LKAB’s planning of its transition is mainly commercially reasonable

The EU’s climate transition policy means that, in the future, European steel will be produced with little or no carbon emissions, and imported steel will be subject to climate tariffs.

State-owned mining company LKAB is therefore planning to transition parts of its operations, in order to contribute to the production of fossil-free steel. This transition will require investments of many billions of Swedish kronor, and LKAB has not yet decided whether the transition will be made.

It is the assessment of the Swedish National Audit Office that LKAB has, so far, essentially acted in a commercially reasonable manner. LKAB has made it a priority to attempt to secure technology and financial viability before an investment decision can be made. LKAB also plans to make successive investment decisions, thus reducing risk.

At the same time, the Swedish National Audit Office notes that the long-term risks are considerable and that it is uncertain whether the transition will be profitable.

“The calculations produced by the company so far are based on a number of assumptions that, at the time, were in line with external analyses. However, several conditions have deteriorated, which has an adverse impact on the expected profitability,” says Magnus Landergren, project leader for the audit.

For example, the price of electricity will play a major role, and even if LKAB can sign fixed contracts with electricity producers during the first years of production, it is not possible to hedge the electricity price over the entire investment horizon. If the transition is made, such large amounts of electricity will be needed that it could lead to higher electricity prices, which would impair LKAB’s profitability.

A condition at the beginning of the project was that LKAB was to build a hydrogen storage facility, to reduce energy costs. It is currently uncertain whether a hydrogen storage facility will be realised.

Another key factor is emissions trading. More expensive emission allowances make it more profitable to transition to fossil-free production. At the same time, sharp increases in the price of emission allowances can lead to political uncertainty that poses heightened risks.

In addition, it is difficult to assess how desirable the new product will be, as there is currently no established market to use as a starting point. Only once sales agreements are signed can LKAB obtain a clearer picture of future revenue.

“It is reasonable for LKAB to investigate the possibility of transitioning to fossil-free production. However, it is important that the company continues to develop the decision-making documentation to be considered by the Board before any investment decision is made,” says Auditor General Christina Gellerbrant Hagberg.