B. Metallurgical Coal
Through Australian subsidiary Mitsubishi Development Pty Ltd., MC conducts exploration, development, production, and sale of mineral resources in collaboration with its partner BHP. The BHP Mitsubishi Alliance (BMA), which we operate as a joint venture with BHP, is one of the world’s largest metallurgical coal operations, with an annual production volume of over 60 million tons and a share of approximately 30% of the global seaborne metallurgical coal market. Steel is an essential industrial material that every country needs in order to achieve economic growth. MC expects to see continued strong demand for steel, as it is a key component of efforts to develop the infrastructure needed to achieve decarbonization. However, the steel industry has yet to implement large-scale, low-carbon steelmaking methods. In addition, it would take many years for any low-carbon steelmaking method that is developed to be adopted worldwide. MC therefore anticipates a transitional period lasting several decades, during which growth in the use of electric furnaces for steelmaking from scrap iron will be accompanied by a shift to hydrogen-based steel production in conjunction with the advent of a hydrogen-based society. In the meantime, blast furnace steelmaking using metallurgical coal is expected to remain the primary steelmaking method in the foreseeable future. Given these circumstances, MC has carried out the following analysis of the outlook for the business environment under the 1.5°C scenario, the transition risks for its metallurgical coal business, and the business policies and initiatives needed to adapt to these changes.
【Analysis of the Business Environment】
BMA’s main product is high-quality metallurgical coal, which BMA supplies to the global seaborne markets. As part of the analysis of the business environment surrounding BMA under the 1.5°C scenario, MC carried out step-by-step evaluations of (1) demand for steel, (2) crude steel production by iron source, and (3) pig iron production and the maritime trade in metallurgical coal.
- (1)Demand for Steel
Steel is an excellent basic material and supports economic growth in every country. It also plays a vital role in the development of infrastructure for achieving decarbonization. Under the FY2022 1.5°C scenario, demand for steel in 2050 is expected to exceed the 2020's level (see chart 5). Furthermore, since achieving net-zero emissions by 2050 will require rapid action to create infrastructure related to decarbonization, consumption for steel can be expected to expand rapidly from the second half of the 2020s. The IEA NZE predicts a similar level of growth in steel production. These forecasts suggest that demand for steel is likely to remain steady over the long term, even if major strides are made toward the realization of a decarbonized society.
Chart 5 Trends in global steel consumption under the 1.5°C scenario (2020=100%)
- (2)Crude Steel Production by Iron Source
The steel industry is seen as a sector in which the reduction of GHG emissions poses major challenges. Efforts are being made to reduce carbon emissions, such as by making further improvements to electric furnace technology and developing hydrogen-based steelmaking technologies. Particularly significant is the hydrogen-based direct reduced iron (DRI) method, which is now being trialed primarily in Europe. However, even under the FY2022 1.5°C scenario and the IEA NZE, the commercialization of this technology is unlikely to take place with large scale until the second half of 2030. This is due to the need to solve various challenges, such as the development of hydrogen supply infrastructure, as well as the level of hydrogen price and carbon prices. Because of these, DRI technology is likely to be adopted gradually in the steel sector, starting in regions where the required conditions are in place, such as Europe. The adoption of this new technology is expected to occur at different times in different regions.
The expansion of electric furnace steelmaking is also expected to lead to a gradual decline in blast furnace pig ironmaking from 2030 onwards.The IEA NZE predicts a decline in blast furnace steelmaking, as well as reductions in carbon emissions from the blast furnaces that continue to operate, thanks to efficiency improvements and the adoption of CCUS technology. According to the IEA NZE, hydrogen-based production methods will account for around 30% of steelmaking by 2050, which is roughly in line with the FY 2022 1.5°C scenario(see Chart 6).
Chart 6 Crude steel production by iron source under the FY2022 1.5°C scenario
The demand for high-quality metallurgical coal produced by BMA is expected to decline more slowly than that for low-quality metallurgical coal, due to the relatively low greenhouse gas emissions from the blast furnace steelmaking process. High-quality metallurgical coal is attractive since there is a growing need for low-carbon measures that can be applied during the transition period when the blast furnace steelmaking process continues to be the prevailing method.
- (3)Pig Iron Production and the Maritime Trade in Metallurgical Coal
The gradual decline in pig iron production via the blast furnace steelmaking process will be accompanied by changes in the countries that comprise pig iron output. Pig iron production in China, which currently accounts for around 60% of the global total, is expected to decline, while production in emerging economies such as India and Southeast Asia is expected to grow (see Chart 7).Unlike China, India and many Southeast Asian countries are dependent on imported metallurgical coal, and demand from these countries is expected to sustain the global seaborne trade volumes. Almost all of the metallurgical coal produced by BMA is exported to handle in the seaborne market.
Chart 7 Composition of pig iron production by country under the FY2022 1.5°C scenario
【Monitoring and Discussion Items for the Transform Discussion】
As with MC’s natural gas and LNG businesses, conditions and trends relating to the following key aspects of the metallurgical coal business and their impact on business strategies are monitored and discussed at the management level through the “Transform Discussion.” The results of these discussions are considered in MC’s business strategies.
- The development of scrap iron collection and supply networks in China and emerging economies, and trends in electric furnace steelmaking
- Technological innovations, such as hydrogen-based steelmaking techniques
- The applicability of CCUS to the blast furnace steelmaking process, as well as trends in the development of CCUS-related laws and systems, and social acceptance of CCUS technology
- Carbon pricing trends in BMA's major markets
- Trends in approvals and the availability of financing for coal mine's development
【Policies and Initiatives Based on the Business Environment and Transform Discussion】
The steel industry is expected to see a long transition period and the need for high-quality metallurgical coal, which is BMA’s main product, will likely increase relative to low-quality metallurgical coal since it contributes to the reduction of emissions in blast furnace steel making process. On the other hand, the supply of metallurgical coal is expected to decrease as a result of the increasing difficulty of new mine's development such as difficulty of obtaining necessary approvals, and therefore fewer investments in new coal mines. BMA will continue to ensure a stable supply of high-quality metallurgical coal.
MC is also actively working to reduce BMA’s GHG emissions by exploring and implementing initiatives in areas such as renewable energy procurement, methane gas processing, and alternatives to diesel fuel. For example, BMA plans to transition 100% of the electricity used at its coal mines to renewable energy by 2027.
MC has also signed a collaborative agreement with its partner BHP, a major steel manufacturer, and a prominent engineering firm regarding the trial use of CCUS technologies in steelmaking. This initiative is part of MC's efforts to reduce GHG emissions throughout the entire steelmaking value chain.
In the mineral resources business, MC will work to promote its EX strategy from the three perspectives of decarbonization, electrification, and the shift to circular economies. In addition to efforts to decarbonize the steelmaking value chain, MC will also strive to expand its involvement in areas that are essential for electrification, such as copper and raw materials for battery, as well as its recycling business.
Climate Opportunity
Renewable Energy
Renewable energy is one of the core businesses of MC’s EX strategy. Renewable energy has been selected as a business with major transition potential in terms of climate change and several projects have already been developed. The following analysis was conducted under the FY2022 1.5°C scenario.
【Analysis of the Business Environment】
Electrification in a wide range of industries is essential in order to achieve net-zero emissions by 2050. It is assumed that a large portion of that electricity needed will be provided through renewable energy, mainly solar and wind power. As shown in Chart 8, in the FY2022 1.5°C scenario, the increase in the scale of total electricity generation and the share of renewable energy in that total generation due to the progress of electrification is very significant. This trend is also consistent with the IEA NZE.
Also, in line with the expansion of renewable energy, power generation amount of which varies according to weather conditions and which has a strong aspect as a distributed power source, further business opportunities are expected to increase, such as the expansion of transmission capacity, utilization of storage batteries, and demand response, which will contribute to improving the flexibility of the power supply and demand system.
Chart 8 Global Power Supply, and % of Renewable Power Supply
【Policies and Initiatives Based on the Business Environment】
The introduction of renewable energy and the spread of battery storage, as well as the accompanying trend toward decentralization of the power supply system, will vary according to country and region depending on the status of policies, regulations, and technological innovations, and the timing of their manifestation may differ significantly.
MC “produces” (generates) renewable energy, “integrates” weather-dependent electricity (through a sophisticated balance of supply and demand), and “delivers” this integrated electricity and high added-value services. By strengthening each of these functions of the power value chain, MC aim to expand our renewable energy business in Japan, where offshore wind power is expected to grow, and in Europe, where Eneco’s platform stands, as well as in the Americas, Asia, and other regions.
MC is making progress toward achieving its target to double its renewable energy power generation capacity from 3.3 GW in FY2019 to 6.6 GW by FY2030.
Specific Initiatives and Case Studies Related to Renewable Energy
<Initiatives in Europe for the Promotion of Renewable Energy (Eneco)>
Eneco is operating power generation businesses, power and gas trading businesses, power and gas retail businesses, and district heating businesses focused in the Netherlands, Belgium, and Germany with a core focus on renewable energy. With a solid customer base that is the third largest in the Netherlands, Eneco has approximately 1,800 MW of renewable energy assetss, which include the ones under construction status. In December 2022, MC and Shell plc were successful in the tender for the Hollandse Kust West Site VI offshore wind farm (760 MW capacity), located approximately 50 km off the Northwest coast of the Netherlands. This will be Eneco’s fifth offshore wind project in the Netherlands and seventh in Europe, bringing total capacity of offshore wind in the Netherlands to 2,500 MW. Renewable energy net equity base capacity will expand from 3,430 MW to 3,670 MW.
<Promoting Renewable Energy in the U.S. through Nexamp’s Distributed Solar Power Generation Business>
Through Diamond Generating Corporation, a wholly owned subsidiary power business in the U.S. MC operates Nexamp, Inc., a distributed solar power generation company. Nexamp's community solar business sets up solar power generation systems in local communities, allowing customers that cannot install solar panels to use solar-generated electricity in their homes or offices.
<Promoting Offshore Wind Power Generation Projects in Japan>
The consortium represented by Mitsubishi Corporation Energy Solutions Ltd. (currently Mitsubishi Corporation Offshore Wind Power Ltd.) was appointed by the government on December 24, 2021 as an operator for an offshore wind power generation project in the following promotion zones under the Act on Promoting the Utilization of Sea Areas for the Development of Marine Renewable Energy Power Generation Facilities. The consortium is moving ahead with the development of a seabed-anchored offshore wind power generation business, the first of its kind in Japan, for general sea areas.
- Promotion-zone offshore wind power generation project off the coast of Noshiro City, Mitane Town, and Oga City, Akita Prefecture
- Promotion-zone offshore wind power generation project off the coast of Yurihonjo City (northern side and southern side), Akita Prefecture
- Promotion-zone offshore wind power generation project off the coast of Choshi City, Chiba Prefecture
<MC Signs Japan’s First Long-term Corporate PPA for Online Retail Giant Amazon>
MC has signed a long-term Corporate Power Purchase Agreement (Corporate PPA), through which it will supply electricity to data centers owned and operated by the Amazon subsidiary Amazon Web Services, Inc. (AWS). Facilitated by MC Retail Energy Co., Ltd., this Corporate PPA represents Amazon’s first use of renewable energy in Japan.Under the agreement’s terms, West Holdings Corporation will build and maintain roughly 450 solar power stations (with a total installed capacity of approximately 22 MW) for Amazon and supply the online retailer with wholesale electricity. MC subsidiaries Mitsubishi Corporation Energy Solutions Ltd. and ElectroRoute will also be involved. The former will manage construction of the solar power facilities and provide tech support, while the latter will forecast the facilities’ outputs and hedge power generation imbalances*.
Summary
As presented above, by aligning key assumptions with the IEA NZE to the extent possible and referring to our FY2022 1.5°C scenario, which includes more granular data such as demand by region and commodity, we were able to analyze the business environment surrounding natural gas/LNG and metallurgical coal, which have considerable GHG emissions and are particularly large assets, from a risk perspective. From an opportunity perspective, we analyzed the business environment surrounding renewable energy, where we believe business opportunities will increase as society continues to decarbonize
The results of our FY2022 scenario analysis above exemplify the resilience of MC’s business portfolio, even under a 1.5°C scenario assuming rapid society-wide decarbonization.