Growth in China's iron-ore demand is already being challenged by weaker economic expansion. Steel prices plunged by more than 50 per cent since 2011 as consumption has declined. By 2020, iron-ore prices will fall to $US35 a metric ton, Morningstar estimates, below the record low of $US38.30 reached in December, and decline to $US30 a ton by 2025. Blast furnaces using coal and iron-ore had been the better money-spinners before a fall in scrap prices in 2015 improved the profitability of mini-mills that use electricity to melt down scrap, according to Yi Zhu, a Hong Kong-based Bloomberg Intelligence analyst. The cost to China's mills of producing steel with ore and coal was about 2130 yuan ($428.68) a metric ton last year, Bloomberg Intelligence calculates. Electric-arc furnaces. spent about 1853 yuan a ton. Scrap prices in China tumbled 48 per cent last year, outpacing the slump in iron-ore, according to Metal Bulletin data. Electric-arc mills now account for around 60 per cent of production in the US and about half of all steelmaking in Europe. The China Association of Metal Scrap Utilization has set a target for 20 per cent of the nation's crude steel output to come from scrap by end of 2020, said Liu Shuzhou, deputy secretary-general of its scrap steel division. Mini-mills were used for about 10 per cent of output in 2014, according to Metal Bulletin Research. "Government policy might be the most important factor," Liu said. "If the government chooses to give subsidies, favourable power tariffs or set up energy-saving funds, etc., the switch can happen very quickly." As scrap supply in China rises, the price should decline further, providing an incentive for steel producers to switch to the electric-arc furnaces, said David Wang, an analyst at Morningstar. "We think that you can start seeing the beginnings of an acceleration of scrap availability," from cars, machinery and household appliances, which will take hold from 2020 to 2025, Wang said. "Beyond that, it's likely that we will begin to an even greater acceleration of scrap availability from construction. Essentially, as buildings are torn down." Recycling a typical car saves more than a ton of iron-ore and about 635 kilogrammes of coal, according to the Washington-based Institute of Scrap Recycling Industries. Using scrap can reduce a steelmaker's carbon dioxide emissions by about 58 per cent, it calculates. China's scrap cycle may take longer to develop, according to BHP, which last year cut its forecast for the nation's peak steel output by as much as 15 per cent after research in cities from Xi'an to Guangzhou. "It is only beyond 2030 that we envisage that an acceleration in scrap availability will translate into a faster decline in demand for iron-ore," the Melbourne-based producer said in an e-mailed statement. China's pool of so-called obsolete scrap -- metal recovered from cars to skyscrapers -- will triple and displace about 130 million tons of iron-ore demand in 2030, Rio Tinto said in a September presentation. Rio declined to comment further on the outlook for scrap's impact on iron-ore demand. The scrap take-up rate may not change rapidly because steelmakers are likely to use excess blast furnace capacity and there's a lack of scrap collection points, according to CRU Group senior consultant Chris Asgill. High energy costs and an overall excess of steelmaking capacity also will limit growth of electric-arc furnaces, he said in an e-mail. The rise of the mini-mills is set to prove a big challenge for the iron-ore producers, Li Xinchuang, deputy secretary-general of the China Iron & Steel Association, said last month. This threat from scrap, on top of a shrinking export market, will potentially act as a deterrent to long-term investments in iron-ore producers, said Romano Sala Tenna, a portfolio manager at Katana Asset Management in Perth. The fund manager sold holdings in BHP and Rio in 2014 on concern over iron-ore oversupply. "The pool of scrap in China is growing out there," said Ian Roper, a Singapore-based director at Macquarie Group's commodities research division. "Ultimately that will be the rusty nail in the coffin."
According to Goldman Sachs, China’s increasing use of recycled metal during a time of worldwide steel surplus could see the nation’s demand for iron ore halved by 2040 along with the profits of large producers such as BHP Billiton and Rio Tinto. Scrap supply is predicted to double in the next decade, as the electrical goods consumed by China's growing middle class are discarded; creating a new threat to the iron ore industry which is already suffering from a 50% plunge in steel prices from 2011 levels. By 2025, Morningstar estimates that iron ore prices will fall to $30 a metric ton, representing a new low compared to record lows of $38.50 reached in December 2015. The Chinese government has been trying to reduce its dependence on imported energy since at least 2012, when it announced plans to increase domestic production of renewable energy.