Hydrogen has been described by the Chinese government as of “great significance” to the country’s clean-energy transition, but its uptake in a range of carbon-intensive sectors has so far faced hurdles of cost and logistics.
Now, a policy push is seeking to encourage the production of hydrogen, including “green” hydrogen made using renewable energy. The aim is to develop China’s hydrogen industry and boost its wider usage, including in the country’s vast steel industry.
In March, three government ministries launched a new pilot programme that will reward five city clusters for pursuing and reaching targets on hydrogen. Among its focuses is encouraging projects “promoting the steel industry’s transition” that make use of low-carbon hydrogen sources.
Green hydrogen is seen as a critical input for reducing emissions from steelmaking, as a lower-carbon fuel for the processing of iron ore, which conventionally takes place in coal-powered blast furnaces, or using natural gas. But only a limited number of facilities are currently producing steel at a commercial scale like this, both in China and globally.
The new programme was announced on the heels of the 15th Five Year Plan, China’s economic blueprint for 2026-2030, which emphasised ambitions to pursue hydrogen as a new energy source and “industry of the future”.
As the new hydrogen push launches and officials describe a potential “inflection point” in the sector, Dialogue Earth spoke with experts to understand the impacts this policy could have on green hydrogen’s role in the steel industry’s decarbonisation.
China’s new hydrogen push
Since the launch in 2022 of China’s first long-term hydrogen plan (for 2021-2035), the gas has become a more strategic part of China’s industrial decarbonisation agenda.
The new hydrogen policy released in March has been described as “an expanded 2.0” version of a previous city-cluster programme launched in 2021, which focused on its use in fuel-cell vehicles. Pilot city clusters under the 2021 policy received a total of about CNY 5.1 billion (USD 719 million) in central-government awards over more than three years. China has long provided financial support for fuel-cell vehicles as part of its broader push towards electric vehicles.
The new policy retains the focus on fuel-cells, while expanding hydrogen’s industrial use, including for steel and metallurgy, green ammonia and methanol, shipping and aviation.
A hydrogen fuel-cell bus refuels at a station in Qingdao, Shandong province. Fuel-cell vehicles have been a focus of previous policies targeting China’s broader switch to electric vehicles (Image: CFOTO / Sipa USA / Alamy)
Isadora Wang, head of China at the Transition Asia think-tank, told Dialogue Earth this latest programme is a “very good initiative” for steel.
“Unlike transport, which can use batteries and many other approaches, steel and chemicals have very limited options for decarbonisation,” she said, adding that they are the sectors “most in need of green hydrogen”.
Compared with more than CNY 32 billion (USD 5 billion) of subsidies injected into China’s EV industry between 2016 to 2020, the ambition for hydrogen is much smaller. Only about a CNY 8 billion (USD 1.17 billion) in total – up to CNY 1.6billion (USD 232 million) per city cluster – will be issued over the next four years for hydrogen projects.
Shen Xinyi, a China analyst focusing on steel at the Centre for Research on Energy and Clean Air, said the smaller subsidies reflect the “more complicated nature of hydrogen”. Since hydrogen has a wider range of applications than EVs, a “‘one-size-fits-all’ approach” or “going ‘all in’ like with solar or EVs” is impractical, she said.
Wang said the design – “rewards rather than direct subsidies” – would help to avoid the “chaotic situation”, such as fraud, seen in EV subsidies. An audit by China’s industry ministry found at least CNY 864 million (USD 121 million) in subsidies for EVs were allegedly “improperly claimed”. EV sales in China also slowed after China ended consumer purchase subsidies in 2023.
“That experience showed how important subsidy design is,” Wang said. She said this “more refined” incentive is “relatively stable and predictable over four years and can draw in some private investment. That, in turn, could help the industry take shape.”
Both Wang and Shen said the biggest challenge for deployment is that hydrogen “is still too expensive”. The policy aims to bring down the end-use price from current levels of roughly CNY 35-50 (~USD 5.10-7.30) per kilogram to CNY 25 by 2030, with some “advantageous regions” – those with high renewable energy potential – aiming to cut the price to around CNY 15 per kg.
The cost of green hydrogen production in China currently stands at CNY 21-46 per kg, but end-user prices are higher due to factors such as transport costs.
Wang said CNY 25 is “very competitive for chemical products”, but is not low enough for hydrogen-based metallurgy, which needs cost of CNY 10-15 per kg.
“It is still fundamentally a pilot-driven policy, not yet a market-wide commercial rollout plan,” Wang added. She described the programme’s emphasis on regulation as “more suited to China’s national conditions” than approaches other markets may take.
In contrast, the European Hydrogen Bank supports renewable-based hydrogen projects through competitive auctions, while the US offers tax credits of up to USD 3 per kg (though the green credentials of the hydrogen it supports has been questioned). Japan, meanwhile, offers a different style of subsidies in the form of contracts for difference, which cover the difference between the cost of low-carbon hydrogen and a conventional-fuel benchmark.
“For steel decarbonisation, this is better understood as an enabling step rather than as proof that hydrogen-based steelmaking is about to scale across China,” said Shen.
Hydrogen steelmaking takes time
The use of hydrogen in China’s steel sector is still at an early commercial stage, with only a handful of companies operating facilities using hydrogen-based direct reduced iron with electric arc furnaces.
This pathway is seen as the most mature route to near-zero emissions steelmaking. But globally, almost all direct reduction of iron (DRI) – a process to remove oxygen from iron ore and enable its use in steelmaking – is currently carried out using fossil fuels. Meanwhile, the build-up and utilisation of electric arc furnaces (EAF) in China has stalled. Coal-based blast furnaces still account for nearly 90% of China’s steel production and are the main driver of the sector’s roughly 15% share of national emissions.
Steel production at Huaigang Special Steel in Huai’an, Jiangsu province. Around 90% of China’s steel output still comes from coal-based blast furnaces (Image: CFOTO / Sipa USA / Alamy)
Among the companies with hydrogen-based projects are state-owned Baowu Steel – the world’s largest steelmaker – and Hebei Iron & Steel (HBIS).
In late 2025, Baowu completed a million-tonne capacity hydrogen DRI-EAF production line in Zhanjiang, Guangdong province. In January, it also announced plans for the CNY 11.9 billion (USD 1.54 billion) Yangjiang hydrogen project, 200 km to the east. This green hydrogen production hub will also feature a dedicated pipeline network connecting Yangjiang to major end-users, including Baowu’s facilities in Zhanjiang. Pipelines are the most economical option for transporting hydrogen in China, especially for distances longer than 200 km, according to a 2024 study.
HBIS, meanwhile, runs the other large-scale hydrogen-based steel plant currently operating in China, at a facility in Zhangjiakou, Hebei province.
For Shen, the fact that Baowu still uses “grey hydrogen” from hydrogen-rich coke oven gas, rather than green hydrogen produced with green electricity, shows how hard it is to commercialise a fully green hydrogen DRI-EAF.
Shen explained that DRI steelmaking costs about twice as much as the blast-furnace route, while green electricity requires stronger grid connections that are not feasible for every factory. “Most demonstration projects are not economically viable on their own. But without this kind of pilot, the chance of it becoming economically viable on its own would be even smaller,” she added.
“What is still missing is a combination of cheaper green hydrogen, more reliable access to low-cost clean electricity, suitable high-grade iron ore or pellets, stronger EAF economics, and clearer downstream willingness to pay for lower-carbon steel.”
A recent paper found that the “levelised cost” of hydrogen DRI-EAF steel could be reduced by 6-10% by pursuing “flexible strategies” across production stages, including pairing with energy storage, so the system can “better align the variable renewable power supply and industrial production demand”. HBIS, for example, is reportedly developing energy storage projects to support its production.
LCOS is a measure of the average cost of producing one tonne of steel over the entire lifetime of a steelmaking facility, accounting for all capital and operating expenditures spread across total lifetime output. Since green steel routes tend to have higher capital expenditure but potentially lower long-run operating expenditure (especially as renewable energy and electrolyser costs fall), LCOS helps analysts assess at what carbon price, energy price, or policy support level green steel becomes cost-competitive with conventional production.
“The challenge is that most of the steel is still produced in the blast furnace-basic oxygen furnace route, rather than the direct reduced iron-electric arc furnace route in China,” the paper’s lead author, He Yuezhang from Tsinghua University, explained to Dialogue Earth. “So you would basically need to rebuild the system from the ground up for it to match the power grid with increasing renewable penetration.”
As for moving away from the blast furnace route, Shen said dismantling large numbers of these plants is hard: “Blast-furnace steelmaking in China has become so cheap. Many aging furnaces are still running because they support employment and social stability.”
She said it is better to stop building new blast furnaces and to retrofit existing plants for decarbonised production, with the priority being to cut blast-furnace overcapacity, expand electric-arc furnace steelmaking and then move toward hydrogen metallurgy.
“There is already overcapacity,” she added. And since both blast furnaces and DRI-EAF use steel scrap for production, “if blast furnaces are cut back, there will be more scrap available for electric-arc furnaces. When steel prices normalise [with less supply], market returns and policy support will then make hydrogen DRI-EAF commercially attractive”.
Demand still an issue for green steel
China remains the world’s largest steel producer, with about 960 million tonnes of crude steel being produced in 2025. However, research firm Wood Mackenzie has estimated the country already has more than 50 million tonnes of excess capacity, and that figure could rise to 250 million tonnes by 2035.
While production has broadly levelled off, China’s crude steel output fell to a seven-year low in 2025 as the continued downturn in the country’s property and construction sectors hit demand. Steel exports, meanwhile, accounted for 12% of last year’s production, but have kept rising: shipments increased by 7.5% in 2025 to reach record highs, after increasing 22.7% in 2024 from 2023. This surge has now met with protectionist measures from over 60 countries.
Among those exports, 10,000 tonnes of hydrogen-produced steel from HBIS’s Zhangjiakou facility were bought by an Italian client.
Wang said this proves green steel has a market, but “while foreign markets can serve as pioneers”, China’s domestic market is “the market we should pay more attention to”.
She added that other countries, similar to China, tend to prioritise support for their own steel industries for national security and employment reasons, meaning China’s vast amount of production still needs to be “digested in the domestic market”. The key, she said, is “matching upstream green steel production and downstream demand”.
“Not every steel plant can simply be built next to a hydrogen pipeline,” Wang said. “Subsidies can help, but they cannot carry the industry forever, and if downstream steelmakers and buyers do not genuinely want low-carbon steel, the cost still has to be borne somewhere.”
Shen also pointed to demand as the bottleneck, “even though hydrogen supply is also a challenge”. Despite signs of growing demand for green steel from the transport sector, such as an agreement between Baowu and automaker Chery, Shen said “this looks more like strategic positioning and supply-chain experimentation than a deep, market-clearing demand pool”.
Nevertheless, she stressed that the “future of hydrogen” should still be in China, thanks to the “foreseeable low cost for hydrogen production”, and as China has “such a complete upstream and downstream supply chain” crossing chemical, metallurgy, transport, and manufacturing.
