Q&A with SteelWatch on Japan’s steel industry

Roger Smith is the Asia Lead at SteelWatch, a non-profit organisation aimed at accelerating the transformation to a decarbonised steel sector.

How do you see the state of play in Japan on steel decarbonisation?

Japan is a tricky place to work on steel and heavy industry for a few reasons, so one is that the steel industry is politically powerful, they were a key part of Japan’s rebuilding after World War II and a real source of national pride, but at the same time at present it is really a legacy industry that has fairly old facilities. While it produces high-quality steel it is done almost entirely with coal-powered blast furnaces, and it is not forward-looking. I think there is a real fear about international competition, and Japan’s declining role in the world and instead of embracing an opportunity to transform itself into a low-emissions and competitive industry it is just working to keep the business model that it has today going for longer.

What do you see as the challenges to decarbonising the steel sector?

In Japan, I think decarbonising heavy industry is difficult for a few reasons. I think one is that the industry has a lot of influence over government policy and at present it seems to just want to keep the existing blast furnaces running for longer. That means they are spending a lot of money looking into technologies like putting hydrogen into blast furnaces instead of really thinking about longer-term solutions. At the same time, the steel companies have very solid relationships with their customers, and I don’t think they are really feeling very much pressure yet from Japanese buyers to develop green steel. Thirdly, Japan is somewhat insulated from activities and events in the rest of the world. So while Japan has a net zero by 2050 policy, and the steel industry is expected to contribute to that there just really isn’t a lot of momentum or urgency at home for the steel makers to move.

I think the factors that are most influential are what other countries are doing, so places like Korea and China and how global markets are changing and how customers internationally are starting to demand lower emissions products. I think that is going to really influence Japan, but I think at present it seems like the steelmakers are really playing more of a wait-and-see game.

Where are the opportunities for steel decarbonisation?

In the past, the Japanese government has been a real leader and forward-thinking about industrial policy. They went from absolute ruins after World War II to just years later having a globally competitive steel industry and shipbuilding industry and then eventually automotive industry. So it is a little ironic that here in 2023 it is these industries that are holding back government. I think part of it is a failure of imagination, a failure to imagine that a different future could be possible, and that Japan could be competitive and relevant in a decarbonising world. The Japanese government policy is really tied to powerful interests, namely the auto and steel industry. I am not that optimistic that we will see government as a first mover. What I think could happen is we could see some local governments, maybe Tokyo, which has pretty aggressive decarbonisation goals looking to reduce carbon from its building, its construction projects, and send a demand signal that way. Japan is willing to put a lot of money into the steel sector and the steel sector is asking for money so we’re going to get things like hydrogen supply chains, it is just a real question of strategy and if these investments are going to be targeted for the steel industry and ultimately how they are deployed. So if it is just putting minute amounts of hydrogen into existing blast furnaces it really doesn’t get you emissions reductions, it is kind of a waste of the hydrogen. I think what the Japanese government should be doing is really thinking about long-term investments that really enhance the competitiveness of the steel industry, so they continue to sell into global markets that are demanding low-emissions products and then building the supply chains and financing support and the other things you need to make that transition. At the moment it is just not targeted, it is everything the steel industry could do to reduce emissions but there isn’t enough money to support every one of these pathways and unfortunately, many of them are likely dead ends.

What action is needed from the government and the private sector to see a real move towards steel decarbonisation?

I think today is a unique place in time for Japan. We’re at a time when Japan is still the third biggest steel maker in the world. It still has some of the best engineers and it has a lot of financial strengths as well in getting international capital. And countries that are competitive, like China and Korea, haven’t really moved that much on creating low-emissions steel. So, I think if Japan, instead of deciding the play a wait-and-see game, decided to actually move forward and do a better job of capturing, sorting and re-using its steel scrap for higher quality uses, and I think if once those facilities are in place it could start importing green iron made with hydrogen and then potentially even produce some domestically Japan could actually be one of the first movers in Asia and really get to markets and really let its buyers, here and abroad, know that you can rely on it for a high quality and low emission product. I think the real danger is in doing nothing, in waiting too long, because when China wakes up and decides that its old blast furnaces, it doesn’t need them anymore and that it has built too many steel mills and starts bringing down capacity and then replaces those with new, low-emissions facilities then I think Japan is really going to be challenged. Japan has a relatively high cost for production in general, and if it is going to sell high-cost but relatively dirty steel, I just don’t see that there is really a market for it. So I think this is a unique place in time for the Japanese industry to really think critically about the future and really invest in no-regrets investments; things like electric arc furnaces could be used with scrap and then in the future could also be used with iron that is produced off-site with hydrogen for example.