Graphite can occur on the steel surface when the cold rolled steel sheets are batch-annealed under non-oxidizing atmosphere. The mechanism of graphite formation was studied by examining the influence of annealing atmosphere and temperature on graphitization reaction and the main results are summarized as follows. (1) Oxygen present on the steel surface plays the most important role and is indispensable to the graphite formation. (2) CO gas generated by the reaction with the solute carbon in steel and the oxygen in oxide film on the surface is decomposed into graphite and CO₂ gas. (3) The graphite formed in a carburizing atmosphere with some extent of CO gas shows the same morphology of the graphite formed in non-oxidized atmosphere, and CO gas in an annealing atmosphere requires the critical partial pressure, 0.1 atm, for the graphite formation on steel sheet. (4) The dependency of oxide film thickness on crystallographic orientation of iron may be responsible for the orientation dependence of graphite formation.