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Hydro had underlying earnings before financial items and tax of NOK 1,110 million in the second quarter, rising from NOK 688 million in the first quarter. Higher realized aluminium prices, continued improvements in alumina operations and higher downstream sales lifted underlying results for the quarter.
- NOK 1,110 million in second quarter underlying EBIT
- Solid demand in seasonally strong quarter
- Upstream improves on higher aluminium prices and alumina performance
- Downstream rises further with strong sales, firm margins and improved productivity
- Energy falls on significantly lower power production
- Qatalum ramp-up on schedule for full output in Q4, 48 percent of cells in operation end-Q2
- Takeover of Vale’s aluminium business on track for Q4 closing
- NOK 10 billion rights offering successfully completed
- 2010 outlook for growth in Hydro’s main markets unchanged at 12 percent
"The solid results are attributable to higher sales volumes, combined with firm margins and tight cost control in a seasonally strong quarter. This quarter confirms Hydro as a strong market performer," Hydro’s President and Chief Executive Officer Svein Richard Brandtzжg said.
"Full output at Qatalum and closing of the takeover of Vale’s aluminium business are expected in the fourth quarter. Combined, these moves will strengthen Hydro in all parts of the value chain and make us an even more robust player in an industry poised for growth," said Brandtzжg.
Underlying results for Primary Metal improved during the quarter compared to the first quarter, due to higher realized aluminium prices. Hydro’s alumina and raw materials business showed improved underlying results, mainly due to the Alunorte alumina refinery which posted higher sales volumes as a result of more stable production. Variable costs increased for Hydro’s smelter operations during the quarter.
Metal Markets' underlying results declined in the second quarter, mainly due to an increase in negative currency effects as a result of the weakening Euro against the US dollar. Capacity utilization and margins remained firm in the quarter despite increased raw material costs.
Underlying EBIT for Rolled Products increased substantially compared to the first quarter, mainly driven by higher sales volumes. Higher margins and lower operating costs per tonne also contributed to the improved underlying results. Extruded Products also delivered significantly better underlying results on seasonally higher volumes and firm margins in all business sectors.
Underlying EBIT for Energy decreased substantially compared to the previous quarter due to significantly lower hydropower production.
The ramp-up of the Qatalum aluminium plant in Qatar continued during the quarter with about 48 percent of the 704 cells operating at the end of June 2010. Production from the plant’s remaining cells will be phased in during 2010 and the ramp-up is expected to be completed in the fourth quarter this year.
Net cash generated from operating activities amounted to NOK 1.6 billion for the quarter. Investments amounted to NOK 1.3 billion, including about NOK 740 million relating to Qatalum. Qatalum investments are expected to be somewhat lower in the second half of 2010 compared with the first half, as the project nears completion. Hydro’s net debt amounted to NOK 0.1 billion at the end of the quarter.
On 2 May 2010, Hydro announced an agreement to take over the majority of Brazilian metals and mining company Vale’s aluminium business. The transaction is expected to close in the fourth quarter 2010. In order to mitigate the risk of a weaker aluminium price and secure a robust cash flow, Hydro has hedged the majority of the net aluminium price exposure in the acquired business until the end of 2011 at about USD 2,400 per mt.
To partly finance the transaction, support the company’s investment grade rating and capacity to implement future projects, Hydro launched a rights offering to strengthen its equity by NOK 10 billion. The rights offering was successfully completed with the proceeds received by Hydro on 16 July, and the new shares delivered to the subscribers and admitted to trading on the Oslo Stock Exchange and London Stock Exchange on 19 July. For further information about the transaction and the rights offering, please refer to the Information Memorandum and Prospectus dated June 2, 2010 and June 21, 2010 respectively.
Market developments and outlook
Average LME three month prices declined during the second quarter and ended with the LME three month price at USD 1,954 per mt.
Global demand for primary aluminium excluding China strengthened in the second quarter reaching an annualized consumption of around 24 million mt. Production outside China increased to 25 million mt on an annualized basis. Demand for primary aluminium in China increased from the previous quarter to around 17.6 million mt on an annual basis. Production was relatively stable at around the same level resulting in a balanced market during the quarter.
LME stocks declined somewhat to around 4.4 million mt at the end of the second quarter compared to 4.6 million mt in the beginning of the quarter.
Demand for metal products (extrusion ingot, sheet ingot, foundry alloys and wire rod) during the second quarter continued above levels experienced in the same quarter of last year.
Consumption in the European flat rolled product market improved by 5 percent in the second quarter of 2010 compared with the previous quarter. Order levels have remained firm, reflecting growth in end use demand compared to 2009. Demand in the North American market showed similar developments. Demand is expected to be stable in the third quarter but with a normal seasonal decline.
European demand for extruded aluminium products declined slightly from the first quarter which was influenced by customer restocking. North America experienced a seasonal increase in demand compared with the first quarter of 2010 and the weak second quarter of 2009 and the market appears to be improving following a long period of continuous decline. Market demand in South America continued to be positive, mainly in Brazil.
On a combined basis we continue to expect demand in our main upstream and downstream markets to grow around 12 percent in 2010.
Nordic electricity spot prices decreased during the second quarter due to a decline in demand following a record cold winter. Dry spring weather in Southern Norway has resulted in lower reservoir levels in this region than in Northern Norway and Sweden. Power production is expected to be lower than normal until reservoir levels are normalized.
Additional factors impacting Hydro
Hydro has sold forward substantially all of its primary aluminium production for the third quarter of 2010 at a price level of around USD 2,175 per mt, excluding expected Qatalum production.
Qatalum will continue incurring operating losses during the ramp-up of production. Qatalum prices production with a one month lag to LME prices. As a result, declining aluminium price during the second quarter 2010 is expected to negatively affect Qatalum’s results in the third quarter of 2010. High depreciation relative to actual production is also expected to impact results for the quarter.
Underlying results for Hydro’s Alumina and raw materials business are expected to decline in the second half of 2010 as a result of lower expected realized alumina prices due to a lower LME, and higher raw material costs due to time-lag effects in the pricing formula for bauxite which is partly linked to LME prices. In addition, a decline in the results for alumina commercial activities is expected in the second half of 2010 from the strong performance in the first half of 2010. The decline is due to lower expected margins.
Low snow accumulations in Southern Norway have resulted in a low replenishment to Hydro’s reservoirs. As a result, power production is expected to remain at a low level in the third quarter unless there is a higher than normal level of precipitation.
During 2009, Hydro 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.
The risk of counterparty default continues under the present economic conditions. So far we have not experienced any significant defaults and are carefully monitoring the situation.
Primary Metal
Underlying results for Primary Metal improved during the quarter compared to the first quarter due to higher realized aluminium prices and improved performance in Alumina and Raw Materials.
Alumina and Raw Materials' underlying EBIT increased further in the second quarter from the improved performance in the first quarter. Underlying results improved significantly for Alunorte mainly due to higher sales volumes as a result of more stable production. Realized alumina prices were relatively unchanged during the quarter while operating costs declined somewhat. Underlying results were positively impacted by a settlement of a claim for business interruption insurance.
Underlying results for alumina commercial activities improved in the quarter following a strong performance in the first quarter mainly due to higher volumes on external contracts. Margins remained good but declined somewhat from the previous quarter. Underlying EBIT was positively influenced by unrealized gains on LME forward contracts.
Underlying results for Primary Aluminium improved significantly in the second quarter with higher realized aluminium prices contributing roughly NOK 600 million compared with the previous quarter. Higher sales volumes and product premiums also made a positive contribution to underlying EBIT for the quarter.
Variable costs increased by roughly NOK 120 million during the quarter mainly due to higher alumina costs and somewhat higher power costs. Other costs were overall stable.
Underlying results for Qatalum improved slightly, but were still negative due to a substantial increase in depreciation charges combined with low output during ramp-up of production at the plant.
Metal Markets
Underlying EBIT for Metal Markets declined in the second quarter mainly due to an increase in negative currency effects as a result of the weakening Euro against the US dollar. Negative currency effects amounted to about NOK 140 million in the second quarter compared with negative effects of approximately NOK 100 million in the previous quarter.
Underlying results from remelt operations declined slightly compared to the first quarter. Positive effects from higher production and sales volumes were offset by higher raw material costs.
Total metal sales from own production and third party contracts increased significantly compared with the first quarter of 2010 mainly due to seasonally higher shipments of extrusion ingots in all markets and increased sales from Qatalum.
Underlying results for our metal sourcing and trading operations were largely unchanged from the first quarter, with good operating performance and positive results in both periods.
Rolled Products
Underlying EBIT for Rolled Products increased substantially compared to the first quarter mainly driven by higher sales volumes. Higher margins and lower operating costs per mt also contributed to the improved underlying results.
Shipments improved across all market segments except for lithographic sheet which was stable. Beverage can shipments improved by 11 percent supported by continued good market demand. Automotive products shipments increased by 8 percent influenced by a continued strength in the market for premium cars. Shipments of thin gauge foil products improved 7 percent compared to the first quarter, mainly driven by strong demand in the liquid packaging market. General engineering shipments increased by 5 percent.
Cost focus continued and cost per mt declined further compared to the first quarter. Labour productivity also improved further compared to the first quarter of 2010 and was above the level achieved in 2008 even though volumes were below 2008 levels.
Extruded Products
Underlying results for Extruded Products improved from the first quarter of 2010 due to seasonally higher volumes and stable margins in all business sectors.
Sales volumes for our extrusion operations in Europe and the Americas increased significantly from the previous quarter mainly as a result of stronger seasonal demand. Volumes for our building systems operations were also seasonally higher compared with first quarter, but the recovery of the building and construction market segment is slow compared to other market segments. Our precision tubing business delivered somewhat higher volumes compared to the previous quarter supported by a continued strong demand from the automotive segment. Margin and cost developments were stable for all sectors compared to the previous quarter.
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