Japan Metals Sector: APAC Focus – Green steel

The 'green' investment theme may seem a difficult fit for stocks in the steel industry, which is known for high CO2 emissions. However, we question whether this assessment is accurate. We have worked together with our Global Mining Team and our ESG analysts to explore the potential of 'green steel', which is steel made using processes that emit little or no greenhouse gas. Our base case is (1) green steel will grow to become an important market reaching 75.2mn MT by 2030, or 4% of the total steel market; (2) Japanese steel companies look set to become green steel leaders due to superior energy efficiency and eco-product supply capabilities; and (3) blast furnace (BF) operators appear to be in a position to see average ROE improve to 10% or more and cost of equity (COE ) decline toward the 10% level.

European and US steel mills pioneered the green steel concept, but superior energy efficiency at Japanese mills gives them greater potential capacity to supply green steel. In addition, we think key to leadership will be a differentiated branding strategy characterised by manufacturing and marketing of high-performance eco-products (Scope 3, Category 11, use of sold products), for example, ultra-high tensile steel that helps lighten automobiles or the electromagnetic steel sheet used in EV motor cores, using green steel processes (Scope 3, Category 1 materials) that can contribute to CO2 emission reductions at customers. Japanese mills should have an advantage in the branding. 

We think share price beta in the blast furnace industry is higher than in the electric furnace industry because the market is uneasy about the environmental risks posed by blast furnaces. However, correcting this bias is likely a matter of time. We expect the blast furnace industry’s strategy of selling green steel at a premium to further insulate company profit structures from swings in spot prices of Asian steel, as has become increasingly evident since last year.