China decarbonization could create graphite electrode shortage amid more EAF steelmaking

China’s decarbonization drive could result in increased demand for graphite electrodes amid the global trend toward more steelmaking based on electric-arc furnaces (EAFs), although supply risks may continue in the near term against a backdrop of energy controls, sources have told Fastmarkets

China decarbonization could create graphite electrode shortage

Working electroarc furnace at the metallurgical plant workshop

scanrail/Getty Images/iStockphoto

“[Increased] EAF [usage] could be a general trend for steelmaking in China, [because this] is what national policies have been encouraging,” a graphite electrode producer said. “With more EAF usage, graphite electrode demand is bound to increase.”

Graphite electrodes act as a conductor for the large electrical currents which are needed to melt ferrous scrap in the steelmaking process in an EAF. This is due to the electrode’s high thermal conductivity and heat-resistance performance.

Bright outlook for EAFs, graphite electrodes demand

EAF steelmaking technologies have been strongly encouraged by the decision-making bodies in China in their attempts to reduce carbon emissions and achieve sustainability in the country’s steel industry.

On October 24 this year, the Central Committee of the Communist Party of China and the State Council jointly released guidance for the country’s emissions of carbon to peak by 2030. The guidance specifies the approaches needed to reach decarbonization in the steel sector.

One of these will be to optimize industrial structures by promoting steelmaking technologies that are not based on blast furnaces (BFs). The guidance said that the standards for steel scrap recycling must be improved to promote EAF steelmaking, given that the main raw material used in EAF production is steel scrap.

According to the guidance on promoting high-quality development of the iron and steel industry issued by China’s Ministry of Industry and Information Technology at the end of last year, the proportion of EAF steel output will be increased to more than 15-20% of total crude steel output, while the scrap usage ratio will reach 30%.

The National Development & Reform Commission (NDRC), China’s economic planning body, published a plan for the country’s resource recycling industry on July 7 this year to accelerate the development of a low-carbon circular economy. The plan included a goal for scrap usage in the steel sector to reach 320 million tonnes in 2025. In 2020, the NRDC said, scrap usage was around 260 million tonnes.

Looking into the next decade, the share taken by EAF steel was estimated to reach 40% of global steel output, against 30% in 2020, with EAF steels in China at 25% of the country’s total in 2030, compared with around 10% last year, according to Fastmarkets’ steel research team.

“Apart from the support from government policies, I expect that there will be more stringent regulations on carbon emissions in the near future. The costs of short-process steelmaking when it comes to environmental protection measures are going to be lower than long-process steelmaking,” a mill source based in Hebei province told Fastmarkets.

Meanwhile, prices for graphite electrodes have been increasing for the past year, with the latest quote for ultra-high power (UHP) electrodes around 600mm at more than 25,000 yuan ($3,909) per tonne, compared with a price of around 20,000 yuan per tonne in March – a rise of 25% in only seven months. Moreover, producers expected further price rises in the near term.

The current surge in prices for certain grades of graphite electrodes indicated that there was sound demand despite the energy controls being imposed in the downstream steel sector within China and the Covid-19 situation elsewhere, according to a second electrode producer.

“And the price will continue to tick up as we step into the first quarter of next year,” she added, “with inventory getting tighter and increasing production costs.”

Impediments still exist

There are clear trade-offs between energy stability and decarbonization.

Electricity accounts for a large proportion of the costs of steel production using EAFs. When the electricity shortage situations in China were more severe in October, many mills running EAFs were required to reduce or suspend production, according to sources.

To help ease the shortage, China’s NDRC published a notice stating that China will allow its floating electricity prices to fluctuate by as much as 20% of the base price from October 15, compared with a maximum fluctuation of 10% before the announcement. But the floating price limit of 20% will not apply to industries that consume high amounts of energy, the notice said.

“The regulation will definitely raise production costs for electric-arc furnaces,” the mill source in Hebei said. “It is true that the government wants more EAFs because they are more environmentally friendly, but sometimes the government has other priorities, in this case, electricity supply stability.”

China’s plan to phase out the use of coal from its energy mix will provide more motivation for EAF steelmaking. But this will be easier said than done because coal still accounts for a significant part of the country’s fuel mix. With the recent surge in energy prices, China has been doing its utmost to raise coal supplies in order to stabilize the markets.

As for graphite electrodes, despite the positive long-term outlook, industry participants expressed concerns over the short-term market supply issue.

The continuing energy restrictions across the country can be viewed as part of the overall decarbonization efforts, which have also been threatening the supply of graphite electrodes, according to sources.

Fastmarkets learned that in major graphite electrode production hubs - such as Inner Mongolia, Henan, Liaoning and Anhui - power usage limits were relatively rigid, with about 50% of operations halted, with capacity interruptions in Inner Mongolia reaching an average of 70% since the second half of September.

“The production of graphite electrodes consumes high volumes of energy… Therefore, we might continue to see production interruptions affecting output of graphite electrodes in China,” a third producer said.

“While the energy consumption control policies will accelerate the adoption of qualified facilities, or improve efficiency in production cycles, the availability issue could persist throughout the remaining months of the year,” a fourth producer said.

“We have received notices requiring power limitations recently,” a fifth market source told Fastmarkets. “It’s just a beginning, and it’s too early to predict what will follow this present round of electricity control, which started earlier this month.”

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