Bracing for a surge

Features - Chinese Ferrous Outlook

Shanghai’s net zero emissions target could peak China’s ferrous scrap imports.

© Alexey Zarodov / stock.adobe.com

China’s ferrous scrap imports could jump by 500,000 to 1 million metric tons in 2021 and by 3 million to 5 million metric tons in 2022 owing to its push for reducing its carbon footprint, reports from the country suggest.

This is a far cry from June 2017, when China halted scrap metal imports, aiming to ban them entirely by 2020. The country also enforced a 25 percent import duty on scrap metal from the U.S. beginning April 2018, canceled the import permits of 960 companies and shut down 8,800 firms that allegedly violated scrap import regulations. The ripple effect was felt worldwide, leading to port congestion and new regulations for ocean carriers.

However, Jan. 1 of last year, China lifted its two-year ban, allowing imports that adhere to a new recycled iron-steel materials standard.

Additionally, China released an action plan late last year to reduce its carbon dioxide emissions before 2030. Under this plan, nonfossil fuel energy will account for roughly 25 percent of consumption, and carbon dioxide emissions per unit of gross domestic product will decline by more than 65 percent from 2005 levels.

Strict standards make an impact

China’s ferrous scrap imports remained subdued between 2018 and 2020 when the import ban was in effect. China’s ferrous scrap imports averaged 2.14 million metric tons per year from 2014 to 2018 before plunging to 180,000 metric tons in 2019 during the scrap import ban.

In 2019, China imported roughly 1.07 billion metric tons of iron ore and generated 240 million metric tons of ferrous scrap, according to its Customs data.

The country said it would allow only ferrous metals with no more than 0.5 percent contamination to be imported, making it difficult if not impossible to meet the new standards.

These regulatory measures limited choices for recyclers from Europe and the U.S., which were compelled to find alternate markets to export scrap, the China Association of Metal Scrap Utilization (CAMU) indicated in late 2019.

The ban also affected global supply chains, with shipping carriers citing it as a key reason for reduced shipments to Asia. Ports and shipping lines witnessed a decline in volumes as scrap goods were diverted to India and Southeast Asia.

Still, China remains a country with an established market and the required infrastructure to be the world’s top importer of scrap. Hence, it could not be replaced as the top scrap importer as emerging markets such as India, Thailand and Vietnam needed time to adjust to the regional shift.

A boost for EAFs

In 2020, steelmaking associations in China worked with the government to enact a set of standards for importing ferrous scrap. The Standardization Administration of the People’s Republic of China approved a plethora of ferrous scrap grades and reduced inspection to only once after they arrived at Chinese ports, making these scrap grades more convenient to import. Moreover, the administration also waived a 2 percent import duty, effective Jan. 1, 2021.

These measures were taken to boost China’s steelmaking capacity through electric arc furnaces (EAFs).

Overall, Chinese industries have welcomed the move to reclassify ferrous scrap as a recyclable resource as its steelmakers continue to grapple with tight domestic supply amid high demand. Steelmakers such as Rizhao Steel and Jiangsu Steel Group aim to import as much as 1 million metric tons of ferrous scrap in 2021.

The total volume of scrap China imports, however, could be insufficient as its annual EAF steelmaking capacity could rise by 14.3 million metric tons in 2021 to about 196 million metric tons, totaling 15 percent of China’s total crude steel capacity, according to reports, as the country reduces integrated production to lower its carbon emissions.

Nevertheless, the growth of EAF capacity could decelerate in 2022-2023 in light of limited scrap supply and high electricity rates.

CAMU says China’s domestic scrap supply could reach 270 million metric tons in 2021, up 20 million metric tons from 2020.

Scrap supply could remain limited despite the projected increase because of the EAF expansion. The scrap utilization ratio in steelmaking processes has increased to offset the loss in pig iron caused by China’s initiative to reduce carbon emissions. 

Import trends rising

In the first seven months of 2020, Chinese ferrous scrap imports grew nearly 32 times to 420,820 metric tons from 13,142 metric tons in the first seven months of 2020 and by 151 percent from 167,407 metric tons in 2019, according to China Customs data.

Japan was the biggest exporter of ferrous scrap to China with 302,176 metric tons of cargo in January to July 2021, followed by 76,354 metric tons from South Korea and 15,032 metric tons from Malaysia. Hong Kong and Taiwan also were major exporters to China.

Chinese ferrous scrap imports in May 2021 stood at 114,741 metric tons, which surpassed the combined volume of its ferrous imports from January through April. May imports grew by 56 percent from April’s 76,249 metric tons.

China’s ferrous scrap imports began their upward trajectory in March of last year, increasing 690 percent to 45,564 metric tons from 5,765 metric tons in February. The surge continued in the following months as mills and brokers became confident about certain shipments successfully entering through the customs inspection process.

China’s ferrous scrap imports, however, declined by 52 percent to 44,460 metric tons in August 2021 from July as the country replaced ferrous scrap imports with semifinished steel imports.

Imported steel scrap demand slumped because of ongoing power shortage and additional restrictions on Chinese steel mill operations. Severe restrictions on power supplies forced a raft of EAF steelmakers and rerollers to scale back or shut down operations in early September 2021.

Therefore, Chinese ferrous scrap imports fell by 44 percent from August 2021 to 24,624 metric tons in September.

Curbs affecting metal production

The relaxation of the ferrous scrap import ban early this year came as a relief to many steel producers across the country.

China’s domestic primary metal output growth, however, has stalled as producers adapt to the strict energy efficiency targets. Producers, therefore, are unable to fully cater to demand, necessitating higher imports to rebalance the domestic market.

The tightness in China’s domestic market has worsened in light of logistics as several producers in the northwest are away from consumption hubs in the east and because of rising demand for exports as global markets continue to recover from the COVID-19 pandemic.

The first half of 2021 saw Chinese steel mills churn out almost 12 percent more crude steel compared with the prior year. China produced 99.45 million metric tons of steel in May 2021, which fell to 93.88 million metric tons in June.

Beijing has directed the steel industry, which contributes from 10 percent to 20 percent of the country’s carbon emissions, to curb production to accomplish net zero emissions by 2060.

As a result, China’s crude steel production, which accounts for half the world’s annual total production, plunged in July by the widest year-on-year margin since the global financial crisis in 2008.

State inspections and production curbs also led to a decline of nearly 12.5 million metric tons in July 2021. Moreover, the curbs have led to a 40 percent drop in global iron ore prices since mid-July.

China’s daily average crude steel production improved in mid-August of last year as Chinese mills boosted output to maintain high utilization standards. Domestic steel demand has seen a lag related to a slowdown in construction activities.

The two-month fall in China’s steel output directed by economic officials proved to the world Beijing’s capability to advance climate goals and control commodity markets. The trend in the economic slowdown, however, will test the sustainability of production cuts. 

An upward trajectory

China’s five-year plan aims to reduce domestic crude steel production capacity and increase the use of scrap-intensive EAFs, which should benefit recyclers.

China is reducing its dependence on iron ore while also increasing scrap and steel billet imports, reports suggest. Additionally, China’s demand for steel scrap could surge to 20 million metric tons in the near term, while annual imports could be around 10 million metric tons.

Experts estimate China’s crude steel production could peak in 2022.

China’s growing demand for imported scrap has doubled steel scrap prices in Asia over the past year, and billet has witnessed an even sharper rise. Prices could maintain an upward trajectory as they continue to feed South Asian and Southeast Asian markets, along with those in Bangladesh and Pakistan.

The authors are assistant editor, Asia, and ferrous analyst, Asia, at Davis Index. Email them at swarnali.chakraborty@davisindex.com and anjana.sabu@davisindex.com.