What factors will drive the steel raw materials market in 2022?

*Lack of China demand to impact iron ore production
*Global steel supply shortage to persist

The global steel industry outlook for 2022 is expected to be predominantly about China, as in other years.

However, the scenario has changed.

China's energy efficiency and carbon neutral goals are at the centre of discussion. China's steel production controls are likely to continue in 2022. The country's Ministry of Industry and Information Technology and the Ministry of Ecology and Environment have already targeted eight cities in Beijing, Tianjin, and Hebei as well as cities in Shaanxi, Shandong and Henan provinces from Jan to mid-Mar'22.

A notice was issued to reduce steel production by more than 30%. Air quality improvement for the Beijing Winter Olympics is a nominal reason. But looking back on past supply-side reforms, this could happen at any time of the year.

Since the 11th Five-Year Plan (2006-2010), the Chinese government has set a goal to reduce energy consumption per tonne of GDP, and one of the main measures to achieve this was to expel small-scale old facilities in the coal, steel, and utility sectors.

In the case of steel, the target of closing old facilities of 150 million tonnes (mn t) was achieved relatively early in three years, and frequent utilisation rates were controlled through environmental regulations, which forced steel companies to invest in environmental facilities.

China's carbon intensity reduction target was more than met in both the 12th and 13th Five-Year Plans. 2021 was the year the 14th Five-Year Plan began, immediately after the declaration of the carbon neutrality by 2060 goal by President Xi Jinping.

The National Development and Reform Commission (NDRC) of China has set the goal of reducing 13.5% of energy source and 18% of carbon intensity by 2025. In the case of energy-intensive industries such as steel, aluminum, cement and crude oil refining, it is necessary to have at least 30% of production capacity meet the strengthened energy efficiency standards by 2025.

This energy efficiency standard and the proportion of companies that must comply with it will be further raised by 2030.

Iron ore, coal

Rio Tinto also recently revised down its 2021 iron ore production guidance. Higher-priced mines, which are not comfortable with iron ore prices below $100/t, may be thinking about cutting production.

Likewise, coal supply and demand are likely to remain tight. It will be some time before China's renewable energy makes a meaningful contribution, and coal demand will continue for some time.

As of 2021, China relied on coal for 56.8% of its energy consumption. Although China is encouraging coal production to overcome the crisis of energy supply disruption, it is highly likely that this is a temporary measure due to the total amount of energy and unit regulations being implemented under the goal of reducing carbon emissions.

Scrap prices will be key

The measure that steelmakers can implement right now is to expand the use of iron scrap, i.e. recycling.

In the US steel industry, the proportion of electric furnaces (EAFs) that use iron scrap as the main raw material accounts for 70% of the total crude steel production.

Nevertheless, additional electric furnace investments are being made, such as by blast furnace companies like US Steel that have recently entered the electric furnace business.

Even Japan's Nippon Steel has recently started to consider investing in electric furnaces to reduce carbon emissions.

The proportion of electric furnaces in China is still around 10%, but there is a plan to raise this to 20% in the mid- to long-term.

Even if it is not an electric furnace investment, attempts to increase the iron scrap loading ratio in the blast furnace (BF) are likely to be made by steelmakers around the world. This means that the demand for iron scrap will eventually increase, and the supply and demand for steel scrap is likely to become tighter.

Currently, the export market for steel scrap, mainly advanced in the developed countries such as the US, Europe, and Japan, is 100 mn t per year.

In the mid-to-long term, China's accumulated iron scrap generation will increase. But China, which aims to secure 300 mn t of steel scrap resources by 2025 (with domestic supply of 240 mn t last year), will have no choice but to rely on imports to some extent.

Increasing carbon cost

The paid allocation ratio is expected to increase further in the future.

ArcelorMittal informed that this year alone the cost of carbon contributes to the cost of more than Euro 60/t. China launched a nationwide carbon credit trading market in Jul'21. It started with the electric power industry as a priority, but the steel industry is also expected to be applied in 2023.

This means that the cost burden of Chinese steelmakers will begin. If the price of carbon credits in China approaches the EU level in the future, the manufacturing cost of Chinese steelmakers will inevitably rise.

This could be another cost push that raises steel prices in the mid to long term.

Supply shortage

The global supply and demand balance is highly likely to remain skewed, with some supply shortage in 2022. This is because China's excess supply has been balancing global supply and demand, as the world's top steelmaker produces more than its own demand and supplies that surplus to the international market.

That extra production in China is no longer easy to increase.

Even if China's demand is stagnant next year, if supply does not increase China's excess supply will be similar to 2021.

Will the increase in production outside China be able to cover this?

In the USA, EU and Japan, the capacity utilisation rate is not high because existing facilities are outdated and do not meet environmental standards. In the case of emerging markets, where production capacity has been increasing recently, the size is still insignificant (1.1% of Vietnam's capacity, 0.8% of Indonesia's), except for India.

If China does not oversupply, the global steel market will have no choice but to endure a short-term supply shortage.