The country's target of achieving a 15% share of steel production in the EAF by 2025 seems somewhat optimistic
China is experiencing a reversal in scrap usage, and the country's goal of achieving a 15% share of EAF steel production by 2025 appears optimistic. This opinion was expressed by analysts at investment bank Morgan Stanley, Kallanish reports.
The long-term, cyclical problems that have led to lower-than-expected scrap utilization are unlikely to change in the short term, with iron ore and coking coal the beneficiaries of the situation.
According to a Morgan Stanley research note, scrap utilization in the country is at a six-year low.
“We believe China's prolonged deflation and declining steel profits will persist for a long time, hence the rise in iron ore prices,” the analysts said.
Morgan Stanley is increasingly cautious about China's ability to rapidly increase scrap volumes.
The investment bank estimates the country's share of converter production at 91%, which is the same proportion last observed in 2017. Expected scrap utilization reflects this trend. Furthermore, only a slight or moderate increase in these volumes can be expected this year.
China's ambitions to produce steel in electric arc furnaces using scrap remained unfulfilled, but not due to a lack of capacity. Since 2017, the country has invested 110 million tonnes per year in new EAF capacity as part of a replacement program. But its average utilization rate is 60%.
The use of scrap in steel production with oxygen converters increases when profits are high and steel mills want to increase volumes. However, according to Morgan Stanley, the current situation is characterized by decreasing profits and will not change in the short term.
Additionally, EAF's steel production was disproportionately affected by the slowdown in the housing market, which affected demand for long products. The fact that BOF furnaces still represent the majority of this production indicates that the economics of using electric arc furnaces are not sustainable.
The underdevelopment of scrap collection in China and the reduced economic incentives for collecting and processing this raw material are additional reasons for the delay in its use.
As previously reported by Compraço, Chinese steel mills produced 1.019 billion tons of steel in 2023, an increase of 0.6% compared to 2022. Thus, the downward trend in the country's steel industry has stopped after two consecutive years of decline in production. Last year, China's pig iron production totaled 871 million tons, an increase of 0.7% from the previous year.
