 21 Visual exploration of the data 21 Drivers of government subsidies 24 Non-drivers or unclear drivers of government subsidies 28 Summary table 29 4 The impact of subsidies on crude steelmaking capacity 30 The impact of cash grants on capacity 30 The impact of BMB on capacity 30 Other factors 31 5 Conclusion, policy recommendations and proposed way forward for future analyses 32 Annex A. Indicative OECD matrix of support measures, with illustrative examples 34 Annex B. The OECD MAGIC database 35 Annex C. Estimating below market borrowing 39 Annex D. Variable and data set specification 41

Annex E. Explaining subsidies: estimations results 42

Annex F. Subsidies impact on capacity - multivariate regression results 446  THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

Annex E. Explaining subsidies: estimations results 42

Annex F. Subsidies impact on capacity - multivariate regression results 446  THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

Annex G. Tackling BMB endogeneity through an instrumental variables (IV) approach 46 References 51 Notes 53

FIGURES Figure 1. The steel sector appears to be a relatively large recipient of subsidies 11 Figure 2. Government support can be delivered to steel firms through numerous instruments of different incidence 12 Figure 3. Steel subsidisation, as a percentage of total firm revenue 15 Figure 4. China’s steel export rose sharply during the 2015 steel crisis 16 Figure 5. The Chinese government provided ample counter-cyclical support in the form of BMB to its stateowned steel firms 17 Figure 6. Subsidies intensities are multiple times higher in China than in other partner economies 18 Figure 7. Distribution of subsidies intensities shows a wide dispersions 19 Figure 8. SOE tend to benefit more from subsidies than other firms compared to their total revenue 20 Figure 9. Larger government ownership is associated with larger subsidies relative to their total asset size 22 Figure 10. Increased government ownership in steel firms is linked to increased debt and decreased return on equity 23 Figure 11. The interest coverage ratio is on average twice less when governments own a majority share in the company than when it owns less than 10% of the steel firm 24 Figure 12. In accounting there are two main categories of grants 38

Figure A C.1. Estimation of below market borrowings through the construction of a hypothetical market rate of interest 40

TABLES Table 1. Conditional probabilities show that subsidy instruments are often used in conjunction 14 Table 2. Summary of the estimated drivers of grants and BMB. 29 Table 3. Correlations to grants, grants intensities, BMB, and BMB intensities 43

TABLES Table 1. Conditional probabilities show that subsidy instruments are often used in conjunction 14 Table 2. Summary of the estimated drivers of grants and BMB. 29 Table 3. Correlations to grants, grants intensities, BMB, and BMB intensities 43

Table A B.1. Sector coverage of the OECD MAGIC database (version 1.0) 35 Table A F.1. Capacity regressions, all sample 44 Table A F.2. Capacity regressions, OECD Member countries observations 44 Table A F.3. Capacity regressions, partner economies 45 Table A G.1. Second-stage regression results 47 Table A G.2. Second-stage regression results, with both grants and BMB as regressors 49 Table A G.3. Second-stage regression results, BMB alone 49 Table A G.4. Second-stage regression results, grants alone 49 Table A G.5. Second-stage regression results, with both grants and BMB as regressors 50 Table A G.6. Second-stage regression results, BMB alone 50 Table A G.7. Second-stage regression results, grants alone 50 7

THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

Subsidies to steel-producing firms are controversial as there is evidence that some subsidies exacerbate crude steelmaking excess capacity by incentivising steel firms to expand their capacity or retain it during times of crisis, and thus distort the level playing field leading to trade frictions. Through cash grants, belowmarket borrowings (BMB) and corporate income tax concessions, a typi cal Chinese steel firm receives 5 times more subsidies, as a share of its revenues, than a steel firm located in an other partner econom y, and 10 times more t han a steel firm located in an OECD Member countr y. In partner economies, and especially the People’s Republic of China (hereafter “China”), subsidies are channeled primarily towards

times more subsidies, as a share of its revenues, than a steel firm located in an other partner econom y, and 10 times more t han a steel firm located in an OECD Member countr y. In partner economies, and especially the People’s Republic of China (hereafter “China”), subsidies are channeled primarily towards firms that are state-owned enterprises (SOEs), or larger in size firms (as per their total asset size), or are more heavily indebted. In partner economies, any additional USD 1 million in cash grants, sustained over a number of years,1 correlates with a 5 000 to 15 000 metric tonnes increase in steel production capacity. This report analyses the differences in subsidy allocation to steel firms and their impact on crude steelmaking capacity using visual exploration and multivariate regressions based on the data collected in the OECD MAnufacturing Groups and Industrial Corpo rations (MAGIC) database. This new confidential database comprises extensive and comparable financial data, as well as BMB estimates, for a sample of 47 steel firms covering 36% and 62% of steelmaking capacity in OECD Member countries and in partner economies respectively, as of 2022, and from the year 2005 to 202 2. The findings highlight the considerable challenges that the provision of subsidies to steel firms, especially in partner economies, can represent for the pursuit of a fairer and more competitive steel market: • Subsidisation practices differ widely across time, jurisdictions, and firms. For example: o Steel firms that are more than 25% government -owned receive twice as much in grants and corporate income tax concessions as firms that are less than 10% government -owned, and 3 times more BMB. o China relied extensively on BMB as a countercyclical instrument in each of the two steel crises covered in our data (the 2009 and 2015 steel crises), contrary to OECD Member countries and other partner economies, which used BMB to a much lesser extent. Countercyclical use of BMB probably impedes necessary capacity reductions and delays market-driven restructuring.

covered in our data (the 2009 and 2015 steel crises), contrary to OECD Member countries and other partner economies, which used BMB to a much lesser extent. Countercyclical use of BMB probably impedes necessary capacity reductions and delays market-driven restructuring. o Addressing implicit government guarantees is crucial, as they may lead even private banks to offer loans at below-market conditions to steel firms by artificially boosting their credit ratings. • Steel subsidies are provided through cash grants, BMB and corporate income tax concessions, as well as through a host of other instruments not captured in the data. o For example, land-use subsidies are very challenging to identify and quantify. o Nevertheless, there is a strong correlation between the three instruments captured in our data, which may extend to more “hidden” forms of subsidies. • In OECD Member countries, subsidies: o Are not correlated with larger government ownership nor with steel firms’ size for cash grants. o Are correlated with larger government ownership for BMB. o Are not correlated with indebtedness (for either grants or BMB).

Executive Summary8  THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

o A possible explanation could be good alignment with the OECD Recommendation on Competitive Neutrality and other policies promoting non -discriminatory practices in the provision of cash grants and other forms of support to steel firms. o The low overall level of BMB in OECD Members countries reflects partly lesser government involvement in these countries’ banking sector and a greater reliance on bonds for corporate funding. It could also indicate that the risk of implicit government guarantees , which can lead private banks to offer loans at rates lower than the market, has been successfully addressed for steel firms overall. • In partner economies, subsidies: o are positively correlated with larger government ownership and larger firm size for both cash grants and BMB. o are positively correlated with higher debt to asset ratio , even when controlling for size, government ownership and profitability.

• Effect of subsidies on Capacity Expansion:

• In partner economies, subsidies: o are positively correlated with larger government ownership and larger firm size for both cash grants and BMB. o are positively correlated with higher debt to asset ratio , even when controlling for size, government ownership and profitability. • Effect of subsidies on Capacity Expansion: o Grants have a significant impact on capacity expansion in partner economies: a grant worth USD 1 million annually, sustained over a number of years , is associated with an increase of 5 000 to 15 000 metric tonne s in steel production capacity in partner economies, whereas grants show no correlation with capacity increases in OECD Member countries, a result similar to those of a previous study (Mercier, 2024[1]). o Regarding BMB, a USD 1 million in subsidies through BMB would increase capacity by about 1 000 metric tonne s during normal times, whereas anecdotal evidence suggests a strong counter-cyclical use of BMB in times of crises and its potential for allowing main recipients to maintain capacity through those crises, especially in partner economies. o Cash grants have an asymmetrical impact in partner economies: increases in grants are correlated with capacity increases, yet r eductions in grants are not associated with any decrease in capacity, indicating that capacity , once installed, tends to remain stable despite decreased funding through grants. o Those findings h ighlight the risk of exacerbating global overcapacity through unchecked subsidy-induced expansions of capacity in normal times and the counter-cyclical impact of the use of BMB to avoid capacity reductions during steel crises times. 9

THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

The debate on steel subsidies and government support (henceforth, “subsidies”) often focuses on their potential negative impact on well-functioning markets. Subsidies can lead to global excess capacity and distort trade by encouraging some steel firms to maintain higher levels of capacity and production, resulting in lower prices and unfair competition for non-subsidised firms. They may also incentivise investment and

potential negative impact on well-functioning markets. Subsidies can lead to global excess capacity and distort trade by encouraging some steel firms to maintain higher levels of capacity and production, resulting in lower prices and unfair competition for non-subsidised firms. They may also incentivise investment and capacity expansions that are not in line with steel market conditions, as highlighted in the OECD Steel Outlook (OECD, 2025[2]). Concerns about subsidies provided to steelmakers relate essentially to two issues. First, many concerns relate to the level playing field among steel producers worldwide, both from an international perspective and from a domestic perspective. Internationally, those issues give rise to trade frictions and trade disputes and can trigger “tit -for-tat” behaviour that can have ripple effects on other sectors of the economy. Subsidies can distort market signals both domestically and internationally, allowing inefficient producers to continue operati ng and depressing global steel prices . This concern links to the question of access to subsidies and which criteria and processes are used by subsidy providers to select subsidy recipients. A second set of concerns is where subsidies help maintain legacy capacity or build additional new capacity, which would exacerbate the global excess capacity issue, distort trade, depress prices in the long term and endanger the financial viability of non-beneficiary firms (OECD, 2025[2]). Furthermore, even subsidies that do not contribute to the installation or maintenance of crude steelmaking capacity may still distort the level playing field, for example by allowing beneficiary firms to increase their market share. This report complements (Mercier, 2024[1]) and (Mercier and Giua, 2023 [3]) to shed further light on both concerns mentioned above by using a new confidential OECD database on government support and subsidies, the OECD MAnufacturing Groups and Industrial Corporations (MAGIC) database . In doing so, the report seeks to help answer the following two questions: • What are the main drivers of subsidies to steel firms, and which firms’ characteristics correlate with their receiving larger subsidies? • What are the impacts of each type of subsidy – in particular, cash grants and BMB, which are

the report seeks to help answer the following two questions: • What are the main drivers of subsidies to steel firms, and which firms’ characteristics correlate with their receiving larger subsidies? • What are the impacts of each type of subsidy – in particular, cash grants and BMB, which are systematically quantified in the OECD MAGIC database – on a steel firm’s crude steelmaking capacity? Section 3 shows that subsidies are pervasive across all economies, but very unequally distributed across time, jurisdictions, and firms . Section 3 explores the factors that seem to drive the provision of subsidies to steel firms, including their ownership status. Section 5 assesses the impact of cash grants and BMB on steel firms’ crude steelmaking capacity in a multivariate regression setting, and Section 5 discusses the policy implications of the report’s overall findings. 1 Introduction10  THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

Subsidies are pervasive and persistent and can be provided through various instruments This report makes extensive use of subsidy data and estimations from the OECD MAGIC database (Annex B). The data accurately capture three instruments largely used by governments and government -related entities to channel subsidies towards steel firms: cash grants, below market borrowings (BMB), and even, for about two thirds of firms in the sample, corporate income tax concessions. Subsidies in the steel sector seem both pervasive and persistent. Only 6% of the 742 firm-year observations contained in the data correspond to zero subsidies, either in the form of grants, tax concessions, or below-market borrowings. Meanwhile, nearly 90% of the firms covered received subsidies for at least half of the period during which they are included in the database. This indicates that very few steel firms among those covered did not obtain any subsidies between 2005 and 2022 and that firms which receive subsidies tend to receive them for several years in a row. Overall, steel firms appear to receive relatively large subsidies as a share of their revenue compared to

steel firms among those covered did not obtain any subsidies between 2005 and 2022 and that firms which receive subsidies tend to receive them for several years in a row. Overall, steel firms appear to receive relatively large subsidies as a share of their revenue compared to firms in other sectors ( Figure 1). Furthermore, as is also the case for aluminium smelting and to some extent cement and shipbuilding, BMB account for the largest share in the total support steel firms receive. This stems in part from heavy industries’ reliance on debt for funding their capital-intensive business operations. 2 Subsidies are pervasive but very unequally distributed across time, jurisdictions, and firms 11

THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

Figure 1. The steel sector appears to be a relatively large recipient of subsidies

Note: See Annex B for more information on the firm sample and full sector names. Sector averages use weights based on annual firm revenue.

Source: OECD MAGIC database.

Cash grants and cash transfers Governments can provide money to a steel firm by distributing grants and awards, either directly or through financial funds or research projects set up for that purpose. A grant can be tied to assets purchased with the grant, or to a specific project (renovation, transformation, technological upgrading, etc.). It can also be given to the company without any condition s attached. Governments can use cash awards to distinguish companies that have excelled in a particular domain. Cost refunds are cash injection s provided by the government to compensate for specific costs already paid by the steel company. 2 BMB Governments can also provide loans at below-market rates, either directly or indirectly through a statecontrolled bank or other public financial institutions. Preferential loans are difficult to identify as the contractual rates of interest are rarely disclosed to the public. Banks are not willing to share this type of information and can even be forbidden by statutory or regulatory requirements to disclose it. Preferential loans can also be loans that have features that make them particularly attractive f or the borrower and

contractual rates of interest are rarely disclosed to the public. Banks are not willing to share this type of information and can even be forbidden by statutory or regulatory requirements to disclose it. Preferential loans can also be loans that have features that make them particularly attractive f or the borrower and would not be obtained at similarly advantageous conditions from private lenders. For example, revolving loans allow the company to avoid repaying their principal at maturity, as those loans are automatically renewed by the lender on maturity. Because individual loans and loan rates are not disclosed, estimations are carried out on the basis of the average effective interest rates applicable to a steel firm’s debt, calculated using assumptions on its average debt maturity and additional informat ion on debt structure and currency, as well as specifically built interest rate benchmarks (Annex C). This approach has the advantage that if preferential treatment is provided even without being disclosed by the lending institution (as there is ample evidence this is surely the case in some jurisdictions), the BMB estimated subsidy amount will still ca pture the implied subsidy contained in the loan. This estimation methodology results in BMB capturing the part of implied subsidies entail by loans from private banks, to the extent that those loans were provided at lower rates due to the government implicit guarantees propping up a steel firm’s ratings.12  THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

Income tax concessions Other forms of targeted government support are tax exemptions, reductions, and credits, when directed specifically at the steel industry or at specific steel firms. Tax benefits can be given in the form of tax credits, tied to the purchase of some equipment (domestically produced or not), to the completion of a project, or even given to the steel firm as a reward for a specific contribution. In several cases, firms benefit from preferential income tax rates for some of their subsidiaries. Tax concessions may also at times concern the property tax of the factories, export tariffs, and the firm’s contribution to workers’ social security scheme, etc. The data research provided an estimate of corporate income tax concessions for approximately two thirds of the companies in the sample.

preferential income tax rates for some of their subsidiaries. Tax concessions may also at times concern the property tax of the factories, export tariffs, and the firm’s contribution to workers’ social security scheme, etc. The data research provided an estimate of corporate income tax concessions for approximately two thirds of the companies in the sample. Other instrument types Subsidies, in the sense of government support, are not limited to grants, BMB and tax concessions. There are many more instruments that are regularly used to channel subsidies to steel firms, although m any of these instruments are not captured in the recorded and estimated data. Figure 2 below illustrates the main channels, or “instruments”, that can be used to provide subsidies to a steel firm, while Box 1 below illustrates an example of a difficult -to-quantify subsidy, land -use. Annex A provides an indicative OECD matrix of support measures, with general examples. Figure 2. Government support can be delivered to steel firms through numerous instruments of different incidence Only the transfers in red, namely cash grants, BMB and corporate income tax concessions (to some extent) are captured in the data used

Source: OECD Secretariat desk research. 13

THE DRIVERS AND IMPACTS OF SUBSIDIES TO STEEL FIRMS © OECD 2025

Box 1. Below-market-price land transfers in China In some jurisdictions like China, land ownership is highly centralised, with all land either state -owned (urban areas) or collectively owned by rural communities. Land transfers for industrial use typically involve local governments leasing land to enterprises through long -term land -use rights rather than outright sales. This leasing system is an important tool for local governments for both revenue generation and economic development. Although the law prohibits the use of low land prices to attract investment (State Council, 2004 [4]), there is evidence that many local authorities do transfer land at below-market rates to encourage industrial expansion and incentivise investment, thereby providing a significant, yet indirect, form of subsidy to industries (Zhang et al., 2024[5]).

investment (State Council, 2004 [4]), there is evidence that many local authorities do transfer land at below-market rates to encourage industrial expansion and incentivise investment, thereby providing a significant, yet indirect, form of subsidy to industries (Zhang et al., 2024[5]). The impact of such subsidies is particularly hard to track because it requires access to local -level transaction data and a clear benchmark of what the market price should be. Moreover, the alignment between local governments and firms - especially state-owned enterprises (SOEs) - further blurs the line between public and private interests. When land is transferred to firms that support the broader strategic goals of the government, such as advancing industrial capacity or technological innovation, it becomes nearly impossible to determine whether the transaction was commercially driven or politically motivated. There has been some gradual improvement of this situation with the implementation of market-oriented land reforms at the end o