The Path to Green Steel

Pursuing Zero-Carbon Steelmaking in Japan

February 2023
Acknowledgements

In creating this report, we received the cooperation of experts and companies in relevant
fields from both within and outside Japan. Agora Industry was especially helpful by providing
us with valuable information and exchanges of opinions that yielded numerous suggestions.
BloombergNEF kindly allowed us to use its valuable data and information. We would like to
express our sincere gratitude for this assistance.

Authors
This report was prepared by Renewable Energy Institute’s Climate Change Team.
Lead author Yuko Nishida Senior Manager, Climate Change
Co-authors Takanobu Aikawa, Senior Researcher
Yuri Okubo, Senior Researcher
Akiko Hirose, Research Staff
Teruyuki Ohno, Executive Director

Disclaimer

Although all possible measures to ensure the accuracy of the information contained in this
report are taken, Renewable Energy Institute shall not be liable for any damage caused to
users by the use of the information contained herein.

About Renewable Energy Institute

Renewable Energy Institute is a non-profit think tank which aims to build a sustainable, rich
society based on renewable energy. It was established in August 2011, in the aftermath of
the Fukushima Daiichi Nuclear Power Plant accident, by its founder Mr. Masayoshi Son,
Chairman & CEO of SoftBank Group, with his own resources.
Table of Contents

Key Findings ............................................................................................... 2

Introduction: Decarbonizing the Steel Industry, a Critical Pillar to Achieve Carbon

Neutrality in Japan ........................................................................................ 6

Chapter 1: Current State of the Japanese Steel Industry and Key Technologies for
Decarbonization ........................................................................................... 9
1-1 Current Status of the Steel Industry in Japan ..................................................................................... 9

1-2 Key Technology Options for Decarbonizing the Steel Industry ......................................................... 12

Chapter 2: Why Accelerated Decarbonization is Important for Japan’s Steel Industry

............................................................................................................... 16
2-1 Reduction Needed by 2030 to Achieve the Global Temperature Target of 1.5°C ............................. 16

2-2 Length of Investment Cycle and Size of Investment – Investment Decision to be Made in the 2020s

............................................................................................................................................................... 17

2-3 Companies and Policies in Europe are Moving Toward Low-Carbon Steelmaking in 2030 .............. 18

2-4 Demand Side Movements for Low-Carbon Steel Products .............................................................. 20

Chapter 3: Decarbonization Challenge of Steelmaking in Japan .......................... 23

3-1 Japan's Plan for Zero-Carbon Steelmaking ...................................................................................... 23

3-2 Issues of Blast Furnace + CCS Pathway .......................................................................................... 25

COURSE50 - A Transitional Measure towards 2050 .......................................................................... 26

Bottlenecks of CCS, the Essential Tool for the Continued Use of Blast Furnaces .............................. 27

CCS does not capture 100% of CO2 emissions.................................................................................. 28

3-3 Challenges of Hydrogen Direct Reduced Iron in Japan .................................................................... 31

Can Japan's Hydrogen Supply Contribute to Green Steelmaking? .................................................... 31

Japan's Hydrogen Costs are Highest of Any Countries ...................................................................... 32

Importing hydrogen will not eliminate the cost difference. .................................................................. 33

[BOX 1] Quality of iron ore required for direct reduction ironmaking + electric furnace method ......... 36

3-4 Challenges and Developments of the Electric Furnace (Recycled Iron Manufacturing) ................... 37
Can the Electric Arc Furnace Method Meet All Iron Demand? ........................................................... 37

Can the Electric Arc Furnace Method of Scrap Utilization Cover All Demand? .................................. 38

Japan’s Electricity Costs are Higher Compared to Other Countries ................................................... 39

3-5 Summary of Issues for Steel Decarbonization Approach in Japan ................................................... 40

Chapter 4: Japan's Zero-Carbon Steelmaking in the Carbon-Neutral Era .............. 41

[Pillar 1] Maximum Utilization of Recycled Iron by Electric Arc Furnaces in Response to the Age of
Circular Economy ................................................................................................................................... 42
[BOX 2] Demand Response by Electric Furnaces - Tokyo Steel's Contribution to the Power Grid ......... 44

[Pillar 2] Utilization of Hydrogen Direct Reduced Iron (H2 -DRI) Imports ................................................ 45

[Pillar 3] H2-DRI by Domestically Produced Hydrogen in Optimal Domestic Locations .......................... 47

Chapter 5: Transition Strategies for Decarbonizing Steelmaking in Japan............. 49

Strategy 1: “Electric Arc Furnace Phase-in / Blast Furnace Phase-out Plan” to develop the local
economy ................................................................................................................................................. 49

Strategy 2: Lead the world in the international hydrogen direct reduced iron (H2-DRI) market and supply
chain ....................................................................................................................................................... 50

Strategy 3: Selection of optimal sites for direct hydrogen reduction ironmaking in Japan in conjunction
with offshore wind power development ................................................................................................... 51

Strategy 4: Promote reduction of domestic demand and maximum utilization of scrap iron by shifting to
a circular economy ................................................................................................................................. 52
1) Incentives to Increase Demand for Scrap Use ............................................................................... 53

2) Ensure the Design Suitable for Recycling ...................................................................................... 53

3) Formation of Closed Loop .............................................................................................................. 53

4) Support for Upgrading Intermediate Treatment .............................................................................. 54

Strategy 5: Develop policies to expand demand for green steel ............................................................. 54

1) Clarify the Definition of Green Steel ............................................................................................... 54

2) Action Initiatives from the Private Sector ........................................................................................ 54

3) Promotion of Public Procurement .................................................................................................. 55

[BOX 3] U.S. Federal Buy Clean Initiative .......................................................................................... 56

4) Emission Reduction from LCA Perspective - Creating a Mechanism for Embodied Carbon

Reduction 57

Reference: Near Zero Emission Steel Definition ............................................... 59

List of Figures and Tables

Figure 1 Energy-related CO2 Emissions from the Steel Industry (FY2019) .................................. 6
Figure 2 Proportion of Total GHG Emissions from the Steel Industry (“Specified Emitters”) ....... 7
Figure 3 Breakdown of Japan’s Crude Steel Production and Consumption (Domestic and
Foreign Demand)......................................................................................................... 9
Figure 4 Ordinary and Special Steel Orders by Application (FY2019) ........................................ 10
Figure 5 Share of EAF Process in Major Countries .................................................................... 11
Figure 6 Comparison of BF-BOF and DRI-EAF Processes and Their CO2 Emissions (Per Tonne
of Crude Steel Production) ........................................................................................ 13
Figure 7 Blast Furnaces Reaching End of Life in the Decades Ahead (Production Capacity) ... 18
Figure 8 Announced Low-carbon Steelmaking Projects ............................................................. 18
Figure 9 Steel Industry Roadmap for Transition Finance ............................................................ 23
Figure 10 R&D and Implementation Plan .................................................................................... 24
Figure 11 Overview of COURSE50 ............................................................................................. 26
Figure 12 Change in Levelized Cost of Net-Zero Steel............................................................... 29
Figure 13 CStore1 Project ........................................................................................................... 30
Figure 14 Potential Demand and Parity Price of Hydrogen for H2-DRI Steelmaking .................. 32
Figure 15 Levelized Cost of Hydrogen Production from Renewable Electricity, 2022-2050....... 33
Figure 16 Transport Cost Breakdown by Hydrogen Carrier ........................................................ 35
Figure 17 Steel Scrap Consumption (FY2019) ........................................................................... 38
Figure 18 Required Performance of Steel Products and Share of Production from Electric Arc
Furnaces.................................................................................................................... 39
Figure 19 Scrap-based EAF Cash Costs for Hot-rolled Coils in Major Countries) ..................... 39
Figure 20 Comparison of Energy and Costs of Iron and Steel Production in Australia and Japan
46
Figure 21 Energy Demand and Cost by Study Case (Per Tonne of Semmi-finished Steel) ....... 47
Figure 22 Near Zero Emission Crude Production Threshold as a Function of Scrap Use ......... 60
Figure 23 Analytical Boundary for Defining Near Zero Emission Steel Production .................... 61

Table 1 Iron Source Consumption and Crude Steel Production by Process (FY2019) (thousand
tonne) ........................................................................................................................... 10
Table 2 Main Technology Options for Conventional and Decarbonized Steelmaking ................. 13
Table 3 Automotive Industry Moves Toward Offtake Agreements and Equity Participation ....... 21
Table 4 Advantages and disadvantages of each potential hydrogen carrier ............................... 34
Table 5 Approach to Decarbonization Approach: Pros and Cons of Steel Industry
Decarbonization Methods in Japan ........................................................................... 40
Table 6 Types of Scrap, Their Properties and Future Directions (FY2019) ................................ 43
List of Acronyms

BF Blast furnace
BF-BOF Blast furnace - basic oxygen furnace
BF- Blast furnace - basic oxygen furnace combined with carbon capture
BOF+CCS and storage
BNEF Bloomberg NEF
BOF Basic oxygen furnace
CCS Carbon capture and storage
CCUS Carbon capture, utilization and/or storage
CO2 Carbon dioxide
DAC Direct air capture
DR Direct reduction
DR-EAF Direct reduction - electric arc furnace
DRI Direct Reduction of Iron
EAF Electric arc furnace
ETC Energy Transitions Commission
ETS Emissions Trading System
FMC First Movers Coalition
GHG Greenhouse gas
H2 Hydrogen
H2DR-EAF Hydrogen-based direct reduction - electric arc furnace
Hydrogen Direct Reduction of Iron/
H2-DRI
Hydrogen Direct Reduced Iron
HBI Hot Briquetted Iron
IDDRI Institute for Sustainable Development and International Relations
IEA International Energy Agency
IRENA International Renewable Energy Agency
Nm3 Normal Cubic Meter
SBT Science Based Targets
SBTi Science Based Targets Initiative
Definition of Green Steel

In this report, steel produced with reduced CO2 emissions is referred to using a variety of
different terms, including “green steel,” “zero-emission steel,” “decarbonized steel,” and “low-
carbon steel,” according to the context.

The most specific definition of “near-zero emission steel” (NZS) is released by the
International Energy Agency’s (IEA), which, in the communiqué of the G7 Climate, Energy
and Environment Ministers’ Meeting held in May 2022, was seen as a starting point toward
a common understanding of this concept.

As shown in the details provided in “Definition of Near Zero-Emission Steel” at the end of this
report, NZS is essentially defined as “a steel product produced by generating less than 400
kg of CO2 equivalent per tonne (kgCO2e/t), including the procurement of raw materials.”
Currently, steel produced using the blast furnace-basic oxygen furnace (BF-BOF) process
reportedly generates more than 2 tonnes of emissions per tonne of crude steel, so the IEA
definition represents a rather stringent standard for primary steelmaking. The IEA definition
demands an even tougher standard when scrap iron is used. This is controversial because
it may tend to inhibit conversion to recycled steelmaking using electric arc furnaces (EAFs).

Aside from this, the “Global Steel Transformation Tracker” of the German think tank Agora
Energiewende defines “low-carbon steelmaking” as steelmaking that emits less than half as
much CO2 than the conventional BF-BOF process.

“Green steel” and other terms are not always clearly defined, so there is a vital need to clarify
definitions and standards. In the years ahead, as discussions and initiatives progress,
common definitions are likely to emerge, along with the evaluation of recycled steel
production.

1
Key Findings

1. Accelerated Decarbonization is crucial for Japan's Steel Industry

● Emissions from the steel industry account for 48% of Japan's industrial CO2 emissions
and 13% of the country's total energy-related CO2 emissions. The decarbonization of the
steel industry is a critical pillar in the strategy toward reaching carbon neutrality and will
become more important in the future, as total emissions from thermal power generation
are expected to fall through the expansion of renewable energy sources.

● Blast furnaces currently account for 76% of Japan’s steel production. Approximately half
of the blast furnaces currently in use in Japan, with average equipment life of 25 years,
will reach their end of operational lifetimes by 2030. As we head towards 2050 carbon
neutrality, decisions must be made on how to decarbonize the steel industry and not to
reinvest a significant amount of money in blast furnaces which may become stranded
assets.

● Low-carbon steelmaking projects have been launched around the world to reduce
emissions by half or more, and the total planned production volume of such low-carbon
steel exceeds 100 million tonnes, which is equivalent to the total annual production
volume of Japan. There is also a growing demand for "green steel," particularly from
European automakers. Accelerated decarbonization efforts are needed for Japan’s steel
sector, both in terms of supply and demand, in order to be competitive in the global
market.

2. Bottlenecks of blast furnace + CCS pathway

● In Japan, so-called “COURSE50” and “SuperCOURSE50” projects, which use hydrogen

in blast furnaces along with CCS, have comprised the main efforts to decarbonize the
steel industry. However, their carbon reduction targets are 30% and 50%, respectively,
and cannot be claimed as methods aiming at zero-carbon steelmaking.

● In addition, COURSE50 shows only a 10% reduction in overall CO2 emissions with the
use of hydrogen alone, with a theoretical maximum reduction percentage in the low
twenties in blast furnaces.

● Ultimately, both COURSE50 and SuperCOURSE50 will rely on CCS to capture and store
the CO2 emitted for the majority of their reductions in order to decarbonize. If relying on
this pathway, the amount of storage required in 2050 is estimated to be about 47 million
tonnes per year. Based on the government's 2050 scenario, the estimated amount of
CO2 storage required for thermal power generation is about 250 million tonnes. On the
other hand, the government's "CCS Long-Term Roadmap" sets the annual storage
capacity in 2050 at 120 to 240 million tonnes, which means that in their plan, the entire
storage capacity will be used up by thermal power generation measures alone. Moreover,
there is no concrete information on the location of possible storage sites in Japan.

2
3. Challenges of H2-DRI making in Japan

● Half of the low-carbon steelmaking projects that have been initiated in Europe and
elsewhere use the hydrogen-based direct reduction method. However, the prerequisite
for this method is the availability of large quantities of inexpensive green hydrogen.

● Japan's hydrogen strategy provides for a limited supply of hydrogen until 2030, and even
less green hydrogen. It is not in line with the pace of steel decarbonization required for
developed countries.

● Reflecting Japan's slow pace in expanding renewable energy generation, the cost of
domestically produced green hydrogen is projected to be the highest of 25 selected
countries in the world in 2030. Even with imports, Japan's reliance on marine
transportation will make its hydrogen costs high.

4. Power source decarbonization enables green steel production in electric

furnaces

● Electric furnace steelmaking can produce green steel if the power sources used are
decarbonized. In order to maximize this potential, maximum utilization of scrap steel and
importation of direct-reduced iron as the new source of iron is necessary. In addition,
technological development is needed for the production of high-grade steel that can be
used for example for automobiles.

5. Three Pillars for Zero-Carbon Steelmaking in Japan

There are three decarbonization pillars for the Japanese steel industry: maximum use of
scrap steel by electric furnaces; utilization of H2-DRI imports; and introduction of DRI making
utilizing domestically produced hydrogen in optimal locations in Japan. Crude steel
production in Japan will shift from a focus on blast furnaces to electric furnaces. The rational
choice for Japan is to make maximum use of the large amount of scrap steel that exists in
Japan, import or produce a limited amount of hydrogen direct-reduced iron domestically, and
make steel in electric furnaces.

[Pillar 1] Maximum utilization of recycled iron by electric furnaces

As a basic strategy toward zero-carbon steelmaking, it is essential to take measures to utilize

scrap steel as much as possible. From now, it is necessary to develop technologies and
invest in equipment to manufacture products using recycled steel that has not been
conventionally manufactured using electric furnaces. Measures are also needed on the scrap
steel side. In particular, in order to ensure the quality of scrap steel once consumed in the
market and to recover it efficiently from every corner, comprehensive measures are required,
including those by the private sector and government, from the design of products and
buildings to intermediate treatment and recovery.

3
[Pillar 2] Utilization of H2-DRI imports

H2-DRI requires a large amount of hydrogen and a large amount of renewable energy for
hydrogen production. It is rational to produce H2-DRI in regions (overseas) with low
renewable energy generation costs and abundant iron ore, and then import it to Japan as hot
briquetted iron (HBI). This would not only reduce the total cost of zero-carbon steelmaking in
Japan and help ensure international competitiveness but also avoid the excessive
infrastructure investment required to import large amounts of hydrogen.

[Pillar 3] Introduction of H2-DRI making utilizing domestically produced

hydrogen in optimal domestic locations

The introduction of H2-DRI plants should be pursued as an option for domestic zero-carbon
ironmaking as we can take advantage of the various benefits of domestic production. In order
to keep production costs low, it would be rational to concentrate hydrogen production and
H2-DRI in locations suitable for domestic renewable energy generation.

6. Transition Strategies for Steel Decarbonization in Japan

[Strategy 1] "Electric Furnace Phase-in and Blast Furnace Phase-out Plan" with
consideration to local economic development

In order for zero-carbon steelmaking methods to become dominant in Japan and continue
the development of Japanese technology in the steelmaking and manufacturing process, as
well as assist the local communities that have long-supported the steel industry with their
workforce and skills, an "electric furnace phase-in/blast furnace phase-out plan" will need to
be developed to introduce electric furnaces as the blast furnaces are shut down. It is
necessary to have dialogue and strategize with local stakeholders under the leadership of
the government and local authorities, taking into account local employment and the economy.

[Strategy 2] Leading the world in building supply chains and the international
H2-DRI market

The H2-DRI market is expected to play a major role as a decarbonization solution not only in
Japan but also in many other countries around the world that do not have the conditions and
technology to develop their own plants. Japan should lead the world in forming an
"international green DRI market" to accelerate global decarbonization by supporting the
realization of H2-DRI plants at an early stage and building a collaborative structure that will
also contribute to local economies and society.

4
[Strategy 3] Select optimal sites for H2-DRI making in Japan in conjunction with
offshore wind development

Regions with high potential for offshore wind power, a large-scale renewable energy source,
are candidates for H2-DRI plants. Some of these regions have blast furnace steel production
currently underway. In order to realize H2-DRI making in Japan, strategic collaboration is
needed among three parties: offshore wind developers, hydrogen producers, and H2-DRI
producers.

[Strategy 4] Reduce domestic demand and maximize utilization of scrap steel by

shifting to a circular economy

In Japan, where population decline is certain, it is necessary to consider decarbonization

strategies for the steel industry, at least on the assumption that the scale of domestic demand
will shrink. Furthermore, it is essential to consider GHG emissions and resource balance,
recycling from a life-cycle perspective while pursuing longer product life and reducing product
weight. At the same time, dealing with issues such as designing products and buildings
suitable for recycling, forming closed loops, and supporting the advancement of intermediate
treatment is key in order to utilizing valuable recycled steel sources without degrading their
quality as much as possible.

[Strategy 5] Develop policies to increase demand for green steel

Realizing the future demand for green steel will reduce the risk of investment in zero-carbon
steelmaking. In order to increase the demand for green steel, the following pull policies are
recommended:

1） Clarify and utilize the definition of green steel as the basis for demand expansion
measures
2） Establish and expand green steel purchasing initiatives that involve the private
sector
3） Promote public procurement of green steel and create a mechanism for this
purpose
4） Create mechanisms to reduce embodied carbon

In addition to the decarbonization strategy for steel production described above, a

fundamental revision of Japan’s energy policy is essential, including its electricity and
hydrogen strategies. The 2030 and 2050 renewable energy targets need to be raised and its
cost needs to be further reduced. If the current government policy of treating grey and blue
hydrogen with high CO2 emissions in the same way as green hydrogen remains in place,
the produced steel will not be considered green, even if H2-DRI is used. An urgent revision
of the hydrogen strategy is needed. Carbon pricing is a further essential policy to decarbonize
the steel industry, such as the introduction of an effective carbon tax and a mandatory
emissions trading system.

5
Introduction: Decarbonizing the Steel Industry, a Critical Pillar to Achieve
Carbon Neutrality in Japan

The steel industry accounts for 48% of Japan’s industrial CO2 emissions

The steel industry consumes enormous quantities of energy and generates a large amount
of CO2. Globally, it accounts for 8% of total final energy consumption, 25% of industrial
energy-related CO2 emissions (direct emissions), and 7% (2.6 Gt-CO2) of total CO2
emissions.1 With the sharp decline in emissions from the electricity sector, the steel industry
will become the leading CO2 emitter before long. This directly impacts the carbon footprint of
many products and structures made with steel in a wide range of economic activities. Due to
the need for very high temperature heat, electrification of the steelmaking process is
reportedly difficult. On top of this, the use of coal, not only as an energy source but also as a
reducing agent, makes decarbonization even more difficult. For these reasons, the steel
industry has been considered a “hard to abate” sector.

In Japan, energy-derived CO2 emissions (direct emissions) from the steel industry account
for 48% of all industrial emissions and 13% of total emissions (Fig. 1). Across the businesses,
the steel industry is also the top emitter of GHG emissions,2 accounting for approximately
30% of total emissions (Fig. 2). Thus, decarbonization of the steel industry can have a
significant impact on the realization of carbon neutrality, both in Japan and globally.

Figure 1 Energy-related CO2 Emissions from the Steel Industry (FY2019)

(Note) FY 2019 data is referenced here, due to the substantial drop in production in 2020 caused by the COVID-19
pandemic.
(Source) National Institute for Environmental Studies, CO2 Emissions by Sector (Before electricity and heat distribution)

1
IEA, “Iron and Steel Technology Roadmap” (October 2020)
2
Ministry of the Environment, “Greenhouse Gas Emissions Selection, Reporting, and Publication System FY 2018
Aggregated Results” (12,150 reporting companies); Nippon Steel, JFE Steel, Kobe Steel, and Nippon Steel Nisshin are
ranked 1, 2, 4, and 10, in order of highest emitters.

6
 Figure 2 Proportion of Total GHG Emissions from the Steel Industry
(“Specified Emitters”)

(Source) Ministry of the Environment and Ministry of Economy, Trade and Industry, “Totaled Results of GHG Emissions
in 2018 with the GHG Emissions Calculation, Reporting and Publication System Based on the Law Concerning the
Promotion of the Measures to Cope with Global Warming” (March 2022)

In December 2021, Renewable Energy Institute published an “information-package” titled

“Towards Carbon Neutral Steel in Japan: Learning from the Latest Trends in the European
Union.”3 In this document, Renewable Energy Institute outlined a variety of steel industry
projects that have already succeeded in implementing decarbonized steelmaking, despite
the significant challenges of decarbonization. Renewable Energy Institute also highlights the
urgent need for Japan’s steel industry to pursue decarbonization.

Since Russia launched its invasion of Ukraine in February 2022, Europe has faced a sharp
decline in natural gas supplies from Russia. In the short-term, this may increase the use of
coal-fired power and may drive up CO2 emissions. At the same time, however, this crisis is
also seen as an opportunity to accelerate the shift away from fossil fuels over the medium
term. Accordingly, the European Commission announced its REPowerEU plan.4

The plan is to accelerate the adoption of renewable energy to substitute for fossil fuels from
Russia, as well as to replace natural gas, coal, and oil in industrial production processes “by
any means possible” by 2030, thereby reducing Europe’s dependence on fossil fuels.
Policies have also been initiated to promote the decarbonization of the steel industry and
other heavy industries, together with energy countermeasures. It is worth noting that even in
the industrial sphere, this energy crisis is accelerating the process of decarbonization more
than weakening it.

3
https://www.renewable-ei.org/activities/reports/20211214_1.php
4
https://energy.ec.europa.eu/system/files/2022-05/COM_2022_230_1_EN_ACT_part1_v5.pdf

7
Japan’s steel industry has made some pioneering efforts to initiate the transition to
decarbonized steelmaking. These include the development of high-grade steel sheet
production technology using large electric furnaces, the use of hydrogen-based direct
reduction ironmaking technology, and collaboration with foreign mining companies aiming for
utilizing direct reduction iron.

This report looks at how Japan’s steel industry can build on these pioneering efforts to
promote and accelerate the decarbonization process, as well as policies needed to facilitate
this.

8
Chapter 1: Current State of the Japanese Steel Industry and Key
Technologies for Decarbonization

1-1 Current Status of the Steel Industry in Japan

Firstly, here is an overview of the current state of Japan’s steel industry. Japan is the world’s
third largest producer of crude steel after China and India, accounting for 5% of total world
output.5 In terms of corporations, Nippon Steel is the world’s fourth largest raw steel producer,
while JFE Steel ranks 13th.6

As Fig. 3 shows, annual crude steel production in Japan has consistently topped 100 million
tonnes per year, except for 2009, in the aftermath of the global financial crisis. Production fell
sharply in 2020. This is most likely occurred because the foreign demand, which had been
strong, fell due to the COVID-19 pandemic, while the domestic demand, which had been
steadily falling for many years, further contracted.

Figure 3 Breakdown of Japan’s Crude Steel Production and Consumption

(Domestic and Foreign Demand)

(Source) Iron and Steel Division, Manufacturing Industries Bureau, the Ministry of Economy, Trade and Industry,
“Current Status and Challenges of the Metals Industry” (December 21, 2021)

A feature of Japan is that a large proportion of its crude steel production goes to foreign
demand. Close to 40% of domestic production is exported, mainly to Asia. 7 The biggest
sources of domestic demand are the construction and automotive industries (Fig. 4).
Interestingly, the auto industry accounts for large slices of both ordinary and special steel
production, as well as a significant proportion of exports. Thus, auto industry demand trends
have a large impact on steel production.

What is the outlook for crude steel production? In its Sixth Strategic Energy Plan, the
Japanese government forecast crude steel production in 2030 to be 90 million tonnes. Its
forecast for 2050 anticipates falling domestic demand due to continued population decline,
as well as falling exports. Although the total demand for steel is likely to keep growing in the
developing world, exports are expected to fall because countries will increasingly produce
their own steel requirements, as a matter of policy. Furthermore, a global oversupply of steel
is foreseen. For example, a study by the Nippon Steel Research Institute projects steel

5
World Steel Association, “World Steel in Figures 2022.” These are 2021 values. If the EU is considered one country, it
would rank No. 2 in the world; Japan ranks No. 4.
6
As above
7
79% (FY2020) is destined for Asia. The Japan Iron and Steel Federation, “Steel Statistics Handbook 2021”

9
production under a moderate scenario (based on government assumptions for 2030) to fall
to 75.22 million tons by 2050, down 24% from 2019.8

Figure 4 Ordinary and Special Steel Orders by Application (FY2019)

(Note)FY 2019 data is referenced here, due to the substantial drop in production in 2020 caused by the COVID-19
pandemic
(Source) The Japan Iron and Steel Federation, “Iron and Steel Statistical Abstract 2021” (October 2021)

Steelmaking is classified as primary steelmaking, in which crude steel is produced from iron
ore, or secondary steelmaking (recycled steelmaking), in which scrap iron is used to produce
crude steel. In primary steelmaking in Japan, iron ore is reduced in a blast furnace to produce
pig iron. The pig iron is then converted into crude steel in a basic oxygen furnace (BOF) by
removing impurities. On the other hand, in secondary steelmaking, crude steel is produced
in an electric arc furnace (EAF) using scrap iron as the main raw material. Although some
scrap iron is used in a BOF, pig iron made in blast furnaces is rarely used in EAFs (Table 1).

Table 1 Iron Source Consumption and Crude Steel Production by Process (FY2019)
(thousand tonne)
Crude steel Iron consumption source
Production process production Scrap iron Pig iron
(by production process)
consumption consumption
Blast Furnace-Basic Oxygen
74,900 (76%) 8,891 71,006
Furnace (BF-BOF)
Electric Arc Furnace (EAF) 23,526 (24%) 23,674 95
(Note) FY 2019 data is referenced here, due to the substantial drop in production in 2020 due to the caused by the
COVID-19 pandemic.
(Source) Japan Metal Daily, “Steel Yearbook 2021” (2021)

As Table 1 shows, most of Japan’s crude steel (76%) is produced using the blast furnace-
basic oxygen furnace (BF-BOF) process. Another feature of Japan is the low rate of EAFs
(24%), compared to 69% in the U.S.A. and 43% in the EU. (Fig. 5).

8
Nippon Steel Research Institute, “Report on Survey Project for Sustainable Development of Japan’s Metals Industry
Based on Carbon Neutrality” (February 2022). “High” scenario assumes 90.49 million tons (-8%); “Low” 41.9 million tons
(-57%).

10
 Figure 5 Share of EAF Process in Major Countries

(Source) Bureau of International Recycling Ferrous Division (2022) World Steel Recycling in Figures 2017-2021 (data
prior to 2016 is from earlier reports)

As a result of industry consolidation over recent years, just three BF-BOF steelmakers in
Japan are responsible for three-quarters of Japan’s total steel production. These are Nippon
Steel, JFE Steel, and Kobe Steel, which collectively operate 19 blast furnaces at 11 locations
across the country. Japan’s total blast furnace capacity of 83 million tonnes per year is the
fourth highest in the world.

At the same time, Japan also has substantial electric furnace steelmaking capacity,
amounting to 37 million tonnes per year, but this is spread out between 60 or so companies.
These EAF steelmakers are very diverse, ranging from small to large producers and handling
a wide variety of products. They are also widely dispersed around Japan.

Companies in the steel industry employ a total of around 220,000 people (as of 2019),9 with
about 40,000 working at BF facilities10 and 27,000 at EAF facilities.11 EAF plants are more
labor intensive than BF plants, employing 11.6 workers per 10,000 tonnes of crude steel
production, compared to 5.3 for BF plants. (However, BF producers reportedly make use of
many temporary workers from affiliated companies, which may not be reflected in these
figures.) There are also other kinds of businesses that engage in wide-ranging activities, such
as those involved in rolling and pipe manufacturing without producing their own steel, as well
as those involved in casting and forging. Scrap-related businesses also employ around
45,000 employees.

9
Ministry of Economy, Trade and Industry, “Industrial Statistics Survey 2020 Final Report on Statistics by Industry”
(August 2021)
10
Facilities that manufacture pig iron using a blast furnace and steel products in an integrated blast furnace operation
11
Facilities that manufacture steel ingots in an electric arc furnace and steel products in an integrated electric furnace
operation

11
1-2 Key Technology Options for Decarbonizing the Steel Industry

All around the world, efforts to decarbonize the steel industry have begun. The steel industry,
especially blast furnace (BF) steelmakers, which use large quantities of coal, generate
massive amounts of CO2 emissions. The big question for decarbonization has been how to
reduce these emissions. In recent years, however, technical studies on reducing emissions
to zero have advanced, yielding some methods that promise to become mainstream.

Current Steelmaking Processes

Table 2 shows current technologies on the left and the main decarbonized steelmaking
technology options on the right. Currently, the dominant method of manufacturing steel
products from iron ore is the blast furnace-basic oxygen furnace (BF-BOF) process. It
became established in the 20th century and is well suited to mass production. It is most
widely used method of steelmaking in China, Japan, Germany, and other parts of the world.
Coal is used as a reducing agent and fuel, so CO2 emissions are high. The left side of Fig. 6
shows the BF-BOF process and CO2 emissions per tonne of crude steel produced. The iron
in the iron ore is bonded with oxygen, so it needs to be reduced. The reduction is carried out
by feeding coke made from processed coal into the blast furnace, to supply carbon and
remove oxygen. CO2 is emitted not only from the reduction process, but also when making
coke and sintering the iron ore as a pretreatment for reduction. Oxygen is then injected into
the reduced iron (pig iron) in the basic oxygen furnace and quick lime is added, to remove
carbon and impurities from the pig iron. This also generates CO2.

Another method of producing iron is the direct reduction (DR) method, which currently uses
natural gas in most cases. This method is widely used in natural gas-producing countries
such as Iran, Russia, and Saudi Arabia. As shown on the right side of Fig. 6, there is no pre-
reduction process because the carbon that acts as the reducing agent is supplied directly by
the natural gas. In addition, natural gas is also used as a raw material for producing carbon
monoxide (CO) and hydrogen, which are necessary for reducing iron ore. Since some of the
reduction is accomplished by hydrogen, in addition to the CO, the resulting CO2 emissions
are lower than those from a blast furnace.12

In contrast to these primary steelmaking processes, there is secondary (recycled)

steelmaking. In electric arc furnace (EAF) plant, scrap iron is melted in the furnace to produce
crude steel, which is then used to manufacture steel products. The main energy source is
electricity, and although CO2 emissions are affected by the emission factor of electricity, they
are significantly lower than those from primary steelmaking because there are no emissions
from the iron ore reduction process.

12
Chevrier et al., “MIDREX® Process: Bridge to Ultra-low CO2 Ironmaking” (KOBE STEEL ENGINEERING
REPORTS/Vol.70 No.1) (July 2020) and Nippon Steel Engineering, “Direct Reduced Iron (DRI) Production Facility”
(accessed October 19, 2022)

12
 Table 2 Main Technology Options for Conventional and Decarbonized Steelmaking

(Source) Created by Renewable Energy Institute from various sources

Figure 6 Comparison of BF-BOF and DRI-EAF Processes and Their CO2 Emissions
(Per Tonne of Crude Steel Production)

(Source) Created by Renewable Energy Institute from various sources; CO2 emission figures for integrated BF
steelmaking from Carbon Trust (2011)

Technology Options for Decarbonization

The right half of Table 2 shows different methods for cutting the CO2 emissions currently
emitted in the steelmaking process to zero. These are the three main steelmaking methods
that are now under development.

13
(1) Blast Furnace-Basic Oxygen Furnace + CCS (primary steelmaking): BF-BOF +
CCS

This method uses the BF-BOF steelmaking process together with carbon capture and
storage (CCS) to capture and permanently store CO2 emissions. It has the advantage that
long-established steelmaking technology can continue to be used without modification, but
there are question marks about the possibilities of capturing all the huge quantities of emitted
CO2 and about transporting and permanently storing captured CO2. This issue is discussed
below. Typically, as the CO2 capture rate approaches 100%, the cost of capture rises
exponentially. For this reason, some other way is needed to deal with the CO2 that cannot be
captured economically, such as offsetting the emissions, e.g., by planting trees. Due to this
limitation, the effectiveness of this method in terms of CO2 emissions is rated “low” in Table
2.

To improve on this approach, in Japan attempts are being made to add hydrogen (H2) to the
blast furnace reduction process, so that both carbon from coal and the hydrogen function as
reducing agents. However, since it is considered impossible to convert all the coke to
hydrogen, it will still be necessary to rely on CCS to deal with a large proportion of the carbon
emissions.

(2) Hydrogen Direct Reduction + Electric Arc Furnace (primary steelmaking): H2-
DR + EAF

Today’s most promising decarbonization method for primary steelmaking is to use direct
reduction by replacing the reducing agent with carbon-free hydrogen. Direct reduction
technology that uses natural gas for direct-reduction steelmaking in a shaft furnace has been
in commercial use for some time. Partial conversion of natural gas to hydrogen has already
been implemented too. To achieve 100% hydrogen, further technological improvements are
needed, but it is expected that near-zero emissions will eventually be possible. In this case,
an electric furnace is needed to convert the direct-reduction iron(DRI) that is produced into
crude steel. Consequently, to decarbonize the whole process, a carbon-free source of power
for the electric furnace is also needed. In Japan, the main technology used for DRI
(accounting for 63% of the world’s DRI production13) is MIDREX®, a proprietary technology
of a wholly owned subsidiary of major Japanese steelmaker Kobe Steel.14

13
Kobe Steel website, “World DRI Production by Process” (accessed October 19, 2022)
https://www.kobelco.co.jp/products/ironunit/dri/dri02.html
14
Improvements and advances in MIDREX are expected to enable steelmaking using H2 with near-zero CO2 emissions.
See [12] for details.

14
(3) Electric Arc Furnace (recycled scrap-based steelmaking): EAF

Recycled scrap-based steelmaking is still today’s least emissions-intensive method, but by

combining it with the use of fossil-free electricity takes it even closer to zero emissions.

Another new technology under development is the direct electrolysis of iron ore.15 However,
this technology is not yet mature, and it remains unclear whether it will be commercially
implemented on a large scale by 2050.

15
U.S. company Boston Metal is in the process of commercializing an innovative, patented production technology for
zero-emission steel production that electrolyzes iron ore directly by Molten Oxide Electrolysis (MOE) instead of reducing
it using coal or hydrogen. It is seen as a groundbreaking technology with the potential to greatly reduce production cost
in the future. https://www.bostonmetal.com/

15
Chapter 2: Why Accelerated Decarbonization is Important for Japan’s
Steel Industry

2-1 Reduction Needed by 2030 to Achieve the Global Temperature Target of 1.5°C

As mentioned above, the steel industry is a major source of CO2 emissions, both in Japan
and globally, so its decarbonization is highly anticipated. However, alternatives to the use of
coal and natural gas in the reduction process have not yet been expanded As the third largest
steel producer in the world16 and the largest crude steel producer among the G7 developed
nations, Japan needs to make the transition to decarbonization faster than other countries.

In considering the 2030 target needed to achieve the 1.5°C global warming target, in
accordance with the goal of reaching global carbon neutrality by 2050, various studies have
looked at the decarbonization pathway that the steel industry must take. Numerous scenario
studies have been published, including IEA’s NET Zero by 2050, ETC’s Mission Possible
Project,17 IDDRI’s Net Zero Steel Project,18 and a study by Agora Industry.19 The report of
the “Glasgow Breakthrough Agenda”20 (an initiative launched at COP26 to stimulate urgent
internationally coordinated action to resolve particularly critical issues) summarizes the
findings of these studies in the following points.

 Increase near-zero emission steel (NZS)21 production to 100-500 million tonnes per
year by 2030 (5-25% of total global production)
 Reduce average direct emissions intensity of steel production by 30% to less than
1tCO2
 Reduce the cost of NZS to approach that of “high emission steel” costs in the most
advantageous locations

16
World Steel in Figures 2022, No. 4 if EU is considered one country
17
Energy Transitions Commission, “Keeping 1.5 ℃ Alive: Closing the Gap in the 2020s” (September 2021)
18
Bataille, IDDRI et al., “Global facility level net-zero steel pathways: technical report on the first scenarios of the Net-
zero Steel Project” (2021)
19
Agora Industry, Global Steel at a Crossroads (November 2021)
20
IEA, IRENA, UN Climate Change High-level Champions “Breakthrough Agenda Report 2022” (September 2020)
21
Near Zero Emission Steel (NZS) refers to crude steel and steel products that have nearly zero emissions. For
definitions, etc., see the end notes.

16
The scale of NZS capacity needed by 2030 varies widely from one scenario to another, but
at a minimum the figure should be 100 million tonnes, equivalent to 40 of today’s biggest DRI
plants, capable of producing around 2.5 million tonnes of crude steel per year. At the same
time, many new projects are also taking shape in developing and emerging countries,22 but
considering that most of them are based on high-emission BF-BOF processes, it’s clear that
further effort is needed to promote NZS in developed countries. According to the IEA report,23
which gives milestone values for the G7 countries in 2030, hydrogen-based DR-EAF and
other steelmaking with CCS will account for 14% of total steel production. Japan, which
produces close to 100 million tonnes of crude steel per year, will therefore need to develop
nearly 15 million tonnes worth of new projects by 2030. Clearly, Japan needs to step up its
efforts to decarbonize by 2030, as well as to lead and collaborate with the rest of the world.

2-2 Length of Investment Cycle and Size of Investment – Investment Decision to be

Made in the 2020s

Capital investments in the steel industry are massive and equipment and facilities are long-
lasting, which means that to recover the investment and increase profits, existing facilities
need to be kept in operation for as long as possible. Over the whole steelmaking process,
the blast furnace emits the greatest quantity of CO2 emissions, requires the greatest
investment, and has the longest service life. Recent blast furnaces have been designed and
constructed to last for over 20 years, with a new blast furnace expected to operate for 25
years or more. 24 There is therefore barely one investment cycle left before the carbon
neutrality target year of 2050. Thus, any high-emission blast furnace facilities based on
existing technology that are repaired or invested into before 2025 are likely to become
stranded assets before 2050, without reaching their full-service life.

Investments in blast furnace renovation are very costly and getting more and more expensive
in recent years. In the 2010s, the renovation cost per cubic meter was ¥6.5 million, compared
to ¥10.2 million in the 2020s. 25 While it is difficult to make precise comparisons due to
differences in the scale of expansion and the extent of repairs and improvements,
construction costs have been rising substantially, in line with a now well-established trend,
due to factors such as a shortage of skilled workers, rising wages, longer construction periods,
as well as the inclusion of sophisticated functions based on AI and other advanced
technologies.

Of the 21 blast furnaces currently in operation throughout Japan, 10 will have been in
operation for over 20 years by 2030, thereby requiring renovation or other kind of
reinvestment. In terms of production capacity, these will account for 48% of the total capacity
of the 19 furnaces in operation in 2030 (Fig. 7). (Two BFs are scheduled to be idle.) A critical
decision needs to be made about these 10 furnaces. What is the best way to avoid the risk
of stranded assets and ensure that steelmaking will be compatible with the zero-carbon era
of 2050 and beyond? We are forced to make a critical decision.

22
OECD, “Latest developments in steelmaking capacity 2021”
23
IEA, “Achieving Net Zero Heavy Industry Sectors in G7 Members” (May 2022)
24
Nakano et al., “Development of Blast Furnace Lifetime Extension Technology” (2019)
25
Average of five blast furnace renovations in the 2010s and four in the 2020s (based on data from each company’s
published materials and press reports, excluding one case that is unclear)

17
 Figure 7 Blast Furnaces Reaching End of Life in the Decades Ahead
(Production Capacity)

(Source) Created by Renewable Energy Institute from various sources

2-3 Companies and Policies in Europe are Moving Toward Low-Carbon Steelmaking
in 2030

A noteworthy trend in steel industry decarbonization is that a variety of low-carbon projects26

are being launched with good prospects for commercialization, particularly in Europe. As
more and more such projects have been announced recent years, total global low-carbon
steelmaking capacity is expected to exceed 100 million tonnes globally by 2030 (Fig. 8).

Figure 8 Announced Low-carbon Steelmaking Projects

(Source) Agora Energiewende, “Global Steel Transformation Tracker - Low Carbon Steel Announcements” (latest
update August 11, 2022)

26
In Fig. 8, from Global Steel Transformation Tracker by Agora Industry, low-carbon projects are those that use or plan
to use processes that reduce CO2 emissions by 50% or more compared to conventional BF-BOF ironmaking. (Projects
that initially use natural gas in new DRI plants before converting to H2 DRI are also included in low-carbon projects
because they pose little risk of locking-in fossil fuel use.)
The definition of low-carbon steel/green steel, etc. is explained at the beginning of this report, while details of near-zero
emission steel are explained at the end of the report.

18
At the pilot level, in 2016 Swedish steelmaker SSAB joined forces with mining company LKAB
and energy company Vattenfall to launch the HYBRIT project aimed at fossil fuel-free primary
steelmaking. Test operation has already begun. The project achieves fossil fuel-free steel
production using a hydrogen-based direct reduction (H2-DRI) and an electric arc furnace
(EAF), without the use of any fossil fuels from the stage of mining. It also utilizes scrap iron.
In the next phase of the project, a 1.3-million-tonne plant is scheduled to start commercial
operation by 2026.

Getting such a project to full-scale operation requires a massive investment, however. Even
after a project is announced, news of a final investment decision has never been heard in
many cases. More recently, though, the situation seems to be changing a little. In July 2022,
German steel company Salzgitter AG announced that its supervisory board had approved
€723 million of funding to implement the first phase of a project to produce low-carbon steel,
under the brand “SALCOS.” 27 Then in September, Thyssenkrupp, another German steel
giant, agreed to make a huge investment in a direct reduction plant, which will be one of the
largest in Germany.28 National and regional governments in Europe are pursuing policies
and support measures to forge a pathway to decarbonization before 2030. In 2021, the EU
toughened its 2030 target, committing itself to reducing emissions to 55% below the 1990
level. Clearly, unless cuts are made in steelmaking and other industrial sectors, which
account for a large share of emissions, this target will be difficult to achieve.

At the same time, there is fierce competition in the global steel industry, not only to develop
decarbonization technologies before 2050, but also to stay ahead of competitors in the global
market. Even China, the biggest player in the global steel industry, has put together a
committee to promote low-carbon initiatives. It seems to have created a vision and roadmap
to guide its transition to the low-carbon future. 29 Japan lags the rest of the world in the
penetration of renewable electricity and the supply of carbon-free hydrogen, so it has no
competitive advantage in steel decarbonization. To survive in the era of decarbonization and
keep up with Europe, which is a pioneer, and China, which has started its low-carbon
transition, Japan needs a strategy that is tailored to its unique situation and fully leverages
its accumulated expertise.

27
Salzgitter AG, “Green light for green steel” (July 2022)
Thyssenkrupp, “Thyssenkrupp is accelerating the green transformation: Decision taken on the construction of
28

Germany's largest direct reduction plant for low-CO2 steel” (September 2022)
29
China Iron and Steel Association, Steel Industry Low-Carbon Promotion Committee, “2022 annual meeting of the
steel low carbon work promotion committee successfully” (August 2022)

19
2-4 Demand Side Movements for Low-Carbon Steel Products

As well as steel companies and supply side movements to start low-carbon steelmaking
projects, there is a growing demand for low-carbon steel products. Sending a clear signal to
let steel companies planning to produce low-carbon steel products know that there is a future
demand for such products can help to ensure the supply of low-carbon/zero-carbon steel.
This can also serve as a demand-side measure to help companies to reduce their emissions
in the medium to long term. Signals from end-consumers to reassure companies that there
is a future demand are important, especially since low-carbon products are initially expected
to cost 15-40% more.30 Demand-side action is a major factor in the final startup of projects
and investment decisions. In this regard, the European auto industry has been particularly
active over the past two years.

In the Swedish HYBRIT project mentioned above, Volvo is committed not only to purchase
fossil fuel-free steel, but also to do R&D on its use in automobiles and to use the green steel
for serial production and commercial products. In this way, it has made a valuable
contribution to getting the HYBRIT project off the ground. There are multiple ways in which
the auto industry can be seen as a suitable demand-side driver.

1） Automakers consume large quantities of steel31

2） Many automakers purchase steel through the terms of purchase contracts that
exert significant influence on steelmakers32
3） Many large automakers operate very broadly across the market
4） The cost increase per vehicle will be limited even when vehicles are manufactured
with low-carbon steel33
5） They are close to end-consumers, so they can take initiatives to manufacture and
sell low-carbon vehicles with the involvement of environmentally conscious
consumers

Like this, the conditions for leading the demand for “green steel” are now in place, with
demand-side initiatives leading the way (Table 3). The forms of these agreements are diverse,
ranging from “off-take agreements,” whereby a company agrees to purchase green steel
when it is commercialized in the future, to equity participation in green steel production,
development of products using green steel, and partnership agreements that involve plant
development.

30
Mission Impossible, “Steeling Demand: Mobilising buyers to bring net-zero steel to market before 2030” (July 2021)
31
Steel for automobiles accounted for 25% of orders. (The Japan Iron and Steel Federation, “Steel Statistics Handbook
2021”)
32
Includes so-called “string-attached transactions,” in which the buyer or recipient is already decided at the time of steel
production, and centralized purchasing, in which steel to be used by parts and body manufacturers is included in the
purchase
33
Even if the cost of steel increased by 20–30% as a decarbonization premium, assuming that 0.7 tons of steel is used
per passenger car, the car price would only increase by about ¥30,000, or 1%. This is a level that can easily be
absorbed in product prices.

20
 Table 3
Automotive Industry Moves Toward Offtake Agreements and Equity Participation
Automaker Steelmaker Form of cooperation Details
Volkswagen Salzgitter AG 2021 offtake MOU to supply low-carbon steel
agreement Supply expected from 2025
Volvo SSAB 2021 agreement on Strategic collaboration with
R&D, serial affiliated companies on
production and development of “climate neutral”
commercialization vehicles
Shape Corp. SSAB 2022 offtake Development of fossil fuel-free
(auto parts) agreement steel crash management system
and car body structural system
Gestamp ArcelorMittal 2021 partnership Purchase and use of
(auto parts) agreement decarbonized steel produced by
recycled steel and in EAF with
100% RE power (XCarb®
certified green steel)
Daimler H2 Green Steel 2021 equity Adoption of green steel for
(Mercedes Benz participation various types of vehicles by
Group) 2025
BMW H2 Green Steel 2022 offtake Support of the BMW Group to
agreement meet its SBT targets. Technical
cooperation agreement for
ambitious CO2 emissions
reduction schedule
(Source) Created by Renewable Energy Institute based on materials published by various companies

At the same time, the Science Based Targets initiative (SBTi) to elicit commitments from
demand-side companies is starting to bear fruit.34 Since participating companies are required
to reduce not just direct emissions from their own operations (Scope 1) and emissions related
to electricity use (Scope 2), but also emissions across their entire supply chains (Scope 3),
they are doing more to influence their supply chains, through their procurement of raw
materials and in other ways. Daimler AG, for example, has set itself the goal of achieving
CO2 neutrality for new passenger cars across all its value chains and supplier networks by
2039, and it is working with all steel suppliers to build supply chains for green steel.

34
SBT/SBTi (Science Based Targets initiative) is an initiative that requires participating companies to set GHG emission
reduction targets (SBT) consistent with the levels required by the Paris Agreement. 20,761 companies worldwide have
committed by FY2021, of which 1,237 companies have had their set targets certified. The following requirements of SBT
encourage demand-side companies to take action on green steel.
-Set a target for the next 5 to 10 years to reduce emissions by at least 4.2% each year to help achieve the 1.5°C target.
-In addition to emissions, including supply chain emissions (the enterprise’s own emissions (Scope 1 and 2)), upstream
and downstream emissions related to business activities including raw materials (Scope 3) must also be reduced.
Methods, tools, and guidelines for setting targets are currently being developed for the steel industry. (SBT website:
https://sciencebasedtargets.org/sectors/steel and Ministry of the Environment “SBT” website:
https://www.env.go.jp/earth/ondanka/supply_chain/gvc/intr_trends.html)

21
Two other new initiatives, Steel ZERO35 and the First Movers Coalition (FMC),36 are also
beginning to make an impact. By bringing together more and more companies, governments,
and other organizations, including those that would otherwise have little influence, these
organizations are able to aggregate demand for low-carbon/zero-carbon steel products and
send a clearer and more powerful demand signal. The Japanese government is part of the
FMC and is expected to be an active member of the coalition. As well as the government,
the Japanese auto industry and various other companies and organizations also need to take
demand-side action.

35
SteelZero is a group initiative launched in 2020 by the Climate Group, an international NGO that operates RE100 and
EV100 programs, to purchase steel products with zero emissions. The goal is to achieve 100% net-zero steel by 2050
at the latest, with an intermediate goal of at least 50% by 2030. The group aims to realize and increase demand for net-
zero steel by inviting companies and organizations to make a public commitment. Currently 27 companies and
organizations are participating. Climate Group “STEELZERO” website: https://www.theclimategroup.org/steelzero
36
The First Movers Coalition (FMC) is an initiative launched jointly by the World Economic Forum and the U.S.
government at COP26 in November 2021. It is a platform designed to formulate purchase commitments by the world’s
leading global companies for the purpose of creating an early market for the critical technologies needed to achieve net-
zero by 2050. Apple, Amazon were initial members of FMC. The initiative focuses on the steel industry and other
industries in which countermeasures are difficult to take, as well as Direct Air Capture (DAC), the direct capture of CO2
from the atmosphere. In the case of steel, the purchasing companies commit to make near-zero emission steel 10% of
their annual steel procurement by 2030. FMC website: https://www.weforum.org/first-movers-coalition/about

22
Chapter 3: Decarbonization Challenge of Steelmaking in Japan

3-1 Japan's Plan for Zero-Carbon Steelmaking

How is Japan’s steel industry currently planning for the 2050 carbon-neutral future? While
the Japan Iron and Steel Federation and steelmakers (BF operators) have planned and
announced a roadmap to decarbonization, the government has reflected this in its Strategic
Energy Plan and other long-term plans. An overall picture of the planning is offered by the
“Technology Roadmap Formulated for Transition Finance Toward Decarbonization in the
Iron and Steel Sector,” formulated in October 2021 (Fig. 9).37 This is an official roadmap
created to help financial institutions and investors determine whether a company that is in
the process of raising funds to pursue decarbonization or thinking about the transition to
decarbonization is a suitable object of investment.

Figure 9 Steel Industry Roadmap for Transition Finance

(Source) Ministry of Economy, Trade and Industry, “Technology Roadmap Formulated for Transition Finance Toward
Decarbonization in the Iron and Steel Sector” (October 2021)

In March 2021, the launch of the Green Innovation Fund, a new government support system,
was announced, pledging up to ¥2 trillion of funds. The announcement stated that “Based on
specific goals shared by the public and private sectors, the plan is to continuously provide
support for R&D, verification and implementation over the coming 10 years to companies
and other organizations that show commitment to working toward this ambitious goal as a
business challenge.”38 One of the 14 projects that is being funded is “Hydrogen Use in the

37
Ministry of Economy, Trade and Industry, “Technology Roadmap for “Transition Finance” in the Iron and Steel Sector”
(October 2021)
38
Ministry of Economy, Trade and Industry, “Basic Policy for Green Innovation Fund Projects” (December 2021)

23
Steelmaking Process.” Thus, solid support for R&D aimed at the decarbonization of the
Japanese steel industry has emerged. An R&D and implementation plan for the project was
announced in September 2021, including a timeline (Fig. 10).

Figure 10 R&D and Implementation Plan

(Source) Ministry of Economy, Trade and Industry, Manufacturing Industries Bureau, the Project for the Green
Innovation Fund, “An R&D and Social Implementation Plan for ’Hydrogen Utilization in Iron and Steelmaking
Processes’” (September 2021)

These documents describe three methods that overlap with the technology options for
decarbonized steelmaking discussed in Chapter 1.

1） Hydrogen in blast furnace + CCUS39

In Fig. 9, hydrogen-based reduction in a blast furnace (on-site and external hydrogen

use).
In Fig. 10, [Research Item 1] - (1) Develop H2 reduction technology for blast furnaces
and (2) Develop low-carbon technologies using external H2 and the CO2 in blast
furnace waste gas
Note: Applies to the COURSE50 and Super COURSE50 projects described below.

39
CCUS stands for “Carbon dioxide Capture, Utilization and Storage.” It is method of reducing CO2 emissions by
separating and capturing CO2 from emissions and storing or utilizing it. However, there has so far been almost no
utilization of captured CO2. Expected applications are conversion to materials such as synthetic fuels and plastics, but
most of these are short-life products that ultimately release CO2 into the atmosphere, thereby making CO2 storage
meaningless. According to the IEA’s “Net Zero by 2050,” even in 2050, 95% of captured CO2 will be stored and only 5%
used. As explained in the report, storing CO2 poses a number of challenges. The term “CCUS” is often used to mask the
difficulties of achieving CCS by making it appear that CO2 can practically be reused. For this reason, this method of
emissions reduction is mostly referred to as “CCS” in this report.

24
2） Hydrogen-based direct reduction (H2-DRI) + electric arc furnace (EAF)
In Fig. 9, partial hydrogen direct reduction in DRI and 100% hydrogen DRI
In Fig. 10, [Research Item 2] Develop H2 direct reduction technology to reduce iron
ore using only H2 - (1) Develop H2 direct reduction technology

3） Direct reduction in electric arc furnace

In Fig. 9, Removal of impurities from electric furnaces and increasing their scale
In Fig. 10, [Research Item 2] - (2) Develop technology for removing impurities from
electric furnaces based on direct reduction

A look at the timeline in Fig. 9 shows that even the first project “(1) Develop H2 reduction
technology for blast furnaces” won’t reach implementation before around 2030. Just recently,
in June 2022, when the steelmakers operating blast furnaces formed the “Hydrogen
Steelmaking Consortium,” they referenced the above R&D and social implementation plan
(Fig 10), but also indicated that they would “consider accelerating the plan as far as possible.”
It could be inferred that the move to commence full-scale operation of direct reduction
ironmaking (DRI) plants in Europe by 2025 has heightened awareness about the need to
push faster on decarbonization in Japan.

However, the need to accelerate the transition is not the only decarbonization challenge
facing Japan’s steel industry. The following is an examination of the challenges for the three
approaches to decarbonization and the pathways Japan needs to take for each.

3-2 Issues of Blast Furnace + CCS Pathway

The Japanese government and Japan’s blast furnace steelmakers have positioned the
COURSE50 and SuperCOURSE50 technology development projects jointly undertaken by
the three companies at the forefront of their efforts to achieve carbon neutrality by 2050 (Fig.
11). This corresponds to the “hydrogen-based reduction ironmaking in blast furnaces (on-
site and external hydrogen use)” referred to in Figs. 9 and 10. The projects were
commissioned by The New Energy and Industrial Technology Development Organization
(NEDO) to run from 2008 to 2020, with government funding of ¥43.3 billion. Then from
FY2021, the projects were run as one of NEDO’s Green Innovation Fund Projects, with a
further ¥193.5 billion of funding planned through up to FY2030. The basic concept of this
technology is to inject hydrogen into the blast furnace ironmaking process to serve as a
reducing agent, as a heating energy source, and also for capturing CO2 emissions. The goal
is to reduce CO2 emissions from the blast furnace by 30%. Pilot trials in a small furnace have
shown that the reduction goal can be met. A demonstration project in an actual blast
furnace40 will begin in 2025.

40
Equipment is set to be introduced to the No. 2 Blast Furnace at the Kimitsu Area of Nippon Steel’s East Nippon Works

25
 Figure 11 Overview of COURSE50

(Source) Ministry of Economy, Trade and Industry, Manufacturing Industries Bureau, "Direction of Research and
Development and Social Implementation of the ‘Hydrogen Utilization in Ironmaking Processes’ Project (Draft)" (June
2021).

COURSE50 - A Transitional Measure towards 2050

The first challenge is that COURSE50 initially aimed at a 30% reduction in CO2 emissions41
(Fig. 11). Even SuperCOURSE50, an evolved form of COURSE50, aims at a reduction of
50%. These targets and the implementation schedule show clearly that this approach is not
aimed at complete decarbonization. This is likely because the plan was conceived before
Japan committed to carbon neutrality by 2050 and before The Iron and Steel Federation and
steelmakers set themselves the goal of decarbonization by 2050

In COURSE50, the emissions reduction rate from using hydrogen gas in blast furnaces is set
at 10%. SuperCOURSE50 aims at further reductions by combining other means, but
hydrogen injection in blast furnaces is reportedly limited by the need for coke (coal) to
maintain the physical space for chemical reduction to occur. There are studies that suggest
that even at optimal theoretical values, the maximum achievable reduction rate is 20
several%.42 With this approach, the remaining emissions reduction will ultimately have to be
achieved with CCS, so the question of whether blast furnaces can be used beyond 2050 for
zero-carbon steelmaking depend on the feasibility of CCS (storage more than capture). In
the final analysis, if these decarbonization methods are used after 2050, the CO2 emissions

41
Based on comparison with emissions from conventional BF-BOF furnaces using coal
Can Yilmaz, et. Al, “Modeling and simulation of hydrogen injection into a blast furnace to reduce carbon dioxide
42

emissions” (2017)

26
that cannot be met by using hydrogen—90% with COURSE 50 and up to 80% with
SuperCOURSE 50—will have to be met by CCS and carbon offsets.

Bottlenecks of CCS, the Essential Tool for the Continued Use of Blast Furnaces

As pointed out above, if blast furnaces continue to be used in the zero-carbon era, it will
ultimately be necessary to treat the remaining emissions with CCS. As long as blast furnaces
remain in use, the need for and dependence on CCS will grow rapidly from 2030 to 2050. In
setting its 2030 target, The Iron and Steel Federation seems to have expressed concern
about the extent of CCS dependence when it stated, “A precondition is that public
infrastructure, including the selection and securing of CCS storage sites when CCS is carried
out under government leadership, must be in place.”43 The realization of the needed CCS,
both in terms of recovery and storage, is a serious challenge.

It is instructive to try and estimate how much CCS storage would be needed to decarbonize
steel production.

Projected CCS Requirements in 2050

Approx. 47 million tonnes per year

[Rough assumptions]
 CO2 emissions from blast furnaces: 2.3 tCO2e44
 Reduction targets and proportion of CCS
Course50: 30% reduction, (20% by CCS, 10% by hydrogen injection)
SuperCourse50: 50% reduction (25% by CCS, etc, 25% reduction by hydrogen)
Other emissions
 Crude steel production with primary steelmaking in 2050: 41 million tonnes
(Total crude steel production in 2050: 75 million tonnes; 34 million tonnes from
EAFs)45
 Three primary steelmaking methods in 2050: H2-DRI, SuperCOURSE50,
COURSE50,with each method producing one-third of the total steel
 CO2 capture is set at 90% of target emissions, with remainder offset

43
The Japan Iron and Steel Federation, “State of Global Warming Countermeasures: Carbon Neutrality Action Plan
(Low Carbon Society Action Plan) Report” (March 2022)
44
Average value in Carbon Trust, “International Carbon Flows Steel” (May 2011)
Set from the “Moderate” scenario of Nippon Steel Research Institute, “Report on Survey Project for Sustainable
45

Development of Japan’s Metals Industry Based on Carbon Neutrality” (February 2022)

27
If COURSE50, SuperCOURSE50, and 100% H2-DRI making are achieved under these
conditions, the volume of emissions that would need to be captured with CCS to achieve
carbon neutrality in 2050 is approximately 47 million tCO2e per year. On the other hand,
according to the Ministry of Economy, Trade and Industry’s “CCS Long-term Roadmap
Interim Summary,” released in May 2022, the study group shared and reached a common
understanding that the estimated annual CCS storage volume available in 2050 is from 120
to 240 million tonnes per year.46 At the same time, under the government’s planning power
source mix in 2050, 30 to 40% of the total power supply will come from thermal power with
CCS or nuclear power. 47 And according to a reference case presented by the Research
Institute of Innovative Technology for the Earth (RITE), which was used in the study process,
the estimated storage needed to handle the CO2 emissions from thermal power generation
with CCS is 245 million tonnes.48 On the basis of these assumptions, there would be no CCS
capacity left over for steelmaking and other industrial sectors.

The apparent inconsistency between the government CCS goals outlined in the long-term
roadmap for the steel industry and other industry and power sector decarbonization
scenarios presented by the same government reflects the difficulty of realizing CCS in Japan.
In the first place, CCS cannot be considered a sustainable decarbonization technology or
approach, because stored CO2 requires permanent monitoring and management, with risks
of long-term impacts that cannot be fully foreseen. If CCS must unavoidably be used to
decarbonize Japan, at least the following storage-related should be kept in mind. For more
information, see Renewable Energy Institute’s report “Bottlenecks and Risks of CCS Thermal
Power Policy in Japan.” 51

Japan’s CCS Bottlenecks

1） Japan has no existing depleted oil or gas fields suited to CO2 storage
2） There are no suitable areas of land identified for CO2 storage in Japan
3） Japan needs to develop unexplored offshore areas where CO2 storage cost is high
4） Japan has not assessed the risks of earthquakes or other risks on CO2 storage

CCS does not capture 100% of CO2 emissions

Looking only at CO2 capture, the COURSE50 project is reported to be currently at the
research and demonstration stage, with the 20% reduction target now in sight for capture
from blast furnaces. However, to really achieve zero or near-zero emissions, it is essential to
capture most of the remaining CO2, including emissions from other sources (apart from blast
furnace), and finally offset the emissions that cannot be captured. Even if credits can be
purchased initially, further in the future it will be necessary to use negative emission methods,
such as direct air capture (DAC) of CO2 from the atmosphere, or Bioenergy with Carbon
Capture and Storage (BECCS) to capture and store CO2 from biomass energy combustion.
Finding solutions to these challenges will take time, but above all, it will be expensive.

46
Agency for Natural Resources and Energy, “Interim Summary of the CCS Long-Term Roadmap Study Group” (May
2022)
47
Committee on the Growth Strategy, Cabinet Secretariat (6th Meeting) Document 1: “Green Growth Strategy
Accompanying Carbon Neutrality in 2050” (December 2020)
48
REI, “Bottlenecks and Risks of CCS Thermal Power Policy” (April 2022)

28
Figure 12 compares the current costs of decarbonization methods with corresponding 2050
projections based on BloombergNEF data. Calculated forecasts were made for the U.S.A.,
Germany, and China, with averages taken of these values. The 2050 values show that the
cost for BF+CCS is more expensive than the other methods. The cost for the BF+CCS
process is even higher if remaining emissions are captured using DAC rather than offset.

Figure 12 Change in Levelized Cost of Net-Zero Steel

(Source) BloombergNEF, “Decarbonizing Steel: Technologies and Costs” (August 2021)

Figures are added to aid understanding by REI

Considering how difficult it is to secure domestic storage sites, the idea of exporting domestic
CO2 emission overseas has recently gained momentum. One example is the CStore1 project,
now under development off the coast of Australia. Nippon Steel is examining the economic
viability of capturing, liquefying, and shipping 1 to 5 million tonnes of CO2 per year from its
steel mills to CStore1 (Fig. 13).49 There are numerous challenges to overcome however,
involving the capture, liquefaction, transportation, delivery, and storage, as well as
associated monitoring. Even the very possibility of transporting CO2 overseas remains
unproven, and the cost hurdle is high, especially given the long distances involved in
transporting the CO2 to Australia. According to the reference materials provided with the
“CCS Long-term Roadmap Interim Summary,” released in May 2022, CO2 transportation
necessitates the development of special carriers many times larger than current LNG carriers,
with even more stringent low-temperature and low-pressure control requirements compared
to those for transportation of LNG and LPG. And such carriers would need to be produced in
large numbers. In any case, the costs would be high.

49 CStone1website: https://www.nipponsteel.com/news/20220214_100.html
and Nippon Steel, “Execution of Joint Study Agreement regarding Capturing and Transporting Liquefied Carbon Dioxide
(CO2) to Offshore Floating CO2 Capture and Storage Hub Project” (February14 2022)

29
The Ministry of Economy, Trade and Industry (METI) expects Southeast Asia to accept most
of Japan’s CO2 exports. A scheme in which a developed country like Japan exports the CO2
emissions it cannot process at home to developing countries could be seen as a failure to
play a leading role in cutting emissions, as befitting an advanced nation.50 Moreover, the
customers who purchase green steel at an early stage are likely to be environmentally
conscious companies and organizations who are prepared to pay a premium to maintain high
standards sustainability. There is a real possibility that such future customers would rate
CCS-dependent decarbonization projects poorly in terms of sustainability.

Considering the above, the continued use of blast furnaces in Japan beyond 2050, requiring
massive amounts of CCS, would not only be very expensive, but also problematic from a
sustainability viewpoint. It must be said, therefore, that this a very risky approach to survival
in the competitive milieu of the decarbonization era. Even if COURSE50 and
SuperCOURSE50 are fully implemented to promote the decarbonization of steelmaking in
Japan, the idea of continuing to use of blast furnaces in 2050 seems unrealistic.

Figure 13 CStore1 Project

(Source) CStore1 website

50 See P.24-25 of REI, “Bottlenecks and Risks of CCS Thermal Power Policy” (April 14, 2022)

30
3-3 Challenges of Hydrogen Direct Reduced Iron in Japan

Now, what about the hydrogen-based direct reduction method of steelmaking? If the risks to
Japan of relying on CCS to continue using blast furnaces are taken into account, it becomes
vital to enhance this method. As discussed in Chapter 1, the low-carbon steelmaking projects
that are now underway, most notably in Europe, employ the H2-DRI method in most cases.
In Japan, this method presents significant challenges, however. Due to the large amount of
hydrogen consumed, the key question is whether hydrogen can be supplied in sufficient
quantity and at a reasonable cost.

Can Japan's Hydrogen Supply Contribute to Green Steelmaking?

To begin, it is important to confirm that the government’s plans and strategies for hydrogen
supply are up to the task of achieving green steelmaking. There are four essential points to
check.

1） Are the timelines of hydrogen supply and steel industry decarbonization compatible?
2） Is the hydrogen supply target appropriate (current government targets are > 1 million
tonnes of new supply by 2030 and 20 million tonnes by 2050)?
3） What is the impact of the government policy that supports all types of hydrogen even
without distinguishing high-CO2 emission hydrogens (i.e., gray and blue hydrogen)?
4） Is the target cost appropriate (¥30/Nm3 in 2030; ¥20/Nm3 by 2050)?

1） Hydrogen supply under the government’s current hydrogen strategy is based on a very
limited response to demand in the 2030 phase. The move to decarbonization on the
steel side described earlier is currently consistent with the fact that Japan will not
significantly expand its hydrogen supply until around 2050. Accordingly, while the
timelines appear consistent, they are slow relative to the speed of steel decarbonization
required of developed countries by the international community.

2） The Japan Iron and Steel Federation (JSF) has published estimates of the potential
demand for hydrogen supply for primary steelmaking. If all the coal currently used as a
reducing agent to make pig iron in blast furnaces were replaced with hydrogen,
approximately 7 million tonnes (80 billion Nm3) of H2 would be needed (this does not
include other uses, i.e., use for energy) (Fig. 14). Japan’s total hydrogen supply is
expected to grow to 20 million tonnes by 2050,51 of which steelmaking will account for
more than one-third. The government’s supply target is no more than a rough estimate,
but it appears that the 7 million tonnes for steelmaking is included in the 20 million tonnes,
and there is no mention of other industry sectors. So, it does not seem that the
government is examining what applications will use hydrogen or how in any detail. Even
at this point, the real issues will not emerge until concrete proposals are presented and
reviewed. The questions of when and how hydrogen will be used to meet what kind of
demand need to be studied, taking into consideration demand volumes and locations
and relationships with hydrogen supply and electricity.

51
Industrial Science and Technology Policy and Environment Bureau and Agency for Natural Resources and Energy,
“Interim Report on Issues of and Measures for Future Hydrogen Policy (draft)” (March 22, 2022)

31
3） In addition, since current Japanese hydrogen policy does not call into question
emissions at the stage of hydrogen production, initial hydrogen supplies are likely to be
gray hydrogen derived from fossil fuel. Even if H2DRI is started through technological
innovation or new capital investment, as long as gray hydrogen is used the resulting
steel material will not be rated as a “green steel.” Domestically, the government is
planning a scheme that rates products as “zero emission” even if they are made using
gray hydrogen,52 but any such classification will not be internationally recognized. As
discussed later, discussions on a definition and rating method for green steel is growing
around the world. As a fuel, hydrogen is evaluated on a life cycle basis, including
emissions during its production. Particularly in the initial stages, most consumers are
likely to be environmentally conscious companies and organizations that will demand
third-party certified products..

4） Cost is the biggest challenge, so it will be discussed in detail in the next section.

As all the above shows, hydrogen supply in Japan faces many challenges that could become
obstacles to the achievement of hydrogen-based direct reduction steelmaking.

Japan's Hydrogen Costs are Highest of Any Countries

The cost targets set as part of Japan’s hydrogen strategy are ¥30/Nm3 (¥336/kg) in 2030 and
¥20/Nm3 (¥224/kg) in 2050. The Japan Iron and Steel Federation (JSIF), however, estimates
that compared to using coal as a reducing agent, the required parity price of hydrogen is
around ¥8 yen/Nm3 (¥89.6/kg) (Fig. 14). The substantial difference between these estimates
is itself a good indicator of the difficulties involved.

Figure 14 Potential Demand and Parity Price of Hydrogen for H2-DRI Steelmaking

(Source) Agency for Natural Resources and Energy, “Measures to Promote Investment in and Expand Demand for
Hydrogen and Ammonia Supply Chains” (April 2022)

52
Refer to P.27 of REI, “Re-examining Japan’s Hydrogen Strategy” (September 2022)

32
The problem is that the level of domestic hydrogen costs in Japan is likely to be considerably
higher than in other countries and regions. Figure 15 shows the projected trend in levelized
cost of hydrogen production by BloombergNEF, which predicts an extended decline in the
global price of green hydrogen. The survey covers 25 countries, with the light green color
indicating the spread in cost. Japan has the highest cost of all the countries. According to
this projection, Japan’s cost of H2 production will be $2.53 (¥278)/kg in 2030, and $1.54
(¥169)/kg in 2050. At these levels, Japan can meet its strategic goal, but the cost remains
higher than that of other countries. The International Renewable Energy Agency (IRENA)
also estimates that cost will be highest in Japan, though its price estimates are different. 53

Figure 15 Levelized Cost of Hydrogen Production from Renewable Electricity,

2022-2050

(Source) BloombergNEF, “1H 2022 Hydrogen Levelized Cost Update” (June 2022)

Importing hydrogen will not eliminate the cost difference.

As cost differentials with other countries become apparent, proposals to promote imports
from countries with lower costs naturally emerge. In fact, the Japanese government’s current
hydrogen policy seems more focused on building an international supply chain based on
imports than on domestic production.

The import pathway is also fraught with difficulties. Due to its low energy density per unit
volume, hydrogen is difficult to transport efficiently. Japan is also very far from regions that
enjoy low hydrogen production costs, so it would be forced to transport hydrogen over long
distances by sea. However, to ship hydrogen, it is necessary to reduce its volume by
liquefaction, compression, or chemical conversion. A variety of studies have identified the
three most promising options for shipping as liquefaction, conversion to ammonia, and
conversion to liquid organic hydrogen carriers (LOHCs). With support from the government’s
Green Innovation Fund Projects, Japanese companies are currently pursuing each of these
methods, striving to commercialize them and reduce their costs. Table 4 shows a summary
of the methods by IRENA.

53
IRENA,“Global Hydrogen Trade to Meet the 1.5°C Climate Goal Part 3: Green Hydrogen Cost and Potential” (May
2022)

33
 Table 4 Advantages and disadvantages of each potential hydrogen carrier
Pros Cons
Ammonia  Already produced on a large scale  High (12–26%) energy consumption for ammonia
 Already globally traded synthesis
 High energy density and hydrogen  High (13–34%) energy consumption for reconversion
content (importing region) with high temperatures
 Carbon-free carrier requirement (up to 900°C but more commonly in the
 Can be used directly in some 500–550°C range)
applications (e.g., fertilizers, power  Ship engines using ammonia as fuel need to be
generation, maritime fuel) demonstrated
 Can be easily liquified (20°C at 7.5  Might require further purification of the hydrogen
bar or -33°C at 1 bar) produced
 Most applications require compression of hydrogen
 Higher NOx (nitrogen oxides) production during
shipping would require flue gas treatment
 Toxic and corrosive
 Flexibility of the ammonia synthesis and cracking still
to be proven
Liquid  Limited energy consumption for  High energy losses for liquefaction (30–36% today),
hydrogen regasification (most of the energy is which calls for larger energy supply
consumed in the exporting region,  Need to expand energy supply
which is expected to have low  Boil-off (0.05–0.25% per day) during shipping and
renewable energy costs) storage
 No need for a purification system at  Cryogenic temperatures lead to high equipment cost
the destination  Currently available only on a small scale
 Easier transport at the importing
terminal
 Low energy consumption to
increase pressure of delivered
hydrogen
 Liquefaction is already a commercial
technology
 Carbon-free carrier
Organic  Can be transported as oil is today  High (25–35%) energy consumption for
hydride using existing infrastructure, making dehydrogenation (importing region)
it suitable for multi-modal transport  Requires high-temperature heat (150–400°C) for
 Low capital cost for all steps dehydrogenation
 Can be easily stored  Requires further purification of the hydrogen
produced
 Hydrogen is produced at 1 bar, requiring
compression
 Only 4–7% of the weight of the carrier is hydrogen
 No clear chemical compound that is the most
attractive
 All the possible carriers currently have a high cost
 Carrier losses every cycle (0.1% per cycle)
 Carriers would probably contain fossil CO2
 Most of the possible carriers require scaling up
multiple times from current global production

Figure 16 shows IRENA’s cost comparison of different carriers in “a future in which each
technology attains its full potential.” The scale of production plants is greatly expanded to
enjoy better economies of scale and the calculated costs are layered to show different cost
components (conversion from hydrogen to carrier, transportation, and reconversion to
hydrogen). The conclusion, in short, is that although all the methods have their challenges,
ammonia appears to be the best option because there is already a supply chain for it. The
weak point of ammonia is that the reconversion to hydrogen is expensive both in terms of
energy consumption and cost. When ammonia can be used directly as a fuel, these energy
and monetary costs can be avoided. However, since hydrogen itself is needed for
steelmaking, the steelmaking sector would have to bear high transportation and storage
costs on top of reconversion costs.

34
 Figure 16 Transport Cost Breakdown by Hydrogen Carrier

(Source) IRENA, “Global Hydrogen Trade to Meet the 1.5°C Climate Goal: Technology Review of Hydrogen Carriers”
(April 2022)
(Note by REI) "I-Electricity" at the right end of the bottom row of the legend remains the same as in the original, but the
original description suggests that it actually refers to “energy for reconversion in the importing country”.

Transportation costs in current pilot projects are $6.5 to $17.3 per kg of hydrogen, but with
bigger plants, economies of scale could bring costs down to somewhere around $1 to $2 per
kg, as shown in Fig. 16. However, the cost of hydrogen production would also drop
significantly over the same time. In the same report, IRENA forecasts that “In 2050, the LCOH
from a stand-alone green hydrogen production system will be very low on average; below
$1.5 per kg in most countries when the best renewable resources are used.” BloombergNEF
predicts that the price of H2 in 25 countries worldwide will range from $0.7 to $1.5 per kg.54
It is therefore likely that the transportation cost, estimated to be $1 per kg or higher, will be
the bigger burden, in the sense that this cost will be paid by Japan but not by green hydrogen
production areas. It is also important not to underestimate the additional cost to Japan
compared to Europe and other regions where hydrogen can be imported from production
areas via pipeline by simply compressing the gas.

These projections suggest that it will be difficult for Japan to access the inexpensive
hydrogen needed to enable internationally competitive hydrogen-based steelmaking,
whether by means of domestic production or imports. Therefore, any large-scale domestic
development of H2-DRI steelmaking, requiring large quantities of hydrogen, is likely to entail
considerable difficulties.

54
BloombergNEF, “1H 2022 Hydrogen Levelized Cost Update” (June 2022)

35
[BOX 1] Quality of iron ore required for direct reduction ironmaking + electric furnace
method

It is fair to say that for now, the most promising technology for decarbonizing primary
steelmaking is hydrogen-based direct reduction iron(H2-DRI) process. The technical
issues have been largely overcome and Sweden’s SAAB has already commenced
production of zero-emission steel in a pilot plant. In fact, according to the Global Steel
Transition Tracker, nearly all the low-carbon steelmaking projects planned for
implementation by 2030 are based on the H2-DRI process (Fig. 8). Two key challenges
remain—hydrogen supply and iron ore quality. Currently, H2-DRI plants need to use the
highest quality (DR grade) iron ore, containing 67% iron on average, which only accounts
for 4% of current global iron ore shipments. Given that the overall quality of iron ore has
reportedly declined in recent years, it is impossible to expect increased production of DR-
grade steel or expanded mining of magnetite ore, which is easier to concentrate, in the
years ahead. Steelmakers are working on various technological innovations to address
this issue. As well as trying to create DR-grade iron ore in the pelletizing process, they are
also pursuing various technological developments in the steelmaking process to improve
performance with low-quality iron ores.55

Direct Reduction-Melter-Basic Oxygen Furnace

This method adds a melting process after direct reduction56 and then utilizes an existing
converter (basic oxygen furnace) instead of an electric furnace. This reportedly allows the
use of blast furnace-grade iron ore pellets with an iron content of 65% or less.
Thyssenkrupp of Germany and BlueScope of Australia are engaged in R&D on this
method.

Fluidized Bed Furnace

Reportedly, a fluidized bed furnace in which fine iron ore powder is reduced by reaction
with 100% hydrogen gas, without the need for pelleting the iron ore, does not require DR-
grade ore. Both Korean company Posco and Japanese company Primetals Technologies
are doing R&D on this method.

The results of NEDO Green Innovation Fund Projects in Japan are also promising, with
some projects announcing aims to launch production before 2030. Like this, it seems that
the issue of iron ore quality in H2-DRI is gradually being resolved.

55
Details are in IEEFA, “Iron Ore Quality a Potential Headwind to Green Steelmaking” (June 2022) and “Solving Iron
Ore Quality Issues for Low-carbon Steel” (August 2022)
An electric arc furnace for melting is attached to the shaft furnace for direct reduction (sub-merged arc furnace) (DRI-
56

SAF-BOF), or melting process is added in which DRI is fed into a melting furnace after direct reduction (DRI-Melter-
BOF)

36
3-4 Challenges and Developments of the Electric Furnace (Recycled Iron Manufacturing)

Two methods, (1) BF-BOF+CCS and (2) H2-DRI, have been mentioned as pathways to steel
industry decarbonization, but in both cases, domestic deployment is fraught with various
difficulties. Then what about the other pathway, method (3) Electric arc furnace (EAF)with
recycled steel? Steelmaking that uses iron scrap in electric arc furnaces (EAFs) is still
practiced today, accounting for 24% of Japan’s total crude steel production (Table 1).
Compared to the other two methods, which require technological innovations, there are no
significant technical hurdles to the feasibility of this method. CO2-based reduction could also
be used in the future to produce carbon-free EAF crude steel, provided that suitable zero-
carbon power sources are available. Thus, if the shift to using electricity as an energy source
for downstream processes continues to advance, it will become increasingly viable to
produce steel products with near-zero emissions.

Nippon Steel has announced that it will construct a new EAF facility at its Setouchi Works
(Hirohata Area), with commercial operation set to start in October 2022.57 This will be the
largest EAF in Japan, with a capacity of 4 million tonnes per year by 2030. Meanwhile JFE
Steel has announced that it is shutting down the No. 2 Blast Furnace at its Kurashiki Works,
to replace it with an EAF. It also has plans to expand the EAF plant at its Sendai Works.58
The move to EAFs by steelmakers that operate blast furnaces merits attention as a highly
feasible approach to decarbonization.

However, even electric furnaces have some issues.

1） Is sufficient scrap iron available to provide enough iron to meet all demand?
2） Can the electric furnace satisfy all quality requirements using scrap iron?
3） What is the impact of the higher cost of electricity in Japan (compared to other
countries)?

Can the Electric Arc Furnace Method Meet All Iron Demand?

The value of scrap iron will increase as a low-carbon iron source that is available domestically
at low cost. The current supply-demand situation of scrap iron is shown in Fig. 17. Total
consumption is approximately 46 million tonnes, including BF-BOF, EAF, castings, etc., plus
exports. Exports are around 8 million tonnes, or nearly 20% of consumption. Exports have
served as a buffer between domestic supply and demand, so when domestic scrap demand
increases, exports may decline. However, even if all current exports were redirected to
domestic crude steel production, they would still fall far short of the 71 million tonnes (Table
1) of iron source (pig iron) currently produced in blast furnaces for conversion in BOF
furnaces. Furthermore, exports of steel scrap from Japan are important for developing
countries that lack sufficient iron and steel reserves of their own. It is therefore essential to
pursue new approaches, such as importing DRI as a new source of iron and using EAFs to
produce that quantity of steel that has been produced up to now in BFs.

57
Nippon Steel News Release, “Commercial Operation Begins at Hirohata Area Electric Furnace of Setouchi Works:
Steady development of high-grade steel production technology, a carbon-neutral technology, in a large electric furnace”
(November 1, 2022)
58
JFE Steel, “Environmental Vision 2050” (September 1, 2022)

37
 Figure 17 Steel Scrap Consumption (FY2019)

(Source) Japan Ferrous Raw Materials Association, “Annual Report of Iron Sources No. 31” (2020)
See Table 6 for an explanation of various kinds of scrap.

Can the Electric Arc Furnace Method of Scrap Utilization Cover All Demand?

Electric furnace steel mills currently use scrap iron for almost all their iron raw material (Table
1). At the same time, their product lines are wider than in the past. However, there are still
some steel products they cannot produce from scrap iron. As a result, BF steelmaking and
EAF steelmaking are now almost “segregated” (Fig. 18). There are also some kinds of steel
products that cannot be made solely from scrap iron, though this also depends on the quality
and condition of the scrap.

On the other hand, JFE Steel is moving forward with technological development and
investment to begin production of high-grade steel for automobiles using an electric furnace
at its Sendai Works in FY2024. Nippon Steel Corporation has also announced a plan to start
production of electromagnetic steel sheets at its new EAF plant in Hirohata. 59 Other
companies are also moving to produce high-grade steel using EAF processes. Some EAF
steelmakers are even producing automotive steel sheet, though this requires further effort
and technological development. Work needs to be done not only on EAF processes, but also
on the iron raw materials and product design, to figure out how to control the composition of
the iron source in order to produce steel products with the optimal properties for specific
products.

59
Nippon Steel, “Briefing Material for Energy Structure Transformation Field Working Group of Green Innovation Project
Subcommittee, Industrial Structure Council” (September 12, 2022)

38
 Figure 18 Required Performance of Steel Products and Share of Production from
Electric Arc Furnaces

(Source) Tokyo Steel website, https://www.tokyosteel.co.jp/pdf/q1-1-2.pdf

Japan’s Electricity Costs are Higher Compared to Other Countries

The economics of EAF steelmaking is influenced by the cost of electricity, which is consumed
in large quantities. It is well-known that the cost of electric power in Japan is currently higher
than in other countries. On the other hand, the cost of scrap iron is relatively low in Japan,
so the overall cost of making steel from recycled iron is aboutthe same as in the U.S.A.,
which enjoys low electricity costs (Fig. 19). While instability in fossil fuel prices will continue
to affect electricity costs across the world for the time being, policies and economies of scale
could eventually lower the cost of renewable electricity. Japan also needs to expand its
deployment renewable energy (including the development of independent power producer),
upgrade its power transmission infrastructure, and operate its electric power plants more
flexibly, giving consideration to supply-demand balance. Such measures can help to reduce
the cost of the power used by EAF steel mills.

Figure 19 Scrap-based EAF Cash Costs for Hot-rolled Coils60 in Major Countries)

(Source) BloombergNEF, “Decarbonizing Steel-Technologies and Costs” (August 2021)

Hot coil (hot-rolled wide strip steel) is a steel product made by heating and rolling steel billets that are made in a BF-
60

BOF or EAF process, before coiling

39
3-5 Summary of Issues for Steel Decarbonization Approach in Japan

Finally, Table 5 offers a summary of Japan’s planned approach to decarbonization.

Table 5 Approach to Decarbonization Approach: Pros and Cons of Steel Industry

Decarbonization Methods in Japan
Method Pros Cons
BF-BOF Difficult to achieve near-zero emissions.
+ H2-DRI + CCS  Can take advantage of the Rather a transitional approach
technological advantages of  Only a 20-30% reduction, even with zero-carbon
current BFs and BOFs
 Renovate existing BFs H2
and add H2 as a reducing  Existing BF-BOF plants can  CCS cannot capture 100% of CO2 emissions
be renovated and utilized,
agent to cut coal use
thereby containing
 Residual CO2 emissions must be offset using
 Capture and store
infrastructure costs to some
DAC or other means of negative emissions
residual CO2 emissions solution
extent
 Makes use of zero-carbon H2
Lack of storage sites for large
volumes of captured CO2
 There is no prospect of securing permanent
storage sites for the large volumes of captured
CO2 (deep-sea storage costs more than land
storage)
 Risks of CCS need to be assessed
Not yet technically mature, but outlook is good
(COURSE50 is on track for 30% reduction)
High infrastructure costs, for facility renovation and
installation of ancillary equipment
H2-DRI + EAF Can be made near-zero  High cost of H2 supply (even if imported)
emission  H2 production needs large quantities of zero-
 Construction of new H2- carbon electricity
DRI plants  Makes use of zero-carbon H2 Not technically mature, but outlook is good
 100% H2 reduction and electricity (Proven in pilot plants around the world)
Need to secure high-quality iron ore OR
Need to develop new technology to enable use of
low-grade iron ore
(Technology is under development in Japan and
other parts of the world)
New capital investment, high cost of H2 supply
infrastructure
EAF Can be made with near-  Need more decarbonized electricity
(Recycled zero emission  Cost of electricity is higher than in other
steelmaking) countries

Makes use of zero-carbon To expand use of EAFs
 Crude steel production in electricity  It is necessary to increase supply of scrap iron
EAFs using scrap iron and Makes use of scrap iron or and/or import DRI iron
DRI zero-carbon iron source (H2- To expand the range of steel products made in
DRI) EAFs
 Existing EAFs and other  Need to improve scrap iron quality
infrastructure can be used,  Need to secure zero-carbon iron source (H2-
allowing infrastructure costs to DRI)
be contained to some extent  Need to develop new technology (on both
 Enables use of existing production and product sides)
technology
(Source) Created by Renewable Energy Institute from various sources

In conclusion, it does not make sense for Japan to continue using the BF-BOF process as a
means of advancing the goal of decarbonization, even if combined with partial use of
hydrogen for reduction, or CO2 capture, especially due to the limitations of CO2 storage. On
the other hand, the supply of hydrogen is a major challenge for the large-scale deployment
of H2-DRI in Japan, particularly in terms of cost. Ultimately, the most rational pathway toward
zero-carbon steelmaking for Japan is to make maximum use of the EAF process while also
using H2-DRI on a limited basis where conditions can be optimized.

40
Chapter 4: Japan's Zero-Carbon Steelmaking in the Carbon-Neutral Era
As already shown, continuing to operate blast furnaces (BF-BOF), relying on CCS to reduce
CO2 emissions, and importing large quantities of hydrogen to commit fully to H2-DRI
domestically are both unrealistic approaches to decarbonizing the Japanese steel industry
by 2050. Considering Japan’s unique circumstances and taking advantage of its strengths,
the three pillars of Japanese steelmaking in the age of carbon neutrality are likely to be the
following.

Pillar 1 Maximum utilization of recycled iron making by electric furnace

to meet the era of circular economy
Pillar 2 Utilization of H2-DRI imports
Pillar 3 Introduction of H2-DRI making utilizing domestic hydrogen at
optimal locations in Japan

Crude steel production in Japan will shift from conventional blast furnace (BF) steelmaking
to electric arc furnace (EAF) steelmaking. The most rational choice to suit Japan’s
circumstances is to take full advantage of scrap iron available domestically, as well as to
import or domestically produce H2-DRI, and to combine these two sources of iron raw
material in various ways to produce steel in EAF plants.

It could be said that up to now, BF and EAF steelmakers have largely operated in different
markets, producing different products. From now on, though, they will both have to tackle
decarbonized steelmaking with no real boundaries between them. BF steelmakers will adopt
EAFs and actively use scrap iron, and work to master a new kind of iron raw material—H2-
DRI. Taking advantage of downstream process technologies, they will work to preserve and
even enhance their international advantage using “integrated electric furnace” production
processes. At the same time, EAF steelmakers will also procure H2-DRI as an iron source to
produce a more diverse range of products. They will be able to take advantage of the
technology of EAF steelmakers to control the content of various substances according to the
steel product they wish to produce.

Several scenarios have been presented for crude steel production in Japan in 2050. It is
quite possible that Japan could manage to supply about half of its iron resource needs by
making maximum use of its available scrap iron, which is the country’s largest domestic iron
resource. Another rational choice would be to import most of its H2-DRI needs, while
producing some H2-DRI domestically too, on a limited basis in areas that offer high renewable
energy potential. This is discussed further below.

Supported by these three pillars, the transition to steel production in the decarbonization era
will require a series of actions on the steelmaking side, including technology development
and penetration, and capital investment, as well as a transition strategy that takes into
account impacts on local economies and employment, expansion of green steel demand,
transition to a circular economy, and acceleration of renewable power source development.
These strategies are outlined in Chapter 5. The following sections will make clear the
importance of each of these three pillars of steel industry decarbonization.

41
[Pillar 1] Maximum Utilization of Recycled Iron by Electric Arc Furnaces in Response
to the Age of Circular Economy

A transition to the zero-carbon era cannot be achieved without the backing of a circular
economy. Even many of the decarbonization scenarios presented at the beginning of
Chapter 2 anticipate significant use of recycling. As a basic strategy for decarbonization, it is
vital to put in place measures to ensure the maximum possible scrap iron utilization, giving it
precedence over iron sources made by primary steelmaking.

In the future, it will be necessary to develop technologies and invest in facilities to

manufacture products from scrap iron that have been impossible to make with conventional
EAF processes up to now. BF steelmakers have begun working to produce electromagnetic
steel sheet in EAFs. The efforts of one of these companies, Nippon Steel, to establish an
integrated EAF steelmaking process at Hirohata61 is an important model initiative for Japan’s
steel industry in the era of decarbonization. Efforts to overcome the weakness of domestic
operations in Japan, which tends to be high in cost by leveraging the advantage of making
steel and manufacturing products within Japan to enhance product differentiation and create
added value need to be undertaken in collaboration with local communities.

Aside from this, Tokyo Steel is moving to begin mass production of steel sheet for
automobiles in 2025,62 while U.S. Steel announced that its new EAF steel sheet plant, set to
begin operating in 2024, will produce leading-edge, high-strength steel sheet from source
iron consisting of 90% scrap. 63 Like this, globally steelmakers are accelerating their
decarbonization efforts utilizing scrap steel. It is important to keep strengthening and
promoting this line of action.

Measures on the scrap iron side are necessary too. Table 6 provides a breakdown of the
current scrap iron supply in Japan along with some explanations. Scrap iron can be classified
as (1) return scrap, generated at steel mills, (2) process scrap, generated by processing steel
into a variety of products, and (3) obsolete scrap, recovered after steel products or structural
materials have been consumed or used. Naturally, return scrap and process scrap need to
be recovered in a way that ensures they are free of impurities. It will also be necessary to
improve the quality of obsolete scrap and to recover and use it efficiently and effectively.
Comprehensive measures that take into consideration everything from product and building
design to intermediate treatment and recovery, involving both the private sector and
government, will be needed.

61
Nippon Steel News Release, “Commercial Operation Begins at Hirohata Area Electric Furnace of Setouchi Works:
Steady development of high-grade steel production technology, a carbon-neutral technology, in a large electric furnace”
(November 1, 2022)
62
NIKKEI BUSINESS DAILY, “Tokyo Steel to mass-produce steel sheets for automobiles in electric furnaces in 2025,
demand for de-carbonization” (May 26, 2022)
63
U. S. Steel website: https://www.ussteel.com/next-generation-steel-mill, https://www.ussteel.com/prereleases/-
/blogs/u-s-steel-confirms-major-near-term-expansion-of-sustainability-commitments-at-ceres-2021

42
 Table 6 Types of Scrap, Their Properties and Future Directions (FY2019)
Qty.
Type of scrap % Description/quality Remarks
(ktonnes)
Scrap from iron and steel Linked to steel production, so
production processes; of availability will not significantly
(1)
13,320 35％ high quality increase. Availability tends to
Return scrap
be decreasing as production
becomes less wasteful.
Commercially available Linked to the quantity of steel
scrap generated from steel consumption, so availability
(2) processing; of relatively high will not significantly increase.
7,808 20％
Process scrap quality Availability tends to be
decreasing as processing
becomes less wasteful.
Scrap iron and steel Linked to past consumption
recovered from obsolete and demand for various
(3) products, structures, etc.; of products and structures. Even
17,384 45％
Obsolete scrap variable quality if quantity does not increase, it
can be exhaustively utilized by
increasing quality.
Total 38,512 100％
Scrap exported abroad.
(4) Decreasing in accordance with
8,286 Supplements the domestic
Exports domestic demand increases
supply-demand balance.
(Source) Created by Renewable Energy Institute based on Japan Ferrous Raw Materials Association, “Annual Report of
Iron Sources No. 31” (2020)

Cooperation between companies on the demand side, especially in the automotive industry
will be even more important. It is widely recognized that the strength of the Japanese steel
industry lies in the quality of its steel products, which are in large part produced for the
automotive industry. However, as the blast furnaces that served as the foundation of
Japanese steelmaking come into disuse, the challenge of making steel products that meet
stringent performance requirements using electric furnaces must be tackled in cooperation
with companies on the demand side. A noteworthy example is the Volvo Group’s commitment
to SSAB’s fossil fuel-free steel production and its development of products that will use the
steel. Japanese automakers and other large steel consumers in Japan should also make a
positive commitment to decarbonized steel production and review their product
manufacturing with a clear understanding of the pros and cons of new steel materials
produced in the decarbonized process, so that they can offer feedback on their requirements
to the steelmakers. It is only through this kind of cooperation and collaboration that Japanese
industry will be able to wield its traditional strengths in the decarbonization era.

43
[BOX 2] Demand Response by Electric Furnaces - Tokyo Steel's Contribution to the
Power Grid

Electric furnaces have started to get involved in demand response efforts. Since electric
furnaces consume such large amounts of electricity, they can play a valuable role in
adjusting the electricity supply-demand balance by coordinating their operation according
to times of electric power surplus or shortage. Demand response behavior by large power
consumers such as electric furnaces will be very important for electric power systems in
the era of decarbonization, when renewable sources, which are subject to output
fluctuations, will account for the bulk of the power supply.

Although electric furnaces have traditionally operated at full capacity overnight and on
holidays to take advantage of low off-peak power prices, as the power supply-demand
balance has become more complex in recent years they are now operating even more
smartly and nimbly. For example, on the request of power companies, they may operate
during the day in spring and fall, when solar power generation is high, thereby boosting
power demand and absorbing surplus power to help balance supply with demand. Such
so-called “raise DR” demand response programs (DRPs) are also seen as an effective
way to ease local output suppression of photovoltaic (PV) power generation. In
cooperation with Kyushu Electric Power, Tokyo Steel has run a trial of “raise DR” since
2018, with a total of 26 implementations in spring and fall by 2021. The opposite kind of
DRP (“lower DR”) is being tested in a collaboration with TEPCO Energy Partner, for the
purpose of reducing peak demand by flexibly adjusting furnace operations on request
when power supply is tight in winter.

Together with various other companies and organizations, Tokyo Steel is also participating
in the “Renewable Energy Aggregation Demonstration Experiment” with Chubu Electric
Power Miraiz. This project aims to verify the magnitude of output adjustment and response
time that is possible with electric furnaces, as part of a system of various adjustable
resources, including storage batteries, EVs, and air-conditioning equipment.64

Thus, even though electric furnaces consume huge amounts of electricity, they can be
operated in ways that contribute importantly to power systems, by serving as “flexible
demand” to balance power supply and demand.

64
Kyushu Electric Power, “About the “Raise DR” Initiative” (November 2021); Tokyo Steel website:
https://www.tokyosteel.co.jp/eco/achievement/; Nara, “Examples of Demand Response” (August, 2022); Nihon Keizai
Shimbun, “Tokyo Steel to support power saving with the use of electric furnaces: Temporarily suspending the use of
electricity when supply and demand are tight to help prevent blackouts in the entire region” (September 2022)

44
[Pillar 2] Utilization of Hydrogen Direct Reduced Iron (H2 -DRI) Imports

Making steel by direct reduction with hydrogen requires both a large amount of hydrogen and
a large amount of renewable energy and power to produce the hydrogen. Even if hydrogen
can be produced at low cost somewhere overseas, importing hydrogen for H2-DRI making
would be very expensive, due to the huge cost of transporting hydrogen over long distances,
as discussed in 3-3. Hydrogen could be converted to ammonia, which is relatively easy to
transport by sea, but the ammonia would need to be reconverted to hydrogen before use.
Whichever way it is done, the cost of H2-DRI in Japan will inevitably be high.

Increasing the use of recycled iron and reducing the demand for steel by promoting a circular
economy will reduce the amount of iron that needs to be reduced from iron ore. However,
some new H2-DRI will need to be supplied for products that are difficult to produce with 100%
scrap, to ensure the quality..

Given this situation, a reasonable approach to securing a supply of the necessary H2-DRI
domestically is to produce it in regions (overseas) that enjoy low renewable power generation
costs and abundant iron and steel resources and then import it to Japan in the form of hot
briquetted iron (HBI).65 The idea of producing H2-DRI in areas of the world where it is possible
to produce green hydrogen inexpensively on a large scale and creating a global market for
trading the commodity is beginning to gain traction internationally.66 The positive aspects of
this approach, particularly for Japan, are outlined below.

1） It reduces the total cost of decarbonizing the steel industry in Japan and helps to
ensure international competitiveness
2） It avoids the need to make excessive investments in the infrastructure needed to
import large quantities of hydrogen, which is difficult and costly to transport and store
3） It enables stronger collaboration with iron ore/hydrogen producing regions (by not
only importing iron ore and hydrogen but also setting up H2-DRI plants locally, the
result is a win-win situation that contributes positively to the local economy and
community)

To compare different approaches to steelmaking, a case study was conducted assuming the
use of a H2-DRI process to produce iron using Australian iron ore and green hydrogen. The
study compared the relative energy and cost advantages of locating a H2-DRI plant and
electric arc furnace (EAF) plant in Japan versus Australia.67 The following three cases (Fig.
20) are compared in terms of energy consumption and cost.

65
Reduced iron is not stable in its original form (sponge-like state); it ignites easily, for example. It is therefore solidified
into masses called “briquettes,” which are suitable for transportation and storage. This material is called “hot briquetted
iron” (HBI).
66
For example, Recharge, “Hydrogen-derived sponge iron could become a globally traded commodity: ETC chair” (June
29, 2022)
67 Devlin et al., “Regional supply chains for decarbonising steel: Energy efficiency and green premium mitigation”
Energy Conversion and Management 254 (2022)

45
 SC1) Iron ore and green hydrogen are imported from Australia and used in H2-DRI and
EAF plants in Japan to produce iron and steel products
SC2) Iron is produced in Australia by direct reduction in a H2-DRI plant and then
imported to Japan in the form of hot briquetted iron (HBI), to be used to make steel
in an EAF plant
SC3) Iron and steel are produced in Australia in H2-DRI and EAF plants, after which the
crude steel is imported to Japan

The results of the study show that regardless of whether liquid hydrogen or ammonia is used
as fuel for marine transportation, in both 2030 and 2050, the first scenario (SC1) of importing
hydrogen and iron ore and performing all the iron and steel production in Japan entails the
highest energy consumption and cost. The second scenario (SC2) of importing iron (HBI) to
Japan has lower energy consumption and cost than (SC1). And the third scenario (SC3), in
which all the iron and steel production is done in Australia, has the lowest energy
consumption and cost of all (Fig. 21).

The results of this study suggest that the best approach is to produce crude steel in Australia.
However, for reasons of industrial competitiveness and regional employment, it is important
for Japan to maintain and revitalize the steelmaking industry in Japan, by manufacturing
semi-finished steel products in EAF facilities using H2-DRI as the iron raw material, and then,
processing them into final steel products. This point will be revisited in Chapter 5, but
importing H2-DRI as a raw material is considered an appropriate approach to steelmaking
for Japan in the decarbonization era.

Figure 20
Comparison of Energy and Costs of Iron and Steel Production in Australia and Japan

(Source) Devlin, et al., “Regional supply chains for decarbonising steel: Energy efficiency and green premium
mitigation,” Energy Conversion and Management 254 (2022)

46
 Figure 21
Energy Demand and Cost by Study Case (Per Tonne of Semmi-finished Steel)

(Source) Devlin, et al., “Regional supply chains for decarbonising steel: Energy efficiency and green premium
mitigation,” Energy Conversion and Management 254 (2022)

[Pillar 3] H2-DRI by Domestically Produced Hydrogen in Optimal Domestic Locations

The third option for decarbonized steelmaking in Japan is to produce hydrogen at optimal
domestic locations, rather than importing it, and using it for H2-DRImaking. Although the
costs of renewable power generation and hydrogen production will go down in Japan, they
are expected to remain relatively high by international standards, which means that the cost
of H2-DRI making will be comparatively high too. However, by various means, the Japanese
steel industry has always managed to produce internationally competitive products, even
with the handicap of high energy costs and other adverse conditions. In view of this, even
allowing that costs may be comparatively high, the deployment of H2-DRI plants that can
take advantage of the various benefits of domestic production should be pursued as an
option to help in the decarbonization of iron and steel production.

To constrain production costs despite unfavorable international conditions, it makes sense

for Japan to concentrate its hydrogen production and H2-DRI plants together in locations that
are well suited to renewable power generation. Locating the sites where power is generated
close to the sites where power is consumed (hydrogen production plants) reduces the cost
of power transmission facilities. Hydrogen transportation is generally very expensive, even
by methods other than vessels (as mentioned above), but if the location of consumption (steel
plant) is close, the hydrogen can be transported cost-effectively by pipeline or truck.

47
Here is an estimate of the quantity of electricity required to produce H2-DRI in a 2.5 million
tonne-capacity plant. 68 At least 1.6 billion Nm3 of hydrogen per year is required for iron
reduction. The hydrogen electrolyzers to produce this much hydrogen would require 930 MW
of power at full load, corresponding to more than 90 units of large 10 MW-class electrolyzers.
If the power used by the electric furnace to produce steel from reduced iron is included, the
total power requirement would be over 10 TWh. 69

The electricity used to produce decarbonized steel must, of course, be decarbonized. There
is a view that nuclear power can serve this purpose, but according to the estimates of the
International Energy Agency and other organizations, nuclear power is expensive to generate,
so it would drive up the price of hydrogen. On top of this, there is little real prospect that new
nuclear reactors will be built in Japan. In any case, their construction would take a very long
time. It is therefore difficult to see their use in steelmaking.

Consequently, H2-DRI will need to rely on renewable energy sources. The most likely
candidate is offshore wind power, which is well suited to supplying a large quantity of energy.
1 GW of offshore wind power capacity can generate around 3 TWh of energy per year (at a
capacity factor of 35%). So, to supply the required 10 TWh of electricity, more than 3 GW of
offshore wind power capacity is required. The ideal places for supplying such a large amount
of decarbonized power are areas with high potential for offshore wind power. This is
discussed further in the next chapter under Strategy 3.

68
Although small compared to recent blast furnace plants, which have capacities of more than 4 million tonnes, this is
the largest DRI making plant in the world today.
69
According to Chevrier et al., “MIDREX® Process: Bridge to Ultra-low CO2 Ironmaking” (KOBE STEEL ENGINEERING
REPORTS/Vol.70 No.1) (July 2020), MIDREX’s H2-DRI making process requires 650 Nm3 of hydrogen for reduction
and 150 Nm3 of hydrogen (or electricity) for heating per tonne of product. The conversion efficiency of the hydrogen
electrolyzer is 5 kWh/Nm3. Calculations assume electricity is used as the energy source for heating.

48
Chapter 5: Transition Strategies for Decarbonizing Steelmaking in Japan
To leverage its strengths and develop a competitive steelmaking industry in the era of carbon
neutrality, Japan needs to turn away from its current decarbonization strategy, which relies
heavily on CCS. The following five transition strategies can help Japan to realize the three
forms of decarbonized steelmaking presented in Chapter 4: (1) Maximum utilization of
recycled iron making by electric furnace to meet the era of circular economy, (2) Utilization
of hydrogen direct reduced iron (H2-DRI) imports, and (3) Introduction of hydrogen direct-
reduced ironmaking utilizing domestic hydrogen at optimal locations in Japan.

Strategy 1 "Electric Arc Furnace Phase-in / Blast Furnace Phase-out Plan" to develop
the local economy
Strategy 2 Lead the world in the international hydrogen direct reduced iron (H2-DRI)
market and supply chain
Strategy 3 Selection of optimal sites for direct hydrogen reduction ironmaking in Japan
in conjunction with offshore wind power development
Strategy 4 Promote reduction of domestic demand and maximum utilization of scrap
iron by shifting to a circular economy
Strategy 5 Develop policies to expand demand for green steel

Strategy 1: “Electric Arc Furnace Phase-in / Blast Furnace Phase-out Plan” to

develop the local economy

To decarbonize steelmaking, blast furnaces, which emit large quantities of CO2 and are not
amenable to effective emission reduction measures, will be phased out. However, Japanese
technologies that have been cultivated through conventional steelmaking and steel
manufacturing processes, as well as the local industries and work forces that have supported
the industry, should be passed on and even developed in the decarbonization era, both for
steelmaking and other new industries. One essential strategy for achieving this is an “electric
arc furnace phase-in/blast furnace phase-out plan,” to guide the adoption of electric furnaces
to coincide with the closure of blast furnaces.

Large numbers of people are employed at integrated steel plants in regional Japan.70 Steel
mills with blast furnaces typically employ over 1,000 people, but their closure would impact
not only employees, who could be reassigned to other jobs, but also various related
businesses, including subcontractors and employee services, thereby disrupting the local
economy. In the transition to decarbonization, the shutdown of a blast furnaces would put
local employment and economic well-being at risk. For this reason, a strategy that aims at
preserving local jobs and economic activity is needed. One example would be to try and shift
seamlessly to electric furnaces for steelmaking in step with the phase-out of blast furnaces.

70
For example, JFE Steel has decided to shut down the blast furnace in the Keihin Area of its East Japan Works by
2023. The company claims that approximately 1,200 employees will be affected by the shutdown of facilities related to
integrated steelmaking, including basic oxygen furnaces, coke ovens, shaft furnaces, continuous casting machines, and
electric furnaces. Some 2,000 employees of group companies and partner companies will also be affected. (It also
stated that it would secure employment for the 1,200 employees through job reassignments and other measures and
address the needs of group companies and subcontractors in good faith. The Kure Area of Nippon Steel’s Setouchi
Works shut down its blast furnace in 2021, affecting 1,500 workers (500 employees and 1,000 subcontractors). The
entire area will close in 2023, with a total loss of 3,000 jobs. The economic impact on subcontractors and affiliated
companies will also be significant.

49
Moves to phase in electric furnaces at the same time as phasing out blast furnaces has
already begun in the Japanese steel industry. On September 1, 2022, JFE Steel announced
plans to convert a blast furnace at its West Japan Works in Okayama Prefecture to a large
electric furnace by 2027.71

Preserving steelmaking and product manufacturing processes in Japan, using electric

furnaces, makes it possible to utilize established human resources and existing facilities, as
well as processing technologies of excellence that offer significant technological and cost
benefits. Since the advanced technologies of the Japanese steel industry have been honed
through collaborative relationships with supply chains and customers, it is important to
maintain production sites that can take advantage of these relationships. For example, the
use of high-tensile steels in automobiles and their increasing sophistication over the years
are seen as the fruit of the long collaboration between Japanese automakers and
steelmakers. This collaboration has focused not only on improving steel performance, but
also on material structure and design optimization, and joining technology to ensure that the
requirements for energy efficiency and crash safety are both met.72 To fully utilize recycled
iron and H2-DRI for decarbonization, it is vital that steelmakers, as well as the various
manufacturers that use steel products, work together on product development.

To ensure a smooth transition to the era of decarbonization, a phase-out plan for all blast
furnaces should be formulated as soon as possible, for example to guide the shift to electric
furnaces. The plan should be jointly promoted by national and local governments and a
dialogue with local stakeholders should be opened. It is important to establish a common
understanding that a transition plan, focused on shifting from blast furnaces to electric
furnaces, is a positive plan that helps to ensure a sustainable local economy and environment
for the future. If Japan continues to rely on blast furnaces without any transition policy, it will
end up losing the international decarbonization race, and the local economy will eventually
die out, along with the blast furnaces. It is therefore essential to create a system in which the
national and local governments play leading role.

Strategy 2: Lead the world in the international hydrogen direct reduced iron (H2-DRI)
market and supply chain

There is currently a growing movement in Japan to build supply chains for international trade
in hydrogen, but whereas in Europe imports are transported by pipelines, Japan must rely on
shipping by sea. Furthermore, to use hydrogen for direct-reduction ironmakingH2-DRI, Japan
needs to either import hydrogen in the form of liquefied H2 or as ammonia (or other carriers)
that can be transported less expensively. On top of this, it is necessary to reconvert the
ammonia back to hydrogen in Japan. In either case, the cost is very high.

Consequently, rather than importing hydrogen for steel production, a more rational approach
for Japan would be to produce H2-DRI in areas outside the country that are optimally suited
to hydrogen production, with access to abundant renewable energy, and then import the
green iron to Japan.

JFE Steel, Carbon Neutral Strategy Briefing Material (September 1, 2022)

71

72
Manabu Takahashi, “Sheet Steel Technology for the Last 100 Years: Progress in Sheet Steels in Hand with the
Automotive Industry” (2014)

50
This kind of international trading of H2-DRI is expected to play a big role as a decarbonization
solution, both in Japan and many other countries around the world that lack the conditions
or technology to develop their own H2-DRI plants. It is important for Japan to lead the world
in establishing an international market for H2-DRI—an “international green DRI market”—and
to build a framework for collaboration that supports the construction of H2-DRI plants and
contributes to local economies and societies at an early stage, with the aim of accelerating
global decarbonization.

If the cost of hydrogen production in Australia, South Africa, and other regions blessed with
the potential to produce green hydrogen thanks to abundant renewable electricity and iron
ore resources, can be sufficiently lowered, the export of DRI iron could end up replacing the
export of iron ore. This could lead to a global-scale shift in ironmaking to the H2-DRI process
in the regions of the world with the most favorable conditions.73 Imports of H2-DRI could also
enable a shift from blast furnaces to electric furnaces in many parts of the world. It is likely
that all regions except those with optimal conditions for hydrogen production would sooner
or later become incorporated into the global “green DRI” market.

If Japan were to accept the clear disadvantages it faces in securing hydrogen supplies, such
as the fact that hydrogen would need to be imported by vessels, it could quickly decide to
work on building new supply chains, based on the premise that H2-DRI will become a highly
traded international commodity. It is essential to quickly establish a forward-looking
collaborative framework with the regions (and companies) best suited to producing H2-DRI.

In a move that leads to this kind of international trading in DRI, Nippon Steel has already
concluded a memorandum regarding “the utilization of raw materials that contribute to
carbon-neutral ironmaking processes” with Vale S.A., a Brazilian mineral resources company.
The memorandum includes engagement of joint research on the utilization of raw materials
which contribute to carbon neutral steelmaking processes.74 By cooperating to create zero-
emission processes with comprehensive consideration to sustainability, from iron ore
extraction to DRI iron production, the two companies are expected to make significant
progress toward the establishment of an international supply chain for H2-DRI in the future.

Strategy 3: Selection of optimal sites for direct hydrogen reduction ironmaking in

Japan in conjunction with offshore wind power development

To implement H2-DRImaking in Japan, it is necessary to examine optimal locations from a

cost perspective. As explained, hydrogen costs in Japan are projected to be relatively high
by international standards. To make H2-DRI production competitive under such
disadvantageous conditions, it is desirable to locate hydrogen production plants and H2-DRI
plants close to areas where there is a high potential for renewable electricity development.
This would reduce the costs for power infrastructure including power grids, as well as
infrastructure needed for hydrogen transportation.

73 Australia: Gielen et al., “Renewables-based decarbonization and relocation of iron and steel making” (2020); South
Africa: Trollip et al., “How green primary iron production in South Africa could help global decarbonization” (January
2022)
74
Nippon Steel, “Nippon Steel Corporation and Vale Sign Memorandum regarding Decarbonization Solutions” (April
2022)

51
The most favorable locations for H2-DRI production plants are in areas with high potential for
offshore wind power generator farms capable of delivering the massive quantities of
renewable electrical power and energy needed for this process. So far (as of May 2022), a
total of 80 environmental assessments of offshore wind power generation development
projects have been conducted in 32 coastal regions of Japan. These projects are most
concentrated in Hokkaido and Tohoku, but some are located on the Pacific coast near Tokyo
and in Kyushu. There are also other areas known to have excellent wind conditions, despite
not being assessed yet. These are being studied for potential future developments. The
government is aiming to have 45 GW of offshore wind power generation capacity in place by
2040, so projects are likely to emerge in many parts of Japan eventually.

In some cases, areas where offshore wind power projects are currently planned coincide with
areas with operating blast furnace ironmaking facilities. And other such cases may emerge
in the coming years. With the goal of establishing H2-DRI making in Japan, the government
needs to select the most suitable candidate sites for these facilities with reference to the
locations of the latest plans for offshore wind development projects.

A look at the leading companies in Europe reveals that some steelmakers are trying to set
up hydrogen production plants on their own, or else in partnership with others. In Japan as
well, it is necessary to devise ways of collaborating that enable hydrogen production facilities
to be established in step with H2-DRI making. At the same time, it is also necessary to locate
such plants close to locations with access to renewable electric power projects capable of
supplying the large quantities of necessary green energy at low cost. Another essential
requirement is to make strategic efforts to form collaborations between the three parties
handling renewable energy development, domestic hydrogen production, and H2-DRI making.

Strategy 4: Promote reduction of domestic demand and maximum utilization of scrap

iron by shifting to a circular economy

The shift to a circular economy must not be forgotten, because it is fundamental and
important perspective on the decarbonization of steelmaking. Even scenario studies for the
decarbonization of the whole world assume a significant evolution of the circular economy,
accompanied by increasing efficiency of resource utilization and a scaling back of demand
itself.

As Fig. 3 shows, there is a gradual and long-term decline in domestic steel demand in Japan.
Given the country’s irreversibly diminishing population, it is necessary to consider a
decarbonization strategy for the steel industry based on a clear recognition that domestic
demand, at least, will inevitably shrink. It is also vital to consider GHG emissions and
resource balance and recycling from a life cycle perspective, and to strive to increase usable
product life and reduce the weight of products (to reduce the quantity of steel per product).

The sharing economy will also gradually change the ways that people use things, live, and
work. The patterns and cycles of demand of Japan’s cars and buildings will also have to
change from the current norm, which is characterized by private car ownership, frequent car
replacement, and construction of new buildings. As a result of these shifts, the demand for
steel will decline.

52
In terms of policy, the best way to start is by reconsidering the design of products and
buildings, to make them as durable and long-lasting as possible. In the face of shrinking
demand, it is important for the steel industry to pursue ways to add value to its products, and
to collaborate with communities in the transition to a circular business model.

The shift to a circular economy is also important in terms of maximizing the use of recycled
iron sources. As shown in the previous chapter, as steelmakers venture into the era of
decarbonization, they will be using some amount of scrap iron in almost all their products.
Japan’s current iron recycling rate is reportedly high. Further measures and policies are
needed, however, to ensure that this valuable recycled resource is utilized to its full potential
without degrading its quality as much as possible.

Some important points to keep in mind for maximizing the use of scrap iron are as follows.

1) Incentives to Increase Demand for Scrap Use

Assuming that there will be policies to stimulate green steel demand, it is necessary to
objectively assess the decarbonization of primary steelmaking and recycled steelmaking, and
to explore incentives to promote the use of recycled steel, especially steel products made
from obsolete scrap. Examples of measures that should be considered are incentives based
on defining recycled steel as “green steel,” preferential use of recycled steel in public
procurement, and even quotas (to mandate minimum consumption) further in the future.

At the same time, it is important for companies on the demand side to actively cooperate with
steelmakers on effective ways of promoting the use of recycled steel, even in products not
previously made with any recycled materials. They need to elicit responses not only from
steel producers, but also from the demand side in areas like product design. These kinds of
incentives need to be implemented in line with policies to encourage such cooperation and
collaboration between steel end-consumers and steel producers.

2) Ensure the Design Suitable for Recycling

In the design of products (and buildings), it is essential to carefully ensure that they can be
disassembled or demolished to recover valuable resources as easily as possible, without
impurities, in order to fully incorporate their life cycle emissions into consideration. To begin,
design guidelines can be established, but at the same time studies should be conducted with
a view to eventually setting standards and introducing regulations.

3) Formation of Closed Loop

Forming a closed loop from production to recovery by identifying automobiles, home

appliances, and IT devices, and other products individually is an effective and indispensable
means of promoting recycling. To complete the loop, producers, vendors, consumers, and
intermediate processors all need to work together on introducing recycling and life cycle
perspectives into product design, on ensuring that producers take responsibility for product
recovery, and on establishing recovery mechanisms. Meanwhile, national and local
government bodies need to take the lead in pushing this process forward by collaborating
with industry and the various other stakeholders.

53
4) Support for Upgrading Intermediate Treatment

To promote greater recovery and reuse, both in terms of quality and quantity, it is necessary
to implement re-sorting before disassembly and to improve disassembly and
sorting/collection processes. It is also vital to invest sufficiently in facilities, equipment, and
technological development for this purpose. A business model for intermediate processes is
required, to establish a tangible service demand and set collection and recovery routes. This
obviously requires government policies and support.

Strategy 5: Develop policies to expand demand for green steel

In Europe and the U.S.A., companies, NGOs, and other parties are already moving strongly
to expand demand for green steel (such as “net-zero steel”). Uncertainty about future
demand presents a risk, because green steel will initially have to be sold at a premium, i.e.,
at a higher price than conventional steel. For this reason, clearly showing that there is a
demand in the future has the effect of spurring decisions to invest in green steel production.
Any actions by companies or other initiatives that serve to increase demand and make it
more evident, or that reduce investment risk and encourage others to make the leap to
decarbonized steel production, will be effective.

Obviously, “pull” policies to stimulate demand are also important. At the least, Japan should
adopt the following policies at the earliest opportunity.

1) Clarify the Definition of Green Steel

Clearly defining “green steel” is an important precondition for expanding demand for the
product. Already the G7 worked out a process for reaching agreement on a definition of
“near-zero emission steel” as proposed by the IEA. Japan should actively lead the discussion,
addressing the issues with this definition. It should also work to achieve a common
understanding of a desirable definition, in way that incorporates promotion of recycled steel
production. Then, based on the clear definition, targets should be set and policies to expand
demand expansion should be formulated. It is also necessary to rank and standardize low-
emission steels that are next grade to near-zero emission steels, and to develop policies for
guidance to raise grades.

2) Action Initiatives from the Private Sector

As noted in Chapter 2, the automotive industry holds the key to generating the initial demand
for green steel, and some players in the European auto industry have already signed
agreements to purchase green steel in the future, invested in green steel-related projects, or
taken other pioneering initiatives. It is now up to Japan’s auto industry to take similar positive
action.

54
Some companies seem to have started acting on an individual basis, by taking part in
Science Based Targets (SBT) or similar programs and reaching out to their supply chains.
The important thing, however, is to send out demand signals in a way that is recognized by
stakeholders across the world. It would be good to see companies signing off-take
agreements to purchase green steel directly and actively participating in initiatives like
“SteelZero.” In Japan, it is especially important that the auto industry and other demand-side
companies make a commitment to using recycled steel, including technological development.
Technology development partnerships are also indispensable because they are an essential
factor in determining the success of auto industry decarbonization.

It is significant that the move to establish the First Movers Coalition (FMC) was led by the
U.S. government with business leaders Japan’s national and local governments too need to
communicate the importance of this kind of action far and wide, to the auto industry,
consumer electronics makers, the construction industry, and other private-sector
stakeholders. At the same time, they need to develop and promote mechanisms and
initiatives, rather than leaving this task to private-sector interests.

3) Promotion of Public Procurement

In the field of construction and civil engineering, there is a huge demand for public works
projects. So, using green steel to meet some of this demand can help to establish stable and
steady growth in green steel demand. In September 2022, the U.S.A. announced the Buy
Clean Initiative, a federal public procurement policy that will divert $650 billion of federal
government spending—the most massive purchasing power in the world—to the purchase
of U.S.-made low-carbon construction materials, including steel. The policy has been well
received. California had previously established its own Buy Clean California Act (BCCA) in
January 2022, setting a cap on embodied carbon emissions for four kinds of materials used
in public works projects: (1) structural steel, (2) steel for reinforced concrete, (3) sheet glass,
and (4) rock wool insulation. The index used to rate the materials is global warming potential
(GWP, over 100 years). Like this, policies to mobilize public purchasing power to help form
a green steel market are already in place.

55
[BOX 3] U.S. Federal Buy Clean Initiative

In September 2022, the U.S. Secretary of Transportation, Senior Procurement Executive

and others visited the direct-reduction plant of steelmaker Cleveland-Cliffs (Ohio), to
announce the Buy Clean Initiative, a federal government public procurement policy. In
accordance with President Biden’s 2021 Executive Order and the Federal Sustainability
Plan, the U.S. government channeled over $650 billion of federal procurement funds (the
largest single purchasing power in the world) to the purchase of American-made, low-
carbon construction materials. Priority will be given to acquiring domestically produced
construction materials and products that boast low embodied GHG emissions over their
life cycle, for use in infrastructure construction by various agencies. This is reportedly the
first policy of its kind by the U.S. federal government.

Already, a budget allocation of $4.5 billion has been decided, and the Departments of
Transportation, State, and Energy have set up task forces, published road maps, and
launched their commitments.

Aim: To generate employment and increase competitiveness of domestic manufacturing

industry and promote sales of low-carbon products, while substantially cutting GHG
emissions
Target procurement items: Steel, concrete, asphalt, and flat glass. More items and
specifications are planned to be covered
Certification of products: Type III Environmental Product Declaration (EPD)75 for each
product, based on best practices

In Japan, there are mechanisms that promote environmental consideration in public works
and public procurement including the “Green Procurement Act” and the “Green Contract Act”.
However, to promote public procurement of green steel, it is necessary to revise these and
put in place other mechanisms.

For items purchased directly by the government such as automobiles and ships, it is
institutionally feasible to set minimum standards based on life cycle criteria. In the case of
automobiles, for example, there is currently an issue that is under investigation relating to the
emissions of batteries from a life cycle assessment (LCA) perspective. It should similarly be
possible to adopt an LCA-based assessment system for steel and other materials. It is
necessary to promptly undertake studies to establish performance assessment methods and
LCA criteria for all kinds of products. However, to establish such criteria (recommendation
criteria, “Criterion 1,” or minimum criteria, “Criterion 2,” under the “Green Procurement Act”),
the products must be readily and commercially procurable. For this reason, this provision is
not applicable to products in the early stages of distribution, such as green steel. In light of
this, it is necessary to consider revising the existing system or else establishing a separate
system. In the case of recycled steel, some criteria have already been adopted, but they
need to be expanded and enhanced.

75
Type III environmental labels: Labels that indicate the life-cycle environmental impact of a product in a quantitative
matter, requiring internal or external independent verification. Type I labels, expressed by a symbol mark, are certified
by a third-party organization based on their criteria, while Type II labels show self-declarations.

56
For construction work, on the other hand, environmentally friendly contracts can be used.
Currently, the proposal method is applied to make new zero-energy buildings (ZEBs), so it
should be possible to use the same approach to adopt LCA standards. Another possibility is
to specify the use of important building materials such as green steel in contract documents,
by prescribing minimum standards of “environmental conservation performance
requirements.” However, it is still necessary to create standards from scratch. And the issue
of steel materials and products in the early stages of adoption remain.

In any case, facilitating the purchase of green steel in public projects needs to be examined
as soon as possible, along with the introduction of LCA standards. Until national systems are
reformed, local governments will need to take the initiative in forming policies.

4) Emission Reduction from LCA Perspective - Creating a Mechanism for Embodied

Carbon76 Reduction

A challenge that needs to be tackled urgently is the labeling of embodied carbon in buildings
and products, along with efforts to reduce such emissions, as a mechanism for supporting
the growth of green steel demand. In the building sector, particularly, energy consumption
during operation or service and associated GHG emissions have been more significant than
other LCA-based emissions until recently, which is why saving building energy for operation
have been the focus of emission reduction measures. Consequently, although ways to
address measures at the time of operation have been progressed, not much progress has
been made in addressing the embodied carbon emissions from the use of steel products,
cement, and other building materials. There is therefore a glaring need to address this issue.

In France 77 and other countries in Europe, regulations on life cycle emissions, including
embodied carbon, have been introduced for new buildings. The proposed revisions of the
EU’s Energy Performance of Buildings Directive (EPBD) in 2021 call for mandatory
calculation and labeling of life cycle emissions from 2030 (from 2027 for large-scale
buildings). Japan should promptly move to mandate the calculation and labeling of LCA-
based embodied carbon emissions too, starting with new construction but eventually moving
to examine policies to require emission reductions. To further this goal, Japan should move
swiftly to promote EPDs for building materials and other construction products, create
publicly accessible reference databases of LCA information on building materials, and
establish suitable calculation methods.

For other products such as automobiles, in addition to the construction sector, it is also vital
to require the calculation and labeling of emissions for the whole product life cycle and to
establish standards. Examination should be started to build such systems.

76
The embodied carbon of a building is the total quantity of CO2 emissions from all processes including raw material
procurement, processing, transportation, construction, improvement, and disposal, calculated using manufacturing data
on the materials used in the construction based on LCA (Life Cycle Assessment), which assesses the environmental
impact throughout the life cycle of the material, as accumulated and contained in the building.
77
RE2020 Law: Requires a 15% reduction in LCA emissions per m2 by 2024 and 25% reduction by 2027

57
Reviewing the entire decarbonization strategy to achieve carbon neutrality in
2050

These are the five strategies needed for decarbonizing Japan’s steel industry. The current
strategy, which is heavily dependent on the use of CCS, needs to be fundamentally revised.
At the same time, all strategies related to electric power and energy, and hydrogen need to
be reviewed with a view to achieving carbon neutrality by 2050.

In the electric power sector, even if steel production in 2050 is reviewed on the assumption
of a shift to a circular economy, and it is assumed that there will be recycled steelmaking and
imports of H2-DRI, the total amount of renewable electric power required for decarbonized
steel production in 2050 is estimated to be more than 30 TWh. Therefore, to achieve carbon
neutrality, it will be essential to promote the electrification of entire industrial sectors including
steelmaking, and to supply them with electricity generated from renewable sources.
Electrification will be promoted in the transportation sector too, using electric vehicles and
other technologies.

Under current government plans, Japan is aiming to supply only 36–38% of its electrical
energy requirements from renewables by 2030. This target will only rise to 50 to 60% by
2050. Given that it has become the norm for many countries around the world to strive for
90% of electricity from renewables by 2050, the Japanese government plan seems
inadequate. It is also unclear how much the demand for electricity is likely to increase,
especially by 2050, due to the electrification of more and more industrial sectors.

To ensure the progressive decarbonization of the steel industry, Japan needs to aim at
deploying more renewable electricity than the government has so far planned for.
Considering the momentum with which international competitors are pushing to realize
carbon-free steelmaking, Japan clearly needs to accelerate the pace of deployment and
reduce prices further.

As for hydrogen strategy, if the current government policy of treating gray and blue hydrogen
with high CO2 emissions the same as green hydrogen is not changed, even if H2-DRI
steelmaking is implemented, steel Japan manages to produce will not be accepted as “green
steel.”

Carbon pricing is another essential policy tool for steel industry decarbonization, although no
carbon pricing has yet been adopted in Japan, unfortunately. Under the EU Emissions
Trading System (EU ETS) that was introduced in Europe in 2005, the free ETS allowances
granted to the steel industry will be phased out from 2026. The early adoption and
progressive strengthening of this carbon pricing schemed has boosted the process of
decarbonizing the European steel industry. Japan’s current policy of starting with voluntary
credit trading under the GX League, a “green transformation” framework, before introducing
an effective level of carbon tax and mandatory emissions trading at a later stage is too little,
too late.

It is therefore necessary to create a new roadmap to decarbonization that is more specific

and allows numerous stakeholders to work together. This would allow more stakeholders to
get involved in the process of redesigning not only the overall plans and goals for Japan, but
also the plans and goals of individual regions, industries, and companies, including the
formulation of new strategies.

58
Reference: Near Zero Emission Steel Definition
Formulating a definition of steel suitable for the decarbonization era, using it develop detailed
standards and criteria, and getting international agreement on the definition and standards
is a vital and important step for the decarbonization of steelmaking, because it enables
stakeholders to move forward with a common understanding. It serves as a basis for policies
to drive demand and boost supply, and it facilitates international cooperation. A move is now
underway to set definitions for “near-zero emission steel” (steel with almost no emissions) or
the production of such products. So far, steel companies (e.g., ArcelorMittal), and other
companies that participate in the steel supply chain (ResponsibleSteel78), as well as demand-
side actors (First Movers Coalition) have proposed definitions and standards. The IEA is
referring to these to propose a common definition for G7 countries.79 The G7 Climate, Energy
and Environment Ministers’ Communiqué of May 2022 calls the IEA's proposed definition “a
robust starting point for a common understanding of ambitious general definitions for near-
zero- emission steel.” The ministers also asserted that they “will work to align definitions in
future projects for industry decarbonization.”

Nevertheless, this definition is not without its issues. The threshold value for primary
steelmaking using 100% iron ore raw material is 400 kgCO2 of emissions per tonne of crude
steel, and 50 kgCO2 for recycled steel made in electric arc furnaces from 100% scrap iron.
These are stringent criteria if compared to the current emissions of over 2 tonnes per tonne
of crude steel for BF-BOF processes (not including emissions from raw material supply).
Additionally the criterion for steel made in EAF process requires higher level compared with
the current status. The standard is certainly ambitious, for both methods. However, these
definitions do not cover the process of conversion from primary to secondary steelmaking,
which already generates less than 400 kg of emissions. While scrap iron is currently available
and used worldwide, these definitions may unfortunately end up discouraging effective
measures that are already in place. In addition, rather than the scrap iron generated at
ironworks and steelworks, it is the use of obsolete scrap recovered from the market after
consumption that most needs to be encouraged (see Chapter 4).

For this reason, these criteria need to be modified too, but at least the threshold for primary
steelmaking and the concept behind the boundary of analysis is worth referencing. These
would be good starting points for an international definition and standard.

78
ResponsibleSteel has launched a global standard and certification system with the participation of diverse
stakeholders to promote the responsible sourcing, production, use, and recycling of steel.
https://www.responsiblesteel.org/
IEA, “Achieving Net Zero Heavy Industry Sectors in G7 Members” (May 2022)
79

59
 Definition of Near Zero Emission Steel in IEA’s Report to the G7
[Definition] CO2 emissions per tonne of crude steel: 50 to 400 kgCO2e
・ Near-zero emission steel (NZS)
Steel produced with emissions 85% or more less than the emissions of steel produced
in a conventional blast furnace (BF-BOF) process, i.e., with emissions below a
threshold level of 400 kgCO2 per tonne of crude steel
・ Criterion when using scrap iron as raw material
The threshold emissions value is 400 kgCO2e per tonne of crude steel when no scrap
iron (0%) is used and 50 kgCO2e when 100% scrap is used. The threshold therefore
varies on a sliding scale between these two values based on the scrap ratio (Fig. 22)

Figure 22
Near Zero Emission Crude Production Threshold as a Function of Scrap Use

(Source) IEA, “Achieving Net Zero Heavy Industry Sectors in G7 Members” (May 2022)

[Scope of analysis for definition]

・ Supply and processing of raw materials (mining, transportation, concentration,

agglomeration, etc.) are included in the scope of analysis (for calculation of emissions).
However, sorting and transportation of scrap iron are not included.

・ Production of crude steel (including casting) used as a basis material for steel products
(Fig. 23)

60
 Figure 23 Analytical Boundary for Defining Near Zero Emission Steel Production

(Source) IEA, “Achieving Net Zero Heavy Industry Sectors in G7 Members” (May 2022)

Together with this initiative, the IEA proposes a way to encourage all steel production to
approach near-zero emissions, by using the reduction level required to qualify as NZS as
standard targets, and by ranking the emission level of all low-emission steel (produced with
lower emissions than conventional steel) into standardized grades.

The FMC has already begun working to establish procurement standards along the lines of
this definition. Meanwhile ResponsibleSteel has launched a certification program that makes
use of similar criteria. More than 50 companies operating in steel supply chains are
participating in the scheme and moving toward certification.

Steel companies are also using mass balance methods80 to market line-ups of zero/near-
zero emission steel products. Even Japanese companies have gotten into the act. After Kobe
Steel announced the release of its “Kobenable Premier” zero-emission steel in May 2022,
Nippon Steel and JFE Steel announced that they would begin producing and selling carbon-
neutral steel in 2023.

80 Low-emission steel products based on the mass balance method means that when emission reduction measures,
such as scrap iron use or H2-DRI result in emission reductions compared to conventional product manufacturing, the
proportion of the emissions reduction can be transferred to the product, such that the same proportion of the production
output can be considered a low/zero-emission product. For example, if a 10% emission reduction measure is achieved
when 100 tonnes of product is manufactured, 10 tonnes of the product can be considered zero-emission steel.
This method has the advantage of allowing low-emission products to be marketed without the risky and massive
investment involved in replacing an entire production process, thereby bringing low-emission products into the spotlight
sooner and helping to build the market for green products. As an essential precondition for this approach, a certification
system that accurately verifies emissions and their proper allocation is needed, and the system needs to have broad
penetration. On the downside, such an approach can encourage companies to stick with transitional measures, so
measures that encourage more radical change are also needed.

61
The Path to Green Steel
Pursuing Zero-Carbon Steelmaking in Japan

February 2023

Renewable Energy Institute

11F, KDX Toranomon 1-Chome Bldg., 1-10-5 Toranomon, Minato-ku, Tokyo 105-0001 JAPAN
TEL：+81(0)3-6866-1020
[email protected]
www.renewable-ei.org/en