China’s steel decarbonization journey could be long, challenging

China is working toward decarbonizing its steel industry – which accounts for around 15% of total emissions from the Chinese manufacturing sector. But several market participants believe that the road to decarbonization will be a long one

Cost of EAFs

The use of scrap in electric-arc furnaces (EAF) is supposed to be the fastest route toward decarbonization in the steel industry. China has set a target to increase its scrap usage to 320 million tonnes by 2025, up from 260 million tonnes in 2020, according to the country’s 14th five-year plan for a circular economy issued by the National Development & Reform Commission (NDRC) in July.

But market participants believe that the cost of running EAFs could be too high.

To increase their use of scrap, steelmakers with EAFs would need to battle the increasing cost of electricity, unless alternative power sources can be secured – wind or hydropower, for instance. The mounting cost of electricity would likely make scrap-based steel production uneconomical, especially when margins are squeezed, a Europe-based mill source said.

Scrap prices have also become elevated, and that could eat into margins for steelmakers as well, a London-based trader said.

Cost of pellets

China is still predominantly using the traditional blast furnace (BF), which typically requires a high ratio of coking coal to make hot metal, along with iron ore.

Some market researchers believe that increasing the ratio of iron ore pellets could be a way to reduce the use of coking coal, thereby reducing carbon emissions.

The cost of pellets, however, is typically higher than that of iron ore fines, and most mills would still have to weigh the cost of production against the margins, a European pellet producer source said.

Instead of consuming high-grade pellets, Chinese steelmakers might consider the slightly cheaper option of second tier pellets from India, but the quality of steel might be jeopardized by the higher concentration of impurities, a northern China buyer source said.

Supply competition for DR-grade pellets and DRI

Another option is to consume super high-grade direct reduced (DR) pellets or to replace the iron produced in BFs using coke with direct-reduced iron (DRI). But market sources believe this would still entail a very high cost for steel production.

Aside from the costs of higher-grade raw materials, the extremely limited supply of such high-grade raw materials is also another issue cited as a concern for Chinese steelmakers.

“Most of the European steelmakers have already been consuming these high-grade materials, and the supply is extremely limited in the world, with few producers supplying these high-grade iron ores,” the London-based trader said, “so China will be facing stiff competition unless they are willing to pay a super high premium.”

But China might be “taking a backseat” to observe its European counterparts and learn from their experiences of consuming both DR-grade pellets and DRI, the European pellet producer said.

There are at least two state-owned steel mills in China, for instance, that have facilities capable of consuming DRI, and studies are currently being conducted to understand the economics of producing steel using the high-grade raw material, the same European pellet producer added.

In summary

The main factor likely posing a challenge along Chinese steelmakers’ path toward decarbonization is costs. Steelmakers will need to either pass the costs along to buyers of their steel products or find ways to offset their own carbon footprints, such as carbon trading.

China will find it difficult to secure its supply of high-grade raw materials, especially while facing demand competition from its European counterparts. But the Chinese government has aimed to achieve carbon neutrality by 2060, so it still has plenty of time to reach its goal.

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