Aiming high: can China’s steel industry hit its ambitious targets?
China’s next Five-Year Plan has some tough goals for the country’s steel industry. It goes beyond solving problems like overcapacity and improving domestic raw-material security, to making its operations greener.
Can it be done? And in such a short timeframe? We assessed the main issues and set out the most likely scenarios over the next five years in a new insight, Can China meet its ambitious targets for steel? Visit the store to purchase the full insight, or read on for an extract.
Challenges for steelmaking
The 14th Five Year Plan runs from 2021 to 2025 and sets out a strategic shift for China’s economy. The steel industry has to focus on these key areas:
1) Reduce overreliance on seaborne iron ore
Dependence on seaborne iron ore has risen rapidly over the last 20 years (to 80% in 2020), while surging iron ore prices have eroded steelmakers’ profits. For such a key part of China’s core manufacturing to be out of policymakers’ control is a major headache. A diplomatic dispute with Australia, China’s largest iron ore supplier, makes the situation even more precarious.
2) Control capacity
Industry reform in the past five years has seen hundreds of millions of tonnes of ageing capacity replaced with cleaner and more effective equipment, in an initiative designed to boost profitability and overall industry health. However, the swap programme could contribute to overcapacity.
3) Reform industry consolidation
China wants to increase the market share of the top steelmakers, as low levels of consolidation leave its industry in a weaker position when negotiating prices with seaborne iron ore majors. The draft guidance wants the top five producers to gain a greater share of the market by 2025
4) Cut carbon
Steel is one of the country’s largest greenhouse gas emitters so is naturally a target for China’s ambitions to reach “peak carbon” by 2030 (going carbon neutral by 2060).
Electric arc furnaces (EAF) use recycled scrap rather than virgin ore and are cleaner and less carbon intensive than the traditional blast furnace-basic oxygen furnace (BF-BOF) process. EAF steelmaking creates an average of 0.5 tonnes of CO2 per tonne of finished steelmaking (including the Scope 2 emissions), compared with 2 tonnes of CO2 for the BF-BOF method.
Hitting the targets
China’s grand vision depends on balancing iron ore imports with its domestic output, as well as sourcing potential scrap resources at home and overseas. We have set out two simplified scenarios to assess the challenges the industry faces over the next five years:
Scenario 1: scrap takes the lead
Following the Five-Year-Plan’s guidance means growing the scrap ratio in total steelmaking to 30%. If China keeps its share of imports stable, then seaborne iron-ore demand would shrink.
But reaching this ratio would mean about 300 Mt of scrap consumption per year – well above the current capability. Even with proposals to strengthen processing capacity, this is difficult to meet in the medium term.
Increasing the ratio would also mean importing scrap. China had restricted these due to environmental concerns, but has now implemented a new ferrous scrap important standard to allow imports to resume.
Read the full insight for more on China’s options to increase domestic scrap production, including comparisons between utilisation rates and reactions from industry.
Scenario 2: China increases ‘domestic’ supply
China could choose to source more of its iron ore domestically. After all, it has the fourth-largest iron ore reserves, after Australia, Brazil and Russia.
But the situation is not quite that simple. China’s self-sufficiency in iron ore has fallen dramatically since 2000. Added to this, the iron ore grade in domestic mines is relatively poor quality, compared with current imports. It’s hard to imagine China returning to reliance on domestic mines.
The solution then is likely to focus on China’s overseas interests. The definition of ‘domestic’ self-sufficiency is broad, so could include assets such as the Simandou mine in Guinea, (which is three-quarters controlled by Chinese parties). This site has the potential to deliver up to 180 Mt of iron ore to the market annually. That said, our most optimistic estimate of when this first batch would ship wouldn’t be until 2025.
Where are the potential risks for China in developing its overseas iron ore interests? Read more in the full insight.
Can China meet its ambitious targets?
China has set a high bar. Success requires a huge reduction in its dependence on importing seaborne raw materials, and an aggressive shift away from blast furnaces to EAF-based steelmaking using recycled scrap.
Is such a fundamental transformation a reality or beyond reach? Over the next five years, or even the next decade, we take a more conservative view – though there are reasons for optimism on some of the targets.
Key themes for metals and mining in the year ahead
Find out more about our forecast for the steel industry in Metals & mining: what to look out for in 2021. This report includes insight into decarbonisation and its impact on the sector, along with commodity-level insight for base metals, gold, iron ore and coal.