A major auto parts supplier has agreed to buy “near-zero-emission steel” from Swedish start-up H2 Green Steel (H2GS) for seven years in a deal worth $130m.

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German firm Kirchhoff Automotive — which makes chassis parts for auto makers including BMW, Mercedes-Benz, Ford, Volkswagen, Audi, Skoda and Hyundai — will start receiving green steel made using green hydrogen and renewables-powered electric arc furnaces from 2027.

H2GS plans to manufacture five million tonnes of green steel annually by 2030 in a purpose-built facility in the town of Boden, northern Sweden, which is due to come on line next year. It will also produce its own green hydrogen from around 1GW of electrolysers, and last May ordered more than 700MW of alkaline machines from German manufacturer Thyssenkrupp Nucera.

“The message from our customers is clear, they want to see products with lower CO2 footprint[s],” said Kirchhoff Automotive’s global executive vice-president for procurement, Michael Rank.

Replacing grey steel made using coal with the more expensive green variety will cost about €300 ($326) per car, according to estimates — an increase that can be fairly easily absorbed by customers already paying five figures for new vehicles.

Kirchhoff and H2GS have also agreed to work together to ensure that at least 30% of its steel scrap volumes will be sent back to Boden for recycling.

“Suppliers to the automotive industry have to follow the ambitious plans that progressive car makers have set out. However, we also have a group of companies that run before the rest as they follow their own compass. Kirchhoff Automotive is one such company,” said H2GS’s head of commercial, Stephan Flapper.

The Swedish company has previously signed binding offtake agreements for green steel with Mercedes-Benz, Porsche, truck maker Scania, US conglomerate Cargill, German auto technology firm ZF, Italian steel maker Marcegaglia, UK-based SPM and Germany’s Bilstein Group.

H2GS secured €4.55bn of financing from European banks and export credit agencies in October 2022, and said in September last year that it had raised €1.5bn in equity.

Groundworks at the Boden site have begun, but H2GS is yet to make a final investment decision on its plant — despite having been expected to do so by the end of last year.

The steel due to be produced in northern Sweden will not be fully emissions-free as the company plans to use pelletised iron ore shipped from Brazil and Canada — resulting in embedded emissions of about 40-50kg of CO2 per tonne of steel produced. But H2GS points out that this will be more than offset by the 1,800-1,900kg of CO2 emissions per tonne of steel avoided by its process.

Kirchhoff has 27 plants in 11 countries around the world, including the US, China, Canada, Mexico, Germany, Poland, Hungary, Romania, Spain, Portugal and Ireland.