How can China raise its share of EAF steel production to meet emissions targets?

• Uncertain scrap, power supply impacting EAF capacity use
  
  
• Higher scrap demand by BF-BOF mills limiting supplies
  
  
• Increasing EAF share in crude steel mix key to achieving climate goals
  
  

Morning Brief: China's Ministry of Industry and Information Technology (MIIT) has set a target to achieve at least 15% crude steel production via the EAF route by 2025 in order to reduce steel industry emissions. The industry aims to achieve the ambitious goal of reaching 20% EAF production by 2030.

As per BigMint estimates, China's crude steel production is expected to edge down to 975 million tonnes (mnt) by 2025 from 1.019 bnt in 2023. The share of EAF in steel production will rise to 20% by 2030, with crude steel output projected to reach a level of 860 mnt by that date, from around 10% currently.

Notably, along with increasing the share of EAF steel output, China aims to reduce overcapacity in the steel industry both with the objective of reducing carbon emissions, as well as ensuring profitability and sustainability of steel production.

Gaps in capacity replacement policy

It is generally believed that China's crude steel production seems to have reached a plateau of a little over 1 bnt since 2020. However, data show that the country's capacity replacement policy has been largely unsuccessful in curbing excess capacity, although EAF capacity additions, especially since 2017, have been significant.

This is because BF capacity addition has been pegged at around 380 mnt from 2017 till around mid-2023, while 455 mnt of capacity has been mothballed, as per data from the Centre of Research on Energy and Clean Air (CREA). However, BOF capacity retirement at over 414 mnt has been much higher than around 300 mnt that has entered the industry during the period under consideration.

At the same time, around 120 mnt of EAF capacity has come onstream, while over 80 mnt has been replaced. The failure of the policy has been chiefly on two counts:

• Many non-operating, idle assets have been replaced for new capacity, thereby increasing overall capacity.
  
  
• Huge additions in BF capacity and less-than-required addition in EAF capacity which directly challenges China's carbon neutrality target.
  
  

Challenges facing EAF mills

Ferrous scrap availability: China's scrap consumption in steelmaking is expected to increase to 300 mnt by 2025, as per estimates. China currently has more scrap steel (260 mnt in 2022) available than the iron and steel industry is using. The majority of scrap steel is concentrated in specific regions within China, which raises questions about whether the distribution of scrap will align with the current layout of steel production capacity. The scrap collection and processing system is still underdeveloped compared to advanced economies, with numerous unlicensed processors, and obsolete scrap volumes are still to rise to desired levels.

Higher scrap consumption by BOF: As per Global Energy Monitor (GEM) data, most of China's scrap steel supply (68%) is currently used in the BF-BOF steelmaking, which means that moving from BF-BOF to EAF steelmaking will make more scrap available to EAF steel producers. The actual rate of scrap adoption could be slower, if the existing players prefer to invest in options allowing the increase of scrap usage in BOF. Scrap usage is being resorted to by BF-BOF steelmakers as a stopgap measure to reduce carbon emissions. Large BOF plants are more willing to pay higher prices to compete for resources to lower carbon emissions. This is further straining supplies to EAF steelmakers.

Electricity supply concerns: In recent years, China has faced insufficient power supply and abrupt power cuts creating unstable energy supplies for industrial users like hydrogen-based DRI and EAF production. In comparison, many BF-BOF plants have captive coal-based power resources directly supplying them. Amid uncertainties surrounding alternative power generation sources, especially hydro, and fluctuating electricity prices, this phenomenon has affected the electricity-intensive EAF mills' capacity utilisation.

Outlook

For China to achieve carbon peaking by 2030, the EAF sector has to increase capacity utilisation to 80-85% from around 50-55% at present. The emissions intensity of China's EAF steel sector is 1.3 tCO2/tcs compared with 2.1 tCO2/tcs for BF-BOF. The higher intensity of the EAF sector is due to the higher volume of pig iron and DRI used in EAF mills due to shortage of quality scrap. Estimates show that every tonne of scrap steel used could reduce 1.6 t of CO2 emissions.

To achieve its carbon peaking target by 2030, China's steel industry needs to develop its scrap ecosystem, ensure stable and continuous supply of scrap and electricity to EAF steel mills, and ensure higher share of EAF in overall crude steel mix.