Feature: Can China’s Import of Recycled Steel Lower Iron Ore Prices?
Benefits limited to using recycled steel in converters
Iron ore is unmatched in terms of market size and maturity
Carbon neutrality goals to catalyze the expansion of AEP capacities
As iron ore prices reach unprecedented highs, propelled by the recovery in global demand for steel, an increasingly popular narrative is circling China of the potential to replace or supplement the Fe element in the manufacture of steel by recycled steel, following China’s lifting of import restrictions on scrap metal in January 2021.
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While dependence on iron ore may seem unassailable in the short term, demand for scrap is gradually increasing as part of China’s overall carbon neutrality goals.
With the passage of the first half of the year for the new classification of recycled steel, imports of scrap did not exert any pressure on the prices of iron ore transported by sea due to its limited use in basic oxygen furnaces. , or BOF, for its low profitability and limited supply.
However, the scrap is mainly used in the electric arc furnace, or EAF, a process which is more environmentally friendly than the blast furnace-BOF process and fits comfortably within China’s ambitious goal of achieving a peak carbon emissions by 2030 and carbon neutrality by 2060.
According to S&P Global Platts Analytics, China’s EAF steelmaking capacity will increase by 17 million t / year in 2021 to reach around 198 million t / year, representing 15% of the total crude steel capacity of the China. The net increase in China’s EAF steel production capacity will be around 10 million tonnes per year over 2022-2023, according to Platts calculations based on approved capacity swap projects.
Low profitability of recycled steel
After receiving the green light to import recycled steel, a considerable amount of material will be used as coolant in BOFs due to China’s heavy reliance on the BF-BOF process for the production of ‘steel.
The decision to increase the use of scrap in BOFs is a cost comparison between the production of pig iron and scrap, with coke, coal and iron ore on one side of the equation and scrap of steel on the other.
“With the recovery in demand in Europe and the United States keeping global scrap prices high, there is little benefit to using imported recycled steel in the short term,” said a steel source based at Hebei.
“There is no apparent technical barrier to increasing the use of scrap and the decision comes down to the costs and benefits, as additional fuel is needed to raise the temperature if too much scrap is added. “, added the source.
According to Platts’ survey of Chinese steelmakers, the utilization rate of scrap in BOFs is generally in the range of 15-20%, with a theoretical upper limit of 25-30%.
“In May, the rate of scrap in our converters was 18% and no scrap was added to the blast furnaces, the cost comparison between hot metal and scrap determines the lower limit for the use of scrap in converters, while the desired casting temperature and the quality of the steel decides the upper limit, ”said a steel source based in north China.
Iron ore is too big to fall
Despite a steady increase in imports of recycled steel from China, market players expect this to have no impact on iron ore prices in 2021 due to the unmatched size and maturity of the iron ore market.
In the first five months of 2021, China imported 471 million tons of iron ore, more than 1,915 times the import volume of recycled steel raw materials, which reached 246,346 tons during the same period, according to Chinese customs data.
A trader, who has been active in the imported recycled steel market, said: “Hebei steel mills have been extremely sensitive to the prices of recycled steel shipments and the lack of financial instruments to mitigate risk exposures. is also a limiting factor for higher trading volumes. . “
“We do not intend to purchase shipments of recycled steel this year due to uncertainties regarding the stability and quality of supply and the creditworthiness of suppliers,” a supply source said, adding that the large public steelworks would be the precursors to open up and develop this market.
On the supply side, given China’s limitations on certain import parameters, which leaned towards raw materials, leaving buyers only a handful of origins to source. This effectively sifted the popular heavy smelting scrap, or HMS grades, as its size ranges did not match China’s parameters.
Limited import options can also be seen in official statistics from China, with Japan and South Korea being the main suppliers to China, corresponding to a market share of 67.5% and 34.8% for the first five months of this year.
These origins also provide a short delivery time advantage for Chinese buyers and provide the option to purchase bulk mini-shipments with fully loaded cargoes according to their selected qualities. This was different from the options in the deep water market, where the use of larger bulk carriers would generally lead to cargoes consisting of mixed qualities.
“Scrap metal has a bright future if regulators expand the types of scrap allowed to import alongside the rapid development and replacement of infrastructure helping to increase the domestic supply of scrap,” a China-based supply source said. .