Southern economists call for termination of H2GS

Economist Magnus Henrekson continues his critical examination of green steel investments in Norrbotten with a new report entitled "From Brown Steel to Green Steel".
Economist Magnus Henrekson continues his critical examination of green steel investments in Norrbotten with a new report entitled "From Brown Steel to Green Steel".

H2GS should be scrapped and LKAB should forget about pig iron. There are too many bottlenecks and the high investment is too risky for society, say economists Magnus Henrekson and David Sundén in a new report.

Investeringar 9 november 2023 13:55

Economist Magnus Henrekson, professor at the Institute for Economic Research, IFN, has become known as one of the most vocal critics of the steel investments in Norrbotten. In a new report led by Henrekson and written by economist David Sundén on behalf of the Southern Swedish Chamber of Commerce, new criticism is directed at LKAB, SSAB and H2GS. The economists claim there are several risks, with access to, and the price of, electricity, and direct reduction pellets being the biggest.

Why is the risk unreasonable?

– First of all, you have to take care of what you have, and this is true not only for Norrbotten, but for Sweden as a whole. I would say that Luleå is a success story with a more diversified economy and with a prominent university that contributes a lot. What makes cities flourish are knowledge-intensive activities, where most of the cost is in the salaries paid to people, says Henrekson.

Economist Magnus Henrekson continues his critical examination of green steel investments in Norrbotten with a new report entitled "From Brown Steel to Green Steel".

He argues that steel investments like Hybrit (which includes LKAB's pig iron production) and H2GS are the opposite.

– It is extremely capital-intensive, with wages accounting for only a few percent. And even if it is profitable, the revenues do not go to the municipalities. It is essentially the municipal tax that supports the municipal investment in health care, education, roads and water infrastructure needed for the people who will live there.

But aren't the jobs created an added value for the counties?

– If we look at Norrbotten County and assume that about half of the population works; let us say there are 110,000 jobs today. Given that, perhaps these 2,000 jobs created are not necessarily the right ones for society, and it would be better if they came from the many start-ups in places like Skellefteå, Piteå or Luleå, for example.

Henrekson argues that these jobs are in danger of being stifled by steel investments, which he describes as "risk upon risk upon risk'.

– And it is a large-scale risk, as opposed to small start-ups with maybe five people, where it can be a tragedy for those individuals if they fail, but society can handle it. If we take H2GS as an example, their investment forces the community of Boden to borrow large sums of money, which becomes a risk if the investment fails.

Henrekson and Sundén argue that H2 Green Steel will not be beneficial for society in the long run. The risks are so high that the investment should be scrapped.

– One of the recurring critical points, in addition to the supply of raw materials, is the price of electricity. Henrekson wants to wait for the results of a forthcoming report, but summarizes the problem as follows:

– It is an extraordinarily diffcult task to expand electricity production to the equivalent of all the electricity produced in Finland today. But even if it is possible, new power plants, whether wind or nuclear, will cost more than the electricity produced by depreciated hydroelectric dams, says Henrekson, who believes it is impossible for the price to be lower than one Swedish krona per kilowatt-hour (kWh).

– Wind enthusiasts may say it will be 30 kroner per kWh, but that is because they do not consider the large investments that must be made in the grid. I'm talking about the delivery of electricity.

The report also has doubts about some of the climate benefits. The shift to electric arc furnaces by SSAB represents the largest reduction in emissions, but the report says it could happen without LKAB's pig iron production. The report identifies about 30 pig iron production projects worldwide (20 within the EU), making it a highly competitive market. As a result, the price of pig iron may be driven down, while direct reduction pellets, which can be used to make pig iron, may become a sought-after product.

As far as H2GS is concerned, Magnus Henrekson is adamant that the project should simply not go ahead. But when their report was presented on Wednesday, Sundén said, "they want H2GS to succeed.

How are we to interpret that?

– If it fails we don't want to gloat and say, "Ha ha, we told you so". But if I had the authority to decide whether they should proceed with this, considering all the factors, I cannot see that this project will be good for society. It may be good for investors, but in the long run, it is hard to see it as a positive outcome for society. Ultimately, they are going to produce ordinary commercial steel, and historically there has always been an oversupply of that. Then prices go down.

The availability of high-quality iron ore at LKAB will, according to the economists, result in an even higher market value for its pellets in the long term. Therefore, it would be better for LKAB not to invest in iron, which is expected to be abundant, while pellets could become a scarce resource.

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