Your steel trash, China's treasure
By Steve Mackrell
LONDON - There are basically only two sources of the iron needed to make steel: iron ore and scrap steel. It's been well publicized that iron-ore prices have soared because of surging global steel production. Much less well known is the fact that scrap steel has seen a spectacular boom as well.
And the biggest reason for both run-ups? China, where the steel industry continues to power ahead, breaking all previous records.
Chinese steel production in 2005 was up a whopping 28%, at 348 million tons, coming on top of last year's 23% increase and 22% the year before that. And it's not only production records being broken - Chinese steel exports also soared to a new height in 2005 with more than 25 million tons, a staggering 55% increase on 2004.
But all this comes at a price - ever-higher steel production means ever-higher consumption of steelmaking materials. Take iron ore. China imported 275 million tons last year, up by a third on 2004. But are supplies becoming dangerously tight for another vital ingredient for China's burgeoning steel industry - scrap steel? This issue was examined at the recent World Scrap Congress, held in Shanghai, where concerns were voiced that future demand for scrap steel from steelmakers could, down the road, come to outweigh availability.
Just what is the role of recycled scrap steel in the steel industry? Simply stated, "old" reclaimed steel (that is, scrap) is a vital ingredient in the making of "new" steel, although the volume required depends on the steelmaking process used. Electric arc furnaces (EAFs), which produce about one-third of global steel (350 million tons), use a scrap charge of virtually 1 for 1 - that's one ton of scrap "in" to get one ton of steel "out". Basic oxygen furnaces (BOFs), which produce some 60% of global steel, use primarily iron ore and coke (a solid residue obtained by baking bituminous coal), although they too consume some scrap steel, to a much lesser extent, typically about 20% of the total charge.
Scrap steel is just that: steel that has been used, discarded, then recovered, cleaned and recycled - the steel from goods such as end-of-life autos and discarded white kitchen goods, or the scrap recovered from demolished buildings and structures. The main vendors of scrap are the recyclers of old end-of-life steel goods - the once-humble scrap merchant - and their product will become increasingly in demand from the world's steelmakers as new capacity plans are unveiled and the popularity of EAF steelmaking grows. Future demand by steelmakers is destined to ensure that yesterday's old discarded scrap steel continues to be transformed into tomorrow's "treasure".
In China, where the pace and size of development are such that the consequences are invariably felt around the world, steel expansion has generally been restricted to BOF steelmaking, which is heavily iron-ore dependent - hence the record-breaking Chinese imports of ore, principally from Australia, India and Brazil. About 85% of Chinese production is produced via the BOF route, but the remaining 15% (about 40 million tons) is produced by the scrap-hungry EAF route, making Chinese demand increasingly important in the global scrap market.
China's development of EAF steelmaking has been hampered by problems with electrical supplies and, compared with other parts of the world, the technology is still in its infancy there. In the United States, production via the EAF route has grown to more than 50% of total steel production. Nevertheless, even with Chinese EAF steel production of 40 million tons, China still needs to import about 10 million tons of scrap steel a year to supplement the relatively low levels of locally available scrap. This makes China the world's second-largest global importer of scrap steel after only Turkey. (Turkey produces most of its steel by EAF, and is also ideally positioned geographically to receive scrap steel from the former Soviet Union, which has become a major scrap exporter.)
What does the future hold for scrap steel? Over the past decade, the average annual growth in global EAF steelmaking has been 5% per year, and this is set to increase. Annual steel production in 2005 - at 1.12 billion tons - is widely expected to increase by 2010 to about 1.35 billion tons. Incidentally, steelmaking capacity is anticipated to increase well beyond production, with global capacity likely to climb an extra 400 million tons to 1.6 billion by 2010, which could well exceed expected demand by some 250 million tons per year.
However, assuming steel mills align future production capability with demand and avoid overproduction, 1.35 billion tons is a reasonable production projection for 2010. This steel will, of course, be made by both the BOF and EAF process routes, although EAF is expected to continue gaining ground against BOF. In Russia, EAF production is planned to increase from 16% (2004) to 28% (2007) of total production, as Soviet-era open-hearth technology is replaced. This could mean more scrap being retained for domestic use, with demand growing by 25-30%, therefore leaving less available for export. In the US the share of EAF steelmaking is expected to grow from 53% to 60% of total steel production by 2010. In India, EAF production is likely to grow from 35% to 50% of total production by 2020, although most new Indian EAF capacity will probably be fed from scrap substitutes (directly reduced iron or sponge iron).
In China, if problems of electricity supply are eased and, if domestic scrap recovery grows in line with an increasingly wealthy society that discards more and more used consumer goods, then the economic case for mini-mills (EAF) will be stronger. Growing "green" pressure for a cleaner environment and lower air-pollution levels also favors the development of EAF steelmaking in China.
Taking all these developments into account, the EAF share of world steel production is likely to grow from 34% in 2004 to some 37% by 2010 - resulting in EAF production of about 500 million tons requiring a metallics feed of some 545 million tons. Exactly how the metallics feed breaks down is a matter of conjecture but, after allowing for the consumption of "steelworks own scrap", (that is, "home" scrap or "revert" scrap arising naturally in the steel mill) and scrap substitutes, then the requirement for merchant scrap is likely to reach 380 million tons by 2010.
That compares with current merchant scrap consumption of 280 million tons (2004), which means an extra 100 million tons will need to be found by 2010 - that's an extra 16 million tons of scrap steel a year. Quite a tall order.
While many point to the existence of a scrap steel "reservoir" - higher scrap prices tend to induce recovery from previously uneconomical sources - others argue there is a limit to what can be reasonably reclaimed in any given period. After all, the world can only discard so many cars and washing machines per year and only so many buildings can be demolished. Of course, it's also true to argue that in the future there will be more and more metallic goods in the system which ultimately will be scrapped. But the real question is, will there be enough scrap to sustain this sort of growth? Many have doubts, and point to a future where the demand for scrap steel will grow faster than the supply, which means supply will remain tight, which means prices for scrap will remain high.
Steve Mackrell is the operations director at the Iron and Steel Statistics Bureau (http://www.issb.co.uk
), the leading producer of steel industry statistics in the United Kingdom.