(Bloomberg) -- Swedish steelmaker SSAB AB will spend as much as €4.5 billion ($4.8 billion) on a new plant in Lulea, in the northern part of the country, that will help clean up one of the world’s dirtiest industries. 

It’s the firm’s biggest investment ever in a new plant and it had been debating whether to go ahead with the plans at Lulea or at its Raahe facility in Finland. 

Steel is the world’s second-largest emitting sector after power generated from fossil fuels. The industry, which has relied largely on the same production techniques for more than a century, accounts for more global carbon emissions than shipping and aviation combined. SSAB is already producing a small amount of fossil-free steel and plans to largely eliminate emissions from its operations by the end of the decade. 

“The peak conditions are in place in Lulea, and it’s focused more on what we call mobility — automotive and heavy transport,” where demand for SSAB’s products is strong, Chief Executive Officer Martin Lindquist said in an interview. “The financial benefits of starting with Lulea are higher than starting with Raahe.”

While the decision was expected, the total budget for the expansion was a surprise, Morgan Stanley analyst Alain Gabriel said in a research note to clients. He added it “may be negatively viewed by the market in light of the significant spending needs over the next four years amid a lack of government support.”

Shares of SSAB fell as much as 5.8% in Stockholm on Tuesday, the most since Oct. 18. The stock is down 2.9% this year, compared with a small gain for ArcelorMittal, the region’s biggest producer. 

“Yes, the shares are down today, but this is a long-term investment and it’s about continuing to build a very competitive steel company,” Lindquist said. “The return on this investment is very attractive even with a conservative view,” he said, declining to provide more details. 

The investment will save an estimated €2 billion in expenditure to upgrade existing facilities over the next decade. The new mill will be funded with SSAB’s own cash flow, and within its financial targets, the firm said. 

A fossil-free conversion is still planned in Raahe, SSAB said, depending on “SSAB’s financing and execution capacity, as well as the learnings from the Lulea project.”

Finnish Target

The decision is a blow to the Finnish government and means the country won’t be carbon neutral by its target date of 2035 — ten years earlier than Sweden’s goal. That’s because SSAB’s blast furnaces at the Raahe steel mill are the single-biggest source of carbon spewed into the atmosphere from Finland.

The new Lulea mini-mill will have a capacity of 2.5 million tons of steel per year, the firm said. The supply of raw material will come from a mix of fossil-free sponge iron from the firm’s Hybrit demonstration plant in Gallivare and recycled scrap. 

It’s expected to begin operating at the end of 2028, reaching full capacity a year later. Environmental permits are expected by the end of this year, SSAB said. 

“We will remove 7% of Sweden’s carbon dioxide emissions, strengthen our competitive position and safeguard jobs,” Lindquist said. 

In 2023, SSAB decided to switch to fossil-free production at a plant at Oxelosund, also in Sweden, and that project is proceeding according to plan and will reduce Sweden’s CO2 emissions by a further 3%, the company said. 

--With assistance from Kati Pohjanpalo.

(Updates with CEO comment from fourth paragraph.)

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