How China's monster steel mills degrade environment

In the space of 30 years, China has become the world's largest steel-maker by a long margin. Decades of rapid economic growth fed huge demand for infrastructure and housing, all of which required massive volumes of steel. As the Chinese economy slows, however, all that capacity is proving a burden both economically and environ-mentally. Chinese steelmakers churned out 822 million tonnes of steel last year, losing an average of US$50 (S$71) on every tonne. Meanwhile, their outmoded, polluting plants account for most of the global iron and steel industry's enormous 6.7 per cent contribution to global carbon emissions.

As the United Nations' climate change talks get under way in Paris, China needs to find ways to fix both problems. The United States may offer a useful model.

Unlike their American counter-parts, Chinese steelmakers remain dependent on iron ore and energy-intensive, coal-fired blast furnaces for more than 90 per cent of production, according to data presented in April by China's trade association for scrap-steel recyclers. That's bad for a steel mill's bottom line - on average, blast furnaces require three times more energy per tonne of steel - and for its environmental footprint. According to one recent study, Chinese steel mills emit as much as 12 times more carbon dioxide per tonne as more modern mills in the US and elsewhere.

The latter are mostly so-called mini-mills - small, relatively low-cost steel mills that rely entirely upon scrap metal and run on electricity instead of coal. In most of the world, scrap-metal recycling now accounts for almost 40 per cent of steelmaking (in the US, it's more than 60 per cent). Mini-mills offer several advantages, including the fact that they can be customised and turned on and off easily. (Traditional blast furnaces must run constantly, often for years.) That allows producers to manage output more readily.

Thirty years ago, China wasn't generating enough scrap metal to justify a transition to mini-mills. While industrialised scrap-metal recycling goes back 150 years, the US itself didn't start using mini-mills on a large scale until the 1970s, after middle-class consumers had begun recycling enough cars, appliances and buildings for scrap steel to become an affordable commodity. Facing pressure from cheaper competitors from the 1980s onwards, US steelmakers eagerly tapped the more efficient technology.

China may be nearing a similar transition. According to China's trade association for scrap-steel recyclers, the amount of scrap metal generated in China grew from 50 million tonnes in 2001 to 160 million tonnes last year. (For comparison's sake, the US produced 88 million tonnes of steel last year.) There's much more where that came from, too.

China's "scrap reservoir" - all the steel currently in use in China, from skyscraper girders to bicycle frames - grew from 1.3 billion tonnes in 2001 to 6.8 billion tonnes last year. The National Development and Reform Commission, China's top economic planning agency, expects the total to hit 30 billion tonnes by 2030.

Repurposing that metal for use in the most advanced mills should be a top government priority. Merely lifting the proportion of Chinese steel that's made from scrap to 20 per cent by 2020, as many Chinese officials believe can be done easily, could result in hundreds of millions of tonnes of CO2 reductions a year. Jobs would inevitably be lost in the shift to smaller mills, as they were in the US. But the industry, as a whole, would emerge stronger and more competitive, while reducing its carbon footprint.

Right now, government subsidies and other support for big steel mills and domestic iron-ore miners have long placed scrap-metal producers and importers at a serious competitive disadvantage. For example, between 2005 and last year, Chinese iron-ore imports grew from 20 per cent of global tradeable totals to 43 per cent. Yet during the same period, China's share of global scrap-steel imports fell from 11 per cent to 4.7 per cent, according to Chinese trade association data.

That support - including an ill-advised tax cut in May for iron miners designed to keep them running during the economic downturn - needs to end. Likewise, China's import taxes and value-added tax on scrap metal should be eliminated entirely - and not just for the best-connected, biggest scrap processors, as is currently the case. That would provide steelmakers more certainty about supply and more incentive to invest in what should be a cleaner and more cost-effective future.

BLOOMBERG VIEW

A version of this article appeared in the print edition of The Straits Times on December 04, 2015, with the headline 'How China's monster steel mills degrade environment'. Print Edition | Subscribe