Can Scrap Steel Solve China’s Climate Dilemma?
As part of its ambitious plan to combat climate change, China has set for itself the goals of reaching peak carbon before 2030 and carbon neutrality before 2060. While public attention has fixated on the usual suspects, most notably coal power, one of the most crucial — and challenging — industries in need of reform has gone largely overlooked: steel production.
China accounts for fully half of the world’s steel output. Its steel industry released nearly 1.8 billion tons of carbon dioxide in 2020, according to the consulting agency McKinsey, and accounted for about 15% of China’s total national emissions. For context, that’s roughly equivalent to half the annual carbon dioxide emissions of the entire European Union.
Nevertheless, the domestic steel industry remains optimistic it can peak carbon emissions ahead of schedule, even committing to hitting the target before 2025. Already, many steel mills are scaling back, with 2021 marking the first time in six years China’s crude steel production fell year over year. This drop is partly due to policies aimed at reducing excess capacity and restoring the environment, and partly because the decline of the country’s real estate market has greatly reduced demand for steel.
The carbon neutrality target poses a greater challenge, however. It will require not just policy tweaks or market shifts, but fundamental changes to the entire industry and production process.
Blast furnace-basic oxygen furnaces (BF-BOFs) account for about 90% of China’s steel production capacity. In a bid to reduce excess capacity, the Ministry of Industry and Information Technology (MIIT) began implementing a steel capacity swap project in 2014: If companies wanted to build new steel projects, then existing facilities with equal or greater capacity would have to be shut down.
Yet, insofar as the reduction in steel capacity advances the goal of reducing carbon emissions, the latest report from the Center for Research on Energy and Clean Air has found the swap policy to be a mixed blessing. High-carbon-emitting BF-BOF facilities are not being replaced by less polluting alternatives, but by newer BF-BOF plants. Today, the average age of China’s carbon-intensive equipment is 12 years, or roughly a third of their expected lifespan.
Retiring that equipment early or underutilizing it represents a massive asset waste, but BF-BOFs, which primarily use iron ore, are extremely emission-intensive, and their continued prevalence in China’s steel industry will make it impossible to achieve carbon neutrality by the target date.
Thankfully, there is a potential alternative: electric arc furnaces (EAF) using steel scrap as their primary feedstock. These could greatly reduce the emissions produced in the process of smelting iron ore, lowering carbon emissions by about 70% per ton of steel and significantly cutting air pollution, even with China’s current power mix.
That said, while the technology underpinning EAF steelmaking is already quite mature, there are a number of obstacles to its wider use in China. To start, China’s scrap steel supply is not yet capable of meeting demand. As long as China’s steel consumption was growing at or near double digit rates, scrap steel from the demolition of buildings or the scrapping of old cars could meet only a small fraction of steel producers’ needs. Meanwhile, shortcomings in China’s recycling system, including outdated equipment and old technology, limited the volume and quality of scrap used for steelmaking and further disincentivized companies from viewing scrap steel as a viable alternative.
The upshot of all this is that crude steel made from scrap in EAFs accounted for only 10% of China’s crude steel production in 2020, relative to 70% in the United States and 30% globally.
But not all is lost. Scrap supply is expected to increase rapidly in the coming years. Crude steel production exceeded 1 billion tons in 2020, while Chinese scrap supply that year totaled only about 260 million tons. By 2025, available scrap is expected to grow to over 300 million tons. If steel demand is stable or falls over that period, it could result in a significant increase in the share of recycled steel — and a concurrent reduction in the use of blast furnaces.
There are powerful incentives, even beyond the climate impact, for China to encourage EAF steelmaking with scrap steel. For instance, the country’s traditional steel production methods are heavily dependent on foreign imports of iron ore. Expanding the domestic scrap supply and transitioning to electric arc furnaces will reduce this reliance and help stabilize prices.
The supply of domestic steel scrap will likely grow as steel products like cars, home appliances, buildings, infrastructure, and other products of China’s earlier waves of development are phased out. China is also systematically expanding its sources of scrap, including liberalizing the import of high-quality scrap to reduce costs. Imported scrap was originally restricted as “foreign waste” in 2019, but new rules set by the China Iron and Steel Association (CISA) have opened the door to scrap steel imports, provided it meets official standards.
Policymakers, too, are beginning to emphasize scrap. The MIIT halted new approvals from late January of 2020 and encouraged companies to replace traditional carbon-intensive technologies with zero- or low-carbon alternatives, such as EAFs. The share of newly approved steel production capacity for EAFs has since increased significantly, from 13.5% in 2020 to 37.8% in 2021 and then 57.2% in the first half of 2022.
Experts estimate that Chinese scrap steel production will increase by more than 50% between 2020 and 2030, when it is expected to reach nearly 400 million tons. That could be enough to meet 40% to 50% of steelmaking feedstock demand. Combined with a gradual phase-out of BF-BOF equipment by 2050, this should enable the steel industry to reduce cumulative CO2 emissions by as much as 20%.
Other leading steel producers, including Germany, the U.S., and Japan, show that it’s possible to cut carbon emissions related to steel by restructuring the industry, but if China wants to meet its ambitious climate goals on schedule, it will have to take action now.
Lauri Myllyvirta, lead analyst at the Center for Research on Energy and Clean Air, also contributed to this article.
Translator: Katherine Tse; editors: Cai Yiwen and Kilian O’Donnell.
(Header image: A worker monitors a furnace in Huai’an, Jiangsu province, 2018. Wu Yang/VCG)