Norsk Hydro publishes fourth quarter 2009 results

Hydro had an underlying loss before financial items and tax of NOK 651 million in the fourth quarter of 2009, compared with a loss of NOK 793 million in the previous quarter, firming slightly on higher realized aluminium prices. Hydro reached a major milestone in December with the start-up of the first cell at Qatalum, and production from all 704 cells at the world-leading aluminium plant in Qatar is expected by fourth quarter 2010.

- Fourth quarter underlying loss before financial items of NOK 651 million
- Higher realized aluminium prices, but weak alumina and trading results
- Downstream result improves for continued operations, boosted by Building Systems
- Stable demand for aluminium products, seasonal decline partly offset by restocking
- Energy result up on higher production and spot power prices
- Qatalum production started in December, on schedule for full production by fourth quarter 2010 
- Divestment of Automotive Structures and Inasa rolling mill completed
- Demand for aluminium expected to grow modestly in first half 2010 against second half 2009 
- Proposed dividend of NOK 0.50 per share
 
"The fourth quarter was marked by the on-time start-up of Qatalum, one of the world’s most cost-effective smelters, as a solid example of Hydro’s exceptional project management skills. We have seen global aluminium markets gradually improving since reaching bottom early last year, and we expect modest growth in demand in the first half of 2010. Still, the market situation continues to be demanding, and we remain cautious in our outlook for 2010," President and Chief Executive Officer Svein Richard Brandtzæg said.

Despite solid corrective measures throughout 2009, Hydro’s results remain weak, calling for continuous focus on operational performance and cost control. "Our upstream cost position is too high. We have therefore launched new measures to improve operational performance at our smelters, and we will continue to adapt our organisation and operations to the changing market conditions," Brandtzæg added.
 
Hydro completed the sales of Automotive Structures and the Inasa rolling mill in Spain in the fourth quarter. Reported results for the quarter included an after tax loss of roughly NOK 400 million relating to these transactions.
 
Higher realized aluminium prices contributed to an improvement in underlying results for Hydro’s upstream activities in the fourth quarter. The positive effect of higher aluminium prices were offset by negative developments within the alumina business. Weak operating results for Hydro’s sourcing and trading activities also had a negative impact on quarterly underlying results.
 
Excluding increased losses for Automotive Structures, which was divested at the end of the year, underlying results for Rolled Products and remaining Extruded Products continued to improve in a normally seasonally weaker quarter. Overall demand for aluminium products was relatively stable, with seasonal declines partly offset by inventory restocking by customers.

2009 – curtailments and cost reduction

In upstream activities, Hydro curtailed high-cost primary aluminium and alumina capacity in 2009, and made substantial reductions in remelt operations. Downstream, Hydro’s focused cost reduction efforts have enabled Hydro to cover a substantial portion of the loss due to the market downturn helping these operations to return to profitability during the second half of 2009. Results in Energy declined in 2009 compared to 2008, mainly due to lower power production.
 
"2009 was marked by continuous adjustments to meet the unprecedented challenges resulting from the financial and economic downturn. We took firm control of our cost position and repositioned our company for future growth," Brandtzæg said.
 
Net cash generated from operating activities amounted to NOK 2.0 billion in the fourth quarter, compared with NOK 1.6 billion in the previous quarter. Investments amounted to NOK 2.4 billion in the quarter including about NOK 1.2 million relating to Qatalum. Hydro had a net cash position of NOK 2.0 billion at the end of 2009.
 
For the full-year 2009, Hydro incurred an underlying loss before financial items and tax of NOK 2,555 million, compared with an underlying EBIT of NOK 6,009 million in 2008, as results were strongly affected by the global economic downturn that caused an 18 percent drop in overall sales volumes from 2008.
 
2009 underlying EBIT was heavily influenced by the sharp fall in aluminium prices that started towards the end of 2008 continued into 2009. Hydro acted quickly in response to the collapse in global aluminium markets, and both fixed and variable costs were reduced significantly throughout the company during the year.
 
Hydro’s Board of Directors proposes to pay a dividend of NOK 0.50 per share for 2009 reflecting the company’s strong commitment to provide a cash return to its shareholders. The decision is based on increased market and earnings visibility compared to the beginning of the 2009 and Hydro’s cash position.

Market developments and outlook

Aluminium prices continued to increase during the fourth quarter similar to price developments for other commodities in general. LME three month prices traded between USD 1,800 — 1,900 per mt in the beginning of the quarter increasing to around USD 2,250 per mt by the end of the year.
 
In China, demand for primary aluminium continued to grow strongly. Correspondingly, production increased during the quarter and it is believed that most of the previous curtailed capacity has been restarted. With additional new capacity coming on stream, production in China reached an all time high of around 16.5 million mt in the quarter on an annual basis.
 
Outside China, demand for primary aluminium in the fourth quarter was relatively stable amounting to around 21.7 million mt on an annual basis. Demand for primary aluminium is expected to improve in 2010 but the magnitude of the increase is uncertain. In the fourth quarter production outside China was 23.9 million mt annualized compared to a total production of about 26.4 million mt in 2008. Most of the capacity that was curtailed has not been restarted. The market surplus experienced in 2009 is expected to continue in 2010 but at a somewhat lower level.
 
LME stocks were stable at around 4.6 million mt during the quarter. Industry analysis indicates that there has been an increase of unreported stocks also throughout the fourth quarter. Much of metal in stock is owned by financial investors, taking advantage of low interest rates, inexpensive warehousing and the contango in the aluminium forward market.
 
The slightly positive development of demand for metal products (extrusion ingot, sheet ingot, foundry alloys and wire rod) in the third quarter continued in the fourth quarter. However, the consumption of metal products in both Europe and North America remains significantly below the levels experienced in 2007 and 2008 and there are no apparent indications of a strong recovery to pre-crisis consumption levels.
 
Demand in the normally seasonally lower flat rolled products market in Europe was slightly higher in the quarter compared to the previous quarter. Order intake improved toward the end of the year and we expect market demand to grow in the first quarter of 2010 and continue growing moderately into the second quarter. In North America, demand was stable following an improvement in the third quarter and is expected to continue to improve in the first quarter of 2010.
 
European demand for extruded aluminium products increased slightly compared to the previous quarter indicating some level of customer restocking during the normally seasonally lower fourth quarter. However, demand remained at a low level. Demand in North America has followed a normal seasonal pattern throughout the year. However the fourth quarter was the first time demand increased compared to same quarter of the previous year since 2006 when the market deterioration began. Market demand in South America continued to be positive, mainly in Brazil. The overall outlook for the European and US extrusion markets continues to be weak, but demand is expected to stabilize.
 
Nordic electricity spot prices increased during the fourth quarter in parallel with deteriorating hydrological conditions. In the middle of January 2010, water reservoir levels in Norway were 11 percentage points lower than normal and 6 percentage points lower than the same period in 2009. Snow accumulation levels were about 50 percent of normal. Colder weather beginning in the middle of December lifted spot prices further and the Nordic system spot price levels increased by around 80 percent by the end of January compared to the beginning of October. Prices are expected to remain at a fairly high level throughout the first quarter of 2010.

Additional factors impacting Hydro

Hydro has sold forward more than 90 percent of its primary aluminium production for the first quarter of 2010 at a price level of around USD 2,000 per mt. The higher realized prices will improve Hydro’s results in the first quarter of 2010. However, the overall impact of LME price improvements for Hydro will be influenced by developments in the US dollar/Norwegian kroner currency exchange rates.
 
During 2009 Hydro has curtailed production capacity and reduced production at several plants. If it becomes necessary to permanently close plants that have been curtailed on a temporary basis, additional substantial closure costs will be incurred.
 
Qatalum is expected to continue incurring operating losses during the ramp-up of production at the site. The losses will decline as production volumes increase during the year.
 
Hydro’s water and snow reservoirs were lower than normal in the middle of January and also lower than the corresponding period in 2009. Despite the decreased reservoir levels, Hydro’s power production is expected to be at seasonally high levels during the first quarter of 2010, partly due to Suldal I being back in operation.
 
The tight power supply situation in Mid-Norway (NO3) has at times in December and January caused significantly higher spot prices in this area than the Nordic system spot prices. Since the Sunndal smelter is located in Mid-Norway while Hydro’s captive hydro power is produced and sold in Southern Norway (NO1/NO2), such differences in area prices may lead to significant area costs for Energy.
 
The present weak economic conditions increase the risk of counterparties defaulting on their obligations. So far we have not experienced any significant defaults and are carefully monitoring the situation.

Primary Metal

Primary Metal incurred an underlying loss for the fourth quarter somewhat lower than the loss incurred in the previous quarter. Underlying results improved for our smelting operations but the positive effects were partly offset by negative developments within our bauxite and alumina business.
 
Higher aluminium prices improved underlying EBIT for our smelters by roughly NOK 320 million compared with the third quarter. However most of our operations continued to operate at a loss. The change in inventory write-downs resulted in a positive effect of about NOK 40 million for the fourth quarter on an isolated basis compared with NOK 125 million in the third quarter.
 
Variable costs at our smelters were stable compared to the third quarter of 2009. Higher alumina costs due to the increase in LME prices were offset by lower carbon cost as a result of lower prices for petroleum coke, and somewhat lower power costs.
 
Seasonally lower sales volume impacted the results marginally in the fourth quarter.
 
The underlying loss from our equity accounted smelters increased by about NOK 60 million mainly due to costs relating to the build up of the operating organization at Qatalum which increased to NOK 174 million for the quarter compared with NOK 125 million in the third quarter.
 
Underlying EBIT for Alunorte, our equity accounted alumina refinery, amounted to NOK 29 million in the fourth quarter, up from NOK 10 million in the third quarter. The improvement resulted from higher alumina prices due to the increasing LME price, partly offset by realized hedging losses. Production was down somewhat during the quarter. Variable costs were relatively stable with the effects of lower caustic prices being offset by increasing energy costs. The temporary measures put in place in March to address Alunorte’s challenging financial situation in 2009 continued to have a positive effect.
 
Underlying results from our alumina commercial activities declined despite higher external volumes and good margins. The decline was mainly caused by unrealized losses on LME forward positions.