Sweden’s new green challenger could evade the Northvolt curse
Producing steel using hydrogen instead of coal is not a technology play
There are several parallels between Swedish green steel start-up Stegra and now-defunct battery maker Northvolt. Among the things the two companies shared: a common equity investor, high hopes of driving forward Europe’s green ambitions, and Swedishness.
Northvolt sank spectacularly after raising $15bn from investors including Goldman Sachs and Volkswagen, and took Europe’s hopes of building a domestic battery supply chain down with it. So the news that, after raising $6.5bn, Stegra is racing to resolve a worsening funding crisis is unwelcome. Yet there is one important difference between the two companies. Northvolt was a bad idea to start with. Stegra is not.
Northvolt had two problems. The first was that it burnt through piles of cash and failed to deliver on its main project. The second was that, even if it had managed to do what it hoped, its batteries faced daunting competition from China’s world-leading producers.
Stegra’s situation is different. True, it too is finding it challenging to deliver its project: its giant plant, which is currently 60 per cent complete, is now expected to cost €1bn or so more than it budgeted. That’s a 15 per cent overrun. But once built, the plant has none of Northvolt’s competitive disadvantages. Producing steel using hydrogen instead of coal is not a technology play. The main differentiating factor is the cost of energy.
Thanks to super cheap and almost entirely renewable electricity in Sweden, Stegra’s cash costs — including iron ore, labour, electricity and hydrogen — should be somewhere in the region of $600 per tonne of steel produced. Its revenue, meanwhile, should equate to the $675 per tonne that ‘dirty’ steel fetches in Europe, plus the saving from avoided carbon emissions and any extra premium that customers such as Microsoft pay on top of that, for the benefit of being ‘green’.
This will ebb and flow over time, but for the sake of argument, plug in $200 per tonne for that premium. On that basis, Stegra would make a cash margin of around $300 per tonne of steel produced. Factoring in the 2.5 million tonnes of steel the company expects to produce in its first phase, that’s 10 per cent of its projected capital expenditure of $7.5bn. Production is expected to double by 2030, although that will require additional investment.
Granted, such assumptions may be overly optimistic. Giant new plants have a habit of running late and producing less than expected. And, while Europe is still relatively steadfast, policymakers elsewhere have rowed back on green pledges. Customers’ willingness to pay a premium for non-polluting steel may also erode over time.
But in broad terms Stegra’s project still has a reasonable chance of stacking up. It should be possible for the company to attract new money, although incoming investors may demand that existing equity holders take a haircut. There’s a risk that investors, skittish over a growing green backlash, simply shun this kind of complex venture altogether. But if rationality in capital markets prevails, so should Stegra.