Japan’s steel decarbonization drive forecast to slash scrap exports, raise imports

Dramatic changes are expected in the Japanese steel industry in the run-up to 2030, with exports of ferrous scrap expected to fall and local use of the material to soar amid the transition away from traditional blast furnace (BF) technology toward greater electric-arc furnace (EAF) capacity

Analysts forecast a shortage of ferrous scrap in Japan over the next few years leading to lower exports, and major Japanese trading houses say they are looking to strengthen their relations with scrap exporting firms in areas such as the United States to prepare for greater import demand.

“We expect a significant increase in scrap demand in Japan due to EAF capacity increases. This will place pressure on consumers in the region that source scrap from Japan and may cause consumers in parts of East Asia, such as South Korea, to look increasingly towards the US to secure volumes,” according to Alex Kershaw, senior analyst at Fastmarkets.

Domestic ferrous scrap demand forecast

Japan’s domestic ferrous scrap demand will exceed supply by 1.2 million tonnes in 2030 and by 2 million tonnes in 2050, according to a forecast by ex-Metal One representative Asada Shinpei at a Mysteel conference in February 2023.

This would represent a momentous shift in trade since Japan is long established as Asia’s largest ferrous scrap exporter nation, shipping most of its volumes to South Korea, Taiwan and Vietnam.

According to official customs data, Japan exported 6.31 million tonnes of steel scrap under HS code 7204 in 2022, down by 13.6% year on year. During the same year, Japan imported a mere 90,029 tonnes of the material.

Despite the aggressive forecasts, the value of ferrous scrap in Japan has fallen amid lower local demand this year, together with weak global scrap fundamentals. Fastmarkets’ price assessment for steel scrap H2 export, fob main port Japan averaged ¥48,308 ($341) per tonne in the second quarter of 2023, down by 17.7% year on year from the second quarter of 2022.

More ferrous scrap use coming

Greater use of scrap in Japanese BFs is seen as an important step toward achieving a drop in CO2 emissions, the Japan Iron and Steel Federation said in February 2021, but a rise in scrap-intensive EAF capacity in the coming years will only further hunger for the secondary material.

Major steelmaker Nippon Steel said in May 2023 that it “needs to shift certain steelworks from the BF steelmaking process to the EAF process as soon as possible. ” Commercial operations for its new EAF in the Setouchi works started in October 2022, and it will install a 10-tonne EAF at its research and development center in Hasaki from 2024.

Major EAF producer Tokyo Steel plans to double its production capacity to around 6 million tonnes by 2030, according to a prominent Japanese scrap trading source who regularly does business with the mill. Fellow producer JFE Steel was also said to be considering replacing a BF with a new EAF at its Kurashiki plant as of August 2022.

But despite the significant plans, data from this year shows that Japanese scrap use has trended down recently amid lower steel production. This situation led to a minor resurgence in scrap exports during the first five months of 2023.

Japanese steel production fell by 5.3% year on year to 36.5 million tonnes in January-May 2023, with steel scrap demand falling by 2.8% to an estimated 12.6 million tonnes, according to Fastmarkets research figures.

Exports of scrap from Japan rose by 6.5% year on year to 2.83 million tonnes in January-May 2023, according to Japanese customs data. The last year in which Japanese scrap exports rose was 2020, when the Covid-19 pandemic smashed local demand for the material.

High-grade ferrous scrap shortage feared first

This year-to-date rise in scrap exports comes despite rumors of market resistance in Japan to the practice of exporting higher grades of material.

A second representative of a Japanese scrap trading house said that his company has recently been reducing the number of export offers for higher grades such as heavy scrap (HS), adding that it is “sensitive” to offer these grades now, given expectations of greater local demand.

“A major mill in the country thinks Japanese scrap should not be exported to a foreign country, because, in the near future, there will be a scrap shortage in Japan. Thus, they are blocking scrap exports,” a third exporter source said.

A shortage of Japanese high-grade scrap could cause major headaches for several mills in South Korea, as well as a large steelmaker in Bangladesh and another major mill in Vietnam, given their traditional procurement of these materials. HS is also the key grade of Japanese scrap purchased by Chinese mills when they are in the market for cargo.

The battle lines may be drawn for higher-grade scrap, but Japan’s mills will also need to make greater use of lower grades, such as H1 and H2, in their melt in order to meet their scrap use targets in the coming years, according to Asada.

H2 in the Japanese domestic market currently has “no demand, so the product needs to be exported anyway,” according to a fourth exporter source.

Japan has 6.3 million tonnes of excess scrap [that last year got] exported, so it’s a natural thing to think of collecting the scrap inside the country.

“Japan has 6.3 million tonnes of excess scrap [that last year got] exported, so it’s a natural thing to think of collecting the scrap inside the country. The problem is whether BF mills can use H2 cargo or not,” he said.

But a move toward EAFs in Japan could take care of the glut of H2 in the country. “EAFs mainly need H2. BFs don’t have the technology to use H2 to produce high-grade products [in Japan],” he added.

He was less convinced of a near-term spike in demand for imports. “Maybe one day we will see more imports, but only for prime grades. There are no primes [available] in the world, as some areas [such as the] EU are also shutting down their doors on export. I think people are still dreaming,” he said.

Tianran Zhao in Shanghai contributed to this report.

The future of Japan in the ferrous scrap market equation is one topic that will be raised at the Material Recycling Association of India’s first Southeast Asia Business Summit. Fastmarkets is a media partner of MRAI and will be featuring at the event in Bangkok on August 21-22. Find out more.

What to read next
Fastmarkets is launching a low-carbon primary aluminium differential, Japan, South Korea to complement its existing premiums in East Asia and to meet market interest in a low-carbon aluminium pricing mechanism.
Fastmarkets’ European green steel price was published earlier than scheduled due to an error.
Fastmarkets explores three innovative pathways paving the way for sustainable steel production in Asia amidst rising capacity and demand challenges, driving the urgent need for decarbonization and low-carbon supply chain development
This week marks two years since Russia invaded Ukraine on February 24, 2022, but despite the resulting threats and challenges thrown up by the war, the Ukrainian steelmaking sector has managed to adapt. Here, Fastmarkets recaps the key changes
Amid inflation and a global economic slowdown, BHP's outlook for the steel industry in China, the world's largest steel producer, has become less optimistic
The publication of Fastmarkets’ US and Brazil pig iron price assessments for Friday Feb 23 were delayed because of an administrative error.