Momentum shifts east in green steel transition

The first half of this decade saw Europe leading the early phase of the steel technology transition away from coal, as it had done previously in the power sector. But more recently momentum has slowed in Europe and is shifting east.

This is a familiar energy transition story – China increasingly dominates in renewable energy capacity and technologies. With steel production considered a strategic industry, Europe needs to do more to ensure it isn’t leapfrogged again. 

European nations like Germany led the world into the renewable energy age, establishing early leadership in solar and offshore wind capacity. More recently, that leadership has been taken on by China. Not only does it dwarf the rest of the world in renewable energy capacity growth, but it also dominates in clean energy technologies: solar, electric vehicles (EVs), batteries – and the minerals required to make them. It is not far behind in wind power technology.

Europe’s failure to catch up and compete with China on battery technology was exemplified by the collapse of Northvolt – the largest bankruptcy in Swedish industrial history. Now Sweden’s Stegra – which has a green steel plant under construction and shares a key investor with Northvolt – is facing a funding crunch. It needs more than US$1 billion to cover additional project costs. 

Stegra’s difficulties are just one example of a wider slowdown in steelmakers’ shift toward direct reduced iron (DRI) and green hydrogen across Europe.

In another similarity with Northvolt, the funding shortfall is also partly due a lack of financial support from the Swedish government, according to Stegra.

Stegra intends to make steel using DRI technology and 100% green hydrogen to replace fossil fuels. If completed it would be a global landmark in truly green steel.

Meanwhile in China, the world’s biggest steelmaker recently announced the integration of its one million tonne per annum DRI plant, running primarily on hydrogen. Although the source of the hydrogen at Baosteel’s Zhanjiang installation has not been made clear, it has previously been stated that the plant is “leveraging coke oven gas as the process gas, in an industry first”. Baosteel is a subsidiary of China Baowu.

Unlike Chinese dominance in solar, EVs and batteries, Baosteel’s plant is using Western technology, at least for now. The facility uses Energiron DRI equipment developed by Tenova and Danieli of Italy. But China’s technology dominance has been based on a deliberate strategy of encouraging Western companies to share their technology in return for access to the Chinese market.

As it stands, based on methane and coke oven gas, Baosteel’s DRI plant has lower emissions, but it is not truly green. A key question now is: Will the company leap ahead of Europe and shift the Zhanjiang DRI plant onto green hydrogen? And how quickly will this be replicated around China? There are several other DRI plants in China that could switch to green hydrogen.

If exported to the EU, steel produced using green hydrogen in China could avoid high charges under the Carbon Border Adjustment Mechanism (CBAM).

In January 2026, another Baowu subsidiary officially launched a green hydrogen project – the first in China to be directly connected to an offshore wind farm. As well as being used for green ammonia production, this will reportedly feed into a hydrogen pipeline in Guangdong province between the city of Yangjiang and Baosteel’s Zhanjiang steel plant, raising the possibility that the plant will become at least partly green hydrogen-based.

Despite 2025 being a year of bad news for green hydrogen, Hydrogen Insight recently reported that 59 clean hydrogen projects began construction last year. Almost all of them are green hydrogen projects and nearly half of them are in China, where 25 projects totalling around 500,000 tonnes of green hydrogen per annum are underway.

While green hydrogen projects In Europe have faltered, China surpassed its 2025 green hydrogen target of 200,000 tonnes of operational capacity according to China Hydrogen Energy Alliance, which also noted that the cost of green hydrogen production in China has fallen 40% in five years.

Despite its current financing difficulties, Stegra’s green steel plant has a lot going for it, not least the fact that construction is 60% complete. It also has access to cheap clean power and a high-grade iron ore supply, and has already signed offtake agreements for the majority of its future production. The fact that offtake announcements have continued despite Stegra’s funding shortfall is a positive sign.

However, the European transition from coal-consuming blast furnace to DRI has slowed, and Stegra failing would be a highly significant further blow to progress. CBAM is supposed to protect decarbonising EU steelmakers from cheaper, emissions-intensive imports. We may instead soon see imports into Europe from places like China and the Middle East that are cleaner than European production.

It’s also not unthinkable that at some point the DRI technology supplied to steelmakers seeking to reduce emissions will be Chinese. 

Europe has already lost several clean energy technology races to China. As well as doing more to support its own production of green steel, it might consider where its future, lower-emissions steel technology will come from.