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Feature: Can China's import of recycled steel take the heat off iron ore prices?

Highlights

Limited benefit to using recycled steel in converters

Iron ore is unmatched in market size, maturity

Carbon-neutrality goals to catalyze EAF capacity expansions

As iron ore prices surge to never seen before highs, propelled by recovering global steel demand, an increasingly popular narrative is making its rounds in China on the potential of replacing, or supplementing, the Fe element in steelmaking with recycled steel, following China's lifting of import restrictions on ferrous scrap in January 2021.

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While the reliance on iron ore may seem unassailable in the short term, demand for ferrous scrap is gradually gaining momentum under China's overarching carbon neutrality goals.

With the passing of the first half-year mark for the new classification for recycled steel, scrap imports put no pressure on seaborne iron ore prices due to its limited usage in basic oxygen furnace, or BOF, thin cost-efficiency, and tight supply.

However, ferrous scrap is mainly used in the electric arc furnace, or EAF, process which is more environmentally friendly than the blast furnace-BOF process and lies comfortably under China's ambitious goal of reaching peak carbon emissions by 2030 and carbon neutrality before 2060.

According to S&P Global Platts Analytics, China's EAF steelmaking capacity will increase by 17 million mt/year in 2021 to about 198 million mt/year, accounting for 15% of China's total crude steel capacity. The net increase of China's EAF steelmaking capacity will be around 10 million mt/year over 2022-2023, according to Platts calculations based on approved capacity swap projects.

Thin cost-efficiency of recycled steel

Upon receiving the green light to import recycled steel, a considerable amount of the material will be used as a coolant in BOFs due to China's heavy reliance on the BF-BOF process for steel production.

The decision to increase scrap usage in BOFs is a cost comparison between pig iron production and scrap, with coke, coal and iron ore on one side of the equation and steel scrap on the other.

"With the demand recovery in Europe and US keeping global scrap prices high, there are few benefits in using imported recycled steel in the near term," a steelmaker source based in Hebei said.

"There is no apparent technical barrier of increasing scrap usage and the decision boils down to costs and benefits as additional fuel is required to increase the temperature if too much scrap is added," the source added.

Based on Platts' survey of Chinese steelmakers, the scrap usage ratio in BOFs generally falls within the 15%-20% range, with a theoretical upper limit at 25%-30%.

"In May, the ratio of scrap in our converters was 18% and no scrap was added to blast furnaces, the cost comparison between hot metal and scrap decides the lower bound of scrap usage in converters, while the desired tapping temperature and quality of steel decides the upper bound," a steelmaker source based in northern China said.

Iron ore is too big to fall

Despite a steady climb in China's recycled steel imports, market participants expect this to have no impact on iron ore prices in 2021 due to the iron ore market's unparalleled size and maturity.

In the first five months of 2021, China imported 471 million mt of iron ore, more than 1,915 times the import volume for recycled steel raw materials, which reached 246,346 mt over the same period, China's customs data showed.

A trader, who has been active in the imported recycled steel market said: "Steel mills in Hebei have been extremely sensitive to the prices of recycled steel cargoes and the lack of financial instruments to mitigate risk exposures is also a limiting factor for higher trading volumes."

"We have no intention to procure recycled steel cargoes this year due to uncertainties with the stability and quality of supply and credit worthiness of the suppliers," a procurement source said, adding that large state-owned steel mills would be the forerunners to open and develop this market.

On the supply side, given China's limitations on selected import parameters, which leaned towards prime material, leaving buyers with only a handful of origins to source from. This effectively sieved out the popular heavy melting scrap, or HMS grades as its dimension ranges did not match China's parameters.

The limited import options can also be observed from China's official statistics, with Japan and South Korea the primary suppliers to China, corresponding to a market share of 67.5% and 34.8% for the first five months of this year.

These origins also hold a short delivery time advantage for Chinese buyers and offer the option to purchase mini bulk shipments with cargoes fully loaded based on their selected grades. This was unlike options from the deepsea market, where the use of larger sized bulk vessels would commonly lead to cargoes consisting of mixed grades.

"Ferrous scrap has a promising future if regulators expand the types of scrap allowed for import in tandem with the rapid development and replacement of infrastructure helping to increase domestic scrap supply," a procurement source based in China said.