Hydro: Solid cash flow and cost savings, markets remain weak

July 23, 2009

SECOND QUARTER: Even though it was mid summer, Hydro's result presentation on July 22 generated much media interest. Photo: Kåre Foss.

Hydro had an underlying loss before financial items of NOK 618 million in the second quarter, compared with a NOK 493 million loss in the first quarter, as the weak global economy continued to weigh on historically low aluminium markets. Results in downstream operations improved due to seasonally stronger demand and swift adjustments made early in the downturn.

Energy posted an underlying EBIT of NOK 281 million in the quarter, down from NOK 447 million in the previous quarter due to lower production and spot sales.

“Although we are going through the most difficult period the aluminium industry has ever experienced, we see very positive effects from our significant cost and capacity adjustments,” President and Chief Executive Officer Svein Richard Brandtzæg said.

The second half of the year, which is normally seasonally weaker than the previous six months, and will continue to execute our cost reduction program and maintain financial flexibility,” he said. “With the substantial reduction in operating capital, reduced input costs and strengthened market positions, we are well-positioned for capturing opportunities.”

Aluminium prices seem to have flattened out at historically low levels, following a small pick-up after one of the sharpest drops on record. Key end markets, most notably construction and transport, remain weak.

Due to Hydro’s policy of forward selling, the company’s average realized aluminium price was about USD 1,470 per tonne, down from around USD 2,000 per tonne in the previous quarter, as the weak market prices of the first quarter was reflected in the earnings of this quarter.

During the second quarter, Hydro completed previously announced capacity curtailments within primary aluminium production and reduced output by about 460,000 tonnes per year, or around 26 percent of 2008 production. Shutdown of the remaining 50,000 tonnes capacity at Neuss is currently on hold. Closure of the part-owned Alpart alumina refinery in Jamaica was also completed during the quarter.

“We have reached our targets in rightsizing the structure, manning and cost level of staff and support functions, expected to result in cost savings of NOK 700-800 million from 2010,” Brandtzæg said. In total, Hydro will reduce manning by 4,500 positions by the end of 2009 compared with the middle of 2008.

The joint venture with Qatar Petroleum on the Qatalum smelter was 84-percent complete by the end of the quarter and on schedule for start up around the turn of the year. Once in operation, Qatalum will make a significant contribution towards lowering the average cost of Hydro’s global smelter system.