Korean steel industry in crisis: Is there a way out?

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Korean steel industry in crisis: Is there a way out?

Published: 14 Mar. 2025, 00:03

Audio report: written by reporters, read by AI

Kwon Nam-hoon

The author is the president of the Korea Institute for Industrial Economics & Trade.

The steel industry is in crisis. Production fell by 5.7 percent last year, hitting its lowest level in over a decade. Most steel companies have seen their profitability deteriorate, with some reporting operational losses. Posco has shut down two plants, while Hyundai Steel initially planned to close its Pohang No. 2 plant but scaled back operations due to union resistance. The economic and employment impact on the Pohang region has been severe, prompting calls for its designation as an industrial crisis response area.

Compounding these challenges, U.S. President Donald Trump recently imposed a 25 percent universal tariff on steel and aluminum from March 12. This echoes his 2018 steel tariffs, which were mitigated through negotiations that led to a quota system that reduced Korea's export volumes. Now, the industry faces another trial. Depending on how events unfold, this could further exacerbate the already difficult situation. What is the fundamental nature of this crisis, and how should Korea respond?

A Posco employee works at its Pohang steel plant in North Gyeongsang in January 2023. [YONHAP]

The structural crisis of the steel industry: The backbone of industry

The history of human civilization is inseparable from steel. As a key intermediate good in sectors such as automotive, shipbuilding, electronics, machinery and construction, steel is often referred to as the "rice" or "backbone" of industry. Historically, nations aspiring to manufacturing dominance have actively fostered their steel industries. The global leadership in manufacturing has transitioned from Britain to the United States, then to Japan and China, mirroring the shifts in steel industry leadership. Trump's focus on the steel industry aligns with his vision of revitalizing U.S. manufacturing.

Korea is the world’s sixth-largest steel producer and third-largest exporter. Many regard the completion of the Pohang Steelworks in 1973 as a pivotal moment in the country's rise as a manufacturing powerhouse. From this perspective, the current struggles of the steel industry could symbolize broader economic difficulties looming over Korea’s manufacturing sector and overall economy.

However, the steel industry’s structural crisis is not new. Since the early 2000s, China has rapidly expanded steel production, now accounting for over half of the global output. By the 2010s, Korean steelmakers struggled against the flood of low-cost Chinese exports. In 2015, China’s economic slowdown led to a surge in excess steel being dumped into the international market, causing prices to plummet. This resulted in Posco's first-ever financial loss and pushed major Korean steelmakers like Dongkuk Steel and Dongbu Steel to the brink of collapse.

Korea has traditionally produced more steel than its domestic demand required, relying on exports. However, with China producing steel at lower costs and exporting in large volumes to Korea, maintaining this excess production model has become unsustainable. Calls for structural reform grew louder, but the government expected the private sector to adjust production voluntarily, while companies remained hesitant. Ironically, China itself provided relief by closing down outdated steel plants, improving supply conditions and stimulating demand through fiscal spending, granting Korean steelmakers a temporary reprieve.

Yet, without fundamental restructuring, crises inevitably recur. Since 2021, China’s real estate downturn has significantly reduced domestic steel demand, leading to another flood of excess supply in global markets. At the same time, Korea’s economic growth has slowed, and domestic demand has weakened, contributing to an unprecedented crisis.

Hoping for another natural resolution seems unrealistic. Although China is once again attempting to restructure and reduce production, results remain uncertain. Meanwhile, Korea’s declining domestic steel demand is unlikely to reverse given its economic maturity. Advanced economies like the United States and the European Union, as well as developing nations, are increasingly focused on protecting and expanding their own steel industries, limiting Korea’s export opportunities. Notably, India — the world’s second-largest steel producer — plans to double its production by 2030.

Hyundai Steel’s automotive steel sheets [HYUNDAI STEEL]

The challenge of carbon neutrality regulations

The steel industry is a major carbon emitter. Traditional steelmaking requires immense amounts of high-carbon refined coal to produce molten iron in blast furnaces. Solutions include hydrogen-based direct reduction processes or electric arc furnaces that recycle scrap metal. While hydrogen-based steelmaking is still under development, electric arc furnaces are gaining traction. The United States, with its abundant scrap metal and low electricity costs, is regaining competitiveness in this area.

Korea has committed to reducing carbon emissions by 40 percent from 2018 levels by 2030. However, many experts believe this target is nearly impossible without severely undermining the manufacturing base, including steel production. Adding to the challenge, the EU will impose a Carbon Border Adjustment Mechanism from January 2026, taxing high-carbon steel imports. While framed as an environmental measure, it effectively acts as a tariff.

Nonetheless, every crisis presents an opportunity. Despite China’s dominance, many countries seek to reduce their dependence on Chinese steel, creating room for Korea to maneuver. If Korean products remain competitive, Trump’s tariffs could even work in Korea’s favor by lifting volume restrictions, allowing for market expansion. Carbon neutrality regulations are also a global issue — if Korea leads in technology development, it could gain a competitive edge.

Unionized workers of Korea's top steelmaker, Posco, hold a ceremony on a planned strike in front of corporate headquarters in the southeastern city of Pohang on Dec. 2, 2024. [YONHAP]

Proactive restructuring and investment in innovation

To navigate these challenges, Korea must actively pursue industrial restructuring and technological innovation. It should phase out the production of low-competitiveness products and pivot toward high-tech, high-value-added steel products. Japan provides a case study in successful restructuring. Facing similar challenges earlier, Japan implemented aggressive consolidation, including large-scale mergers and facility closures. As a result, industry giants like Nippon Steel and JFE emerged, not only restoring profitability but also exerting significant influence on global steel markets. The recent debate over whether to allow Nippon Steel’s acquisition of U.S. Steel underscores Japan’s strategic approach to global competition.

Avoiding structural reform delays due to market protectionism

This time, the government must take a more active role. While past experiences offer lessons, two new factors demand fresh strategic direction. First, Korea’s leading steelmakers, Posco and Hyundai Steel, are now under pressure to change. As Korea’s only integrated steel mills — producing steel from iron ore to finished products — these companies were once seen as the most secure. However, their declining price competitiveness now places them in a more precarious position than some firms reliant on imported raw materials. Protecting these firms without reform is no longer viable; strategies for national champion companies must be reconsidered.

Second, protectionism is intensifying, as symbolized by Trump’s policies. The steel industry has long been subject to nationalist and protectionist measures. In contrast, Korea has historically maintained relatively lenient import policies, sometimes criticized for allowing market erosion. However, last month, Korea imposed antidumping duties of up to 38 percent on Chinese steel plates, signaling a shift. Calls for similar measures on other steel products are growing.

As global trade conflicts escalate, Korea cannot afford to keep its markets entirely open. However, it must carefully consider the consequences of protectionist policies, which could delay much-needed restructuring and harm related industries. Sectors like shipbuilding and construction, which rely heavily on steel plates, could face higher raw material costs. Even if protectionist policies are implemented, they must align with long-term industrial development goals and account for their broader economic impact.

Translated using generative AI and edited by Korea JoongAng Daily staff.