China’s steel recycling surges

Weakened appetite for iron ore hits foreign miners

China’s supply of steel scrap is surging as aged buildings, bridges and cars produced over decades of rapid economic growth are knocked down, dismantled or crushed.

This should push Chinese steelmakers to use more of the material in the coming years, potentially sapping demand for steel ingredient iron ore from the world’s biggest metals consumer.

Faltering appetite for iron ore could hit a critical lifeline for international mining giants which have banked on China continuing to suck up hundreds of millions of tons of the most widely traded bulk commodity.

“In the medium to long term, scrap is the real threat to iron ore, for sure,” said Daniel Meng, an analyst at brokerage CLSA in Hong Kong. “We believe by 2020, replacement would become faster and the risk on iron ore from scrap would become more serious.”

China now produces about 11 percent of its steel from scrap, compared to over 70 percent in the US, suggesting it may have plenty of room to grow in recycling the material.

The recent abundance of scrap in China followed the central government’s decision to shut mills churning out low- quality steel from induction furnaces – typically big users of scrap – as part of its drive against pollution and a glut in steel supply.

The closure of these mills, with a combined production capacity of 120 million tons, helped push the nation’s scrap exports to an all- time high in May.

China last year generated a record 143 million tons of steel scrap, up nearly fourfold from 2002, data from the World Steel Association and CLSA showed. That could potentially replace around 200 million tons of iron ore, equivalent to about one- fifth of China’s imports of the commodity last year.

China’s steel scrap generation should rise to 200 million tons by 2020, the China Association of Metal Scrap Utilization said.