China's carbon emissions trading plans to keep steel on uptrend in long run

Chinese steel prices, set to be capped to an extent in the second half of 2021 by the level of demand, are likely to stay on an up trend in the long run given the country's efforts to reduce carbon emissions through quota trading and implementation of carbon-free metallurgical technologies.

The China Iron & Steel Association said June 29 it was seeking measures and suggestions from the steel industry around carbon emissions monitoring and accounting, quota allocation, carbon asset management, low carbon iron-making and carbon capture and storage.

Meanwhile, the People's Daily -- a government mouthpiece -- called for a tough but steady approach in setting carbon emissions quotas, taking into account related industries' stress tolerance and competitiveness.

Steel industry in focus

Some market sources said it remained unclear when carbon emissions quota trading would be launched for the steel industry. However, they expected preparation work, such as setting emissions quota for each steelmaker, would take time due to lower industry consolidation.

The total crude steel output of about 85 steel mills monitored by CISA accounts for about 75% of China's total steel production, according to calculations by S&P Global Platts. A large number of small mills are not monitored by CISA, some sources said.

However, the quota trading mechanism, once launched, will help accelerate the industry's consolidation, as small mills that usually have poor environmental protection standards, will be gradually phased out by rising costs for carbon emissions, sources said.

On June 28, the EU sold 3.2885 million CO2 allowances at Eur55.06/mt ($65.74/mt). Some market sources said Chinese carbon prices were unlikely to be anywhere near EU prices in the early days, but costs for trading carbon emissions will almost certainly rise in the long run.

Hydrogen, a costlier affair?

Chinese steelmakers have also begun to employ carbon-free iron-making technology using hydrogen. Sources said the production cost of hydrogen-based direct reduction iron plants is almost four times as high as that through traditional blast furnace and converter route.

Some sources said it was impossible to make iron by using hydrogen on a large scale at present, as it remains too expensive.

But in a bid to reduce carbon emissions and eventually meet carbon neutrality, China's steel industry needs to tap into carbon-free iron-making technologies now, they said.

Investments were expected to increase for the development of low-carbon or carbon-free iron-making technologies, which will be needed for the Chinese steel industry to maintain competitiveness in the future, but this will also bring them financial and cost challenges, some sources said.

China's Jianlong Group commissioned its first hydrogen-based direct reduction iron furnace in Inner Mongolia province in April, with production capacity of 0.3 million mt/year.

Xuanhua Iron & Steel, a subsidiary of Hebei Iron & Steel Group, plans to build two hydrogen-based furnaces in Hebei province, each with 0.6 million mt/y production capacity. The first one is expected to be commissioned in 2021.

Meanwhile, Baosteel plans to start construction of a 1 million mt/y hydrogen-based direct reduction iron furnace in Guangdong province in 2021.