Scope 3 reductions drive demand for low carbon materials

In our report on Green Steel we analysed the metals sector from a scope 1 and 2 emission reduction perspective. In this report we examine the impact of scope 3 emissions reductions on the user sectors. We expect demand for "low carbon materials" that contribute to Category 1 (purchased raw materials etc.) and "eco-products" that contribute to Category 11 (when sold products are used) to expand rapidly as a key means of reducing Scope 3 emissions for metal user industry. Given supply constraints are likely to persist, we expect this ‘demand pull” to keep per unit prices, and profitability elevated. We see Japanese blast furnace (BF) as leaders in this trend. While some of this is already visible, we think the markets are underestimating the impact of the demand-supply mismatch, and expect valuation expansion for BF operators. The catalyst will be news flows about ASP trend and new contracts of the green steel &. eco products with their user industries.

High-performance eco-products market size of more than 10mn tonnes/y

We estimate the eco-product (high-performance steel that can help reduce the environmental burden of user industries) to reach 10mn tonnes/y by 5years vs 6mn tonnes/y at present, led by strong end user demand in areas such as construction / auto vehicle / shipbuilders. We cite electromagnetic steel and ultra high tensile strength steel sheet for lighter auto and ship etc, as an example of the "demand pull" trend - rapid expansion of demand of high-efficiency transformers and EVs has resulted in a notable tightening of supply/demand from 2021, With sales prices rising from USD 1,500/tonne to USD 3,000/tonne for electromagnetic steel case.

ESG indicators as denominator are key to metal industry growth strategy

Expanding volumes by simply capacity expansion can no longer be regarded as a strategy of maximizing shareholder value. Because the risk of increasing CO2 emissions could lead to a decline in multiples. We believe the key indicator to work on is growth in "profit / CO2 emissions", with a need for both technological development for decarbonisation and an increase in shareholder value. We see metal industry leaders as Japanese blast furnace operators who proceed facilities integration to reduce CO2 emission and expanding supply of low carbon materials / eco-products which are expected to be premium items at the same time.