Japan’s oldest steel mill is venturing into recycling the industrial metal to tackle climate change and survive a race with Chinese mills.

Nippon Steel Corp. has been making steel from mined iron and coal in blast furnaces for more than a century. But as competition heats up, President Eiji Hashimoto called on his staff last month to examine an alternative process that recycles steel from scrap in an electric-arc furnace to cut costs and help it expand in emerging Asian economies.

Nippon Steel has so far distanced itself from electric-arc furnaces partly because of technological hurdles in making high-end steel even though its units and affiliates have used the technology. Electric-arc furnaces are estimated to release only a fourth of the carbon dioxide compared with traditional furnaces, according to Tokyo Steel Manufacturing Co., Japan’s biggest maker of recycled steel.

With mills in top producer China catching up on technology and making inroads into Nippon’s key market of Southeast Asia, the company is looking to cleaner steel to cut costs and maintain its market share. The cost of building an electric-arc furnace is estimated at a 20th of a blast furnace, according to Tatsuya Kikkawa, an analyst at JPMorgan Securities Japan Co.

The use of electric-arc furnaces, which are cheaper to set up, “will enable the company to expand in many regions more flexibly and quickly,” said Kikkawa. “With scrap piling up more and more, the company intends to utilize the resource while curtailing initial investment in facilities.”

The world’s third-biggest steelmaker also plans to build an electric-arc furnace in western Japan to produce electrical steel, a critical material for electric vehicles’ motors. It will be its first attempt to make that variety in that type of furnace.

Global efforts to combat climate change are putting pressure on the steel sector. While switching to an electric-arc furnace can cut emissions, some lobbyists and investors are calling for fossil-fuel free green steel production by developing new technologies such as the use of hydrogen.

Nippon Steel this year set up a committee to discuss how it will take steps to achieve zero carbon emissions. The company is currently working on its target for emission cuts by 2030 and 2050, and will unveil the plan by March, Hashimoto said.

Developing expertise in recycling steel will also give Nippon Steel more options for overseas expansion as it seeks to compensate for a dim demand outlook in Japan, said Hashimoto.

Steelmaking capacity in Southeast Asia will surge by 69% if all projects to build integrated mills — mostly outlined by Chinese companies — come onstream, according to an estimate from the region’s industry group.

“An era of mega-competition is coming soon,” said JPMorgan’s Kikkawa. “The most pressing issue is how the company is going to win in a life-or-death race.”

Nippon Steel previously said China is set to tighten its grip on the global steel market as the economy recovers faster from the new coronavirus pandemic and mills expand into high-quality products.

“We’ll be prepared to confront Chinese producers,” said Hashimoto. “We have no strategies without being conscious of them.”

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