But two deals by Baowu Steel Group and Zhejiang Judong struck just after January 1 appear to be part of an early trial and are not indicative of a surge in scrap imports, given the excessively high prices struck, analysts said.

“The market thinks these deals are mostly symbolic, as current economics don’t add up. Chinese domestic scrap prices are nearly US$60 a tonne cheaper than Japanese scrap prices after accounting for freight rates. So, we don’t think there will be any surge in imports in the short term,” said Keith Tan, S&P Global Platts’ senior steel and raw materials analyst.

Navigate Commodities managing director Atilla Widnell added that the deals were more likely a publicity move.

“While some cargoes were booked on New Year’s Day from Japan to China, we believe this was little more than a ‘public relations trade’ rather than out of any economic benefit,” he said. “Looking at the economics, Chinese mills can procure similar ferrous scrap grades locally today at much more competitive rates compared with the cargoes recently purchased from Japan.”

The continued strength of Chinese steel production has, in part, driven the changes. Strong production has called for more sources of steelmaking raw materials, on top of iron ore.

The move to permit scrap steel had also been long in the making, as Chinese authorities pivoted towards waste management and recycling, analysts added.

Analysts added that, due to the higher prices of imported scrap and the small size of the global scrap market, it is unlikely steel mills will be motivated to replace large amounts of imported iron ore with scrap steel in the short term. The high price of scrap steel and its low availability are not compatible with volume-driven steel producers.

According to S&P Global Platts, Ouyeel, a ferrous-scrap-trading unit under China Baowu Steel Group bought 3,000 tonnes of high-grade scrap from Japanese trader Mitsui & Co on January 1 to be used for steel production by its subsidiary Baoshan Iron & Steel.

While the agreed-upon price was kept confidential, industry sources have indicated that it was around US$500 a tonne.

Judong, a metal-scrap processor and trader in east China, also said in a WeChat post on Saturday that it had bought 2,800 tonnes of high-grade scrap from Japan’s Heiwa. Prices were also not revealed.

Chinese steel-scrap prices, based on scrap buying in Zhangjiagang, Jiangsu province, are around US$409 a tonne, making Baowu’s price per tonne about US$90 more expensive – steep by industry standards.

Leaving aside Baowu’s one-off deal, prices of high-grade scrap from Japan, where China usually buys its scrap steel from, currently sit at around US$467 per tonne – still about US$60 more expensive than local prices – according to S&P Global Platts.

Navigate Commodities estimates current local Chinese steel-scrap prices at US$420 to US$440 a tonne, and calculates Japanese high-grade steel scrap at around US$497 a tonne. Both calculations show imported scrap prices exceed local prices, which would deter steel mills.

“Given the parabolic increase in global seaborne ferrous scrap prices over the past two to three months, removing the ferrous scrap import ban has come a little too late to materially benefit Chinese mills,” Widnell said.

The other factor preventing scrap steel from becoming a fast replacement for iron ore is its small supply.

In 2019, global iron ore consumption was around 2.2 billion tonnes, with China consuming around 1.2 billion tonnes. In comparison, global scrap consumption was around 686 million tonnes, with China accounting for around 240 tonnes, according to Navigate Commodities.

“There simply aren’t sufficient volumes available in the seaborne ferrous scrap market to make a material dent in reducing China’s reliance on imported iron ore,” Widnell said.

Furthermore, with 90 per cent of China’s steelmaking reliant on coking coal blast furnaces, steel scrap would be unlikely to edge out iron ore in the short term, as scrap steel is more compatible with carbon-friendly electric arc furnaces.

“Scrap is unlikely to supplant iron ore in any big way, and will be viewed opportunistically as a supplement to lower costs,” said Tan from S&P Global Platts.

Metals analyst Mysteel Global said the current tightness in scrap supply in Japan – China’s main supplier – would also put a lid on a surge in imports.

While imports could rise in the future, senior analyst Li Hongmei reiterated that the lifting of the scrap ban was not to “replace” iron ore, but to open up the scrap market and to cool local scrap prices.

“More importantly, scrap is more eco-friendly, and it fits into China’s drive in cutting down on carbon emissions,” Li said.

As the steel industry looks to scrap as an alternative, iron ore prices have risen again after cooling slightly at the end of last year. There were smaller shipments from the big producers in Australia and Brazil in the past week that were likely caused by seasonal factors such as berth and mine maintenance, as well as weather disruptions.