The Korean steel industry is increasing investments in electric arc furnaces to meet carbon neutrality goals and transition to eco-friendly production. However, profitability is under pressure due to rising costs. The price of scrap metal, a key raw material for electric arc furnaces, has surged, exacerbating cost burdens. Additionally, rising electricity prices are further complicating the transition to lower carbon emissions, leading to concerns that the shift may increase costs for steelmakers.
As of this month, domestic scrap metal prices have risen sharply, reaching 515 won per kilogram. This marks a significant increase from the low 400 won range earlier this year.
Scrap metal is essential for electric arc furnace steelmaking, which melts scrap instead of using iron ore and coke like traditional blast furnaces. Scrap metal accounts for about 40% of production costs in electric arc furnaces, meaning rising scrap prices directly impact overall costs.
The surge in scrap prices is attributed to a supply-demand imbalance. Demand for scrap has increased sharply this year due to the expansion of electric arc furnaces, while the supply has decreased due to a slowdown in the construction sector. Additionally, imports have significantly declined, further tightening market supply.
From January to May this year, scrap metal imports totaled approximately 400,000 tons, down from about 600,000 tons during the same period last year. Meanwhile, exports have remained steady at around 500,000 tons, worsening the domestic supply shortage.
Scrap metal is not a raw material that can be produced in large quantities in a short time. It is generated from the demolition of old buildings, discarded vehicles, appliances, and manufacturing byproducts. As demand increases, it is challenging to quickly expand supply. The growing investment in electric arc furnaces is intensifying competition for scrap metal, leading to upward pressure on prices.
In response to global carbon regulations, major Korean steelmakers are accelerating their transition to electric arc furnaces. POSCO recently inaugurated a large electric arc furnace capable of producing 2.5 million tons annually in Gwangyang, bringing the total number of companies operating electric arc furnaces in Korea to 11.
Market analysts predict that as the expansion of electric arc furnaces accelerates, the burden of securing scrap metal will increase for domestic steelmakers. As large steel companies, traditionally reliant on blast furnaces, also increase their demand for scrap, competition for securing raw materials is inevitable.
Particularly for producing high-quality, low-carbon steel, securing consistent, high-grade scrap metal is crucial. This could lead to a competition not just for quantity but for quality in scrap procurement.
Meanwhile, rising electricity costs are also increasing the cost burden for steelmakers. Although electric arc furnaces emit less carbon than blast furnaces, they consume more electricity, meaning that higher electricity prices directly raise production costs. This has led to concerns that the expected profitability improvements from expanding electric arc furnaces may not materialize.
One industry insider stated, "Transitioning to electric arc furnaces is an unavoidable choice in the era of carbon neutrality, but without stable scrap procurement and reasonable electricity costs, the cost burden will continue to grow. In the future, competition for securing raw materials is likely to determine the competitiveness of steelmakers more than competition for production facilities."
* This article has been translated by AI.
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