Chinese mills continue to use more scrap to produce crude steel even after blast furnace restrictions were lifted
China's crude steel output during January-April increased by 5pc against a year earlier, while pig iron output fell by 1.2pc. Even after the output restrictions were removed in March, pig iron output fell in April by 0.4pc to 63.11mn t, while crude steel output rose by 4.8pc to a record high 76.7mn t.
China last year imposed a 50pc reduction in blast furnace output in 28 cities from 15 November-15 March to curb emissions, which boosted scrap use sharply as mills sought to get around the blast furnace restriction by increasing the scrap charge in the basic oxygen furnace (BOF).
Molten pig iron produced in the blast furnace is poured into the BOF, also called a converter, where the scrap acts as a coolant. Increasing the scrap charge proportionally reduces the need for iron ore and coke in the furnace burden. Typically, a tonne of scrap can displace 1.6t of iron ore and 0.54t of coking coal in the blast furnace-based steel production process, according to Argus estimates.
While there are no reliable estimates on monthly domestic scrap use by steel mills, the relation between crude steel and pig iron output serves as a useful proxy.
Demand for iron ore will fall in the long term, although gradually as scrap use increases. If scrap prices go up too rapidly demand will be affected, said the secretary general of the China iron and steel association Cisa Liu Zhenjiang. Chinese mills are trying to produce as little molten iron as possible. Profits of mills from now on could be determined to a large extent on the trend in prices of scrap and iron ore, a Cisa analysis said last week.
Scrap prices in China for now are mirroring falls in iron ore and finished steel markets. Steel producer Jiangsu Shagang today lowered its purchasing price by 40 yuan/t to Yn2,300/t for heavy melt #3 delivered to its facility, its third cut in two weeks.
Chinese mills typically used 10-12pc scrap charge in the BOF burden but this figure could be closer to 10-20pc at present on anecdotal evidence from mills. Scrap use spiked to 25-30pc in the November-March restriction period, according to analysis by US bank Morgan Stanley. Average scrap charge in BOFs was at 16pc in 2017 compared with 12pc in 2016, said a veteran steel industry analyst Morgan Stanley.
China eliminated 140mn t/yr of scrap-fed induction furnace capacity by 31 July 2017, freeing up millions of tonnes of scrap for use in both electric arc furnaces and blast furnace-based steel mills. It shifted scrap use to mills that show up in statistics, lifting China's reported scrap use by 64pc to 147.9mn t in 2017.
Restrictions lift scrap estimates
Sintering restrictions have become common in China over the past couple of months as Beijing is focusing on pollution even in the non-winter months. Key producing cities such as Tangshan and Handan are regularly facing sintering restrictions. There have been possible sintering restrictions over the past several weeks in Jiangsu province as part of an air pollution clean-up drive along the Yangtze river. Shandong province will possibly impose sintering restrictions in the first two weeks of June during the Shanghai Co-operation Organisation meeting in Qingdao next month.
There are mills in Tangshan city that are still operating with a scrap ratio of 30pc. Scrap use in different regions vary according to scrap prices, said the manager of a north China-based mill.
If mills are making profits and there are iron ore sintering restrictions, they will typically increase the scrap content to keep producing crude steel at near peak rates, said a Beijing-based trader.
"We increased scrap usage because of the restrictions in winter. Now that the restrictions continue, we might increase our scrap ratio again," a Tangshan mill purchasing official said.
Scrap use shows wide variance across steel mills. A Shandong mill is only using 10-15pc scrap, while another Shandong mill peaked at 36pc scrap ratio in the winter. Some mills are adding scrap at different steps including into the blast furnace because they are hitting the upper limits of a converter, which cannot be cooled too much from the scrap.
Scrap overall could substitute 10-25pc of China's annual iron ore consumption in the medium term, if total steel scrap availability remains around 200mn t/yr. Annual iron ore imports in China have been over 1bn t/yr since 2016, while domestic output is in the 200-300mn t/yr range on a 62pc equivalent basis. Not all the ferrous scrap generated will be used to produce crude steel and could find use in other recycling businesses.