China's steel scrap imports in 2023 may not breach 1 mil mt mark: sources

China's steel scrap imports may not be able to go past the 1 million mt mark in 2023 because of higher quality standards that limit available supplies, analysts said March 24.

In 2022, China imported 558,900 mt of recycled steel materials, up just 0.6% on the year, according to the latest customs data. Japan was the largest import market, followed by the UK and South Korea.

China Iron & Steel Industry Association (CISA) recently urged the state to relax rules targeting imported steel scrap to help boost imports into the country, a move which could help reduce scrap sourcing costs.

In 2021, China revised quality standards for the scrap sector, requiring impurities in scrap to not exceed 0.3%-1% for three different grades.

These higher standards affected the use of imported scrap resources, as availability of compliant material was limited in global markets, according to the CISA.

If imported steel scrap does not meet quality standards, it can be deemed as solid waste imports, leading to cargo repatriation risks, or breaching of rules, sources said.

Favorable factors

While quality standards are limiting shipments, some favorable factors could slightly boost China's steel scrap imports in 2023, but they may not be able to take imports past the 1 million mt mark, according to analysts.

If economic challenges continue to persist globally and Chinese economy remains comparatively steady, decent arbitrage import trade opportunities could emerge, which could slightly boost China's steel scrap imports in 2023, analysts at investment consultancy Shanghai Dongzheng Futures said.

China's steel scrap usage is already seen rising and pressuring domestic supplies, which could help boost scrap imports from the year-ago levels.

The seasonal steel scrap buying season has already started in China, which typically covers the March-April period, China Association of Metal Scrap Utilization (CAMU) said in its latest note.

Acceleration of construction projects across China is also leading to higher steel scrap demand from the domestic steel sector, squeezing scrap supplies, CAMU said.

Investment consultancy GF Futures expected China's steel scrap supply to remain under pressure in the near term, led by weak supply and demand pick-up in the domestic markets.

In 2022, China's steel sector consumed 210 million mt of steel scrap, down 7% on the year, according to CAMU.

The decline was mostly because the steel sector faced pressure amid pandemic lockdowns and debt crisis in the property sector, according to sources.

Since 2022, steel scrap stocks at Chinese steel scrap recycling hubs have continued to decline, with upstream scrap suppliers facing challenges to collect scrap, as scrap recycling volume depends on steel sector demand and recyclers' profits, according to Shanghai Dongzheng.

Scrap struggle

Though China has over 700 steel scrap recyclers, with scrap recycling capacity of more than 150 million mt/year, the recyclers are spread out sparsely with comparatively big quality variances, according to Essence Securities.

Back in March 2022, China began new steel scrap value added tax rules, requiring steel scrap recyclers to pay 3% VAT, with the recyclers granted an immediate 30% tax rebate, according to Shanghai Dongzheng.

However, recyclers were already receiving tax rebates even before the new policy, and after the March 2022 policy came into effect, regional governments removed the rebate, so actual operational costs have risen for steel scrap recyclers, according to local industry sources.

One way to boost recyclers' profit margins is encouraging more short steel production over long steel production.

China is aiming to raise the ratio of short steel production process to over 15% in the total scrap production process by 2025, according to China's Ministry of Industry and Information Technology (MIT).

The ministry is aiming to move the ratio up to 20% by 2030, compared with 10% in 2020.

Before 2017, Chinese steel sector using long production process added 10%-15% steel scrap, and with profits rising, many raised steel-scrap ratio to 20%-25%, with some reaching 30%-40%, according to Shanghai Dongzheng.

The short steel production process, which uses scrap as feedstocks, emits less sulfur dioxide and nitrogen oxides than the long process production process.

The short steel production process has also economic edges over the long process, as investment costs for the short process are only around 7%-8% of the long process, while per ton environment protection operation costs also are at just one-eighth of the long process, according to GF Futures data.

Scrap generation seen robust

China's steel scrap generation is expected to rise to over 340 million mt by 2025, up 31% from around 260 million mt in 2020, according to the China Metallurgical Industry Planning and Research Institute.

In the long run, China's steel scrap resource volume is expected to rise further to 380 million mt by 2030, the Chinese Society for Metals estimated.

Chinese analysts attributed the anticipated growing steel scrap volume to the short end-of-life period of steel products, with the car sector's end-of-life period estimated at around 14 years.

However, in 2023, China's steel scrap resource volumes may see a limited change, with volumes only to start growing after 2024, and rising to over 400 million mt after 2035, according to Shanghai Dongzheng.