Shanghai trader Yu Yongzhang’s annual steel sales plummeted by over three-quarters in just a few years. China is the dominant force that has long controlled the steel industry. In the world of steel, China is the undisputed queen, churning out over a billion tonnes annually, more than half of the world’s production. But now, the giant is faltering. Just as China’s rise as a super-producer shook the global industry, its decline from peak steel production could be equally, if not more, disruptive.

In simpler terms, the collapse of the construction sector means there’s an oversupply of steel and a serious lack of demand. The rest of the world now fears that the market could become a dumping ground for China’s surplus, leading to plummeting prices, factory closures, and mass layoffs.
This couldn’t come at a worse time for the global economy, particularly for Europe, where Germany is teetering on the brink of stagnation. The United States, despite its enhanced protections for the industry, may still find this a political hot potato, especially in steel-dependent states like Pennsylvania, as the next presidential election looms.

President Xi Jinping’s grand vision of moving away from property-driven growth towards high-tech manufacturing and green technologies is shaking the steel industry’s core. His crackdown on the country’s real estate boom has effectively choked off what was once a rapidly expanding demand. Now, the big question is how China’s leaders can manage this contraction while trying to sustain the economy and jobs.

The scale of the challenge was laid bare by Hu Wangming, the head of China Baowu Steel Group Corp., who oversees an empire of blast furnaces churning out 130 million tonnes of steel annually—more than the combined output of the US, Germany, and France. When Hu warned of a “severe winter” for China’s steel industry, it was a signal heard in China and across the globe.
It’s not just the big players feeling the chill. Over in Shanxi, Zhang Rui, CEO of Jianbang Group, pointed out that the steel industry needs to cut more than 30% of its workforce to survive the current crisis. It could take two to three years for the sector to emerge from this cycle unless the government steps in to force mergers and restructure the industry.

Beyond the property market slowdown, infrastructure spending is also starting to wane, and factories grapple with steadily declining prices. Despite all this, China’s economy is expected to hit a growth target of around 5%, even as President Xi’s government avoids the massive stimulus seen in previous crises.
The price drop is a boon for companies using steel. But for producers, it’s a different story, with profits under pressure and factories shuttering. In Chile, the government slapped new tariffs on Chinese imports to try to save Cap SA’s steel mills from closure.

In Europe, where steel demand is already weak, German firm Salzgitter cited overcapacity and Chinese exports as the reasons for its first-half losses. Even the German Ministry of Economy keeps a wary eye on the situation, while ArcelorMittal, Europe’s largest steelmaker, voiced similar concerns.
The last steel crisis in 2015-2016 sparked political firestorms in Europe and the US, with Donald Trump making it a central issue in his 2016 campaign, vowing to protect America from cheap Chinese imports. Today, trade tensions are more focused on 21st-century technologies, but steel still has the power to ignite passions, especially in regions like the US Rust Belt and northern England. Given steel’s importance to the defence sector, it’s also a matter of national security.

China’s sheer size means even a slight drop in domestic demand can have significant repercussions. Chinese exports in the first half of the year were as large as North America’s total production and are on track to reach about 100 million tonnes this year. This surge is driven by falling domestic prices, making it more profitable to ship steel abroad. Hot-rolled coils, a benchmark product, are being exported from China at their lowest prices since 2020, with global prices—typically lagging behind China’s by two to three months—also at historically low levels.

Latin America is particularly vulnerable, facing a flood of cheap imports due to high tariffs elsewhere. While China used to send just 80,500 tonnes of steel annually to the region at the start of the century, last year, that number soared to nearly 10 million tonnes.
Tensions are running high as the US and its allies scramble to counter China’s influence in the steel sector. Even Japan’s Nippon Steel Corp.’s proposed takeover of United States Steel Corp. is causing political waves, with both Trump and Biden weighing in.
China’s steel woes also affect iron ore prices, which have plunged nearly 10% in just one week. While still incredibly profitable, the world’s largest miners are growing increasingly concerned about China’s rapid deterioration.

Now, the Chinese government faces a dilemma. On the one hand, they want to restructure the sector, but that risks slowing growth and threatening jobs at a time when the economy is already shaky. Steel is a crucial industry, with millions of jobs dependent on metal production and the coal that fuels blast furnaces. The drop in demand and overcapacity has led to a sharp rise in loss-making companies, with over 2,300 firms in the red as of June—a third more than last year’s end.
There are some signs that steel producers are responding to the crisis, possibly addressing the underlying overcapacity issues. Production in July was down 9% year-on-year, and exports have slightly decreased in recent months.
China’s last significant effort to curb overproduction came in 2015-2016 when the government ordered the mass closure of outdated plants and imposed stricter rules for new construction. This time around, the drive to reduce production comes under the banner of decarbonization. After hitting a record 1.05 billion tonnes in 2020, Beijing imposed a cap to keep output at or below the previous year’s level to control emissions from the polluting industry. While this effort has been successful gradually, it has yet to significantly reduce production, which remains stubbornly above a billion tonnes.
According to Kallanish Commodities Ltd, domestic demand has dropped by more than 10% since 2020. In April, the World Steel Association stated that China may have already hit its peak steel demand, with further declines likely in the medium term.
It’s normal to lose money, but it’s abnormal for the entire industry to be losing money. The consequences worldwide could be significant, especially as the current geopolitical situation has been unstable for years.