SMM Review of Chinese Steel Scrap Market Supply and Demand and the Prospect

Rapidly development steel industry lays the foundation of steel scrap market

Driven by easy economic policies and strong downstream market demand, China's steel industry has maintained continuous growth in the past five years. During the 13th Five-Year Plan period, the compound growth rate of China's crude steel production reached 7.2%, and the annual output peaked at 1.07 billion mt in 2020.

Also in the past five years, the amount of recycled steel scrap has shown rapid growth, and the compound growth rate during the 13th Five-Year Plan period reached 13.8%. In 2021, affected by the pandemic and other factors, the overall recycling volume dropped 2.9%, but it did not affect the increasingly significant strategic importance of steel scrap.

The market gradually recovered amid fading impact of COVID

The year of 2023 is likely to generate better opportunities. Internationally, the global growth is slowing down, but the pace of monetary policy tightening in major economies such as the United States has slowed down, and may even turn around. This will help stabilise China's financial market and reduce external constraints on Chinese monetary policy. Domestically, at the beginning of December 2022, the pandemic prevention and control policy has been adjusted nationwide. In 2023, it will be more optimised and open, and the impact of the pandemic will be gradually eliminated, which will be conducive to the recovery of industrial production and our daily life. Under an optimistic scenario, the impact of the pandemic will basically subside, and both supply and demand will gradually return to pre-pandemic levels.

But it is also accompanied by challenges. The foundation of domestic demand recovery is not solid, the security of the industrial chain and supply chain is vulnerable, and the spillover risk of international economic and financial market fluctuations still exists. There is still the possibility of a retreat in manufacturing investment. On the one hand, enterprises have limited proprietary resources. Corporate profit is an important source of internal financing for manufacturing investment, and the growth rate of total corporate profits usually precedes the growth rate of manufacturing fixed asset investment by about one year. In 2022, the profits of industrial enterprises continued to slow down, with a year-on-year decrease of 3% from January to October, which will restrict the investment capability of the manufacturing industry in 2023. On the other hand, enterprises are not strongly motivated to invest. The current capacity utilisation rate is at a relatively low level, and enterprises will only launch new expansion projects after the production recovery drives the capacity utilisation rate to a relatively high level. In other words, it has restricted the manufacturing investment in 2023.

The cumulative output of crude steel in the first 11 months of 2022 was 935 million mt, a drop of 1.4% YoY (946 million mt from January to November 2021). According to the forecast released by the Metallurgical Industry Planning and Research Institute, Chinese crude steel output will be 1.01 billion mt and 1 billion mt in 2022 and 2023, respectively, a year-on-year drop of 2.4% and 1%. Nonetheless, the downstream demand is expected to recover, especially the infrastructure and real estate sectors, while other industries are also in the process of recovery. The steel industry’s profit situation is likely to gradually pick up. In general, the impact of the pandemic will gradually subside, following which the market is expected to gradually recover.

Steel scrap consumption rebounded slightly but the competition in the processing market intensified

In 2022, Chinese steel scrap supply is expected to reach more than 200 million mt, and the supply will continue to grow in 2023. The profitability of steel mills has rebounded, although it is incomparable with that in 2019, especially the profit and consumption of electric arc furnaces. It is expected that the overall steel scrap consumption by steel mills will increase slightly, and the scrap supply will also resume growth.

But at the same time, the competition among processing enterprises has intensified. At present, the total number of first ten batches of "white list companies" has reached 706, and the processing capacity is estimated to reach 200 million mt, which is close to or has reached the capacity target of 200 million mt in the "14th Five-Year Plan" for the steel scrap industry issued by the China Scrap Steel Utilisation Association. Therefore, the white list application may be gradually coming to an end.

Long-term development drive: steel scrap application has become an important means of carbon reduction under "carbon peaking and neutrality" target + circular economy

In 2020, the country puts forward the goal of "carbon peaking and neutrality” (dual carbon). China will strive to reach the peak of CO2 emissions by 2030, and carbon neutrality by 2060. A circular economy was proposed during the 14th Five-Year Plan period, requiring the full implementation of circular production methods by 2025. China is now in urgent need to develop circular economy, improve utilisation rate and level of renewable resources.

However, China's steel industry is dominated by blast furnace with high carbon emission intensity, accounting for about 90% of the total capacity. According to data from the China Iron and Steel Association, the carbon emissions of Chinese steel industry are as high as 1.8 billion mt, accounting for about 15% of the total carbon emissions, second only to thermal power generation. Accounting for about 50% of the total carbon emissions of the global steel industry, there is a long way to go to effective reduce carbon emission.

The following measures will be taken in order to achieve the goal of carbon reduction and circular economy. First, to optimise the industrial structure. By 2025, the proportion of electric arc furnace capacity shall reach 15%-20%, and the ratio of steel scrap used as raw material will reach 30%. Second, to control the total capacity. The capacity replacement scheme shall be closely followed, and new steel production capacity is not allowed, while mergers and reorganizations will be encouraged to improve the industry concentration. Third, to adhere to green and low-carbon development path. It is important to build a resource recycling system, transform 80% of steel production capacity to ultra-low emission, reduce comprehensive energy consumption per mt of steel by more than 2%, reduce water resource consumption intensity by more than 10%, and ensure that carbon peaks by 2030.

With the adjustment of economic structure, the GDP will enter a stage featuring slow growth, and the demand will contract, that is, the demand for crude steel will gradually in the future with the maturing of urbanisation. At the same time, under the call of the "double carbon" goal, the supply side will actively reduce the production. Specifically, as the steel industry is a highly polluting and energy-intensive industry, the total output of crude steel shall be reduced under the environmental protection need. Therefore, it is expected that China's crude steel production will continue to fall in the next ten years.

Long-term development drive: Cornerstone Plan to promote the development of scrap resources to ensure the strategic security of the steel industry

In order to reduce the dependence on imported raw materials, the "Cornerstone Plan" was proposed in 2022, which aims at "supporting the development of the steel scrap industry and accelerating the recycling of scrap resources" as an important measure to ensure the safety of steel resources.

The steel industry plays an important role in the national economy. In China, it accounts for about 5% of China's GDP; while globally, Chinese steel production accounts for half of the world's total output. However, China is still highly dependent on overseas iron ore sources, which erodes the profits of steel mills and restricts the development of Chinese steel industry.

The Cornerstone Plan focuses on improving resource protection and enhancing resource diversification. Ultimately, China is hopefully to have a greater say in the supply and pricing of raw materials through domestic iron ore development, overseas equity acquisition, and steel scrap resource optimisation. With regard to steel scrap, supported by the policy end, the recycling and processing system will continue to improve, and the resource utilisation level will also climb rapidly. And making good use of steel scrap as an alternative to iron ore will effectively alleviate the hidden dangers to industrial safety caused by the extremely high dependence on imported iron ore.

In recent years, following the introduction of strategies such as "energy saving and carbon reduction", "circular economy", "double carbon" goals, and "cornerstone plan", the strategic position of steel scrap has been continuously enhanced, and the importance of steel scrap has reached an unprecedented high level, which has promoted the construction of a steel scrap recycling system. Coupled with the rapid development of China's economy after the reform and opening up, a large amount of steel resources is now serving the entire society. With the gradual improvement of the recycling system, massive steel scrap resources have been and will be recycled. It is estimated that in the next ten years, the amount of recycled steel scrap will maintain an average annual growth rate of 3-4%.

The rapid growth of society-born steel scrap is the main source of steel

The proportion of steel scrap recycled from the society will gradually expand, and is expected to increase from 50% in 2021 to about 70% by 2030. Society-born steel scrap mainly comes from various channels, such as residents, self-employed recyclers, enterprises, etc. It is the scrapping of steel products serving the production and life of the people. With the development of the economy and the improvement of people's living standards, the consumption capacity is booming. At the same time, policy incentives, such as the renovation of shantytowns, the renewal of old home appliances, and the current subsidies for new energy vehicles, etc., have all helped the creation of steel scrap.

The creation of new industrial scrap and inter-production scrap has been falling amid technological progress. Both inter-production scrap and new industrial scrap are steel scraps produced by production enterprises (steel mills and their downstream players) in the course of production activities. Among them, the loss of steel mills has basically stabilised at 5%~3%, and is unlikely to be further reduced, but the reduction in the total output of crude steel will still drive the reduction in the recycling volume of scrap produced by steel mills. However, the loss rate in the production and processing process of different downstream industries is rapidly decreasing with the cheering progress of production technology, and the amount of new industrial scrap is also falling fast.

Machinery is currently the main source industry of scrap, and the recycling volume will continue to grow

The machinery industry is currently the industry with the largest recycling volume of steel scrap. It is estimated that the recycling volume will exceed 40 million mt in 2022, accounting for 32.5% of the overall recycling volume. In the next decade, the amount of recycling will show rapid growth, and at the same time, the proportion will continue to expand.

In the construction and automobile industries, the steel scrap output is relatively similar. The recycling volume in the automobile industry will grow steadily with the construction of the recycling system, and the recycling of scrap in the construction sector is expected to grow explosively as a large number of buildings will reach the end of their life, but the peak may fall in 2040 or even 2050.

The shipbuilding industry is ushering in a new round of growth, and will maintain high growth in the next few years. In the long run, the green dismantling and recycling of scrapped ships in China will also show a substantial growth. The shipbuilding and home appliance industries are also welcoming a new round of upcycle, but they still account for a smaller proportion of the entire steel scrap market.

Scrap recycled from machinery sector is reaching the peak with rapid growth

Under the "four trillion" plan in 2008, a large number of infrastructure projects fuelled the rapid growth of the machinery industry. From 2012 to 2016, the industry experienced a cyclical decline. In 2016, affected by the high growth of real estate investment, the industry achieved high-speed growth. At the same time, domestic enterprises took the initiative to go overseas, which also boosted domestic production. In 2019, the consumption of steel in the machinery sector peaked, and these steel products will be scrapped by 2035, before which time the scrap volume will grow strongly.

Because most of the equipment in the machinery industry has a service life of 10 to 20 years, a large number of equipment put on the market from 2007 to 2010 will start to be scrapped around 2022 to 2025 based on the average life of 15 years. The total output of scrap in 2021 exceeded 400,000 mt, according to SMM estimate. Compared with other downstream industries, the recycling rate in the machinery sector is relatively low, and the overall recycling system still needs to be improved with support from the policy end.

Scrap generated from buildings will be postponed with extending service life of buildings

The 1990s was the initial start of real estate development, and most buildings will be demolished between 2020 and 2030. In 2005, the shanty town reform policy was gradually implemented, and then came the "four trillion" era.

In terms of housing, the shanty town reform policy is the most important driving force for accelerated recycling of steel scrap in the construction sector in recent years. After 2005, an order was introduced that residential housing was not allowed to be used for commercial purpose. Since then, commercial non-residential office buildings have also grown rapidly, especially starting from 2010 when the development momentum of office building construction was extremely strong. Although the use of steel slumped amid macro regulation and de-stocking of completed housing, the overall industry is still colossal.

Multiple factors affect life of a building

Short-term influencing factors: In the past, the combined effects of various factors such as low quality, imperfect housing design, and unreasonable urban planning, as well as the shanty town renovation policy, resulted in the life expectancy of most buildings being less than 30 years. Recent, a large number of old communities will be repaired and updated under the guidance of new policies, which will strengthen the quality of existing housing and gradually extend the service life.

Long-term influencing factors

The economy has changed from high-speed growth to high-quality growth. The real estate market will be able to mirror real consumer demand, focus on quality and scientific development, and the life of housing will be extended.

The population will peak soon. The latest Green Paper on Population and Labour released by the Chinese Academy of Social Sciences predicts that China's population will reach a peak of 1.433 billion by 2030, and then start to grow negatively from 2030 before falling to 1.364 billion by 2050.

The urbanisation course is slowing down. According to the Chinese Academy of Social Sciences and the China Development Foundation, China's urbanisation rate has reached a high level, and it is estimated that the urbanisation rate will reach 71% by 2030, with little room for further growth.

The aging of the population is accelerating. According to economists' predictions, in 2022, China will enter a deeply aging society, with the elderly population accounting for 14% of the total Chinese population; by 2030, it will turn into a super aging society where the elderly accounts for 24%; and around 2050, the proportion of the elderly will reach 27.9%.

The per capita housing area is close to the upper limit. The per capita housing area will stagnate when it reaches a certain level. The per capita housing area in developed countries is merely 40-50 square meters. According to the National Bureau of Statistics, China's per capita housing area has exceeded 40 square meters. Since China's land resources for housing are not rich, there is little room for future growth in per capita housing area.

Long-term driving force: increasing scrap usage to push up EAF’s output

In light of aggravating environmental pollution, the production in high-pollution areas has been frequently restricted. Steel mills have carried out large-scale ultra-low emission equipment transformation, and tried to reduce carbon emissions by adjusting the structure of raw materials. The Ministry of Industry and Information Technology once stated that the proportion of steel scrap as raw material for steel making is expected to exceed 30% by 2025. It is well known in the industry that the goal can only be realised by replacing the old capacity by EAF capacity. The Implementation Measures for Iron and Steel Capacity Replacement proposes to vigorously encourage the development of electric arc furnaces (EAF), which is an important measure for energy conservation and emission reduction. Meanwhile, the dependence on imported iron ore will be further reduced. China is the world's largest steel producer and consumer, and is heavily reliant on imported iron ore. The proper use of steel scrap can well fill the supply shortage of iron ore in China.

At the policy level, circular economy and “dual carbon” targets have jointly promoted the development of the steel scrap industry. The "urban steel mill" and scrap recycling system will complement each other. On May 17, 2022, the European Parliament ENVY approved the text of the carbon boundary adjustment mechanism. And in China, the Ministry of Industry and Information Technology encourages "urban steel mills" to give priority to on-site transformation and "integrate production into city life". The "14th Five-Year Plan" circular economy development plan puts forward the goal of steel scrap consumption, which will provide solid support for the steel scrap industry to enhance its competitiveness and standardise its development. At the same time, because the steel industry is the second largest carbon-emitting industry after thermal power generation, there is a huge pressure to reduce carbon emissions. The extending application of electric arc furnaces will become the main driving force for steel scrap demand. On the one hand, the government is improving the policy system and paying more attention to the field of environmental protection. On the other hand, capacity replacement also reduces the possible excess capacity. At the same time, the capacity replacement scheme may attract more steel mills to build more electric arc furnaces.

In conclusion, increasing the use of scrap and increasing the output of electric arc furnaces will be the driving force for the scrap industry in the long run.

The rapid growth of steel scrap demand mainly comes from electric arc furnaces

According to the Implementation Measures for Capacity Replacement in the Iron and Steel Industry and Opinions of the State Council on Resolving Overcapacity in the Iron and Steel Industry to Achieve Development While Addressing Difficulties, in the next few years, in order to control carbon emissions, steel mills are encouraged to use electric arc furnaces instead of blast furnaces. In the future, the total crude steel capacity will fall, while the capacity of electric arc furnaces will increase. According to SMM statistics, a net increase of about 41 million mt has been announced.

Summary

The entire steel industry is developing centring the general goal of carbon emission reduction. In terms of supply, steel scrap is still in short supply, and society-born scrap will increase substantially. In terms of demand, the use of steel scrap in Chinese steel industry will increase, and the proportion of electric arc furnaces will also increase further, demanding more steel scrap.