CBAM could drive China to cleaner green steel but DRI cost struggles ahead likely

China’s steel industry is standing at the crossroads to transform its current steelmaking process with the country setting carbon emission peak and neutrality targets for 2030 and 2060 respectively.

The transformation will speed up after the European Union’s Carbon Border Adjustment Mechanism (CBAM) regulation was implemented in October this year with a two-year transitional period ending January 1, 2026, industry sources told Fastmarkets.

The EU’s CBAM is a tool aimed at putting a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the EU.

Steel products are key carbon-intensive goods and raw materials for automotive and manufactory sectors. As the largest steel producer in the world with 1 billion tonnes of crude steel output in 2022, China exported steel products directly to some countries in EU, as well as to other countries to be further processed into industrial goods to be shipped to EU countries. This has made it important for Chinese steelmakers shift to low-carbon steelmaking route, Fastmarkets understands.

In the first 10 months of 2023, China exported about 74.73 million tonnes, up by 34.8% year on year from 55.44 million tonnes, according to China customs data.

An increasing number of market participants are exploring non-blast furnace (BF) steelmaking processes to achieve ultra-low carbon emissions in steel production, including using electricity arc furnaces (EAF) with ferrous scrap feedstock, production of direct reduced iron (DRI) via gas-based shaft furnaces, as well as iron reduction via technologies such as Corex, HIsmelt or Finex.

But major market sources in the steel industry see both challenges and opportunities for the transformation in the short- and long-term, Fastmarkets learned at China’s Non-Blast Furnace Ironmaking Forum on October 27-29.

Challenges for new DRI projects in China
Coke oven gas or natural gas-based DRI plants were developed in response to China’s decarbonization goals. But the high cost of building such projects and restrictions on new ironmaking capacities have limited such projects to only a few large state-owned and private Chinese steelmakers.

“To produce one tonne of DRI, there is a requirement of about 700 cubic meters coke oven gas with high quality and low impurity, as well as high-quality iron ore pellets,” Wang Tianyi from the China Metals Association said.

Wang added that the key disadvantage of DRI production powered by natural gas or hydrogen in China was poor cost efficiencies compared with other ironmaking routes, due to the low energy resources available, and steelmakers seeing thin margins in recent years.

Meanwhile, some sources in China said more specific and supportive policies for new non-BF steelmaking projects are expected in the future.

An industry source added that China issued a plan to push high-quality steel development in August this year, which includes measures to delay the shutdown of old ironmaking capacity if the newly-built facilities are catered for low-carbon ironmaking.

While developing hydrogen-based DRI capacity is supported by the Chinese government, the current policy of no new ironmaking and steelmaking capacity makes it difficult to carry out specific DRI ironmaking projects if there are no new capacity allowances for independent plants, Fastmarkets understands.

“To apply to build a non-BF ironmaking project, including a direct-reduced iron plant, [the company] needs to move away from old ironmaking capacity. Only green-hydrogen ironmaking projects might be approved on a case-by-case basis, but the cost and technology needed for the latter is much higher,” an industry source said.

“Steelmakers have already taken risks to apply new ironmaking technologies, but the lack of old ironmaking capacity, or the high cost to buy capacity quotas from other steelmakers have restricted new DRI projects,” a Tianjin-based industry source said.

Some market participants added that there were also some current restrictions of building new DRI capacity via coal-based shaft furnaces route from local governments, such as carbon emissions and energy consumption quotas.

Another key challenge for developing non-BF steelmaking projects is the high ratio of BF-based steelmaking in China with major BFs built within the past 15 years and mature ironmaking technologies, which leaves steelmakers unwilling to replace them with high cost and new non-BFs steelmaking facilities, such as DRI and EAF-based routes.

“[However,] adding high quality DRI in EAFs could help reduce the total cost as well as increase the hot metal quality,” China Metals Association’s Wang said.

“Steel mills with BFs under the decarbonization drive have shown increased interest in non-BF low-carbon steelmaking technologies, but most adopted a wait-and-see attitude due to a lack of pivot sample and clear production data [of DRI products],” another Tianjin-based mill analyst said.

Opportunities with DRI technology and raw materials sources
An industry source told Fastmarkets that the Chinese steel industry has obtained the capability to operate DRI plants powered by non-natural gas and high-quality iron ore produced from domestic miners.

Gas-based shaft furnace is the major route to produce DRI, accounting for more than 75% in global output with relatively mature technologies, sources told Fastmarkets.

The gas-based shaft furnace could produce relatively high output of DRI products with low emission and energy consumption compared with other facilities and has become the market focus with a major state-owned steel mill conducting pivot production as a sample for other steelmakers.

In China, eight companies with about 5.5 million tonnes per year of DRI capacity powered by coke oven gas were under construction or pivot production over 2021-2024, according to the survey by a DRI working group of the China Association of Metalscrap Utilization.

For raw materials to produce DRI, Chinese steelmakers and mining associations have been working closely to increase the supply of high-grade iron ore for DRI production using China’s domestic low-grade iron ore fines to produce high quality iron ore concentrate for pelletizing.

“There has been regular production of 71.5% Fe iron ore concentrate from Liaoning, Anhui and Shanxi province in China, with additional beneficiation [costing] less than 100 yuan per tonne compared to produce normal concentrates,” the same mill analyst from Tianjin said.

Published by: Alice Li