Hydro decided during the quarter to temporarily shut down the oldest production line at its Sunndal smelter facility in Norway, which has an annual production capacity of 100,000 mt per year. This will bring total upstream capacity curtailments to about 500,000 mt a year, or close to 30% of production in 2008.
Earlier announced curtailments include the Neuss smelter, 50% of the part-owned Soral smelter, 10% of production at Slovalco and the permanent closure of the Soderberg line in Karmoy. Around 60% of the announced curtailments had been completed by the end of the first quarter, with the remaining due to be closed during the second quarter.
Hydro also announced a temporary shut down of its 35% owned Alpart alumina refinery in Jamaica, with a total production of 1,650,000 mt alumina per year, which is expected to be fully closed by mid-May. The company’s program to reduce costs and manning throughout its downstream operations progressed according to plan and provided a significant contribution in the first quarter.
Aluminium Metal delivered an underlying loss of NOK476 million in a quarter strongly affected by the sharp fall in global aluminium prices. Both fixed and variable costs related to the production of primary aluminium declined as capacity curtailments started to affect operating costs and key raw material prices fell. Results in Bauxite and Alumina fell sharply due to lower realized alumina prices, and Commercial Products continued to be impacted by weak sales volumes and low production in Hydro’s remelters.
Aluminium Products incurred an underlying loss of NOK257 million in the first quarter due to a further market deterioration from already depressed levels, resulting in sales volumes dropping further from the previous quarter and margins coming under increased pressure. Significant cost reductions only partly offset the market effects.
Energy had an underlying EBIT of NOK416 million, down from the record results of the previous quarter. Spot prices declined from the exceptionally high level in the fourth quarter of 2008. Power production declined, but was seasonally high for the quarter.
Net cash used in operating activities was NOK1.1 billion for the quarter, compared with net cash provided by operating activities of NOK2.9 billion in the previous quarter. Hydro had a net cash position amounting to NOK1.7 billion at the end of the quarter.
Hydro had stand-by credit facilities of NOK12.7 billion at the beginning of the year, and further strengthened its financial position by securing new financing during the first quarter, including a new EUR 750 million syndicated three-year revolving credit facility. The company also issued NOK1 billion in commercial paper during the quarter with a six month maturity.
Reported EBIT and income from continuing operations:
Reported EBIT for Hydro amounted to a loss of NOK1,598 million for the first quarter including charges of roughly NOK1,100 million comprised of negative metal effects of NOK660 million, rationalization charges and closure costs of NOK300 million and net unrealized derivative losses of about NOK130 million. Reported EBIT amounted to a loss of NOK3,106 million for the fourth quarter of 2008 including charges of roughly NOK3,980 million, comprised of impairment losses of NOK2,150 million, write-downs of roughly NOK300 million relating to our minority interests in solar businesses, net unrealized derivative losses of about NOK770 million and other net negative effects of roughly NOK760 million.
Reported Loss from continuing operations amounted to NOK280 million in the first quarter including net foreign exchange gains of about NOK1,480 million mainly relating to intercompany balances denominated in Euro. These gains have no cash effect and are offset in equity by translation of the corresponding subsidiaries during consolidation. Reported Loss from continuing operations amounted to NOK5,845 million in the fourth quarter including net foreign exchange losses of NOK4,629 million. Around half of the losses related mainly to Hydro’s US dollar hedging program. The remainder related to losses on intercompany balances denominated in Euro.
Market developments and outlook:
The severe downturn in the global economy has led to a continued decline in demand for aluminium following a sharp fall in demand in the previous quarter and rapidly increasing inventory levels. Prices started the quarter at $1,536 per mt and closed at $1,405 per mt. At such levels, prices are lower than the cash cost of a substantial portion of global smelter production. In response, announced capacity curtailments have reached a global level of 3.4 million mt annually excluding China.
The market for metal products (extrusion ingot, sheet ingot, foundry alloys and wire rod) in Europe and North America has continued to decline following the dramatic weakening of these markets in the previous quarter. All major end-use markets have been impacted including automotive, building and general engineering.
Aluminium prices are expected to remain low in the medium-term, but forward visibility continues to be limited and there is significant uncertainty regarding developments. There are indications that the rate of increase in LME inventories is slowing as announced curtailments are put into effect. No substantial improvement in demand for metal products is expected in the coming months and there continues to be significant uncertainty regarding the timing of an eventual recovery.
Outlook for Hydro:
Prices of key raw materials used in the production of primary metal have fallen in the past several months and Hydro has taken active steps to capitalize on this development. Hydro expects a more substantial impact from the price declines in future quarters. Measures to significantly reduce costs and manning throughout our downstream activities are continuing which will enable us to partly mitigate the effects of the significantly lower market demand as the on-going recession in Europe and the US develops.
Hydro’s water and snow reservoirs were lower than normal at the end of the first quarter, and considerably lower than the corresponding periods in 2008 and 2007. As a result, power production and financial results for Energy are expected to be significantly lower in the second quarter of 2009 compared to previous quarters.
During a maintenance shutdown in March, Hydro detected serious damage in the Suldal I power station at the Røldal-Suldal hydroelectric facility in Norway. As a result, Hydro’s power production in 2009, and in particular in the second quarter, will be negatively impacted. The cost of repair and effects of the business interruption are covered by insurance, however, offsetting effects of the reimbursement will likely occur in later quarters than the negative effects of production losses.
At the end of first quarter, Hydro had sold 87% of its primary aluminium production for the second quarter of 2009 forward and expects to realize an average price of $1,426 per mt. Hydro expects a continued weak result in the second quarter of 2009.
In fourth quarter 2008 and first quarter 2009 Hydro made provisions for future rationalization and closure costs relating to the plant shut-downs of roughly NOK400 million in total. These are reported as items excluded from underlying EBIT and will mainly have cash effects in future quarters. If it becomes necessary to permanently close plants that have been curtailed on a temporary basis, additional substantial closure costs would be necessary.
Hydro is in process of reviewing the size and structure of its administrative staff functions which are expected to result in reduced manning levels with corresponding rationalization costs in the coming quarters.
