China's green steel transition slowed by scrap shortages, weak investment

China's transition away from coal-based steelmaking has been stunted by scrap metal shortages and an ailing property market, dampening investment in the low-carbon steelmaking route.

China produces more than half of global steel output, and its steel industry accounts for about 15% of the country's total carbon emissions. To reach peak steel industry emissions by 2030, Beijing has asked steelmakers to curb output since 2021 as well as encouraged them to boost renewable energy use and replace retiring capacity with the environmentally friendlier electric arc furnace (EAF) process.

Beijing aims to raise EAF mills' share of total crude steel production to 15% by 2025, from 10.1% currently. EAFs are smaller, more efficient and can use 100% recycled steel, making the process 60%‑70% less energy-intensive than the other routes, according to the International Energy Agency. Blast furnaces (BFs) and blast oxygen furnaces (BOFs) feed on iron ore, coke and limestone and emit more than three times as much CO₂ as scrap-based EAFs, according to the World Steel Association.

Chinese local governments approved 52.5 million metric tons per year of EAF projects between January 2021 and June 2023. But EAF capacity utilization rates have not budged as investments continue to flow into coal-fired steel projects. China's steel sector invested $100 billion in coal-based steel plants after 2020, with 119.8 MMt/y of BF and 76.6 MMt/y of BOF projects getting approved between January 2021 and June 2023, according to Helsinki nonprofit Centre for Research on Energy and Clean Air.

"Chinese EAF steel plants are living on the edge," Qian Yi, head of steel research at consultancy ICCSINO, said in an interview. The EAF sector has been losing money so far this year, making steel companies reluctant to increase investments in them, Qian said.

Structural shortfalls

EAF mills face higher production costs and difficulty sourcing enough scrap steel, in contrast to BF and BOF mills' access to plentiful metallurgical coal and imported iron ore.

China has a limited supply of obsolete scrap, and its scrap metal recycling industry is fragmented with poor recycling efficiency, Nanhua Futures analysts Yuan Ming and Yan Zhini wrote in an Aug. 4 note.

These conditions put EAF plants in competition with large BOF plants, which can melt up to 30% of recycled steel to lower their carbon footprint. BOF plants, which are majority-owned by large state-controlled companies, have consumed more than 60% of scrap steel in recent years, Nanhua Futures said. BOF plants face lower cost pressures and have higher pricing power than most EAF mills operated by small private businesses, Nanhua Futures added.

Recycled steel imports are not likely to surpass 1 MMt/y in 2023 due to high quality standards that restrict solid waste imports.

"Even though EAF produces fewer emissions, coal still dominates China's power mix due to insufficient green electricity. Chinese scrap steel output is around 250 MMt/y, far from enough to support the 1 billion metric ton production," Wu Xiaodi, general manager of state-owned Baoshan Iron & Steel Co. Ltd., told investors on May 25. "Therefore, the company is committed to reducing carbon in blast furnace smelting."

Baosteel is partnering with XinJiang Ba Yi Iron & Steel Co.Ltd. to develop a hydrogen-rich carbon cycle oxygen technology that could lower BF plants' carbon emissions by 30%, and further to 50% with renewable energy, Wu said.

Property slump

China's macroeconomic headwinds have also contributed to EAF mills' woes. Chinese steel mill margins once again turned negative in early August, as steel prices have been falling due to a downturn in the housing market and shrinking exports.

"EAF steelmakers in China are more vulnerable than BF [and] BOF steelmakers when facing a bad market situation," Shen Xinyi, researcher at CREA, said in an email. "The demand is declining, and the profitability of the Chinese steel sector has been thin since last year. As a result, more EAF steel mills idled or cut their production in 2022, as well as in 2023."

Overseas EAF mills generally produce more high-value-added steel, but nearly 70% of China's EAF plants produce cheap rebars or wire rods used for construction, ICCSINO's Qian said. EAF mills are joining the relentless "rat race" with BF and BOF mills, facing greater pressure amid the property downturn in recent years, Qian said.

As of Aug. 11, 43.4% of EAF mills were running at a loss, according to consultancy Mysteel. Companies are forced to cut production to narrow losses, bringing the capacity utilization rate of EAF steel plants to about 50%.

Weakness in China's property and manufacturing sectors reduces not only steel prices and demand but also scrap steel supplies. It is easier to stop and restart operations at EAF mills than at BF and BOF mills, hence the former bear the brunt of crude steel output curbs and power rationing, according to Mysteel.

More stimulus needed

Rising scrap steel supplies and the shift to more premium products such as superior steel or specialty steel could incentivize more EAF capacity, Qian said. The analyst expects China's scrap steel supplies to significantly improve after 2025, which will lower EAF production costs and help EAF mills reach 15% of total crude steel output.

The launch of EU's Carbon Border Adjustment Mechanism, which will impose tariffs on emission-intensive steel products, would force China's steel industry to lower emissions, but the low carbon pricing in the country remains a huge challenge, Qian said.

More subsidies for EAF mills would help further, Qian said, noting that China has offered stimulus policies for new energy vehicles but lacks supportive policies on electric costs or scrap steel to ease EAF mills' burdens.

CREA's Shen recommends that China should include the steel sector in the emissions trading system by 2025, and the emissions trading system should shift from an intensity-based allocation to an absolute cap.

To reach peak CO₂ emissions targets for the iron and steel sector, China should limit new investments in BF capacity and speed up the adoption of EAF and hydrogen-based steelmaking technology, Shen said.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.