China faces challenges in lifting scrap use to help curb steelmaking emissions

An electric arc furnace mill, which requires supply of scrap metal for more environmentally friendly steelmaking. Source: PJSC Novolipetsk Steel

The availability of scrap steel is proving to be a challenge to China's efforts to curb emissions by developing electric arc furnace, or EAF, steelmaking to help meet its 2060 decarbonization goal.

Increasing the use of scrap steel, the main raw material for EAFs, is seen as one of the few paths for the largest industrial source of carbon emissions in China to go greener. To this end, its steel industry is looking to lift the ratio of EAF-produced steel to overall crude steel production to 15% from 2021 to 2025, China's 14th five-year period.

China's move to increase EAF steelmaking could also help reduce its reliance on Australia for iron ore, a key input material in blast furnace steelmaking — the dominant steelmaking route currently — amid geopolitical tensions between Beijing and Canberra.

Data from the Bureau of International Recycling, an industry association, shows that EAFs contributed only 9.2% to China's steel production in 2020 and ranged between 6.3% to 13% from 2016 to 2020, far lower compared to other major steelmaking nations such as Japan, Russia and the U.S.

Long road ahead

EAF steel costs 500 to 600 Chinese yuan more per tonne than steel from basic oxygen furnaces, according to data from China's state-backed Central Iron & Steel Research Institute.

The relatively higher cost of making steel via EAFs, the tight availability of domestic scrap and varying electricity costs across China have put a damper on the growth of EAF steel production, S&P Global Market Intelligence's principal iron ore and steel analyst Ronnie Cecil said in an email interview.

David Feng, an analyst at brokerage Guotai Junan International, echoed Cecil's statement, saying that China's EAF steel production still has a long way to go to be more economically competitive due to challenges in securing scrap as well as high electricity costs involved. As a result, the share of EAFs in the Chinese steel industry has been relatively low for years compared with other major steelmaking countries, Feng said.

Though EAF technology has improved steadily over past years, Feng said China's scrap supply is not enough to support the fast development of EAFs and meet the demand for lower-carbon steel production, which leads to high scrap steel prices.

Additionally, the quality of scrap supply needs to be improved, Feng said. China's scrap steel is mainly processed by small, private-owned businesses, and the analyst noted that raw material costs will only go down when there is sufficient qualified supply.

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Scrap shortage

The available scrap pool at any given time is a function of many decades of economic activity through consumption of autos, white goods and other products, Cecil said, adding that the infrastructure enabling China to recover more scrap from its existing scrap fund is way behind the U.S. and EU, which have both been leading industrial economies for longer than China.

"However, given the massive scale of China’s steel consumption over the past 20 years, there is a huge potential pool of domestic scrap in the pipeline that can be exploited ... Presently China cannot supply enough scrap to its domestic steel sector, and in turn reduce its dependence on imported iron ore," Cecil said.

"The incentive to invest is there, with China's decarbonization push ramping up and the desire to curtail reliance on Australian [iron ore] exports," Cecil said.

For China to capitalize on its emerging scrap fund, Cecil said major investment is needed on the scrap supply side: More shredders, processing technology trucks, scrapyard and handling equipment will be required over the coming years.

In the near term, Cecil said China is looking to increase its scrap usage in basic oxygen furnaces relative to pig iron, with iron ore prices hitting record highs in 2021. He noted that China has eased import restrictions on ferrous scrap by recategorizing it from waste product to resource, resulting in a sharp rise in scrap imports this year to date.

According to a June 23 report from China Metallurgical Industry Planning and Research Institute, which advised on China's steel policies, scrap supply available for the steel industry will grow to 310 million tonnes in 2025 due to a faster accumulation of scrap materials, compared with a consumption of 230 Mt by the industry in 2020.

A boom in steel scrap supply is expected in the mid-21st Century in China with a significant number of cars retiring in large cities, the former president of the Chinese Academy of Engineering, Xu Kuangdi, said, state-run China News Agency reported June 21. By then, steel producers could adopt a business model of collecting scrap by day and producing steel via EAFs in the evening to avoid peak electricity demand and cut expenses, Xu said.

Iron ore impact

In a June report, Market Intelligence noted Chinese iron ore imports dropped to a 12-month low of 89.8 Mt in May, while scrap imports rose to the most since May 2018 to 114,741 tonnes in May 2021.

China's policymakers have been urging a crackdown on speculation and hoarding of iron ore in recent months amid inflation concerns, amid a surge in commodity prices.

By 2050, the share of blast furnace-based steel production could fall to 81% of China's steel output from 89% currently, under a Wood Mackenzie modeled scenario which would see a "moderate" impact on iron ore demand, the research firm's senior iron ore analyst Kim Christie said in an email interview.

"However, if scrap's share of the metallics mix in China rises sooner and faster than we expect, the implications for iron ore would be negative, with seaborne iron ore prices moving back towards marginal cost sooner than forecast," Christie added.

"A concerted effort to centralize (or subsidize) obsolete scrap collection in China could have negative long-term implications for hot metal production, with direct flow-through to iron ore demand and pricing."

As of July 5, US$1 was equivalent to 6.46 Chinese yuan.