China's steel output caps to continue in 2022 despite easing emissions timelines

China's crude steel production will continue to get capped in 2022 and beyond, keeping annual output below 2021 levels, a development that comes despite a flexible timeline allowed for reaching peak carbon emissions, industry sources told S&P Global Platts.

China's Ministry of Industry and Information Technology in a guideline issued Feb. 7 made the timetable to achieve peak carbon emissions more accommodating rather than specifying a year.

This move was partly targeted at giving the steel sector more room for transforming into a low-carbon industry, and also to tame market talks over steel output cuts that have caused price volatility, sources said.

"The year 2030 is just the bottom line for the steel industry to peak carbon emissions, but the industry probably will hit the emissions peak years before 2030," one source said.

"This is not only because the government will continue to cap steel production, but also as domestic steel demand has been on a downward trend as China's urbanization has been nearing completion, facilitating the declines in steel output and thus in emissions," the source added.

Production levels

A few mill sources said they had already been notified verbally to keep 2022 steel production within 2021 levels.

Some market sources expected China's crude steel output in January-March to remain lower than the year-earlier levels, as steel output cuts continued in northern China in a bid to tackle winter smog. The cuts were also meant to guarantee clear air during the Winter Olympics in February and the National People's Congress and the Chinese Political Consultative Conference in March, they added.

China's crude steel output would likely rebound starting late-March or April when output cuts are expected to be eased or lifted in northern China, and the typical strong demand season begins.

But steel output cuts are expected to begin in eastern China in September to reduce emissions for the 19th Asian Games in Hangzhou city Sept. 10-25. After that, such curbs would be widened again in northern China for the winter season.

Focus on EAFs, hydrogen furnaces

In addition to steel output controls in the coming years, the development of electric arc furnaces and hydrogen furnaces are forecast to play a big role in reducing carbon emissions.

The guideline aims to increase EAF steel production to more than 15% of China's total crude steel output by 2025. A few market sources expected the ratio to easily breach 15% by then as the approvals for new EAFs had shown signs of accelerating since 2021.

In 2021, China approved the construction of 43 new EAFs with a total crude steel capacity of 29.33 million mt/year through capacity swaps, while in 2020, only about 10 million mt/year of new EAFs got construction approvals, showed Platts calculations based on announcements by local governments.

Just within January, another seven new EAFs of 6.3 million mt/year capacity got approved for construction through capacity swaps.

These new EAFs approved since 2021 would be commissioned mainly from late-2022 to 2025.

China's crude steel made by EAFs during January-November 2021 accounted for 10.86% of the country's total crude steel output, or 102.77 million mt, according to the China Association of Metal Scrap Utilization.

Meanwhile, key producers Baosteel, Hebei Iron & Steel, Xingtai Iron & Steel and Fushun New Steel have all set out to build their first hydrogen furnaces with a combined pig iron capacity of 3.43 million mt/year. These furnaces will be commissioned over 2022 to 2024.

China's Jianlong Group commissioned in April 2021 its first hydrogen-based direct reduction iron furnace of 300,000 mt/year capacity in Inner Mongolia province.

The Feb. 7 guideline also reiterated accelerating consolidation of the steel industry through mergers and acquisitions.

However, the new guideline no longer specifies the production percentages of the top five and top 10 mills in China's total steel production.

While China's steel industry consolidation will continue to gather pace amid rising decarbonization costs, Beijing now appeared to focus more on quality consolidation of the industry, a few market sources said.