SPglobal
As iron ore prices surge to never seen
before highs, propelled by recovering global steel demand, an increasingly
popular narrative is making its rounds in China on the potential of replacing,
or supplementing, the Fe element in steelmaking with recycled steel, following
China's lifting of import restrictions on ferrous scrap in January 2021.
While the reliance on iron ore may seem
unassailable in the short term, demand for ferrous scrap is gradually gaining
momentum under China's overarching carbon neutrality goals.
With the passing of the first half-year
mark for the new classification for recycled steel, scrap imports put no
pressure on seaborne iron ore prices due to its limited usage in basic oxygen
furnace, or BOF, thin cost-efficiency, and tight supply.
However, ferrous scrap is mainly used in
the electric arc furnace, or EAF, process which is more environmentally
friendly than the blast furnace-BOF process and lies comfortably under China's
ambitious goal of reaching peak carbon emissions by 2030 and carbon neutrality
before 2060.
According to S&P Global Platts
Analytics, China's EAF steelmaking capacity will increase by 17 million mt/year
in 2021 to about 198 million mt/year, accounting for 15% of China's total crude
steel capacity. The net increase of China's EAF steelmaking capacity will be around
10 million mt/year over 2022-2023, according to Platts calculations based on
approved capacity swap projects.
Thin cost-efficiency of recycled steel
Upon receiving the green light to import
recycled steel, a considerable amount of the material will be used as a coolant
in BOFs due to China's heavy reliance on the BF-BOF process for steel
production.
The decision to increase scrap usage in
BOFs is a cost comparison between pig iron production and scrap, with coke,
coal and iron ore on one side of the equation and steel scrap on the other.
"With the demand recovery in Europe
and US keeping global scrap prices high, there are few benefits in using
imported recycled steel in the near term," a steelmaker source based in
Hebei said.
"There is no apparent technical
barrier of increasing scrap usage and the decision boils down to costs and
benefits as additional fuel is required to increase the temperature if too much
scrap is added," the source added.
Based on Platts' survey of Chinese
steelmakers, the scrap usage ratio in BOFs generally falls within the 15%-20%
range, with a theoretical upper limit at 25%-30%.
"In May, the ratio of scrap in our
converters was 18% and no scrap was added to blast furnaces, the cost
comparison between hot metal and scrap decides the lower bound of scrap usage
in converters, while the desired tapping temperature and quality of steel
decides the upper bound," a steelmaker source based in northern China
said.
Iron ore is too big to fall
Despite a steady climb in China's
recycled steel imports, market participants expect this to have no impact on
iron ore prices in 2021 due to the iron ore market's unparalleled size and
maturity.
In the first five months of 2021, China
imported 471 million mt of iron ore, more than 1,915 times the import volume
for recycled steel raw materials, which reached 246,346 mt over the same
period, China's customs data showed.
A trader, who has been active in the
imported recycled steel market said: "Steel mills in Hebei have been
extremely sensitive to the prices of recycled steel cargoes and the lack of
financial instruments to mitigate risk exposures is also a limiting factor for
higher trading volumes."
"We have no intention to
procure recycled steel cargoes this year due to uncertainties with the stability
and quality of supply and credit worthiness of the suppliers," a
procurement source said, adding that large state-owned steel mills would be the
forerunners to open and develop this market.
On the supply side, given
China's limitations on selected import parameters, which leaned towards prime
material, leaving buyers with only a handful of origins to source from. This
effectively sieved out the popular heavy melting scrap, or HMS grades as its
dimension ranges did not match China's parameters.
The limited import options can
also be observed from China's official statistics, with Japan and South Korea
the primary 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 hold a short
delivery time advantage for Chinese buyers and offer the option to purchase
mini bulk shipments with cargoes fully loaded based on their selected grades.
This was unlike options from the deepsea market, where the use of larger sized
bulk vessels would commonly lead to cargoes consisting of mixed grades.
"Ferrous scrap has a
promising future if regulators expand the types of scrap allowed for import in
tandem with the rapid development and replacement of infrastructure helping to
increase domestic scrap supply," a procurement source based in China said.