With a new standard for recycled steel enabling imports of steel scrap, China aims to increase its consumption of scrap in steelmaking over the next five years as the country tries to reduce both its heavy reliance on iron ore and its carbon emissions.
After a ban in July 2019 on imports of solid waste, the Chinese government implemented a new classification for recycled steel scrap this month, allowing materials that meet the standard to enter the country. Steel scrap is used as raw material in the steelmaking process in electric arc furnaces, or EAFs, and converters.
The Chinese steel sector is looking to lift the contribution of EAFs to overall crude steel production and consume more steel scrap in converters during its 14th five-year period, according to a statement released by the Ministry of Industry and Information Technology, or MIIT. EAF steelmaking only consumes steel scrap and is seen as more environmentally friendly than using converters.
Data from the Bureau of International Recycling, an industry association, shows steel scrap use in China increased to 215.9 million tonnes in 2019 from 83.3 million tonnes in 2015, while overall crude steel production surged to 996.3 million tonnes from 803.8 million tonnes over the same period.
While the resumption of scrap imports will not immediately alleviate the shortage of domestic scrap resources due to the current differential between domestic and international prices, the new policies align with the industry’s long-term needs to reduce its over-reliance on iron ore and its goals of cutting carbon dioxide emissions, Qiu Yuecheng, research director of coal and steel at Everbright Futures in Shanghai, said in an interview.
"The new policy is a reasonable move after the rally in iron ore prices last year," Qiu said.
About 80% of China’s iron ore relies on imports, according to a report by state-owned Xinhua News. Australia is the biggest source of iron ore for the world’s largest steelmaker, accounting for 62% of China’s total imports.
S&P Global Platts reported the first deal signed between China Baowu Steel Group Corp. Ltd.'s trading unit Ouyeel and Japanese trader Mitsui under the new ferrous scrap standards earlier this month. Platts cited a source as saying that the deal was seen more as a trial, as the current international scrap prices are higher than domestic prices.
The permit for ferrous scrap imports met the demand of the industry for more resources amid a tight domestic supply as prices for steel scrap in China hit the highest in seven years last month, said Wang Guoqing, research director at Beijing-based Lange Steel Information Research Center, an industry data provider.
"Many market participants had called for a removal of the import ban for a while," Wang said, though she added that steel scrap use and EAF capacity in China are very low compared with developed countries.
Platts Senior Managing Editor Paul Bartholomew said the imports of scrap will help reduce some of the cost pressure as domestic scrap was expensive due to a lack of import competition, but the EAF ratio will not be lifted by much in the coming year due to the fragmented domestic scrap market, high power costs and the fact that China has built so much high-quality blast furnace capacity in recent years.
From 2021 to 2025, the Chinese steel sector aims to increase the proportion of EAF capacity to overall crude steel capacity to 15% and lift the steel scrap consumption in converters to 30%. According to Platts, steel scrap consumption in converters in Chinese steel mills typically ranges between 10% and 25%.
S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.