MB RESEARCH: A radical reassessment of China’s future scrap consumption

Metal Bulletin Research’s latest study of the global ferrous scrap sector, A Strategic Five Year Outlook to the Global Ferrous Scrap Industry, is available now and shows why Chinese scrap consumption will remain high over the next decade.

Metal Bulletin Research’s latest study of the global ferrous scrap sector, A Strategic Five Year Outlook to the Global Ferrous Scrap Industry, is available now and shows why Chinese scrap consumption will remain high over the next decade.

Whether it is revert, prompt or obsolete, scrap is consumed in large quantities in electric arc furnaces (EAFs), oxygen furnaces (BOFs), and even in blast furnaces.

Scrap consumption in the global steelmaking and foundry industries has increased rapidly since 1985 and is expected to grow and radically change out to 2021.

The report focuses in particular on the development of obsolete, prompt and revert (home) scrap market trends, and how this interacts with global trends in the pig iron and DRI/HBI sector.

Previous studies have covered scrap consumption in steelmaking, but have often overlooked the foundry sector, despite it being an important consumer of scrap. There are many reasons for this, not least the fragmented nature of the global foundry sector and the sheer difficulty in collating accurate consumption rates within this sector. This report makes up for this deficiency by revealing the role, size and growth of the world’s foundry sector and shows that Chinese ferrous scrap demand has been grossly underestimated.

The consensus among many observers is that China will become a net exporter of scrap after 2020. Before then, however, MB Research suggests that the transition from the country being a net importer of scrap to a net exporter will be delayed by increased domestic consumption of scrap (mostly in the BOF sector) and government policy. The study sees Beijing working to discourage scrap exports and instead divert material towards feeding the growing Chinese steel industry, albeit one growing at lower rates going forward than in the recent past.

On top of that, the MB Research study finds that the country’s foundry sector will be an important driver for global scrap market trends overall out to 2021.

We expect the demand for scrap in China to increase by 7% per year on average out to 2021, at a time when the world’s scrap supply will dramatically increase, reaching well over 2 billion tonnes – with the lion’s share of supply coming from obsolete scrap, stemming from the past decade’s substantial manufacturing.

China’s abundance of domestic scrap may lead to convincing arguments for China to deliberately refocus its steel industry towards EAF start-ups and expansions, which will see greater scrap consumption, in addition to rising consumption by the BOF sector, out to 2021.

Why EAFs will proliferate in China in the years to 2021
• In MBR’s analysis, Chinese infrastructure spending will continue to raise steel consumption and require the building of new steelmaking capacity, particularly in the country’s central and western provinces. So mills will be built, despite the slowdown in China’s top-line economic growth, because the relationship between China’s GDP growth and Chinese steel production/consumption rates will remain largely unchanged out to 2020. This conclusion goes against the views of most other commentators, who have highlighted the oversupply issue – both inside and outside China, and have called for cuts in capacity in both markets. The MBR study also notes that the overall composition of end-user demand for steel will not change either, with the construction sector remaining the biggest consumer of long product steel.

• Beijing will count on the construction of new EAFs to mitigate the political impact of the closures of obsolete and uneconomical capacity. This strategy will enable new investment and employment to be poured into the right locations. This in turn will suit an increasingly localised construction product industry.

• Investment in EAFs will be stepped up in response to China’s growing concerns about pollution, which is seeing a concerted central government campaign to cut coal usage. EAFs will be favoured for their lower carbon-footprint, and there will also be a move away from smaller blast furnaces. Furthermore, the country’s power supply will be stepped up, with a planned rollout of grid programmes, such as the national smart grid programme.

• Rising wages and steel production costs are likely to be a cause of pent-up political instability. EAFs offer significant cost advantages. New integrated capacity costs $600-1,200 per tonne up to the semi-finished product level, depending on global location – with Chinese production at the cheaper end of this spectrum. New EAF capacity costs $200-350 per tonne up to the semi-finished level – again with Chinese production being towards the lower end of this range. Similarly, MBR estimates the labour input per tonne of slab at a modern Western plant is 0.66 hours, compared with 0.50 hours at an EAF plant up to the slab caster stage of production.

• Annual maintenance costs represent, on average, 6% of capital expenditure – that is $46-75 per tonne for integrated mills and $18-20 per tonne for EAFs, although this does vary. Moreover, in integrated mills, reinvestments often come in large outlays to replace major items of equipment: for example, a new coking battery can cost $350-400 million. Costs incurred for environmental protection compound the difficulties.

• Compared to BOFs, EAFs use 75-85% less energy, 90% less virgin materials and 52% less water; they also produce 76% fewer water pollutants, 86% fewer air pollutants and 97% less mining waste. On average, recycling 1 tonne of steel saves about 1.1 tonnes of iron ore, 630kg of coal, and 55kg of limestone. Carbon dioxide emissions are reduced by 58% through the use of ferrous scrap. Recycling 1 tonne of steel saves 642kWh of power, 1.8 barrels (287 litres) of oil, 10.9 million Btu of energy and 2.3 cu metres of landfill space.

• Currently, grade 2 rebar accounts for roughly 60-70% of all the steel products used in China’s construction sector. The country lags far behind other markets in the use of higher-strength 400MPa and 500MPa rebar. However, EAF technology will be developed that closes the gap with integrated plants in terms of the level of steel grades that can be produced, and the MBR study forecasts that the country will start producing far more grade 3 and grade 4 rebar.

• The rapid increase in ferrous scrap availability within China combined with the development of EAFs give it a strategic opportunity to address its dependence on seaborne iron ore imports. The spread of EAFs could also help the country ease its pollution and environmental problems. However, the Chinese have also been diversifying their raw material supply base by acquiring overseas assets, notably in Africa, in an attempt to reduce the perceived pricing power of the major seaborne suppliers.

The risk of scrap shortages in China through to 2021 is low, the only potential issue we see is the sheer size of the expected increase in domestic scrap consumption in the decade between 2012 and 2021. We believe there will be sufficient supplies of scrap; the issue will be the ability of the supply chain to develop the infrastructure necessary to meet the demand needs. Under favourable circumstances, EAF steelmaking in China could viably increase from the 10% share it commands today to closer to 15% over the forecast period.

USA will be short of scrap for prime grades of steel…
In contrast to China, the main issue in the USA in the next 5-10 years will be the risk of shortages of prompt industrial high quality scrap. While the USA’s scrap consumption is expected to increase from 72.7 million tonnes in 2012 to 75.6 million tonnes in 2021, the country’s available supplies of prompt scrap are expected to increase by only 1.6 million tonnes between 2012 (15.2 million tonnes) and 2021 (16.8 million tonnes). In response to the demand from EAFs for high quality metallics for use in flat rolled production, we expect DRI production in the USA to increase substantially, and displace merchant pig iron imports from Brazil – a trend we see continuing beyond 2013/2014. This poses significant challenges for a Brazilian pig iron sector that is atomised (with about 163 mini blast-furnaces), belonging to more than 70 different companies, and with a huge proportion of idle capacity (more than 50%). The study also looks closely at the prospects for the Brazilian pig iron industry.

…while Turkey risks scrap shortages due to the boom in its steel sector and lack of CIS exports
Our research also shows that the risk of scrap shortages in Turkey through to 2021 is very high, with Russian exports all but ceasing and the strong rise in Turkish steel production. One possible solution for Turkey is to step up the recovery of obsolete scrap from its level of only 3.1 million tonnes in 2012, since the country has a reservoir of 56.9 million tonnes. We expect Turkey’s recovery of obsolete scrap to rise to 4.9 million tonnes in 2021, with a scrap reservoir of 126.2 million tonnes. However, if Turkey’s recovery of obsolete scrap were to increase even more rapidly between 2012 and 2021, the potential scrap shortage could be eased.

Alternatively, Turkish steelmakers could look to switch scrap sourcing more towards the EU, despite claims from Turkish steelmakers that the EU supplies inferior quality scrap. Our study suggests the EU’s scrap reservoir will increase over the forecast period to allow for this possibility. We also hold the view that since some of the new EAF capacity in Turkey will be focused on flat products, higher quality metallics will be required, including scrap, which could therefore see a rise in Turkey’s pig iron and DRI imports.

MB Research’s report, A Strategic Five Year Outlook to the Global Ferrous Scrap Industry, provides valuable information, expert analysis and forecasts for the scrap, DRI/HBI and pig iron markets for each key country. At its core are detailed statistics and forecasts (with the proprietary forecasting model and methodologies included) for 1985 to 2021.

To receive the report, please contact marketing@metalbulletinresearch.com or contact + 44 (0) 207 556 6020

Brian Levich
Consultancy director, Metal Bulletin Research