Norsk Hydro: Third quarter 2021 - Records results, 2021 improvement target delivered
Norsk Hydro ASA posted third-quarter adjusted EBITDA of NOK 7,219 million, compared with NOK 3,100 million for the same quarter last year. Higher all-in metal and alumina prices, in addition to improved upstream volumes contributed positively to adjusted EBITDA, partly offset by higher raw material costs.
- Strong markets and higher volumes driving record result in Aluminium Metal
- Robust operations in Bauxite & Alumina
- 2021 improvement target achieved
- Lower production volumes mitigated by price area differences in Energy
- Investments in Recycling and Extrusions supporting Hydro 2025 strategy
“I am happy to see our organization delivering record quarter results in a strong aluminium market and reaching our full-year improvement target already during third quarter. Extrusions is delivering ahead of plan, while robust operations in Brazil have been a key lever within the improvement program, where Alunorte has produced at nameplate capacity for the third consecutive quarter,” says President and CEO Hilde Merete Aasheim.
Hydro’s top priority remains the health and safety of our people and the communities where we operate. Hydro continues to implement guidelines in accordance with national regulations in handling of the pandemic. During the quarter, Hydro was able to lift Covid-related restrictions at workplaces in several countries with high degrees of vaccination and low infection rates.
The aluminium market was in deficit during the third quarter. In China, energy supply constraints and consumption limitations resulted in supply cuts. Outside of China, demand continued to rise in key segments like building and construction, while several disruptions impacted supply. As a result, global inventories were reduced during the quarter, and the primary aluminium market for 2021 is expected to be in a deficit.
“World leaders will soon meet at COP26 to accelerate action towards the Paris agreement. Aluminium has a strong place in efforts reducing global carbon emissions in support of the green shift. We see increased demand for aluminium used in customers’ solutions to curb emissions. Demand for our low-carbon aluminium offerings continues to increase, while we also are taking strong measures to reduce our own emissions. The fuel-switch project underway at Alunorte will make a solid contribution towards our 30 percent emission reduction target by 2030,” says Aasheim.
These market conditions elevated the London Metal Exchange cash price for aluminium and aluminium premiums to near-record highs, supporting the record high result in Aluminium Metal of NOK 4,263 million in adjusted EBITDA for the third quarter.
The alumina market also tightened during the quarter. Energy constraints in China and production disruptions in the Atlantic region impacted the global supply of alumina. As a result, the Atlantic alumina market traded at a premium compared to the Pacific. Alumina prices on the Platts alumina index rose from USD 285 per tonne at the start of the quarter to over USD 480 per tonne by mid-October.
In general, the prices of raw material used in producing alumina and aluminium rose during the quarter. The market prices for caustic soda, fuel oil, coal, pet coke, and pitch continued to increase, which began during the second half of 2020. Energy prices also rose globally during the quarter. Further, energy consumption restrictions have triggered supply cuts for alloying metals such as magnesium and silicon.
During the third quarter, dry hydrological conditions resulted in lower power production volumes in Energy. As a result, Energy became a net spot purchaser of power. The dry conditions also contributed to high spot prices in southern Norway, which peaked at over NOK 1,200 per MWh in September. The negative impact of purchasing in the spot market was largely mitigated by a gain from price area differences.
Hydro has set out a clear strategic direction toward 2025 and aims to strengthen its position in low-carbon aluminium, while exploring growth opportunities in new energy. Sustainability is one of our competitive advantages and a key enabler for successfully delivering on our 2025 strategy.
Hydro reached its 2021 improvement target of NOK 5.1 billion already during the third quarter. Strong performance in Extrusions is the main driver for achieving the target ahead of schedule. The overall 2025 improvement program of NOK 7.4 billion, compared to a baseline of 2018, remains on track.
Robust operations in Brazil have been a key lever within the improvement program. During the third quarter, Alunorte produced at nameplate capacity for the third consecutive quarter at an annualized rate of 6.3 million tonnes of alumina. Hydro has also strengthened its position in Brazil from a sustainability standpoint during the third quarter.
Switching from heavy fuel oil to liquid natural gas at Alunorte is expected to reduce CO2 emissions by 600,000 tonnes. This project is a key enabler of Hydro’s 2030 goal to reduce CO2 emissions by 30 percent. During the third quarter, Hydro executed definitive commercial terms with New Fortress Energy to supply natural gas to Alunorte for a term of 15 years.
In addition, Hydro aims to reforest mined out areas at Paragominas bauxite mine in Brazil at a 1:1 ratio. This means that for every one hectare made available in the year, one hectare will be recovered within two years after availability. During the third quarter, Hydro’s Brazil-Norway Biodiversity Research Consortium confirmed that reforested areas of Paragominas have attracted native bird species, a good indicator of reforestation quality. During the quarter, Hydro has also committed an additional BRL 100 million (NOK ~160 million) in the development of multipurpose social centers for local communities in northern Brazil.
Extrusions is a selective growth area for Hydro and aims to achieve a commercial uplift of NOK 1.2 billion by 2025, with automotive being a key contributor. During the quarter, Precision Tubing announced investment in a new automotive press in Suzhou, to deliver crash management systems and other automotive safety components to the growing e-mobility sector in China. The press will increase capacity by around 12,000 tonnes. In general, electric vehicle sales are growing worldwide, with higher aluminium intensity than vehicles with internal combustion engines.
“Electrification of the transport sector is a driver for aluminium demand. By 2035 it is expected that more than 50 percent of vehicles sold will be electric, and battery electric vehicles have around 40 percent more aluminium than a typical combustion vehicle. Hydro is well positioned to capture this longer-term demand in automotive,” says Aasheim.
Hydro also has ambitions to double its recycling of post-consumer scrap (PCS) by 2025. Recently, Extrusions announced that it will upgrade its recycler in The Dalles, Oregon, United States. This upgrade will allow The Dalles to process an additional 10,000 tonnes of PCS each year and increase overall recycled aluminium output by 27,000 tonnes. This upgrade will also reduce energy consumption and result in lower CO2 emissions and metal costs at the site. The investment at The Dalles comes on top of the previously announced recycling investments in 2021 which provide 185,000 tonnes of additional cast-house products, based on an additional intake of 65,000 tonnes of PCS.
In all new energy areas, Hydro continued to develop profitable projects and partnerships during the quarter. In Batteries, Hydro’s 50/50 joint venture with Northvolt, Hydrovolt, has ramped up its facility in Norway and is expected to begin recycling batteries by year end. Hydrovolt’s order book is full for 2022.
Compared to the second quarter 2021, Hydro’s adjusted EBITDA increased from NOK 6,598 million to NOK 7,219 million in the third quarter 2021. Higher all-in metal and alumina prices and currency contributed positively to adjusted EBITDA. This improvement was partly offset by costs upstream, lower volumes and margins in Extrusions and lower Energy production.
Adjusted EBITDA for the first nine months of 2021 increased compared to the same period last year. Higher all-in metal and alumina prices, improved volumes upstream, improved margins and volumes in Hydro Extrusions, and better results from Hydro Energy, contributed positively to adjusted EBITDA. These positive elements were partly offset by higher raw material costs upstream and negative currency effects, in addition to increased operational costs in Bauxite & Alumina relating to the decommissioning of a crane used to unload bauxite from ships.
Net income from continuing operations amounted to NOK 1,127 million in the third quarter. In addition to the factors described above, Net income from continuing operations included a net foreign exchange loss of NOK 622 million and a NOK 3,005 million unrealized loss on LME-related contracts.
Hydro's net debt position decreased from NOK 3.6 billion to NOK 1.2 billion at the end of the quarter. Net cash provided by operating activities excluding changes in short-term and long-term collateral and excluding purchases of money market funds amounted to NOK 3.2 billion. Net cash used in investment activities, excluding short term investments, amounted to NOK 0.5 billion.
Adjusted net debt remained largely stable compared to the second quarter, ending the third quarter at NOK 10.5 billion. The decrease in net debt was more than offset by an increase in collateral requirements amounting to NOK 6.3 billion at the end of the quarter, mainly relating to strategic and operational hedging positions.
Hydro held NOK 18.8 billion in cash and cash equivalents, NOK 1.0 billion in time deposits and NOK 1.4 billion in money market funds, included in short-term investments, at the end of the third quarter. Time deposits and money market funds are normally available at short notice. The revolving credit facility of USD 1.6 billion was fully available at the end of the quarter.
In addition to the factors discussed above, reported earnings before financial items and tax (EBIT) and net income include effects that are disclosed in the quarterly report. Net debt, adjustments to EBITDA, EBIT and net income (loss) are defined and described as part of the alternative performance measures (APM) section in the quarterly report.
Certain statements included in this announcement contain forward-looking information, including, without limitation, information relating to (a) forecasts, projections and estimates, (b) statements of Hydro management concerning plans, objectives and strategies, such as planned expansions, investments, divestments, curtailments or other projects, (c) targeted production volumes and costs, capacities or rates, start-up costs, cost reductions and profit objectives, (d) various expectations about future developments in Hydro's markets, particularly prices, supply and demand and competition, (e) results of operations, (f) margins, (g) growth rates, (h) risk management, and (i) qualified statements such as "expected", "scheduled", "targeted", "planned", "proposed", "intended" or similar.
Although we believe that the expectations reflected in such forward-looking statements are reasonable, these forward-looking statements are based on a number of assumptions and forecasts that, by their nature, involve risk and uncertainty. Various factors could cause our actual results to differ materially from those projected in a forward-looking statement or affect the extent to which a particular projection is realized. Factors that could cause these differences include, but are not limited to: our continued ability to reposition and restructure our upstream and downstream businesses; changes in availability and cost of energy and raw materials; global supply and demand for aluminium and aluminium products; world economic growth, including rates of inflation and industrial production; changes in the relative value of currencies and the value of commodity contracts; trends in Hydro's key markets and competition; and legislative, regulatory and political factors.
No assurance can be given that such expectations will prove to have been correct. Hydro disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
This information is subject to the disclosure requirements pursuant to Section 5-12 the Norwegian Securities Trading Act
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