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Understanding China's Steel Industry Energy Saving and Emission Reduction Requirements

June 11, 2024

Key Findings:

1. MRPC Action Plan:

   • The National Development and Reform Commission and four other departments issued the "Action Plan for Energy Saving, Emission Reduction, and Intensity Reduction in China's Iron and Steel Industry."
   • Sets quantifiable targets: reduce comprehensive energy consumption per ton of steel by over 2% by 2025 compared to 2023.
   • Promote energy-saving and emission reduction renovations and equipment upgrades, aiming for coal saving equivalent to ~2 million tons and cut CO₂ emissions by ~5.3 million tons.
   • Reinforces structural transformation through controlling crude steel output and increasing the proportion of electric furnaces (EAF) steel.
   • . Clarifies the criteria for energy efficiency benchmarks (top level >30% of total capacity by 2025) and capacity exit/restructuring (below baseline level).

2. Crude Steel Reduction Uncertainty:

   • The Plan implies but does not explicitly set quantitative crude steel reduction (production control) targets for the 2024-2025 period.
   • Based on energy efficiency data of major industry players, a 1.5-1.6 million ton reduction in crude steel output (~0.5% YoY reduction annually) might be potentially associated with the energy-saving targets by 2025-2026.
   • However,
     • The estimated reduction is based partly on (likely high-efficiency) member enterprises' data.
     • Market dynamics, achieved demand moderation, and potentially lower-than-projected overall energy efficiency might make the required reduction feasible without aggressive administrative cuts.
     • The report cautions against over-interpreting the Plan's intent for significant output pressure.
   • The actions will focus more on limiting production at high-energy-steel plants and encouraging those above standards to increase capacity utilization.

3. Electric Furnace Steel (EAF) & Scrap Metal Challenges:

   • Target: 15% EAF steel production and consumption of 300 million tons of scrap metal by 2025.
   • Barrier: Limited scrap consumption is main due to cost劣势 of scrap over molten iron/indirect reduction plants, stemming from insufficient scrap supply accumulation and price determination power held by mills (resulting in sell-side negotiation).
   • Policy Direction: Future policies might encourage scrap collection (e.g., via equipment upgrades, scrap import standard relaxation) and cost reductions (e.g., electricity subsidies, tax incentives).

4. Summary & Outlook:

   • The Plan primarily targets energy efficiency improvements and penalty-based limitations on less efficient plants, rather than drafting explicit and aggressive crude steel reduction targets.
   • Market-driven (demand moderation/supply-side effects) adjustments are likely to reduce overall production.
   • Steel prices and national demand are the primary risks.
   • Cost competitiveness of EAF steel/scrap remains a major hurdle for meeting scrap metal targets.

Disclaimer: Please refer to the official document for specific legal interpretations and consult a financial advisor for investment decisions.