LKAB’s transition – planning for a new value chain
(RiR 2025:7)
Summary
The Swedish National Audit Office has examined whether the planning for state-owned mining company LKAB’s transition to producing sponge iron has been conducted in a commercially reasonable manner. The transition would mean LKAB taking a step up in the value chain and starting to produce a higher-grade iron ore product that also enables fossil-free steel production. In an initial step, LKAB intends to build an industrial-scale demonstration plant that would convert about one-tenth of LKAB’s iron ore production. No investment decision has yet been made. The audit shows that LKAB has essentially acted in a commercially reasonable manner in its planning of the transition. LKAB has made prioritised attempting to secure technology and profitability before an investment decision can be made. The transition is intended to be gradual. A potential decision to build the demonstration plant does not imply any commitment to transition a larger part of production at a later stage. LKAB’s assumptions in the preliminary profitability calculations are essentially in line with external analyses from when the calculations were made. Some conditions have deteriorated since the last calculation. It is far from certain that the investment will be profitable.
LKAB’s schedule has been deferred
In 2017, LKAB established Hybrit Development AB (HDAB) together with Vattenfall and SSAB. HDAB conducted research and development regarding technologies for fossil-free steel production as well as planning for how such a transition could be conducted. Since 2022, LKAB has taken over planning of the demonstration plant. Currently, pre-planning is in progress ahead of an investment decision. An investment decision was planned to be made in the first quarter of 2025, but LKAB has deferred the decision and a new schedule has not yet been determined.
The demonstration plant is a major investment and profitability is sensitive
Despite its modest name, the demonstration plant entails a significant investment. According to LKAB’s application for support from the Industrial Leap programme (Industriklivet), submitted to the Swedish Energy Agency, the estimated cost is SEK 31 billion, albeit including a small portion that is not an investment cost. For the demonstration plant alone, electricity consumption would represent almost a 4% increase in Sweden’s total electricity consumption.
LKAB is now preparing a final profitability calculation for the demonstration plant, which will provide a basis for an investment decision for LKAB’s Board of Directors. The Swedish National Audit Office has examined the three calculations performed so far in the planning process. The calculations have gradually improved. The latest calculation is based on values that are essentially in line with forecasts made by external analysts at the time. There is considerable uncertainty about several important calculation values such as the future price of sponge iron and the price of electricity.
LKAB has plans for managing several risks
LKAB plans to hedge prices for items such as electricity and sponge iron, in agreements with suppliers and customers before an investment decision is made. It is LKAB’s hope that such agreements would significantly curb uncertainty ahead of an investment decision. The agreements cannot be signed until LKAB is very close to an investment decision and thus the outcome cannot yet be evaluated.
There are also risks that are difficult for LKAB to address effectively. These include how the EU Emissions Trading System will evolve, what will happen in the ongoing permit process for a new comprehensive environmental permit for LKAB’s operations at Malmberget, and the condition and capacity of the Iron Ore Line.
Profitability target lowered by the owner
As the owner, the Government has thus far had a relatively minor role in the transition, as there has not yet been any owner coordination. LKAB’s Board of Directors is planning for owner coordination to happen when the Board makes its investment decision regarding the demonstration plant. Documentation from the owner dialogue and interviews has not given any indications of political control pre-empting the investment decision.
The owner has lowered LKAB’s profitability target with the aim of supporting the transition. The new profitability target has been produced using established methods. However, the owner’s decision on the new profitability target at the Annual General Meeting was based on different premises than those used to calculate the target. This means that the profitability target now applied is lower than the calculated target.
Recommendations
The Swedish National Audit Office makes the following recommendations.
To the Government as owner representative
- Ensure that the estimated profitability target is applied consistently.
To LKAB
- Continue to seek having hedged agreements in place prior to an investment decision. Use price information from the agreements in the profitability calculation that the Board receives as a basis for the decision.
- Ensure that the internal rate of return reflects the project-specific risk in the investment.
- Clarify to the Board how competitiveness is expected to develop in the short, medium and long term if the transition is made.