From 2000 to 2012, Chinese apparent consumption of finished steel products rose at an average annual rate of 13.6 percent per year to 641 million mt. WSD contends that the obsolete scrap reservoir is comprised of steel consumed 10-40 years prior. Taking into account this massive growth in Chinese steel consumption from 2000-2012, the Global Metallics Balance System forecasts that the Chinese obsolete scrap reservoir will expand 10.9 percent per year from 64 million mt in 2013 to 222 million mt in 2025. The extent to which this is accurate may depend on the following:
- The life cycle of Chinese infrastructure and commercial building projects that account for a great deal of the steel consumption during this period.
- The price of steel scrap relative to the raw material cost to produce pig iron. High scrap prices induce greater scrap collection.
- The price of alternate steelmaking metallics and raw materials. If the prices of spot iron ore and coking coal remain low, Chinese steel producers may have limited incentive to drastically change their steelmaking practices.
Assuming that China does, in fact, have a rapidly growing supply of steel scrap, this may lead to significant ramifications for both the Chinese steel industry and for steelmakers outside of China. Assuming no dramatic changes in the proportion of steel produced via the BOF and EAF steelmaking routes, obsolete scrap demand may be only 20 million mt higher in 2025 versus today, compared to an increase of 155 million mt in steel scrap supply.
Currently, the Global Metallics Balance System estimates that an average Chinese basic oxygen furnace (BOF) metallics charge consists of 86 percent blast furnace pig and 14 percent steel scrap. A surplus of obsolete scrap may result in a shift towards greater scrap consumption in the BOF. A change in the proportion of steel scrap charged in the BOF to perhaps 20 percent would imply 174 million mt of scrap requirement for Chinese BOF steel production in 2025 compared to 142 million mt assuming a static 14 percent charge, an increase of 31 million mt of obsolete scrap consumption.
Although WSD believes that it is increasingly unlikely that the Chinese steel industry will shift to a greater proportion of steelmaking via the EAF route, a shift from a current split of 90 percent BOF and 10 percent EAF to perhaps an 80 /20 percent BOF/EAF split in 2025 could increase obsolete scrap demand dramatically. Under this assumption, Chinese EAF production in 2025 would amount to 136 million mt and the scrap requirement for EAF steelmaking would be about 95 million mt, implying a 40 million mt increase in demand for obsolete steel scrap.
Potential restrictions on the future exports of steel scrap from China are a major wildcard for the price of steel scrap (and other key steelmakers' metallics) traded on the global market. In the absence of restrictions, a significant proportion of any surplus of Chinese scrap is likely to be exported to other regions, thereby increasing the metallics supply for the World ex-China and potentially reducing the overall price "level" in the metallics bathtub.
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