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China has become the second-leading importer of ferrous scrap in the world, after Turkey. Imports grew at an average annual rate of 26 percent between 1999 to 2004 as the rapid growth of China’s steel industry and the lower growth rate for the primary iron-producing industries in China increased the country’s demand for ferrous scrap. Domestic production of scrap within China has not kept pace with consumption, because the reservoir of steel products to be scrapped is low in relation to the current rate of consumption. The high rate of growth of demand for ferrous scrap in China and other nations has caused scrap prices worldwide to increase to record levels and also to fluctuate widely in reaction to uncertainties in the market.
Factors Broadly Affecting Demand
Ferrous scrap is a raw material for the production of steel products and ferrous castings, and so demand for scrap is closely linked to production trends in the steel industry. Steel and castings production are commonly established in developing nations to provide a foundation for growing manufacturing economies. Additionally, many developing nations with low labor costs, low real estate costs, low energy costs, reliable access to transportation, and other positive factors are attractive sites for steelmaking, even if they must import iron ore or scrap from other sources. Under normal market circumstances, ferrous scrap is a lower cost alternative to primary iron products such as pig iron and direct-reduced iron, which are produced directly from iron ore.
Demand for Ferrous Scrap in China
As in other developing countries, the expansion of China’s scrap consumption has been driven by its production of steel mill products and ferrous castings. Production of crude steel and castings increased from 106 million tons in 1995 to 136 million tons in 1999, and to 293 million tons in 2004 (table 5-1). The steel industry in China has been and remains primarily dependent on primary iron produced directly from iron ore. Throughout the period, however, China’s production of primary iron in the forms of pig iron and direct-reduced iron increased at a lower rate; 5 percent per year during 1995 to 1999 and 15 percent per year during 1999 to 2004, than the average annual rate of growth of steel and castings production; 6 percent during 1995 to 1999 and 17 percent during 1999 to 2004. Chinese scrap consumption has made up the difference, increasing from approximately 19 million tons in 1995 to 29 million tons in 1999 and to 76 million tons in 2004, representing average annual growth rates of 10.5 percent during 1995 to 1999 and 21.5 percent during 1999 to 2004 (table 5-2).2
Metallics balance for China (thousand metric tons)
The Chinese growth rate of steel production is expected to moderate in 2006, as demand for steel products has abated, but an increase to at least 450 million tons is generally expected by 2010.3 Production of pig iron in China increased by 30 percent in 2005, to 328 million tons, a more rapid increase than that of steel production, which increased only 28 percent. As a result, demand for scrap moderated somewhat in 2005, but may resume its increase in future years. Further increases in pig iron production are anticipated, to over 400 million tons by 2010, representing an increase of about 5 percent per year. The fact that pig iron production increased in 2005 at a much higher rate than steel production has already resulted in some relief in the demand for scrap, and there has been an easing of scrap prices worldwide. Present indications that future growth of pig iron production in China will be less than that of steel production may indicate a return to increased imported scrap demand and higher prices, worldwide.
Factors Broadly Affecting Supply
Supply of Ferrous Scrap in China
Obsolete scrap from the demolition of structures and the scrapping of obsolete articles, especially automobiles, is a more important source of scrap than prompt scrap in developed countries such as the United States. For 2004, the estimated quantity of steel scrap from obsolete sources in the United States is 39 million tons.6 China, unlike the United States, lacks a vast reservoir of old manufactured products and buildings to be recycled as scrap. As a result, obsolete scrap is a less important source in China than in the United States, resulting in only about 24 million tons of scrap in 2004. Hence, China relies on imports of scrap, which have increased fourfold from 1995 to 2004, and on domestically-produced prompt scrap. However, the size of the Chine se scrap reservoir is growing rapidly, but from a small base, and the amount of obsolete scrap available will increase in future years. On July 20, 2005, China’s National Development and Reform Commission published China’ s Steel Industry Development Policy, which has been described as the blueprint for the Chinese steel industry over the next decade. In their planning, China recognizes that its production of obsolete ferrous scrap will increase as its economy matures, and plans that the proportion of iron ore used in steelmaking shall be gradually reduced while that of scrap steel shall be increased.7 In addition, the policy urges that exports of scrap, along with certain processed products that represent a high level of energy consumption and heavy pollution should be restricted. The policy urges that tax reimbursements for exporting these products be reduced or eliminated.
Increased world demand has led to increases in scrap prices in recent years (figure 5-1). The selling price of No. 1 Heavy Melting Steel scrap9 in the United States increased slowly from 2001 through the first half of 2003 and more sharply in late 2003, before fluctuating in a higher and broader range through 2005, mostly from about $180 to $250 per long ton. The price of automobile bundles10 followed a similar pattern, except that its increase in 2004 was much greater, as it climbed to almost $450 per long ton in September 2004, before dropping back to a level that was still more than double the price during the 2001 to 2003 period.11 Scrap prices in China followed a similar pattern, but with less month-to-month fluctuation. The price index of Heavy General Scrap in China during 2001 to 2002 was steady at an index of 75 (equivalent to $119 per long ton). The price increased steadily through 2003, dropped briefly in May–June 2004, then renewed its increase, finishing 2004 at an all-time high index of 163 (equivalent to $258 per long ton). Scrap prices in China declined in 2005 and continue to fluctuate, although at levels above those of 2001. While China’s imports of ferrous scrap have increased quickly over the past decade, it is not clear from the existing economic literature how much of the observed increase in global prices is due to the increase in China’s demand.
Ferrous scrap is widely and competitively traded. Ferrous scrap exporting nations are those with vast reservoirs of steel that have been in service for many years. The United States perennially generates far more scrap than it consumes and is a leading exporter of steel scrap. During 1995–2004, U.S. exports to Turkey and Korea declined while exports to China increased (table 5-3). Russia, historically a large steel producing nation, has a huge reservoir of scrap and has emerged as the leading exporting nation in the world, with its exports increasing from 2 million tons in 1995 to 13 million tons in 2004. Ukraine, Kazakhstan, and Romania have also become leading exporters of scrap. Scrap production within the European Union varies widely and most EU trade in scrap is internal, with its northern
nations generally exporting to the southern nations. The EU is a relatively minor net exporter of scrap. China produces some ferrous scrap, as noted above, but is not a scrap exporter. Global trade in ferrous scrap nearly doubled from 1995 to 2004, reaching 96 million tons in 2004, driven by increased consumption in China and other Asian nations including Taiwan, South Korea, Malaysia, Indonesia, and Thailand. Most of the growth in trade has occurred in the last 5 years, as higher prices have spurred recovery of obsolete scrap throughout the world. Exports increased primarily from Russia (an increase of 11.1 million tons), Ukraine (2.1 million tons), Kazakhstan (1.8 million tons), and eastern Europe (4.3 million tons). Japan has changed from a net importer of 0.3 million tons of scrap to a net exporter of 6.5 million tons, representing a total shift of 6.8 million tons. Exports increased from other Asian nations including Hong Kong, the Philippines, and Singapore. The leading importing nations for ferrous scrap from 1995 to 2004 were Turkey, China, and Korea. Turkey, with a steel industry heavily dependent on scrap, has been the leading importing nation over the period, and its imports have increased, from 7 million tons in 1995 to 13 million tons in 2004 (figure 5-2). Imports by Korea also have increased, but at a lower rate, from 5 million tons in 1994 to 7 million tons in 2004. China’s steel industry has been growing at a prodigious rate, and production of scrap in China has increased at a slower rate than demand, resulting in increased reliance on imported scrap. China’ s net imports of scrap increased from about 1 million tons in 1995 to 3 million tons in 1999, and to over 10 million tons in 2004.13 The United States was the leading source of scrap for China in 2004, followed by Kazakhstan, Japan, Hong Kong, and Russia (figure 5-3). Over the same period, many other major Asian markets increased their scrap imports. China accounted for the highest increase (8.8 million tons), followed by Turkey (5.1 million tons) and other Asian steel-producing countries (9.3 million tons).
International Iron and Steel Institute, Annual Statistical Report, various issues