What impact does carbon neutrality have on China's steel raw materials?

Carbon neutrality has become an important direction for China's long-term transformation and development. 

General Secretary Xi Jinping announced at the 75th United Nations General Assembly that my country will strive to achieve carbon peaks in 2030 and achieve carbon neutrality in 2060, reflecting my country's policy determination in the direction of carbon peaks and carbon neutrality.

The carbon emissions of the steel industry account for about 18% of the national carbon emissions. Except for the power industry, the industry with the highest carbon emissions in the entire industrial production activities is bound to be one of the key industries for industrial carbon reduction. Xiao Yaqing, Minister of Industry and Information Technology, has repeatedly publicly emphasized from the end of 2020 to the present that the steel smelting capacity should be greatly reduced, the work plan for reducing production should be studied and formulated, the double control policy of production capacity and output should be implemented, and the national crude steel output in 2021 will decrease year-on-year.

Crude steel production forecast without policy influence

Let us first review the growth trend of crude steel production in 2021 without the policy of reducing emissions and suppressing production. According to the China Iron and Steel Association data as of the end of February, the average daily output of crude steel and pig iron in China from January to February increased by as much as 11% year-on-year. This is related to the low base under the influence of the epidemic last year, and also to the reduction of the heating season's impact on crude steel production year by year. Of course, the most important thing is still the increase in the production efficiency of the entire steel industry.

In the previous annual strategy report, we have mentioned that according to incomplete analysis, the net increase in blast furnace capacity in 2021 is expected to be about 20.9 million tons. Combining the production time and multiplying by the higher capacity utilization rate, we have comprehensively estimated that the molten iron output of the long-process steel plant in 2021 can increase by about 3%, which is equivalent to an increase of about 27.06 million tons of molten iron, corresponding to about 28.5 million tons. Production of crude steel increased.

Then consider the increased supply of scrap steel, which will increase the production of crude steel. According to forecasts, in 2021, China's domestic scrap increase will be around 20 million tons, and the import increase will be around 5 million tons. The total annual scrap supply increase is expected to be 25 million tons. We convert the Fe element in the scrap steel. In the end, the increase in scrap steel will bring about 28.5 million tons of crude steel output growth, whether it is directly converted in the electric arc furnace or added in the long-flow converter link.

Above, if there is no other supply-side policy influence, and the demand-side has sufficient digestibility to match, then China's crude steel supply capacity in 2021 could have achieved an increase of about 50 million tons.

Scenario analysis of crude steel output reduction

However, considering that the policy side has repeatedly emphasized the reduction of carbon emissions and the reduction of crude steel production, then we will make a guess about the policy's implementation path. First of all, the Bureau of Statistics recently raised crude steel production in 2020 from 105299.9 to 1.064.767 million tons, raising the base of crude steel production by 11.77 million tons. This move can partially offset potential crude steel supply growth expectations.

Regardless of the difference in carbon emissions or the difference in production capacity replacement ratio, the policy end advocates electric arc furnace steelmaking. And if strictly implemented in accordance with the Ministry of Industry and Information Technology's policy expectations of flat or even reducing 10-20 million tons year-on-year, the remaining reductions should be achieved mainly through reductions in molten iron output.

If the crude steel reduction task is to be strictly implemented this year, it will have a greater impact on the output of pig iron, which will directly correspond to the charge and cause a significant blow.

Impact assessment on the main raw materials of steel

1. Coke

Limiting carbon emissions in the iron and steel industry is certainly the most important factor in the supply of coke, the main raw material for carbon. Previously, in combination with the lowered coke ratio, we forecast that coke demand will increase by about 2% in 2021, and the national coke supply will increase by about 3.4%. However, according to the policy expectations of the reduction of crude steel, the output of molten iron in March-December will be reduced by 3-5% year-on-year, which will make the situation worse for the coke that has just turned from a short supply to an oversupply.

Of course, on the other hand, we also need to track whether the main coke producing provinces will limit the output of coking enterprises due to reduced energy consumption. At present, apart from Inner Mongolia's proposal to accelerate the elimination of outdated coking capacity by 2022, Shanxi Province only proposes to sort out the "two highs" projects that are planned to be put into production during the "14th Five-Year Plan" period. There are no other specific impact measures. The follow-up needs to be further observed.

2. Iron ore

As the main source of iron and steel Fe, iron ore will also be dragged down by the reduction in carbon emissions. However, compared with coke, which is entirely domestically produced and used, iron ore still has a supporting role in the recovery of overseas demand, and the overall demand impact is slightly smaller.

We previously predicted that domestic iron ore demand will increase by about 3% year-on-year in 2021. According to the policy of reducing crude steel, iron ore demand will decrease by 3-5% year-on-year from March to December. For the iron ore whose global supply is expected to increase by about 3.7%, it means a shift from tight supply to oversupply. Unless overseas demand for blast furnaces can increase by more than 14%, the negative effects of China's crude steel reduction policy on iron ore can be basically hedged.

In addition, from the perspective of carbon emission reduction, in order to minimize the amount of coke, the demand for high-grade mines will still be relatively strong, and the Fe grade premium should remain at a relatively high level. The emissions from the sintering process are also relatively large, so it is inevitable that sintering will continue to be restricted this year. There will also be relative differences in the classification requirements for lump ore and pellets.

3. Scrap steel

Scrap steel is used as a substitute for Fe in iron ore, which has low carbon emissions and is obviously favored by the policy side. On the demand side, whether it is direct electric arc furnace production or converter steel addition, it is expected that it will not be affected by the carbon emission reduction policy. In addition, this year's resumption of overseas electric furnace production has boosted the demand for scrap steel. Under the competitive price situation, the supplement of imported resources is limited. This year's scrap price performance is expected to continue to maintain a relatively strong relative to molten iron.

In summary, under the general guidance of the carbon neutral policy, if China strictly implements the reduction of crude steel this year, it will have a significant impact on blast furnace raw materials. The impact of coke demand is greater than that of iron ore, while the demand for scrap steel is expected to be basically no effect. The above is only a rough estimate based on the general policy goal of crude steel reduction. The follow-up needs to be followed up with the actual policy implementation. We expect that the actual implementation pressure of this policy should be concentrated in the second half of the year, especially the heating season at the end of the year. Therefore, it may be even more unfavorable for the raw material demand in the far month.