Ovako: Almost all new business won in the past year has a strong sustainability profile

Steel production accounts for 8% of global CO2 emissions and could play a major role in achieving the Paris Agreement targets to limit global warming. Our Nordea On Your Mind author Viktor Sonebäck spoke with niche steel producer Ovako's CFO Erik Bohman about how the company is striving for a superior CO2 footprint. They also discussed the ways in which both regulatory initiatives – including those related to carbon pricing – and consumer behaviour will be necessary to move the needle. Innovative projects, such as a new hydrogen plant, can yield multiple sustainability and economic benefits, both for Ovako and for our broader society.

Viktor Sonebäck (VS): Can you start by briefly telling us about Ovako's business?

Erik Bohman (EB): We are a steelmaking company operating in the niche for long special steel products, typically used for cars, trucks or other industrial applications for which the requirements for the steel properties are especially demanding. If there are three attributes that set us apart, it would be our material properties, quality consistency and low CO2 footprint. Size-wise, we have the annual capacity to produce one million tonnes of steel and a turnover of around EUR 1bn.

VS: Given the nature of your industry being quite energy- and emission-intense, what does your own sustainability footprint look like? What are the major challenges you are facing?

EB: Our CO2 footprint is about 80% lower than the global average in our industry, making us a leading player. This is mainly the result of two factors: the Nordic energy and electrical system is largely fossil-free and we have a large share of our operations in Sweden, meaning that it has been economically beneficial for us to convert away from gas and other fossil sources to electricity. This has essentially been the case ever since the oil crises of the 1970s, and it is entirely vital that the energy production available to us is based on water, wind and nuclear, and not fossil fuels. Without this, our footprint would look very different. 

Besides our energy footprint, 97% of our raw materials are reused steel, which makes a substantial difference, compared to the global sector average. There are two main processes for making steel. One is based on iron ore and the other uses recycled steel. The first one entails reducing iron ore by using carbon, and the entire point of this process is to make CO2. We avoid this step entirely by using recycled materials, but even in comparison to other scrap-based manufacturers, we have a very competitive footprint, owing to our use of fossil fuel-free electricity and the fact that we have electrified almost the entirety of our production. Since electricity has been cheaper than gas in the Nordics, we have always striven to increase electrification. We have a higher share of electricity in our process compared to our competitors, while, for example, our German or Italian counterparts rely more heavily on gas. 

Steel is unique in that it is, theoretically, endlessly recyclable. Compare this to paper or textile fibre, where you always have to mix in quite a high share of virgin material. This is not the case for steel. The problem, however, is that the recycling process is imperfect and you always get a small share of unwanted metals that are difficult to get rid of. This leads to a gradual accumulation of, most famously, copper, and means that you want to mix in other material as well to control the copper ratio. 

It may also be the case that special products for special applications require a higher share of steel that might not have been recycled more than once. So, theoretically, we can use any type of steel, but there is a large cost and sustainability benefit in focusing on recycled material. Very large-scale production tends to be iron ore-based. For example, large steelmakers producing flat products have traditionally relied on iron ore. Our path and decision to focus on scrap has been guided by sound economic decisions, and our choices continue to be shaped in this way. Sustainability must be first and foremost financially sustainable – otherwise someone else will end up footing the bill. So, for every step we take in our sustainability journey towards an even more improved CO2 footprint, it is of absolute necessity to also be economically viable.

VS: How important is the broader societal green energy transition for you to be able to reach your own sustainability targets?

EB: There are three factors that are important. Number one is the abundant availability of fossil fuel-free electricity, in terms of both availability where we need it and production at sufficient volume levels that the price is competitive. Number two is for the price of CO2 emissions to be reasonably high. If the price is too low, then the incentive to reduce emissions is lower for everyone. The third is that there be a level playing field, meaning that not only European manufacturers should be subject to CO2 emission charges, but that these charges also apply to imported products. This is absolutely not the case today.

At present, an emissions right costs about EUR 60-70 per tonne of CO2 in the EU. A traditional blast furnace process emits more than two tonnes of CO2 for every tonne of steel. So, you should reasonably pay between EUR 120 and EUR 140 per tonne of steel in some form of climate charge. This is the case for European steelmakers and it should also be the case for imported products. There is a framework being introduced called the Carbon Border Adjustment Mechanism (CBAM) that is supposed to manage this competitive asymmetry, but this framework is not enough, in our view.

In addition, the price of CO2 is too low. The EU sets the price via emissions rights and there are prognoses saying this should increase towards EUR 150 per tonne, if not more, if or when the EU restricts allocation. In that case, the CO2 charge for imported steel should be in the range of EUR 300 per tonne, which would equal around 20-30% of the price, making it noticeable and a clear incentive to work towards CO2 reduction. This mechanism is essential to drive development in the right direction. Another obvious aspect is demand from the end consumer. If demand is tilted towards low-CO2 products, then our steel will naturally be more competitive. And, every time you switch over to our products compared to an imported blast furnace product, the planet saves somewhere around 1.7 tonnes of CO2 for every tonne steel shifted over.

VS: In September 2023, you inaugurated a hydrogen plant in Hofors that produces fossil-free hydrogen fuel for your furnaces. Can you share more about this project and what it means for your production emissions?

EB: There are technical limitations dictating how far you can go with electrification, and our industry has historically been quite difficult to electrify. What we have done for this project is to switch to using hydrogen gas to heat up the steel before rolling it, whereas we previously used LPG. In essence, it is a way of electrifying the heating process using hydrogen gas instead of fossil fuel-based gas, meaning we can address significant sources of CO2 emissions. It also has other benefits. By using hydrogen gas, we produce our own oxygen. The process is quite simple. We use fossil-free electricity to split water molecules into hydrogen and oxygen, and then burn the hydrogen gas together with oxygen which creates heat and returns water as the only residual.

We do not have any large hydrogen storage facility or battery, but our system is constructed so that we can switch between hydrogen gas and LPG, meaning that when electricity prices are low, we can use hydrogen, and when electricity prices are higher, we can use LPG, enabling us to do peak-shaving. This yields further benefits in us acting as a power grid stabiliser and enables the selling of frequency-balancing services to the power grid companies. It is a smart system with many advantages.

A plant such as this is costly to build, and our business case depends on certain electricity prices and certain emissions rights prices; if the economics make sense, we will naturally build more. But, if they don't, we won't. The important factor here is a long-term electricity price that is good enough, since the system is built in such a way that allows us to manage short-term fluctuations.

VS: Do you see additional investment needs as a result of your sustainability ambitions? Is there an increased investment need to change your current business, or perhaps to capitalise on any future growth opportunities arising?

EB: To start with, if you look at the business we have won in the past year, almost all of it has displayed a strong sustainability profile. This is a highly important argument and a very important means of competition. It is, of course, not the only important parameter; sustainability needs to materialise in conjunction with quality, performance and price. But, it does indeed make a difference. And, based on the extent to which demand for our products grows, we can gladly invest in bottlenecks and increased sustainable production.

Looking ahead to 2030, a lot of companies have come out with ambitious sustainability targets – often related to science-based targets. Many of these companies produce various mechanical products, like cars, trucks, mining equipment, excavators, etc. Steel typically makes up a substantial share of their existing CO2 footprints, meaning that it is practically mathematically impossible for them to reach their targets without reducing the CO2 footprint of their steel. And, steel is actually one of the few areas for which there are already solutions available today, so our belief is naturally that there will be an increased demand for our product. That said, for this development to be sustainable, it will require a continued build-out of the power grid and energy production in Sweden. We will not, on our own, be able to drive any substantial change in energy demand, because as we expand our production, we are also becoming more efficient. But, many other initiatives will also require power capacity, meaning that we need to be sure there is enough available for all of us to grow and electrify together.

VS: Do you see an increased demand for your products stemming from end consumer preferences or from regulatory pressure placed on companies? Is it a combination of both, and if so, in what way?

EB: Regarding the drivers behind an increased focus on sustainable steel, it is difficult to gauge how much is regulation-driven and how much is directly consumer-driven. You might wish that it would be entirely driven by demand preferences from the end consumer, and the difference might not always be that substantial. Take a car, for example: how much more would it cost to make it in entirely fossil-free steel versus the worst imaginable alternative? The answer is only a small additional amount per car. It really is no more than that. So it should not be too much of an issue economically, and yet it is. To what extent this will change going forward will most likely depend on how apparent climate challenges become to the end consumer, who in turn exerts pressure on companies, politicians and others.

This is an important mechanism, albeit perhaps one that works slowly – even more so than many climate goals require. So, in addition to this direct pressure on companies stemming from the end consumer, you need indirect pressure. At the political level, I think it is of the utmost importance to create a level playing field. From the financial side, it is very interesting to see how financial institutions contribute in different ways, and it is reasonable to assume that the price of capital will be affected by climate performance to an even greater extent in the future than it is today. This financial side of driving change is a very interesting and “clean” mechanism, in comparison to certain regulatory initiatives that may be more or less “clunky”, and tend to solve one problem while creating another.

Our experience is that the importance of fossil-free steel is determined more by how far along each company has come on its sustainability journey, rather than the specific sector in which the company operates. It is reasonable to assume that car manufacturers strive to be at the forefront, and this is true for many, yet not all of them, but some construction companies are at least as ambitious as the car manufacturers. And, there are many companies that have espoused an outspoken environmental profile, but once you scratch the surface, they may not live up to expectations, and are not willing to budge an inch on price to use a CO2-efficient steel alternative.

VS: At the global level, what role does the steel industry in general, and Ovako in particular, play in facilitating the green transition and for society to reach its climate targets?

EB: Steel is incredibly important, and makes up something like 8% of global emissions, meaning there is massive potential for improvement. Moreover, there are already alternatives available today. It essentially boils down to access to capital and the rules of the game driving players in the right direction. We are quite a small player, in the grander scheme, and in that sense, our power to drive large-scale change is quite limited. But, we firmly believe that we can contribute positively by being at the forefront technologically and showing what is possible. On the commercial side, we can demonstrate that being sustainable and financially successful go hand in hand.