China's EAF mills to become more cost-effective by 2039: study

• BFs face climbing costs as carbon prices rise

  
  
  

• EAFs now hindered by high operating costs
  
  

Mysteel Global: Reversing the wide imbalance now, electric arc furnace (EAF) steelmaking in China is expected to become more cost-effective than blast furnace-basic oxygen furnace (BF-BOF) methods by 2039, when the latter category's operations will face escalating carbon emission expenses, Mysteel argues in a new research report comparing both technologies through the lens of carbon reduction.

Compared with BF-BOF steelmaking, the EAF route aligns better with the 'green trend' of the steel industry because of its low-carbon nature, but its development is currently being hindered by higher operating costs, the report pointed out.

Mysteel estimates that between January and end-October this year, the average cost incurred by EAF steelmakers for producing 1 tonne (t) of carbon steel was RMB 3,330 ($460), some RMB 208/t more than producing the same tonne via the BF-BOF route.

To improve production efficiency, Chinese steelmakers usually consume steel scrap and hot metal (or pig iron) simultaneously in both the EAF and BOF processes, though the proportions of the feeds differ. Mysteel's calculation shows that the average steel scrap ratio in EAFs is currently about 65%, while in the BF-BOF route, the proportion is around 16%.

Mills such as Jiangsu-based Shagang Group, China's largest privately owned steel company, that hosts both electric and blast furnaces and converters at the same works, have the option of using hot metal in the EAFs. Conversely, mini-mills with only electric furnaces must procure pig iron from the market.

In addition to steel scrap and hot metal, operators of both technologies need to pay for similar additives, auxiliary materials, and the potential 'carbon emissions quota' for both methods, Mysteel Global noted.

However, EAF steelmaking involves two other costs: electricity and electrode expenses, which are key contributors to this technology's higher costs overall.

Currently, the carbon emission costs for both steelmaking methods are low, as carbon pricing for the steel industry has not yet been implemented nationwide. Only some steel mills are participating in pilot programmes, with free carbon allowances covering approximately 99% of emissions.

China's national carbon emissions trading market or emission trading scheme (ETS) began operations in July 2021, but so far, the market has focused only on the coal-fired electricity generation sector, Mysteel Global notes. However, in September, the Ministry of Ecology and Environment (MEE) announced a draft plan to include the cement, steel, and aluminium sectors, three emission-intensive industries, in the ETS within this year.

The inclusion of these sectors will bring the carbon emission coverage of the trading system to about 60% of China's total, the MEE had said at the time. The expansion of China's ETS will proceed in two stages, with the aim of the first, during 2024-2026, to help participants adapt to the trading rules. Companies will be granted carbon emissions quotas free of charge - that is, they have been allowed to emit a certain volume of carbon dioxide without paying extra money.

However, starting from 2027, the quota distribution to companies will be reduced as regulations are tightened and carbon emission data become more accurate.

From that year, carbon trading will take full effect in the steel industry nationwide, with the initial free allowances covering 96% of emissions and gradually decreasing to zero by 2050.

As the free allowance decreases, carbon prices are expected to rise. Since the launch of the carbon trading market for the coal-fired power sector three years ago, carbon prices have increased from RMB 40-50/t to RMB 100/t as of now.

However, prevailing prices in China are still far from the levels seen in leading carbon markets already functioning elsewhere in the world. In Europe, for example, prices of the EU carbon emission allowance reached a record high of Euro 100.34/t (RMB 730/t) in February 2023. The International Monetary Fund also stated that to meet the global carbon reduction targets for 2030, the average global carbon price would need to reach $75/t (RMB 544/t). As such, there is significant room for carbon prices in China to rise.

Against this backdrop, carbon emission costs are set to become a significant component of steelmaking expenses in the future, which will gradually enhance the cost-effectiveness of EAFs.

On the other hand, both EAF and BF steelmakers will increase their consumption of steel scrap in the future, but the change in the scrap ratio and prices of the same and hot metal will have little impact on the difference between the costs of the two steelmaking routes.

On this basis, Mysteel predicts that by 2039, EAF steelmaking costs will edge below BF-BOF steelmaking for the first time, with average costs estimated at RMB 3,178/t for the former and RMB 3,180/t for the latter.

However, even after EAF steelmaking gains a cost advantage, the technology's share in steel production may not increase indefinitely, Mysteel's report observes. This is because, at the moment in China, mini-mill steel items generally have lower purity compared with those made with BF-BOF-produced steel.

This could limit EAF steel's suitability for high-end manufacturing applications. Consequently, traditional BF-BOF steelmaking is expected to maintain its market share in specific sectors such as automotive and home appliances for the foreseeable future.

However, given the frenetic pace with which steel companies worldwide are investing in environmentally friendlier EAFs, those limits on steel grades and quality should diminish substantially over the coming 15 years.

Note: This article has been written in accordance with a content exchange agreement between Mysteel Global and BigMint.