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12 February 2020, Sweden | Mutual Funds | News

SSAB - A game changer?

Investments in fund units are associated with risk. Past performance is no guarantee for future returns. The money invested in a fund can increase and decrease in value and it is not certain that you will get back the full amount invested. No consideration is given to inflation.

SSAB is facing a major transition. The company, which until now has emitted the most carbon dioxide in Sweden, is to become carbon neutral. Key to this will be a complete change in the way its steel is manufactured.

This was revealed when SSAB CEO Martin Lindqvist joined the Catella Fonder podcast together with Nordea sector analyst Christian Kopfer and Catella Fonder fund manager Martin Nilsson.

SSAB’s recently published interim report was no bombshell – weaker on some points and stronger on others. The company had problems in Finland, with strikes that cost about SEK 250 million. The past quarter was a low point, and may turn out to be the weakest of this cycle. The cost of producing standard products varies little between companies, says Christian Kopfer, who believes the outlook will gradually improve.

Christian Kopfer and Martin Nilsson agree that SSAB is in many ways a best-in-class steelmaker, which is why the company stands out.

“SSAB has been significantly better than its competitors over time, this is a fact. There is plenty in its strategy to suggest it could be even better going forward,” says Christian Kopfer, and Nilsson agrees.

“They have invested in a niche strategy instead of bulk products, which means lower volatility. The dividend is very positive, with a yield in excess of 5 percent, which creates security. I believe SSAB is a very attractively valued share,” says Nilsson.

According to Nilsson, the indications are that steel prices are starting to turn upward, and SSAB’s CEO is of the same opinion.

“Prices have bottomed out for this time, which is one of the reasons we are retaining the dividend. We are very confident,” says Martin Lindqvist.

Kopfer describes the steel industry as a fairly fragmented sector, with a number of very large producers, while SSAB is more of a specialist. The cost curve for standard products is flat. We have just been through a deep and rapid steel-market slump – but looking historically, the downturns do not usually last very long.

Lindqvist highlights SSAB’s niche strategy.

“We are number 44 in the world among the steel companies, so we are incredibly small – but we are strong in our chosen areas. We have no ambition to increase our total volumes,” he says.

According to Lindqvist, SSAB is particularly capable of creating internal cleanliness in its steel. The company is also described as good at product development and a world leader in wear steel, which is typically used for dumper truck beds in mining or in major infrastructure projects. In places where you need steel that is particularly resistant to wear.

“We are really good at that. We are also skilled in some narrow areas of the automotive industry, but in wear steel we have 25-30 percent globally,” says the CEO.

“If we look at SSAB in the very long term, there are almost no margins in making standardised sheet metal. Is there an ambition to phase out these products?” asks Kopfer. The response is a denial.

“I do not think that will be the case in the foreseeable future. The difference between different geographies over time is usually just the freight cost, and it is quite significant. Over time there is no one to beat us here,” says Lindqvist.

SSAB has a large part of its sales in the Nordics and North America. Otherwise, the company sells its special products, and the idea is to continue to expand that proportion. SSAB’s special steel division is to move from 1.3 million tonnes to 1.6 million, and once fixed costs are covered the impact of the product mix on the income statement is tangible,” according to Lindqvist.

The sectors that buy the most steel, according to Lindqvist, are the automotive and construction industries, and if these start to stall the steel companies feel it. But a look at the economic indicators suggests the situation may now be a little better.

“We are hearing from a number of companies that the fourth quarter may have been the low point,” says Kopfer.

Nilsson agrees.

“Even Volvo had better order figures, and trucks are among the first to turn around.”

SSAB is set to become fossil-free

The thing that has really generated interest in SSAB is its long-term outlook. Together with Vattenfall and LKAB, the company is working on and developing steel-making technology that could make SSAB carbon neutral. This involves removing coal from the process and, if successful, Sweden’s total carbon emissions will fall steeply since SSAB accounts for over 10 percent of the country’s emissions.

“We use coal to reduce the oxide from the iron ore. The carbon bonds with oxygen, producing carbon dioxide and pure iron,” explains Lindqvist about the current manufacturing process.

The SSAB CEO emphasises that the company has calculated how to make this cost-effective in the longer term. Moving ahead with the old production method using coal and, for example, building a new coking plant, costs big money.

“In the future we intend to use fossil-free power to produce hydrogen gas through the electrolysis of water. Then we store the hydrogen in the smelter. Iron ore pellets and hydrogen are introduced into the smelter, reacting to produce pure iron. And, instead of releasing carbon dioxide, it leaves pure water. The theory is simple, but not entirely easy to put together in practice,” continues Lindqvist.

The goal for the new technology, dubbed HYBRIT, is to enable SSAB to supply fossil-free steel to the market as early as 2026. By 2045, SSAB should be entirely fossil-free. Because the energy used in production will be green, from hydropower and wind power instead of coal, it will eventually be possible to reduce carbon emissions to zero.

“The interest from our customers has been unexpectedly large. I am absolutely convinced that SSAB will make a premium product and also get paid for it,” says Lindqvist.

And the energy you use is green?

Yes. And we have received substantial and enthusiastic support from the Swedish Energy Agency, which has invested about SEK 500 million. The remaining SEK 1.6 billion is shared between the stakeholders LKAB, Vattenfall and SSAB,” says Lindqvist.

Nilsson mentions discussions with Nordic companies that focus on sustainability. These firms have said that, if SSAB succeeds, they will not be able to buy any other steel.

“What premium could you charge?” he asks.

“That will be governed by end consumers like us. We will not be able to meet the needs of the whole world. Hopefully the HYBRIT company, which manufactures the sponge iron, will later be able to license out the technology,” says Lindqvist.

SSAB’s CEO describes how his own view of the transition has changed over time. From initially having seen the new process as a “high-risk project”, he now only views it as a “risk project”. But what factors are most uncertain right now? Lindqvist points to two things.

“We need a 130-kilowatt cable laid by 2025. The process is ongoing, but is not entirely easy as it involves a large number of landowners. We also need environmental permits – even doing something better requires a new permit. When it comes to the technology itself, I am less worried,” says Lindqvist.

Is there any difference in the finished products?

“No, it’s the same steel. And if the order books were already open we would have been able to sell quite a bit of this steel,” says Lindqvist.

Your own estimates suggest a 20-30 percent more expensive product with this technology initially?

“I am absolutely certain that this will be a premium product, and I am less concerned about the price point. The costs of emitting carbon will also increase over time,” says the SSAB CEO.

SSAB will have its pilot facility in operation by the summer, and the aim is to start working with customers on prototypes and other issues by the autumn. Lindqvist does not envisage any risk of the HYBRIT company eventually helping to improve SSAB’s competitors.

“Absolutely not. We will not license the technology for free.”

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Mikael Wickbom

Senior Sales Manager
Direct: +46 8 614 25 51

Martin Nilsson

Fund manager
Direct: +46 8 614 25 64

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