China: Fresh EAFs account for over 50% of new steelmaking capacity

China's mammoth steel industry is passing through a crucial phase of consolidation. In Nov'21, 18 steel capacity replacement plans were released, involving nearly 20 million tonnes (mn t) of steelmaking capacity and over 21 mn t of iron-making capacity.

Capacity addition

Recently announced steel capacity replacement plans reveal that the newly-built steelmaking capacity added over the months stands at about 30 mn t, of which electric furnace (EAF) steel capacity exceeds 15 mn t, accounting for more than 50%.

According to the 'Implementation Measures for Capacity Replacement in the Iron and Steel Industry' of the Ministry of Industry and Information Technology (MIIT), provinces that have not completed the total steel production capacity control target shall not accept steel production capacity transferred from other regions.

The Yangtze River Economic Belt region prohibits new or expanded steel smelting projects outside the compliance zone. The replacement ratio of key areas for air pollution prevention and control should not be less than 1.5:1 (the previous ratio was 1.25:1), and the replacement ratio of other regions should not be less than 1.25:1 (the previous ratio was 1:1).

New EAFs

As more companies choose short-flow processes, in line with current national policies, the State Council has issued the 'Carbon Peaking Action Plan by 2030' to clearly promote structural optimisation of the steel industry, vigorously promote the demonstration of non-blast furnace iron-making base numbers, and implement the all-scrap electric furnace process.

The replacement of the new capacity furnace types range from 1,260 cubic metres to 1,580 cubic metres. The eliminated converter furnace types range from 35 t to 50 t, while the replacement furnace types with new capacity range from 100-120 t.

Among the capacity swaps approved by the MIIT in Nov are a few notable EAF investments. Guangdong Jinshenglan Met Tech is putting two 150 t EAFs in place with estimated production of 1.2 mn t. The steelmaker had placed orders with Danieli for the furnaces.

Again, Inner Mongolia's top steelmaker Baotou Steel Group will install a 100 t EAF with steelmaking capacity of 750,000 t, while Xinyu Steel Group in Jiangxi Province will install a 1*130 t EAF with capacity of 1 mn t per annum.

Xingtai Steel in Hebei Province will put in place four electric furnaces with combined capacity of 4.6 mn t of steel production as well as a HIsmelt furnace with 1.6 mn t of iron-making capacity. Fushan New Steel has also received approval to install to a fluidised HIsmelt furnace with iron-making capacity of 325,000 t.

In addition, stainless steel producer Liyang Baorun Steel, with capacity of 2.8 mn t per annum, will install four argon oxygen decarburization (AOD) furnaces with combined capacity of 2.76 mn t for production of refined steel.

Reduction replacement

Industry mergers and reorganisations have further increased the degree of concentration. Production capacity of short-process electric furnace steel increased.

The replacement of production capacity in the steel industry is essentially a reduction replacement, which is also fully in line with policy requirements. In the future, capacity replacement and mergers and reorganisations will be necessary trends in the industry, and industry concentration will be significantly increased. In the medium and long term, it is positive for steel prices.

The task of reducing production is still continuing, but the marginal impact is weakened. The market expects steel demand to rise from the first quarter to the first half of next year, and the price of steel is expected to fluctuate. The risk is that if steel companies resume production on a large scale, it will be detrimental for steel prices.

Future perfect?

However, experts have expressed apprehension that the growth of EAF capacity will slow down in 2022-2023, as tight scrap supply and expensive electricity will continue to undermine EAF steel's profitability.

Although China has restarted scrap imports since the start of 2021, the market consensus is that the total scrap import volume in 2021 is unlikely to surpass 5 mn t. According to China Association of Metal Scrap Utilization (CAMU), China's domestic scrap supply is likely to increase to 270 mn t in 2021, up by 20 mn t from 2020, accelerating from about 10 mn t increase in 2020 from 2019.

Although the imported and domestic scrap supply may increase, scrap supply and demand are likely to remain in a tight balance, not only because EAF capacity is expanding, but also because scrap utilisation ratio in pig iron and steelmaking process have been rising - by some estimates from 15-25% to 35%.

Again, China's electricity prices are likely to trend upward in the following years, driven by efforts to reduce carbon emissions as well as by rising electricity demand. This, in turn, is likely to hinder rapid development of EAF steelmaking.