China Iron Ore Demand to Fall on More Scrap Use, Dealer Says

China will increase scrap use in steel production in the next three years, displacing some demand for iron ore, as more recycled material becomes available, according to the nation’s largest scrap dealer.

Scrap may account for more than 20 percent of steel production in China by 2015, from 14 percent now, which will put some pressure on iron ore prices, Chun Chi Wai, chairman of China Metal Recycling Holdings Ltd. (773), said yesterday by phone from Shanghai. The company controls about 6 percent of the fragmented scrap market, he said.

“China’s steel production growth is set to slow from double digit gains in the past,” Chun said. “Meanwhile, there will be more and more recycled steel, which will definitely reduce the use of iron ore.”

China, the world’s biggest steelmaker, cut production in August to the lowest level in six months due to slowing economic growth. Steel prices last month fell to their lowest level since the 2008 financial crisis. While iron ore producers that supply China such as BHP Billiton Ltd. (BHP) and Vale SA (VALE3) have shelved new projects or plan to cut output, China Metal Recycling is looking to expand as steelmakers demand more scrap, Chun said.

Using scrap rather than iron ore is more energy and cost effective for the steelmakers, Chun said. Building a steel mill using iron ore would be at least two-thirds more expensive than one using scrap, he said.

Scrap Consumption

China’s scrap consumption is low compared with 60 percent in the U.S., according to a HSBC Holdings Plc report in July.

China Metal’s stock has fallen 11 percent this year, compared with the 14 percent gain in the benchmark Hang Seng index. The shares rose 0.4 percent to HK$7.50 today.

The company plans to set up operations close to Zhanjiang in Guangdong province, where its customer Baosteel Group Corp. is building a 69.68 billion yuan ($11 billion) plant to produce high-grade sheets used in automobiles and appliances.

It is also planning to introduce an electronic scrap- trading platform by the end of the year for its network of about 10,000 buyers and sellers, Chun said.

To contact the reporter on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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