Couldn’t Get Much Worse: Greenhouse Gases and the Chinese Steel Industry

Last Tuesday the International Iron and Steel Institute announced that the Chinese steel industry is responsible for approximately 51% of all carbon emissions released by steelmakers worldwide. No surprise, right? After all, China is the world’s largest steelmaker, with roughly 35% of the world’s production capacity, and – despite government efforts to rein in the industry – it is getting bigger. According to Bloomberg, two of China’s largest steelmakers now expect the country’s total steel output to exceed 500 million tons in 2007, up from 418 million mt in 2006. This, too, is jaw-dropping: back in March, I attended a presentation by Wu Jianchang, an official with the China Iron & Steel Association [CISA], in which he estmated that 500 million tons would be “achieved” in 2010, at the earliest.

So, more steel means more pollution. That’s easy. But what’s hard – and interesting – is determining why China’s share of steelmaking carbon emissions (51%) is so much larger than its share of steel-making capacity (35%). The obvious answer is that China doesn’t enforce laws requiring pollution abatement equipment on its smokestack industries. I’ve probably visited a dozen Chinese steel mills over the last few years, and every one has fallen below the environmental standards set and followed at similar facilities in the developed world. In most cases, there is little to no pollution equipment at all. In other cases, the pollution abatement equipment is installed – and unused. This is nothing new: Chinese officials have commented publicly on the tendency of Chinese industrial facilities to run pollution equipment only on the occasion of an official visits (On Sunday, Joseph Khan of the New York Times provided an example involving Premier Wen Jiabao). Last fall, I visited a small, technically advanced three-year-old private steelmaker in East China. When I asked to see the pollution control equipment, an employee took me around to the back of the facility and pointed to a “baghouse” that was too small for the production capacity – and which had obviously been left idle for months, if not years. See below [update: no, C., at this time I will not be explaining baghouses; suffice it to say, they fill bags with pollution]:

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For these reasons and others, I’ve never been particularly sympathetic to Chinese claims that pollution control is a first world responsibility that a developing country – like China – cannot be expected to share. That’s ridiculous. China could install and operate pollution control equipment on every one of its steel mills (the technology is simple, well-known, and easily built and installed) – and still have lower steel-making costs than the developed world. However, there is another, more complicated side to this story suggesting that – even if China suddenly met developed world steelmaking environmental standards – it would still be the world’s dirtiest steelmaker.

On a very general basis, there are two major types of steel mills in the world today: iron-ore fed blast furnaces, and scrap metal-fed electric arc furnaces [EAFs]. From a carbon emissions standpoint, there is one very important difference between these two devices: blast furnaces are usually powered by coal (particularly in China), and EAFsare not. In China, home to some of the world’s most abundant, “dirtiest” (meaning, high in sulfur and other noxious chemicals) and, most important, cheapest coal – blast furnaces account for 89% of all Chinese steel production capacity (according to the above cited speech by Wu Jianchang at the China Metal Recycling Forum held in March, in Dalian). In contrast, roughly 60% of US steel production capacity comes from electric arc furnaces and scrap steel.

Of course, electricity has to come from somewhere, and in the US that somewhere is coal country. But even if the electricity that runs an EAF is generated from coal – on average, an EAF requires only 2/3 of the energy necessary to produce the same ton of steel as a blast furnace.

So – as an energy and cost-saving measure – why doesn’t China just lay down the law and increase the proportion of its steelmaking dependent upon scrap? The reasons are several and – taken as a whole – depressing.

1. Industrial electricity prices in China are more expensive than those found elsewhere in the world — and much more expensive than the cheap coal that fires most of China’s steelmaking capacity. So long as those prices remain high, Chinese steel made in EAFs will have a significant cost disadvantage in a highly competitive Chinese steel market.

2. China doesn’t import or generate enough scrap steel to provide a viable alternative to iron ore and blast furnaces. Best estimates (from the China Iron & Steel Institute and the China Association for Scrap Metal Utilization) are that China produced between 40 and 60 million tons of scrap steel for recycling in 2006, and imported roughly 5.4 million tons — not nearly enough for China current scrap steel requirements (of between 60 and 70 million tons, annually). At current rates of growth, China may be able to generate 70 million tons, domestically, by 2010. But that’s a stretch, and even if it does, that won’t be enough to dent the growth in coal-powered furnaces. At the same time, China will struggle to compete on the global scrap metal market (around 120 million tons available in 2006) due to high prices. In fact, in 2006, China’s scrap steel imports declined precipitously (10.1 million ton to 5.4 million ton) precisely because Chinese traders couldn’t afford the high prices that Chinese demands are (ironically) creating.

The result? Since the early 1990s, the percentage of Chinese steel made from energy and resource saving scrap-fed EAFs has declined from 20% of total steel production in 1995 — to 11.7% in 2005 (again, figures from Wu at the CISA). And until Chinese industrial electricity prices fall, coal prices rise, and the world scrap markets collapse – the trend will remain steady, at best.

Which means (going full-circle here) that China is either going to have to start enforcing laws and regulations related to pollution abatement – or rest easy knowing that it will continue to be the world’s leading source of steel-related carbon emissions.