CRU: Chinese Scrap Supply Surge Will be Utilized

Editor’s note: The Chinese government currently bars exports of ferrous scrap to other parts of the world to assure China of an adequate domestic supply. As this analysis by CRU Principal Analyst Chris Asgill points out, China’s economy will eventually generate a scrap supply that far exceeds its scrap consumption, opening up the doors to scrap exports in the late 2020s. The following article was originally published in July 2018, but its conclusions are unchanged.

Chinese obsolete scrap availability will expand rapidly in the coming years and will gather further pace in the next decade and beyond. However, even with availability rising, scrap could theoretically remain unutilized if investment in collection and processing is not incentivized. This incentive ultimately comes from having a scrap price high enough that market participants are profitable and yield a return on any capital invested. On the other side of the coin, scrap prices must be low enough to stimulate domestic consumption or enable profitable exports. The price of scrap is strongly correlated with the cost of hot metal and, applying CRU’s long-term forecasts for iron ore and coking coal, we expect scrap prices will remain sufficiently high to incentivize investment in scrap collection and processing, while remaining low enough to stimulate increased consumption in steelmaking. Even so, supply growth will exceed the ability of the Chinese steel industry to consume scrap and exports will be required, which will support EAF output growth elsewhere in the world.