STEEL mills in China are spending big on equipment that shreds cars and other junk metal for use as raw material, as government demands to make smoke-stack industries cleaner continue to reshape heavy manufacturing.

Investing in scrap-processing equipment is the latest sign that mills have cash to spend after bumper margins last year resulted from skyrocketing metal prices. It also indicates that China’s tough rules on pollution are pushing companies to be more efficient.

Scrapyards typically remove paint and other contaminants from used metal, cut it into small pieces and bale it for delivery to factories. But steel plants are increasingly performing those processes themselves to feed their furnaces, according to executives of mills and shredder makers.

They say producers want to use cheaper untreated scrap, which is more abundant and typically sells for 200 yuan (US$31) to 500 yuan per ton less than the cleaner product, potentially saving substantial amounts of money and giving them more control over their raw material supplies.

Hebei Jingye Group, a medium-sized plant in Shijiazhuang, is installing a 3,000-horsepower shredder next month, which would allow it to more than double its scrap intake this year to 2 million tons, said Zhang Lijie, manager of the scrap department.

Cheaper raw materials could save the company as much as US$157 million a year.

The shredders strip paint and contaminants from scrap and cut it into small pieces, and can also sort it, improving the quality of the final product.

“The quality of scrap steel we buy is quite uneven,” said Zhang. The company makes about 12 million tons of steel a year, mostly construction steel rebar.

The arrival of shredders is likely to accelerate the pace of that shift, dealing another blow to global miners, like Vale and Rio Tinto, which have bet big on voracious demand from China, the world’s top importer.

China generated 200 million tons of scrap steel in 2017, up 67 percent from a year ago, according to data from the China Association of Metalscrap Utilization.

That comes as China promotes recycling as part of its push to upgrade heavy manufacturing, but it could potentially replace around 280 million tons of iron ore, equivalent to nearly a third of China’s total iron ore imports last year.

With profit margins as high as 1,000 yuan a ton due to higher metal prices and shredders costing 5 million yuan, mills can get their money back within months, executives said.

Wang Guangrui, vice president at Xuzhou Jinhong Iron & Steel Group, warns there may not be enough scrap to meet the country’s burgeoning demand in the long term, which would likely drive up waste metal prices and hurt margins.

China, the world’s top steel producer, aims to raise the portion of scrap usage to 30 percent by 2025. Analysts expect capacity from electric arc furnaces to reach 166 million tons this year, up by nearly 20 percent from 2017.

The drive to process scrap at home also marks a shift for China’s mills as they look to become more integrated operators with ready supplies of raw material.(SD-Agencies)