Chief Representative, Beijing Office/Advisor on Economics, Raw Materials and Markets

13 February 2018

The focus of the last month’s Metal Bulletin’s iron ore conference in Beijing was the short and medium-term outlook of the global iron ore market. I was invited to deliver a presentation that I titled The Chinese steel industry at a crossroads.

Iron ore and steel scrap are the two major raw materials used in steel production, and they can substitute each other. China has been the world’s largest iron ore importer since 2003. In 2017, its imports reached a new record-high of 1075 million tonnes (Mt). China has also been importing steel scrap over the past decade, with annual imports totalling approximately two Mt/a. Its exports of scrap have been virtually nil in the same period.

However, in 2017, China’s steel scrap exports suddenly surged to reach 2.3 Mt, which triggered a debate over whether or not China should build more electric arc furnace (EAF) plants to make use of its increasing domestic steel scrap. Today, EAF technology represents around 6.5% of China’s steel production, compared to around 45% elsewhere in the world.

Within this context, I would like to share my views about the future of EAF in China:

  • I think China’s steel scrap is currently still in short supply and the jump in scrap exports was due to the closure of a huge number of obsolete induction furnaces, which use 100% of steel scrap as raw materials.
  • In the medium to long-term, China’s domestic steel scrap is set to increase rapidly thanks to the fast growth of China’s steel consumption that we have seen over the past two decades (see chart below). China’s domestic steel scrap will most probably be able to meet China’s steelmaking demand within a few years, but a surplus in the supply is likely in 15 years.
  • There was a bottleneck of electricity supply for China to use EAF’s over the past two decades. However, since about three years electricity has become abundant, with even an oversupply of electricity reported in some provinces.
  • Environmental regulation in China is becoming stricter. In addition to this, China’s carbon trading system was officially launched in January 2018. This suggests that operating blast furnace-blast oxygen furnace (BOF) processes using iron ore will incur increasingly higher environmental taxes, compared to plants using the EAF process.
  • The Chinese steel industry has a dilemma to overcome in relation to whether or not to replace BOFs with EAFs. One of the main arguments for not replacing them is that most Chinese steelmakers’ blast furnaces (BFs) and BOFs are modern with high efficiency and low intensity levels and more than half of them were just built in the past 10-15 years. This means that substituting BOFs with EAFs will have a very high financial burden on steelmakers and the economic return is in question.
  • The substitution of some BOF’s with EAF’s in response to the rising scrap availability will happen, sooner or later. Different steelmakers in different regions should have different strategies, depending on the availability of both steel scrap and electricity in their regions.
  • For the longer-term, there is a need to develop a breakthrough technology which can flexibly switch between iron ore and steel scrap to deal with the volatility in supply of different raw materials and changing environmental regulations.

To conclude, from the scrap and power supply point of view, there is certainly room for the Chinese steel industry to increase its share of EAF steelmaking capacity. In the coming years, it will be making use of the growing domestic scrap availability considering that a BOF can be charged with up to approximately 30% scrap and an EAF up to 100%. In the longer-term, the industry will need to overcome the dilemma of the choice between BOF and EAF.

Add your comment here:

  • I think that both the logistic aspect (supply/surplus scrap) and the strategic aspect (technological products) should be considered. Much of China’s steel production is made of flat products for the automotive industry, the can industry and so on, and these cannot be manufactured by the EAF route. In this way, I think that China will continue as the flat products leader through BOF in addition to increasing EAF production with its own scrap. In this context, it is clear that although China will maintain the BOF production level, this percentage will decrease because they will increase the total production via modern EAF.

  • Please keep in mind that most of the EAFs in China use liquid iron, up to 85% of the total charge, so scrap is not such a big issue as it is for the western countries.

  • Thank you for your comment. Yes you’re right, China’s EAFs do charge a very high ratio of hot metal compared to the scrap input and in addition, the total capacity of installed EAFs in China is small compared to BOFs so it will have less influence on the country’s scrap consumption.

  • In my opinion, first of all, we need to look at the infrastructure of the required power supply or the invention of a new method for supplying power to the companies and then go to the arc furnace. Thanks.

  • Thank you for your input in the discussion, Hedayat Gholami. In China, most steel plants are modern because they were built in the past 10 to 15 years and already have very efficient power supply infrastructures; any improvement would be minimal.

  • In my opinion, there is no reason to think that China will not do the same as Europeans and Americans did before them: switch route from BOF to EAF as soon as a huge surplus of scrap becomes available. It is true that Flats is not Longs, but even so, it is a question of scrap quality. Perhaps there will be some supply/demand imbalance for some time but it is hard for me to imagine ships of scrap coming from China into Europe in a stable way. Perhaps to Vietnam and nearby. We’ll see anyway…

  • The integral approach is also to consider the production and use of DRI. China has huge reserves of coal and coal gasification is a potential substitute for the lack of natural gas.

  • You also need to consider that electricity in China is generated mainly from coal. You save energy using scrap in EAF but have to burn coal in the thermo power plant. I believe the future for China is to charge more and more scrap in the BOF. It maybe more economical and also more environmental friendly.

  • Thanks for your comment. Indeed, the environmental footprint should be evaluated from a life cycle point of view. And yes there is still room for Chinese steelmakers to increase the scrap charge ratio for BOFs.

  • A very nice discussion and summary. Can we say that production cost and quality might be two constraints of EAF development? Which one do you think is more important? Or are there any other factors?

  • Thank you for your comments, Li Zhaoling. Indeed there is a cost and quality issue. The cost difference is heavily dependent on the price spread between iron and scrap for which it’s hard to predict for the future. Quality wise, EAF technology has been proven reliable worldwide and many world leading steelmakers are using EAF to produce premium grades of steel products. However, there is a quality issue with the scrap. The quality of scrap is a critical factor here.

  • thanks for these interesting insights. Question: are there also already figures on shares of EAF production in China after 2016? I am contributing to a blog which focuses on the availability/pricing of graphite electrodes and therefore is directly related to yours. If someone is interested, please have a look on.

  • That China is the biggest source of raw materials for production of Graphite Electrodes, is a big advantage for the country. Nowadays, Graphite Electrode consumption contribute almost 20% of the conversion cost of crude steel through EAFs. If my information is correct, China has recently closed down about 100 million tons of steel making capacity that were highly polluting for the environment. These were mainly Induction Furnace facilities. If these shut-capacities have to be made-up again EAF steel making is a good option, because of its lower project costs and faster implementation compared to BF/BOFs. A huge country like China will probably not ignore its domestic scrap resources and would like to diversify its steel production technologies too.

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