Declining Scrap Steel Usage in China Supports Iron Ore Demand

Overview

This report analyzes an intriguing market phenomenon: despite downward pressure and declining output in China’s steel sector, iron ore imports have actually increased. The report identifies a sharp decline in scrap steel usage in steelmaking as the key explanation. Specifically, China’s implied scrap steel usage in FY2025 was only 125 million tonnes—well below historical averages—meaning steelmakers are increasingly relying on iron ore and pig iron as raw materials, thereby boosting iron ore demand. This counterintuitive dynamic provides unexpected support to the iron ore market.

Core views

The report’s central observation is that China’s scrap steel usage trend has reversed in recent years. Conventional investment expectations assumed scrap usage would rise annually as the steel industry matured and environmental regulations tightened (since scrap-based recycling is more efficient and less polluting). However, the opposite has occurred: scrap usage in 2023–2025 was consistently below the post-2015 average of 0.46 million tonnes/day, registering 0.41, 0.42, and 0.34 million tonnes/day, respectively. The report attributes this decline primarily to falling steel prices, which rendered electric arc furnace (EAF) operations—typically scrap-intensive—unprofitable, especially for flexible capacity used to balance supply and demand. When steel prices slump, these relatively high-cost EAF facilities are idled or scaled back. Early 2026 data reinforces this trend: scrap usage in the first four months of 2026 (4M’26) declined 10% YoY, but rebounded to a 2% YoY increase in April alone. This reflects persistently weak steel output in early 2026 (down 4.1% YoY in the first four months), though seasonal factors and recovering demand led to month-over-month improvement in scrap usage. Given that March–May are traditionally peak months for scrap usage in China, the report expects scrap consumption to remain elevated in the coming months before declining again after June due to weaker seasonal scrap collection in the second half of the year. For the iron ore market, this implies that even if global steel output underperforms, sustained low scrap usage can maintain or even exceed expected demand for primary ore. This breaks the traditional assumption of a direct correlation between steel output and iron ore demand, offering additional fundamental support for iron ore prices.

Analysis framework

The report employs incremental analysis by decomposing the gap between 'apparent demand (steel output)' and 'actual imports' to infer 'implied scrap usage.' The core logic is: crude steel output = scrap usage + pig iron usage. When crude steel output declines while imports (reflecting pig iron and iron ore demand) rise, scrap usage must be falling. This reverse-engineering approach helps uncover overlooked structural shifts in supply dynamics. The report also emphasizes seasonal analysis. It highlights clear seasonal patterns in China’s scrap collection and usage—spring (March–May) is the peak period, while the second half of the year (especially winter) is weaker. Recognizing this cyclical behavior helps investors interpret short-term data fluctuations through a structural lens rather than reacting to surface-level trends.

Methodology notes

• Industry/ Sector Analysis FrameworkSupply-demand framework

  By comparing divergent trends between steel output and iron ore imports, the report infers changes in scrap steel usage.

  Steelmaking relies on three raw material sources: iron ore, pig iron, and scrap steel. When total output declines but imports of one input rise, usage of other inputs must fall. The report uses this logic to reverse-engineer scrap usage trends—a common method in supply chain analysis.

• Industry/ Sector Analysis FrameworkCost curve analysis

  Falling steel prices make high-cost EAF capacity (the primary scrap-based route) unprofitable, leading to reduced scrap usage.

  Different steelmaking processes have distinct cost structures: blast furnace-basic oxygen furnace (BF-BOF, using iron ore and coking coal) typically has lower costs, while EAF (using scrap) is costlier but more flexible. When steel prices fall, marginal (usually high-cost) capacity shuts down first. The report uses this to explain why scrap usage declines during price downturns.

• Industry/ Sector Analysis FrameworkSubstitution Effect Analysis

  Rising scrap costs or deteriorating EAF margins prompt mills to shift toward cheaper iron ore and pig iron blends.

  This reflects substitution between raw materials. When relative prices or profitability shift, producers adjust their input mix. The report interprets rising iron ore demand via declining scrap usage—essentially analyzing this substitution effect.

Key data

• China’s Implied Scrap Steel Usage in FY2025125 million tonnes15.6% below the post-2015 average (0.46 million tonnes/day)
• Daily Average Scrap Usage by Year (2023–2025)2023: 0.41 Mt/day; 2024: 0.42 Mt/day; 2025: 0.34 Mt/daySustained downward trend, with 2025 hitting a record low
• Daily Average Scrap Usage in First 4 Months of 20260.41 million tonnes/dayDown 10% YoY but above FY2025’s 0.34 Mt/day
• April 2026 Monthly Scrap UsageUp 2% YoYShows sequential improvement, though still below historical averages
• China’s Iron Ore Import Growth (Despite Weak Steel Output)FY2023: +7% YoY; FY2024: +5% YoY; FY2025: +2% YoYSustained import growth driven primarily by falling scrap usage
• China’s Crude Steel Output in First 4 Months of 2026Down 4.1% YoYOutput decline alongside falling scrap usage reflects structural capacity adjustments

Impact & implications

From a market perspective, this observation offers a fresh lens on iron ore fundamentals. Investors typically view global steel output as the primary driver of iron ore demand, with output declines seen as bearish. However, this report highlights a complex interaction between output declines and raw material structure: when output falls, it is often high-cost capacity—including scrap-intensive EAFs—that shuts down first, potentially increasing relative demand for low-cost primary ore. If this trend persists, it will provide structural support to the iron ore supply-demand balance. The report explicitly states, 'If this trend continues, support for iron ore demand from lower-than-expected scrap usage may persist.' This means that even under macroeconomic pressure and declining total steel output, capacity restructuring could lead to iron ore demand exceeding simple output-proportional estimates. This provides additional fundamental backing for bullish iron ore investors.

Risks

• Scrap usage could rebound: If steel prices recover or EAF costs decline, scrap usage might return to historical averages, weakening iron ore demand support.
• Uncertainty in seasonal patterns: The report’s projections rely on historical seasonality, but actual patterns could be disrupted by macro policy shifts or weather events.
• Rapid recovery in Chinese steel output: If output rebounds faster than expected without fundamental capacity restructuring, scrap usage could rise again, undermining this support thesis.

What to watch

• Monthly Chinese scrap usage data over the coming months, particularly whether it rebounds significantly during the historical peak season (March–May).
• Steel price trends and their impact on EAF profitability.
• YoY changes in China’s crude steel output to assess whether capacity restructuring continues.