Japan’s Scrap Industry Faces Challenges

In the global scrap market, Japan is the third largest exporter after the European Union and the United States. In 2022, Japan’s scrap exports accounted for 10% of the total exports of net scrap exporting countries, about 6 million tons. Most of Japan’s scrap exports go to markets in the Far East, with South Korea and Vietnam exporting the most. Before 2019, China was also one of the main destinations for Japanese scrap exports, but the implementation of the import ban led to lower sales in the 2019-2020 period. The ban was lifted in 2021, but China’s imports from Japan and other sources have not returned to pre-ban levels because China still has high restrictions on quality-related imports. Meanwhile, Vietnam has emerged as an alternative market for Japanese scrap exports.

However, in the medium to long term, despite a tightening global scrap market, Japan’s exports will face constraints due to slower domestic demand growth and slower supply growth.

Scrap will play a key role in decarbonizing Japan’s domestic steel industry in order to achieve Japan’s policy goal of carbon neutrality by 2050. In 2022, Japan’s electric arc furnace steel will account for about 24% of total crude steel production. Initial actions by major steel producers to reduce emissions include increasing the proportion of EAF steel in their production, and long-term development strategies that include mass production of large-scale, high-quality EAF steel.

In addition, due to the large proportion of converter production in Japan, increasing the amount of scrap steel used in the blast furnace-converter route is another emission reduction measure used without major changes in the steelmaking process. It is expected that the amount of steel scrap used in furnace steelmaking will continue to rise in the medium term.

Although the country’s crude steel production is on a downward trend in the medium term, scrap demand in Japan will grow at a CAGR of 4% from 2022 to 2027. However, growth in Japanese scrap supply will be more constrained in the medium term for three main reasons.

(1) Over the past two decades, Japan’s depreciation scrap funds have been shrinking, and this downward trend will continue. Depreciation scrap accounts for more than 60% of Japan’s total scrap supply. Since the 2007-2008 global financial crisis, Japan’s steel consumption has been at a structurally low level.

(2) Japan has a mature recycling industry. Thanks to efficient distribution channels and advanced processing technology, the recycling rate of depreciable scrap steel has exceeded 60%, and further improvement will be very limited.

(3) As steel production is expected to shrink, the supply of major steel scrap from finished steel production and consumption is also not expected to increase.

Japanese domestic mills have been competing with scrap exporters for output. As a result, the prospect of higher domestic demand and a tightening global scrap market have raised concerns among domestic buyers about how to avoid losing out to exports.

Japan’s export destinations are mainly developing countries in Asia, where steel production and scrap demand will continue to grow strongly as industrialization and urbanization advance. However, due to increased domestic supply and limited export growth potential in Japan, the research institute predicts that developing countries in Asia will tend to be self-sufficient in scrap supply.

Export controls are gaining momentum in major scrap exporting regions. For example, Russia imposes export tariffs on steel scrap and further increases tariff rates to curb exports. There is also controversy over the EU’s Waste Transport Regulation and whether its review includes restrictions on waste exports.

While scrap is a great help in reducing the carbon footprint of steel-making, scrap is not the only solution for decarburization, especially when availability and quality are limiting factors. So, in addition to the above-mentioned emission-reduction measures that require greater scrap usage, Japanese steelmakers are also investigating other technologies, including carbon capture, utilization and storage (CCUS) and replacing coke with hydrogen for blast furnace iron-making. These are attractive options for large-scale converter production, although there are cost and scalability challenges to be overcome.