China’s scrap market remains trapped in a conundrum of low-utilisation, oversupply and lack of profit, according to participants in the recent International Metal Recycling Conference in Beijing held over 29-31 August. However, a resumption of value added tax rebates could help the industry turn around, industry participants argued.

Yuan Fengzhou, general manager of overseas operations at Fengli told the conference that China’s scrap market has entered oversupply as steel output growth has slowed. China will generate 41 million tonnes of new scrap from processing and manufacturing and collect a further 55mt of obsolete scrap this year, Kallanish learns

Despite domestic steel production topping 800mt, Yuan believes scrap demand will be just 88mt this year, 8mt less than supply. Little wonder imports have plummeted and local scrap dealers are struggling.

One way to support the industry is to reintroduce rebates on VAT for scrap dealers. Domestic scrap prices in China increased sharply when a 50% rebate from the 17% VAT was removed in 2011. The China Association of Metalscrap Utilization (CAMU) is lobbying for the rebate to be reintroduced to promote the industry. To support its cause, it highlights the environmental benefits of such a move. However, CAMU has been trying for some time without success.

Scrap remains one of the more obscure sectors of the Chinese steel industry and data is sparse or unreliable. Deriving China's scrap use from statistics on crude steel and hot metal production has been plagued by problems of over-reporting of both the latter numbers, as Macquarie recently pointed out.

While some indicators suggest growth in scrap use so far this year, Kallanish notes other factors show the extent of weakness in the market. China’s scrap imports, which in 2009 were second only to Turkeys at 13.69mt, fell a further 45.47% year-on-year over January-July 2014 to just 552,000t.

Most dramatically, Fengli, China’s largest scrap supplier by far, stopped its scrap business altogether in late August saying it was no longer able to turn a profit.

Analysts from abroad however note the contrast between these figures and usage elsewhere globally. Yuan’s estimate suggest scrap use per tonne of steel at 11%, far lower than the global average of around 35-40%.

If scrap were competitive with iron ore as a source of iron units Chinese scrap supply could easily double without going into oversupply, Kallanish calculates. EAF’s in China currently use hot metal and pig iron as much as possible because of lower costs and increased productivity, while basic oxygen furnaces are also using the bare minimum.