Global aluminum demand grew 19% in 2010, 7% in 2011, according to Norsk Hydro CEO; growth outside of China expected to decline to 3%-5% in 2012

Alison Gallant

Alison Gallant

Dec 1, 2011 – Norsk Hydro

OSLO, Norway , December 1, 2011 (press release) – With substantial long positions within bauxite and alumina in a resource-constrained world, ambitious cost improvement programs in place throughout the value chain and the highly competitive Qatalum smelter in full operation, Hydro is now positioned as a performance frontrunner within the aluminium industry.

"The long-term prospects of aluminium remain very promising despite the current economic turbulence, and I am highly encouraged by the strong development of Hydro's operational performance" says Hydro's President and CEO Svein Richard Brandtzæg.

"With our solid financial position and ability to make proactive corrective measures, we aim to come strengthened out from this period of uncertainty and further improve our relative industry position within the metal of the future," Brandtzæg says.

Hydro concluded its transforming transaction in Brazil in 2011, creating a fully integrated aluminium company with world-class assets within bauxite mining and alumina refining that have shown considerable operational improvements in the nine-month period since becoming part of Hydro.

Now with a complete value chain from bauxite to fabricated products and strong fundamentals for aluminium in a longer-term perspective, Hydro also saw Qatalum reaching full production in September, a state-of-the-art smelter with the world's biggest value-added casthouse in a logistically advantageous region.

With the current macroeconomic uncertainty, including the sovereign debt situation in Europe, a slow recovery in the US economy and slowing growth in emerging markets, the consumer sentiment has been negatively affected, which in turn has led to weaker aluminium prices and softer end-markets.

In a forceful response to the uncertain economic environment, Hydro has implemented several proactive improvement measures across the value chain. The USD 300 per mt improvement program within Primary Metal is developing as planned and in accordance with the 2013 completion target, while Hydro's flexible remelting system has been utilized to meet the lower demand seen after the summer.

"Continuous improvement is a core activity within all business areas to establish Hydro as a performance frontrunner. Our operational model has already given impressive results in the Bauxite & Alumina business area, and our strong operational capabilities enable our downstream business to create new business opportunities through technological leadership and innovation," Brandtzæg says.

World aluminum demand has grown strongly over the last two years, rising 19 percent in 2010 and around seven percent in 2011. Growth outside China is expected to continue in 2012, although at a slower pace of around 3-5%. Aluminium fundamentals remain promising due to the metal's many positive qualities, including its light weight and recyclability, and the global aluminium market is expected to show solid long-term growth.

Hydro's Capital Markets Day includes the following highlights:

Hydro's strategically important assets within Bauxite & Alumina have delivered solid operational improvements since the acquisition in the first quarter of 2011. The implementation of Hydro's production system continues as a core activity and has already given significant improvements.

Hydro will seek to capture the full potential of its long position in bauxite and alumina in a resource constrained world, which may be further strengthened through the CAP and Paragominas projects. As part of the strategy, Hydro aims to take advantage of this favorable position by considering commercial opportunities and possibilities of growing the smelter portfolio.

Hydro's USD 300 per mt cash-cost improvement program for its fully-owned smelters is on track, with completion planned by the end of 2013. A real-term accumulated cost improvement of USD 200 per tonne is expected to be realized by the end of 2011, and a further USD 100 per tonne is targeted by end-2013. The industry is facing raw material cost pressure and strengthening of currencies, offsetting the savings of the improvement program and underpinning the importance of the measures taken.

The Qatalum smelter reached full production in September 2011, concluding the USD 5.8 billion project. Qatalum is now producing at 600 000 tonnes per year, slightly above its nameplate capacity, and its volumes of value-added products are leading to growing market positions in the US and Asian markets for Hydro. The focus in 2012 will be on streamlining operations and achieving a cost level of USD 1400-1500 per tonne at 2010 market conditions.

In the current uncertain economic climate with high levels of volatility, Hydro is in a robust financial position with only NOK 0.1 billion in net debt and with an ambition of maintaining its financial flexibility and upholding its investment-grade rating. Sustaining capital expenditures are expected to remain at NOK 3.5 billion in 2012, of which approximately NOK 1.0 billion relates to Brazilian assets acquired from Vale.

Hydro presents three scenarios for earnings potential at the Capital Markets Day. The scenarios are not forecasts, but represent earnings potential based on selected aluminium prices and NOK/USD exchange rates using sensitivities. All non-LME related revenues and costs and other currencies are kept constant, and the last four quarters pro-forma underlying EBITDA have been used as baseline. All three scenarios indicate EBITDA significantly above sustaining capital expenditures, illustrating Hydro's cash generation ability.

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