Q&A with Transition Asia on the Japan’s steel industry
What is the state of play on steel decarbonisation in Japan?
The current state of play in Japan is not favourable. The share of EAF in the production mix is low, only 25% of steel production compared to a global level of 50% excluding China resulting in a high average carbon intensity per tonne.Reasons for include a lack of and expensive renewable energy (RE), a net export scrap market and a low carbon price. We can say that the steel industry in Japan is falling behind competitors in the sector in the transition to green steel. The Japanese steel industry is working hard in the development of new technologies, such as hydrogen co-firing in blast furnaces (BF) but such technology is not yet commercially proven and has modest greenhouse gas emission reductions, currently limited to less than 22%. Furthermore, proposed CCS technology is not used at scale on any blast furnace with material capture rates.
Therefore we propose two feasible solutions. The first recommendation is increased utilisation of secondary scrap steel with electric arc furnaces (EAF). Japan has a rich amount of scrap with a cheaper price compared to global competitors like China where the market is far more disorganised. Utilising the combination of RE and scrap-based EAF steel is the quickest and cheapest option the industry can take to reduce emissions. Our second recommendation is to replace BF iron making facilities with iron produced via DRI with green hydrogen (H2DRI). This technology has been commercially proven from some European players for the production of green steel. However, the use of hydrogen to create iron in Japan is an economic non-starter. Japanese steelmakers would benefit from utilising international import of hot-briquetted iron (HBI; an easily transportable form of DRI) produced in RE and iron ore rich countries to then be charged into domestic steel making facilities.
Though some would insist that H2 DRI production with lower-grade iron ore, which is different from the higher-grade ore that European players are using, would not be possible as of now. Nevertheless, POSCO, the largest steelmaker in Korea has been very confident in commercialisation of H2-DRI-based ironmaking with even such lower-grade iron ore by 2030. The Japanese steel industry currently faces serious risks if they fail to decarbonise. This includes loss of market share and competitive disadvantage globally due to new climate-focused regulations, such as CBAM
What are some of the challenges in decarbonising the steel sector?
There are two key challenges for the Japanese steel sector- mobilisation of funds and the transition to low carbon steel production and business model change from the current domestic BF-BOF processes that dominate Japan.
Generally speaking, global competitors such as China and the EU have injected tsignificant funds into the decarbonisation of their steel industries, but in Japan, public financial assistance is fairly limited. According to Japan’s Green Growth Strategy, the government states that the steel industry does not sit at the core of its strategy. Furthermore, the steel industry is not viewed independently from other materials sectors, limiting the options for the private sector. However, recent political developments have put more focus on the steel industry that has led to an almost doubling of public support and expedited capital expenditure plans. However, the amount of public financial assistance is still inferior compared to China and the EU.
Significant business model change will be needed for Japan to decarbonise its steel industry affecting both iron and steel making and upstream and downstream supply chains. We foresee a significant head wind for Japan’s iron making facilities as the emissions from BFs can not be abated in-line with any credible net zero transition pathway. Producing hydrogen domestically or importing it in either liquid form or ammonia is not economically viable. There is not enough RE capacity for Japan to produce hydrogen at home and importing it in liquid form will lead to globally uncompetitive steel prices. Japan would be far better suited to utilise its world class steel making abilities by importing HBI produced in countries with plentiful resources of DR-grade iron ore and cheap RE. Furthermore, scrap steel utilisation will have to increase, ensuring that Japan does not maintain its status as a net exporter for scrap steel.
What do you see as the role of investors in steel decarbonisation in Japan?
Investor actions will be critical for the decarbonisation of the steel industry in Japan. Japan has seen increased investor interest on climate issues in the past few years after attention on the banking and the power sectors has spilled out to other sectors, including steel. In East Asia, Japan is one of the most advanced countries on investor stewardship and has some of the most globalised companies in the world. It also has a reasonable threshold for resolution filing that allows shareholder engagement to escalate if necessary. Now that many investors have divested from coal-focused power sector companies and banks that support coal, the steel sector is proving to be the next frontier due to its reverberating effect on many other industries in both the upstream and downstream, including highly visible industries like auto. It is still early for aggressive action from investors, but engagement appears to be increasing which then incentivises more investors to get involved and add pressure. In fact, the two largest steel makers in Japan, Nippon Steel and JFE, have disclosed their newly updated roadmaps including more EAF installation as a result of long-run engagement by global investors. Not only among foreign players but also among Japanese financial institutions, the concerns over the decarbonisation of the steel industry have been increasing. It is expected that more pressure will be imposed on the steelmakers by both global and Japanese investors.
What actions do you think need to be taken by the government to stimulate green steel production?
The Japanese government should take swift and meaningful action. First the government should mobilise more funds for the decarbonisation of the steel industry, including support for capex as well as OPEX and not only one-off subsidies to transition away from BF-BOF processes. Second, they should look to qualify this support through the introduction of impactful carbon pricing, ensuring both carrot and stick approaches to supporting the transition to low carbon steel. Third, they should seek to stimulate downstream market demand to de-risk the actions that steel companies make to produce low carbon steel products. A final critical point is the decarbonisation of the energy grid because zero-carbon electricity is a prerequisite for green steel production from EAFs. For instance, the largest steel maker in Japan, Nippon Steel, heavily relies on in-house power generation, with almost 90% of the electricity used coming from in-house generators. Meaning that decarbonisation of manufacturing will not be realised without RE therefore the government should assist and push them from fossil fuel in-house generators to RE. So it is also critical to deliver policy support for cheaper and abundant RE in order to make BF-BOFs phase out otherwise the country will not be able to break away from carbon lock-in.
