Continuous increase of the annual amount of steel scrap generated presents a problem to the sustainability of human society. The effective utilization of scrap is a serious problem to be solved in the near future, and the optimization of the global system of steel production should be considered from various viewpoints, particularly those of environmental load and material efficiency. For the consideration of a global system that contains many different kinds of flow, a criterion for evaluating the efficiency of the system is necessary for optimizing the utilization of materials in the system. The concept of exergy was adopted in this study and the application of exergy analysis to the evaluation of a complicated system was considered. A simulation model was developed for the steel industry in Japan and the exergy analysis of the Blast Furnace-LD converter (BF-LD) process and the Electric Arc Furnace (EF) process was conducted. The exergy loss was expressed as a function of parameters, such as the mixing rate of pig iron in the EF process and the total exergy loss in the system was calculated. The applicability of exergy as a criterion for the analysis of a production process and for evaluating material efficiency was discussed. Environment and recycling become important keywords in the consideration of a new industry structure for optimizing material efficiency and environmental load for production and utilization of materials. In the present study, a methodology for evaluating the degree of optimization in the system includ- ing material recycling was investigated. The Blast Furnace- LD converter (BF-LD) process for the production of high- grade steel and the Electric Arc Furnace (EF) process for the production of low-grade steel are the main steel produc- tion processes used in Japan. This division occurs because of contamination by tramp elements as impurities, which is inevitable in processes using low-grade scrap as feed. The percentage of EF steel in the total production of crude steel in Japan is about 33%, 1) and the total amount of the accumula- tive steel stock in Japan is increasing continuously. Generally, processes that consume large amounts of electric energy for heating and smelting are wasteful from the viewpoints of ef- fective energy use and environmental load. However, the op- timum steel production ratio in BF-LD and EF processes has not been investigated clearly. For the further improvement of steel productivity, it is necessary to optimize the steel pro- duction system from various viewpoints such as the suitable selection of feed materials, the total demand for steel products in society, and the impurities limit in the steel product. The recent state of the steel industry in Japan is that the amount of scrap is increasing annually and its quality is de- creasing. Therefore, the effective use of iron resources orig- inating from iron ore for the dilution of scrap has recently become a principal subject in the EF steel industry, together with the improvement of scrap recovery technology. Recent electric furnaces are operated with a high mixing rate of pig iron, from 20 to 50%, as iron feed, and other furnaces have been combined with a converter to enable the hybrid steel- making process. 2) Since it is very important for the steel in- dustry in Japan to utilize the iron stock effectively as valu- able resource, the optimum ratio of EF product to BF product and that of scrap utilized in the EF process to that utilized in the converter were investigated in this study in terms of the efficiency of the use of iron resources originating from iron ore for the dilution. A model of the iron and steel recycling system including material flow was constructed, and the ther- modynamic property of exergy was applied to estimate the measure of optimization for the steel production system. 2. The Concept of Exergy