That should push Chinese steelmakers to use more of the material in coming years, potentially sapping demand for steel ingredient iron ore from the world's biggest metals consumer.

Faltering appetite for iron ore could hit a critical lifeline for international mining giants which have banked on China continuing to suck up hundreds of millions of tons of the most widely traded bulk commodity.

"In the medium to long term, scrap is the real threat to iron ore, for sure," said Daniel Meng, an analyst at brokerage CLSA in Hong Kong.

"We believe by 2020, replacement would become faster and the risk on iron ore from scrap would become more serious."

China currently only produces around 11 percent of its steel from scrap, compared to over 70 percent in the United States, suggesting it may have plenty of room to grow in recycling the material.

The closure of these mills, with a combined production capacity of 120 million tons, helped push the nation's scrap exports to an all-time high in May.

China last year generated a record 143 million tons of steel scrap, up nearly fourfold from 2002, data from the World Steel Association and CLSA showed.

That could potentially replace around 200 million tons of iron ore, equivalent to about a fifth of China's imports of the commodity last year.

China's steel scrap generation should rise to 200 million tons by 2020, the China Association of Metal Scrap Utilization said.

ELECTRIFYING

The bulk of China's steel is produced via blast furnaces where iron ore is melted and later mixed with steel scrap.

As domestic scrap prices ST-SCCNDHV-MB tumbled 20 percent in May from this year's peak, mills increased scrap use in these furnaces to 20 percent from 8 percent, Chinese traders and mills said. But as demand picked up in June, some scrap traders say profits have doubled.

And renewed interest in electric arc furnaces (EAFs), or mini-mills that use only scrap, could fire up demand for recycled steel.

EAFs emit far less carbon than blast furnaces, which use coal as fuel, suiting China's anti-pollution campaign.

"In the long term, I believe the authorities do support EAFs in China," said Wang Guangrui, vice-general manager at Xuzhou Jinhong Steel Group in Jiangsu province, which restarted a 1-million-ton EAF.

The company first launched its EAF in 2011, but was forced to shut it to switch to a much cheaper induction furnace. It moved back to the EAF after the closure of all the nation's induction furnaces.

• [Editor:Wang Linyan]