Rikard Lindqvist - IR
Svein Brandtzaeg - President and CEO
Hilde Aasheim - EVP, Primary Metal
Johnny Undeli - EVP, Bauxite & Alumina
Eivind Kallevik - EVP and CFO
Erik Fossum - Head of Commercial in Primary Metal
Arvid Moss - EVP, Energy and Corporate Business Development
Alberto Fabrini - Head of Operations in Bauxite & Alumina
Rob Clifford - Deutsche Bank
Bengt Jonassen - Carnegie
Hans-Erik Jacobsen - Swedbank First Securities
James Gurry - Credit Suisse
Norsk Hydro ASA (OTCQX:NHYDY) Capital Markets Day December 5, 2013 3:30 AM ET
Welcome to Hydro’s Capital Markets Day 2013. It’s a pleasure to see all here in Oslo. I would also like to welcome those following us on webcast. As always in Hydro let’s start with safety. In case of an emergency, an alarm will go up. Please leave the room calmly through the doors either on the left hand side or the right hand side. If you then turn to the left you will find emergency exits both on your left and right hand side. I would also like to draw your attention to the cautionary notes in relation to forward-looking statements that we’ve provided on the screen and also in the printed material.
Just a brief look at the agenda; we’ll start with Hydro overall presentation by President and CEO followed by a presentation on finance; then we’ll stop for a short Q&A session and then a break. After the first break we’ll start with the market outlook presentation with a deep dive on product premiums, standard ingot premiums and inventories. Market session is followed by presentation on world products; then we’ll again stop for a short Q&A session and a break; after the final break we’ll first have a presentation on Primary Metal and then finish off with the last presentation on Bauxite and Alumina where we will have the deep dive on operations and in particular Alunorte; then we’ll have the final Q&A and a short summary; we’ll also serve lunch at 1 o’clock.
For those of you following us on webcast you will be able to ask questions by sending an email to Rikard.Lindqvist@hydro.com and then I’ll make sure that we also raise those questions during the Q&A sessions. Then I’ll leave the stage to the man who needs no introduction, President and CEO, Svein Brandtzaeg. But first let’s have a look at this.
Dear all welcome to Hydro Capital Markets Day 2013 lifting the bar. Our main aspiration is of course to lift the bar in every sense and with everything we do, our operational performance, innovation, improvement efforts, technology, HSE and CSR. We aim to be the best company operationally, strategically and financially aiming to be the best for our company for our employees in the societies where we operate and also of course for the shareholders. This is the overall team today and we offer to get our interesting program for you and we will look at how we work to lift the bar across the company in these presentations.
But first let me highlight our strong focus on HSE and CSR and compliance. We aim to be a responsible company in all aspects and all operations. And we have experienced that there is a very close link between operational performance and good performance in HSE and CSR and compliance. We are already at the benchmark level on safety but we are still not satisfied and we aim for significant improvements also here. A strong safety culture is good for business is good for the employees and it’s also very cost effective risk mitigation measure. In Hydro, these issues are integrated cost of operations within all business areas and we aimed to be the industry benchmark in all these three areas. Thanks to our safety culture. We have made significant improvement since 2002 and we acquired [indiscernible] that we have now leveled off at the TRI level around 3.5 also hitting our best score in 2009 and we aim to improve that level. Behind this figure, however, is considerable improvement in serious accidents but still we’re not satisfied and we’re going for another step change down on the TRI in the time to come. But today, this is the business item. Hydro’s main priority is to become even stronger more robust more innovative and more effective and of course more profitable.
We know that it has been five challenging years in our industry with weak markets, power supply build up on inventories and low returns, but Hydro has been able show progress throughout the period, thanks to a clear agenda giving us a higher improvement momentum. We have the necessary competence and dedication to follow a true despite the headwinds chasing our industry. Our response was to set the clear course and stick to it overtime, realizing our ambitions brick-by-brick, step-by-step, 2013 was another year illustrating our strategic direction with the Sapa joint venture has the strongest example creating a global leader in extrusion.
Nevertheless, the overall strategy for each business area remains unchanged. It’s all about delivering on our overall agenda. In Bauxite & Alumina, it’s about lifting the volumes and also delivering on the improvement program. In Energy, we’re working to maximize the potential of our captive assets and also feel the strength in energy global support to the business areas thereby getting through potential out of the very competent organization we have in energy. In Primary, it’s about extending the very strong improvement track record and getting full benefit from the technological edge we have. In Rolled, it’s continuing the high grading of product portfolio and strengthening our innovative muscle aiming to deliver service to all customers that is over and above expectations and also on their liability, quality, and technological solutions.
You will up here of course find and get all the details over the course of day with separate presentation from business and from Bauxite & Alumina from Primary and Rolled as well as from the market and from the financial perspective. Somewhat our agenda looks very much the same as we presented to you last year. A clear agenda with clear results now we have of course added the Sapa market joint venture transaction with the new global extrusion champion standing out on its feet. We have also added the joint venture program in Primary which we touched upon on our last capital market day and which has now been developed into fully fledged improvement program for the portfolio of part-owned smelters.
I’m sure this is one of the key issues for you to discuss today and the Head of Primary, Hilde Aasheim, will give you a thorough presentation later today. But now I want to draw your attention to the overall agenda for the [indiscernible] Hydro which is what we have maintained since we become a streamlined aluminum company. We have been able to develop this agenda step-by-step throughout the period and will continue to do so going forward. We have dedicated improvement programs for each business area throughout the company combined with transforming trisections that we have now seen has clearly been when this has been a right move for us, strategically and financially.
In summary, we’re aiming to continuously lift the company operationally while maintaining our ability competency and capability to develop the strategic agenda and the leading force within the aluminum industry. The all important vector (Ph) when we discussed the way forward in aluminum is in general the fact that world economy has been especially hard on Hydro and Aluminum industry over the last few years. Europe and specially Southern Europe was very hard hit by the financial crisis and the subsequent debt crisis and is still characterized by weak markets although we see some signs that they downward trend is starting to bottom out. Of course, high unemployment combined with low productivity levels in some countries in Europe continues to weigh on Europe. But at least the recent uncertainty there is substantial trust in what the Euro is not largely paused.
In South America, we have experienced softening the demand amid structural issues and we see transport and can stock in aluminum as key growth segments. In North America, automotive and transport, we see these segments where demand is picking up, all the way from low level and building and construction is also improving as private debt has been substantially reduced; 40% reduction since the maximum in U.S.
In China, we see continuous balanced situation in aluminum. The want to be balanced obviously its increasing problem for China that they don’t have raw materials, so they are short upstream, and they need to cover that shortage with import of Bauxite. Aluminum is a key building block in modern society so when China is moving from economy based investments and exports more towards consumption in economy aluminum is very well placed.
In Asia outside China, the fast growing middle classes led to growth picking up, even as the overall global economy has been reached and moved sideways and emerging markets although in outer areas in general I am seeing a softening. So Asia outside China has been a very interesting market for Hydro in aluminum.
For Hydro this multispeed economy has several implications. Hopefully on the smelters, in Norway and rest of the global smelter portfolio, we now have broadly speaking a balanced market, although LME is remaining at low levels. Still our considerable improvement effort we have managed to improve our cash cost position in a better level in the industry and although has competitive levels seen from a cost curve perspective.
For our Bauxite and Alumina business in Brazil, we experience stable markets even as LME is drifting downwards. We are working hard to position our self in a best possible way on the commercial side. There is a commercial upside as we see it from a stronger commercialization of Bauxite and Alumina with index spread pricing and a gradual move towards pricing these products on their own thinner metals.
Operationally you know that we have experienced some challenges and but I want to assure you that at this stage we nevertheless maintain over 10 to 15 targets on our improvement targets. With the center of gravity for overall products business in Europe we have of course has been exposed to the downturn there.
Europe and especially southern Europe was hurt by the financial crisis and the subsequent debt crisis and still characterized by weak markets and margin pressure challenging our overall products business area. Still the downturn has been most acute in building and construction sector while packaging, cans, has developed sideways as has lithographic plates and the car industry where the drive for lighter and more fuel efficient vehicles – we’re seeing that the amount of aluminum in the car has been rising considerably.
Enrolled, we have managed to maintain all market share while continuing to high-grade our portfolio towards more attractive segments largely upholding the profitability in all products business area.
With the demand picking up in North America, we are now well-positioned, thanks to our share in the Sapa joint venture, gaining bigger market share and being well-positioned for further growth. The U.S. is also an important market for Quatalum and we have Remelters in the U.S. serving our downstream customers.
Our Quatalum Smelter, the joint venture in Qatar ranks among the 10% best smelters from a cost curve perspective as all have most cost position and value added product. All the metal we produce in Qatar is going to metal products as primary foundry alloys to dedicated customers as also extrusion ingots to customers in Asia, but also in U.S and Europe.
We have set through the pace of the build-up and ramp up that this is the world class smelter. It is now generating considerable cash flow and also paying dividends even at the slow LME levels as we see today. In Asia outside China we have a strong market for Hydro, we see a positive demand growth even in this difficult period of the world economy and we have seen Hydro establish itself as the biggest supplier in the primary form the alloy (Ph) market which is an exciting development for also further growth with further potential. If you take a closer look at the developments in China, we see a reconfirmation that China is a net importer of aluminum from a full value chain prospective. Due to the important raw materials, Arvid Moss will go through it later today, the developments in China, in his market presentation. But in terms of headlines, I can say that we expect the raw material shortage in China to increase in the years ahead. We expect this shortfall be mainly covered through bauxite imports for which they currently rely on Indonesia where there has been discussions about possible restrictions which could open up for import of alumina later, and this uncertainty will also be discussed by Arvid later. But overall it would seem that China's strategy remains unchanged, the primary is balanced, they are producing as much all mine metal as the conception, controlled by trade barriers with the rest of the world, and the downstream export of fabricated products continues from China. From this macroeconomic consideration, let us move and take a look at key markets alumina and aluminum as seen through the fast developing Platts index in alumina and aluminum through the LME price development including premiums. The first thing to notice from both curves are is that both alumina and aluminum are at low levels, which of course constitute the main challenge for the industry and our ability to generate shareholder returns. But the picture is of course more complicated than that. In alumina and alumina price as a percentage of LME has been in positive trend since hitting a low early mid, to mid 2012. And then aluminum we have seen premiums rise considerably since 2012, hold on it was small deeply connection with the discussion of changing the warehousing rules early on this year. Alumina in percentage measured against LME plus premium has seen a more moderate development over a period; still the overall takeaway is that prices are at unsatisfactory level leaving a considerable part of the industry total capacity with the limited ability to generate sustainable returns. So this picture only reinforces our overall ambition to create the global leader by become even stronger, more robust, more innovative and more cost effective, which is our key focus in all parts of the value chain, in every region we operate, in every plant. But if aluminum prices are low, demand has now returned to pre crisis levels and continues to grow, we expect a growth of 2% this year, in 2014 the growth will be 2% to 4% that is what we estimate today.
For the period, 2012-2022, we expect annual growth of 3% to 4% that is outside China, if you include China we expect 4% to 6% globally. The reason is of course aluminum’s many qualities. A highly versatile, lightweight material that is a key building block of modern society. If the current macroeconomic situation is challenging, the long term prospects remain bright. With our steady improvement in our relative position we will be ideally placed to realize our full potential once the downturn swings to upturn. And we do that by improving step by step, lifting the bar inch by inch throughout our value chain. As we said in the capital market's day last year, we would focus on improving our relative position, capitalize on our raw material position, maintain our financial strength and flexibility and share competitive shareholder returns. Even if 2013 has turned out another challenging year we have moved in the right direction on all these aspects, although we did experience some setbacks in our bauxite alumina business in the first half of this year. Out ambition is to ensure that Hydro is the most attractive alternative in our industry from a shareholder perspective, and we have kept that ambition on top of our list of priorities, throughout the year, since, that has passed since our last Capital Markets Day. And that brings me to my tree pot agenda for today. Hydro has attractive positions along the value chain and we have developed a strong improvement culture and a leading position in technology, innovation that can take us to the next level. Hydro has maintained our financial strength throughout the downturn giving us flexibility and continue route to navigate. All-in-all, when you these strengths together as a whole, Hydro should had every opportunity to continue to lift the bar, creating a global win-up.
And first let us take a look at our positions within the aluminum value chain. We maintained a full value chain focus even though it’s clear that the main investments and the main asset base our capital employed is within those two segments. We do not regard Hydro value chain as separate businesses but it’s an integrated system from bauxite to finished products. It may be a more complex model than the alternative but with the right competence, experience, technology, commercial instinct, and dedicated business model for each business area we are in the position that and also to create value from bauxite in Paragominas in Brazil to body and sheets all products to automotive customers in Germany.
This gives us an understanding of our material that is both deep and broad from the atomic and normal level to the global trade flows of all in [protectors] and the macro-economic developments. To us this present a competitive advantage and we aim to make the most out of that advantage to serve our customers in the best possible way, creating added value for them as well as for ourselves. We have a global reach and we have a high quality asset base. In Alunorte, we have the world biggest alumina refinery some of the best alumina in the world from our considerable resources of Gibbsite bauxite in Paragominas. If you add up the mine assets we have all together as big as the country of Belgium.
In Norway, we have a solid portfolio of high performing captive power assets among the cleanest and the most competitive power sources available. We have a global smelter portfolio some fully owned some parts owned as owned as the world-class class of smelter Quatalum, which is a joint venture. Of course which is high competitive. And all together we have a solid story of performance improvements. We are Europe’s largest in the core products and the core products we are 50% on off the world biggest portfolio and 100% one of the world biggest coal holding and finishing mill [indiscernible] in Germany. And that makes us possible to deliver the preferred products to the most demanding customers in core products.
Through our Sapa joint venture we created a world champion in extrusion with us controlling 50% while maintaining our optionality for the future. These all attractive assets from their own merits but together they represent highly attractive platform within aluminum covering the entire value chain and providing Hydro with the flexibility that is hard to match. Throughout our 2011 transaction with Vale we went from short to long in bauxite and alumina and strategic move to complete our value chain and gain a firm foothold in an area within our industry where we many expect to see considerable developments in the years to come as the fight for raw material continues.
That said the period of today has been characterized by weak markets and weak returns due to the economic downturn which has weighted on all play offs within bauxite and alumina. For our part we have also been working hard to lift and stabilize the production in Alunorte. And with incidence such as two power outages in the first half setting us back temporarily. We see the effect of the problem on the graph on the right illustrating the recent setbacks among other factors. Nevertheless, these are really first class assets and we do have a fully fledged dedicated improvement program in place to lift the bar within our newest business area. And as I said at the start the 2015 ambitions from B to A program remains unchanged, which will help us to realize our goal and improving our relative industry position. Thanks to its improvement program, dedication, hard work and process optimization the primary business area has made a steady climb down the cost field and in terms of industry position.
By now we’re very close to the top and aim to take that title by continuing our strong momentum. Each step is of course harder than the previous one but in Primary with a holistic approach to improvements and efficiency measure combined with aluminum metal production system and world class asset in cut off we’re in the best possible position to both identify and realize even stronger results.
At the very center of the rolling business tends to customer opting demanding and always focused on cost, delivery, performance, quality and technology. In Hydro, we very much liked that kind of customer because they’re seeking innovative solutions, high quality and service to win the battles in the car industry in construction, packing and so on. In all following products, we have already been rated very high on quality and service and we aimed each day to be even better than we were the day before. We have a clear strategy of hydrating our production portfolio to focus on these areas with highest margins and potentials for returns.
We worked hard to create a step change innovations to find new better and efficient solutions for our customers based on the philosophy that if we help them to win, we will also be a winner and we’re expanding our recycling capacity to bring more metal back to the loop and fill our improved over cost position and reduce the metal cost. In Energy, we’re already at the benchmark in terms of operational performance and we have one of the Nordic power markets most professional commercial organizations in place in Hydro. Over the last few years, we have lifted our equity position in the normal year of participation from 9.5 to 10 terawatt hour, representing a significant contribution to the capital.
We are also successfully delivered on the three bigger projects and well on track with fourth there we’ve done upgrade which is on cost and schedule in 2015. Part of the lift up to 10 terawatt hour is due to better understanding and mathematical modeling and commercial optimization leading to less water loss. We also 180 gigawatt hours when we acquired Vigeland power station earlier this year. For Energy going forward, this will mean to maintain a steady growth keep momentum and a share we maintained our top position while at the same time utilized its global competence to support our all the businesses on the energy agendas.
In summary, Hydro is a resource rich company in terms of competencies, experience, technological and commercial knowhow as well as in assets. This represents a solid platform which we can further develop for Hydro in the recent coming years. Perhaps one of the most excited topics for Hydro over the last years has been our result when it comes to improvement, which we lead by philosophy of continuous improvements but I think we can say now and we have enough data showing that it has gone from a philosophy to a culture in Hydro. Based on our long value chain and the fact that we aim for sustainable improvements as well as cost reductions, it is clear that there could never be one size fits all programs in Hydro instead we have few menu of dedicated programs, tailor-made programs for each business area in value chain even including dedicated program for start and support functions within our corporate center.
We have now reduced the corporate center cost once in 2010 with 30% and we’re on the way do another 30% cut in corporate center for the second time in just three years now. In terms of size and significance it’s of course $300 in Primary and Bauxite & Alumina program from B to A that are most important but key to success is nevertheless that improvements becomes in all Hydro agenda, so deeply embedded in each business area plant and team that we can talk about it as a culture more than a culture than a spreadsheet exercise, and we have several important businesses organized as joint ventures therefore it’s important that we can capitalized on our experiences from our fully-owned plants also from our jointly-owned assets as Hilde Aasheim will talk more about in Primary Metal.
The ability to foresee a culture means in many ways the ability to write our own history and also write our own future something Primary Metal has done so successfully with $300 programs that is now being completed. By now Primary is $300 program to say equivalent to $300 part one produced aluminum almost needs no introduction. We have been reporting on track on schedule for 16 consecutive quarters, which surely must be some kind of improvement record as the result of the great work by Hilde Aasheim and her 4500 team members in primary metals, everybody from top management to shop floor assistant has been fully on board. And as we have also been able to report for some time, this is a program that has been paying off. Without it, we would be in a very challenging situation, but instead it has lifted our self considerably relative to our competitors and we are running a competitive smelter portfolio. The $300 program has been a great story and Hilde will come back later today and explain the new program for our part owned smelters. We aim to save $180 per pound aluminum produced by end 2060. Showing how primarily it’s truly living by the philosophy of continuous improvements. To achieve that we don't need, not only to identify new opportunities but also make sure that there was achievements already made become permanent avoiding a cost base yo-yo effect that in a longer perspective could end up doing more harm than good. In the bauxite alumina from B to A program the total improvements of 1 billion and we take one by end 2015 and a 20% reduction in manning is ongoing. The ambition is maintained despite the setbacks the first half of the year, including two power outages and the business area expect to have the improvement from to back to price fuel (Ph) in the next year.
Head of bauxite alumina Johnny Undeli will provide us with more details later. While the programs in bauxite alumina and primary have the biggest impact, it is important to note that also whole products and energy are following the same structural approach, with our own dedicated improvement programs. Both areas complement their programs and fully dedicated production systems as improvements in Hydro are equally important way of working as they are both results, the one followed the other, now really two side of the same coin if you are to create reserves that can be sustained over time and give you the stability necessary to aim to the next level, the next lifting of the bar. In the world the program is called climb and aims to rise towards a point of business area to fully sustainable levels. In energy, the aspiration, the goal is both to maximize the potential of the assets and to utilize its competence to support other business areas with our energy agendas in bauxite alumina in Brazil, sourcing for primary and in whole products. Extrusion was an area that was hit especially hard by the financial crisis due to its exposure to building and construction market in Europe adding to the challenges we saw already present in a fragmented area with many different players, varying business models and varying incentives.
We therefore came to realize that was a business in Hydro, in need for restructuring over and above what Hydro could do alone. Orkla the owner of software was in the same situation and together we formed Sapa, a true global champion in extrusion that aims to maximize value creation, lifting it into a sustainable profitable industry. Today Sapa is number one in Europe, number one in US, it's one of the biggest player in South America, also very strong I Asia, making it a clear global leader in extrusion. Our main priorities for Sapa going forward is of course to ensure that we have a successful integration but also to realize the synergies of 1 billion NOK, which should according to plan be delivered end 2015.
Turning over to our focus on technology and innovation, we have for sometime maintained an holistic approach resting on three pillars. First, we aim to reduce our own energy consumption in our primary production and reducing our cost base and raising our competiveness. Second we are aiming to support our customers to help them to reduce their energy bill and emissions, a stronger and stronger driver for many of our customers and a clear competitive advantage for those that have the ability to provide the right solutions. Third, we aim to take more metal back to the loop which is good work for the climate and our own bottom-line. For the first pillar we can show a strong history with incremental improvements in terms of energy efficiency improvements, gradually moving down the scale towards global leadership. But a competitiveness in aluminum so closely linked to energy costs it is quite clear that running the most cost efficient smelter technology is a key success factor, overall average in 2012, 13.8 kWh/kg aluminum against the world average of 14.1, and my best guess for this year as that they will be about 13.7 and we do have test cells (Ph) running at 12.3 and even below 12 kWh/kg Al.
We are utilizing spin-offs from our research cells to about 16 smelter portfolio to bring our current average down as we prepare for next generation technology. The whole potential financial impact is considerable if we reduce energy consumption within our Norwegian portfolio of about 1 million tons capacity a year with 1 kWh/kg Al. We are talking about energy saving close to one terawatt hour tier.
Our ambition to be the world leader in smelter technology is illustrated by our recent announcement that we are looking into building a possible pilot plant at Karmoy. If established this plant will contain the next generation electrolysis technology and our goal will be to have the world’s most energy efficient plant with the lowest CO2 footprint in the world.
Realization will depend on several factors like competitive power sourcing, fuel, financial support from the public in all our fronts, grid reinforcements that can allow for later expansions to a full scale plant and of course also at overall financials and market situation has to be in place. And we aim to continue to ensure that even as we develop tomorrow’s smelter technology we also are able to capture significant benefits with technology spin-offs to our existing smelters.
Similarly, when we work together with our customers to ensure that they get the fuel potential out of aluminum mandate qualities, it is because we firmly believe that is a clear business case in doing so. If we are able to prove them that they are all value added in partnership with Hydro, because that would make them to meet better we think value of demands of their customers. Then they could indeed be a very strong business case also for Hydro. In this sense almost difficult customers are our best customers, those that are innovators with respective fields and are highly technology dependent to maintain the edge around their competitors.
We’ve talked much about building and construction, their energy efficient buildings, are totally dependent on a complex combination of technologies and materials from great design and functionality as well as considerable energy savings, there aluminum play an important role. In cars we’ve seen a considerable shift towards aluminum as producers rush to develop lighter, more fuel efficient cars to save emissions while maintaining and even sometimes dramatically rising the user experience.
Aluminums qualities and the versatile properties as a material is the enabler in many of these developments. For example in offshore aluminum has a significant potential for material substitution. In short we aim to use our competence, technology and innovation to provide new solutions that can make our customers left the bar and thereby lifting our own competitiveness.
And lastly we aim to bring more metal back to life which is as good for the business and is good for climate. With only 5% of the energy needed to recycle aluminum as it originally takes to produce at first time around, had been no loss of aluminum’s many qualities, recycling of aluminum makes perfect sense, especially as more and more customers are seeking greener and usable products from lifecycle perspective.
Currently we recycle around 160,000 tons of aluminum post-consumed scrap and our target is to double that by 2020. Some key steps towards this ambition are already underway. First we plan to increase our recycling capacity of used beverage can segment and install a UBC line in Neuss in Germany with 50,000 tons annual capacity. If you make a positive decision on that project the UBC line could be ready during 2015.
Secondly we plan to upgrade our remelter in Clervaux in Luxembourg strengthening its ability and versatility for post-consumed scrap. If the project gets a final go, that upgrade could be also finished during 2015.
And finally we have recently made agreement with Norwegian association for beverage packaging, Norway and Norsk Resirk ensuring that cans used in Norway are recycled in Norway. Today these cans are sent to France for recycling. In total these steps will give us strong stock on our renewed recycling focus increasing our ability to deliver a greener product to our customer.
In summary our holistic three-pillar approach to making technology a strong competitive advantage for Hydro is closely correlated with our climate strategy. Focusing on our own emissions the considerable climate benefits of aluminum values and recycling.
Our ambition is to make Hydro climate neutral from a lifecycle perspective in 2020. Our goal to become carbon neutral rests on three aspects; a considerable share of our production is based on renewable energy here in Norway but also in Canada and Brazil, which makes important contribution. We also have targets to improve our energy efficiency in existing France and is also the main element of our technology development going forward. Recycling is also reducing our footprint and we see only 5% of energy necessary to recycle aluminum bring it back to the value chain because recycling does not affect the properties of the metal the use of benefits remains the same.
And the use benefits are most prominent in the transport sector tighter requirements on fuel efficiency and cost in Europe and the U.S. led to light weighting of cost and increased use of aluminum thereby saving emissions of those. That would give us a leading position on climate within our industry that is again strongly underpinned by a clear business case for ambitions within each of the legs of our climate strategy. As I mentioned several our customers are now more and more focused on their footprint of their material because end users the consumers are being more educated, more informed and this customer pressure is generating a thrill in this market. If our technology focus gives us opportunity to meet our customer’s expectation also on the climate. We are creating a double advantage.
Going into the financial crisis with the strong financial position was of course very important maintaining that robustness throughout the period even more so. During a highly challenging period we have a number of transforming moves of which the most important are completing the Quatalum and acquiring the Vale bauxite and alumina assets in Brazil. Of course this was not have been possible without our financial strength and the support from the shareholders. But we also managed to maintain that strength even after completing these transactions meaning our room for maneuver is still in place safeguarding our financial and operational flexibility.
We first started longer view of our industry and this is the LME development during the last 13 years. Aluminum missed the commodity boom but we did see a significant rise in the LME in 2007 and 2008 just prior to the financial crisis. Then the crisis hit aluminum especially hard with a long and steep fall in aluminum prices. After a modest rebound in 2010-2011, LME has again been caught in the negative trend to today’s level below $1,800 per ton. If you then add the curve representing the 90% or 90% yield on the cost curve we get an interesting picture. In broad terms aluminum price is very much following the 90% yield throughout the period at part from the high cycle period leading at to the financial crisis. After the short rebound we even saw a short period of the 90% yield was in both LME indicating that the substantial part of the production was cash negative globally.
Finally if you then add the supply demand balance in this period we see a confirmation that the economic period thus indeed middle the reality when it comes to aluminum. As the financial crisis hit and the metal balance shifted from being more or less balanced or even short so there is significant over supply situation the aluminum prices fall dramatically. While the metal imbalance has been dramatically reduced from 2009 there are still been over production in the years 2010 to 2012 continuing to weigh on aluminum prices.
That said our production has gone down gradually over the last couple of years and 2013 looks in fact to come in as a balanced market or even with the modest production deficits and this is outside China. But there is no discussion that the aluminum has a persistent supply problem leading to inadequate terms for industry even as demand is showing a solid continuous growth. From a birds eye perspective the last decade has been characterized by formidable capacity build ups in China and Middle East. The net capacity change outside China and Middle East in this period is outside China and Middle East in this period has been very modest as the reduction in North America has been offset by some increases in Russia and India.
To see the full picture we need to other drivers beside the traditional shareholder return focus. With its high petroleum exposure and dependency the focus in Middle East has been equally about diversification from oil and gas and building the industry base. In China, decision makers has often been are centered on building the country with aluminum being seen as a strategic building block, and building their own country rather than rely on imports that has largely saved China for probably a couple of hundred billion U.S. dollar which would be additional cost if should import that metal.
Going forward, we see more limited growth activity in Middle East. The gas surplus is concentrated to a few countries and raw material is also a risk and challenge in the Middle East. In China we see also some soft spots and there are some secret signs that growth of new capacity is slowing down. Higher power cost, raw material deficit and the financial gain may have so many impacts. I will revert to this later.
Turning to a more detailed view on the supply and demand balance, we immediately noticed that after a significant gap between supply and demand during the financial crisis, the two come back in line again and have been broadly in balance till last one and half years. Looking ahead, we expect this balance also to continue in the 2014. Some new capacity may come in, mainly in Middle East but we do not expect a lot of new capacity going forward, is more ramps up of existing capacity underway to be build up. And with demand growth estimated 2% to 4% outside China next year, we might even see small reduction of the inventory levels.
In conclusion, our best estimate is nevertheless that we will see a broadly balanced market in 2014, making a somewhat more optimistic that we may start to see some consumption of inventories going forward. We find these developments also reflected on the supply side developments where we just standout event came with over production as came as result of the financial crisis in 2008, 2009. As demand fell, supply did not follow, resulting in a significant buildup of inventories that are still with us today.
However, we have had a situation over the last 12 to 18 months with broadly balanced markets and by also stable inventory levels over the last quarters. Within this complex industry landscape with its current market challenges and certain outlook it is critical for Hydro to maintain a financial business. On the top level we maintain a balanced positioned with similar amounts of cash as we had that. We went into the financial crisis with robust financial position and we have maintained that position throughout the period.
We are not sure about the time that even this period of weak markets we are not only been able to gradually improving our position within the industry but also made several industry shaping moves. In 2010, we started up Quatalum a strategically positioned first designed smelter that has already started to generate evidence. In 2011, we closed the deal with Vale back by all shareholders and this gives us a long position for several decades to come. And in 2013, we established Sapa creating a new global leader in extrusion.
And we have done this and kept over business and showing that we also have kept overall financial flexibility. The downturn has of course led to of our total shareholder return for the period being and satisfactory. Net asset has been for old players within our industry. We do of course aim to give the best possible returns for our shareholders, over the cycle. So, these challenging years are a course of high concern for us that said we have been able to perform better than our competitors and we have been able to gradually increase our competitiveness. With a long term outlet for aluminum being positive thanks to continued growth and materials substitution combined with a steady stream of new products solutions and innovation. We believe Hydro is very well placed within the aluminum industry.
We aim to maintain the absolute dividend level also for 2013 which represents higher dividend than our full policy will suggest, illustrating our commitment to shareholder return. In summary, our value proposition this period of high and certainty and the challenging market is to stay loyal to our long term agenda, lifting the bar step by gradually implemented improvements across the value chain. We build a highly attractive acid base and we ensure that the improvements we make are sustainable while also maintaining all financial strength.
For the rest of the day we’ll aim to this with you from a wide virility of angles and perspectives and therefore it’s my pleasure to introduce our CFO, Eivind Kallevik, who will now give you his own presentation dedicated to financial aspects and guide you all through all of the station over course of the capital market day 2013. Thank you for your attention.
Thank you Svein and it’s also pleasure for me to see so many of you taking the time this morning to spent at least half a day with us on these important topics. In my financial update today, I would like to start by looking at our financial policy and also some important items for reporting going forward. We then like to continue with looking what measures we’re taking internally and throughout the company which intern results to the next agenda items which is our financial results as well as our position.
I would like to add my presentation by presenting Hydro Group our sensitivities as well as from EBITDA scenarios looking forward and also how these relate to last year’s scenarios. We have three main priorities within the areas for capital allocation. Firstly, it is very important for us to deliver competitive return to our shareholders and that’s why predecessor also mentioned last year we have of course not delivered satisfactory returns in the last few years, largely driven by the limited profitability within our industry whoever as I will show you later on. Through clear bottom line examples, we’re working hard to influence the factors that we control our results through the improvement programs that we have throughout the corporation. This of course we’ll continue also going forward and through that improving our relative industry position.
Secondly, it is very important for us to maintain a solid balance sheet particularly due to the cyclical nature of our aluminum industry. The last couple of years I believe have been a great example of this where its challenging markets proved, this has been important part for us enabling us to take strategic moves such as the Vale acquisition as Svein mentioned. Thirdly, we do have broad portfolio of growth opportunities but as we mentioned many time before we will imply also in future very disciplined capital spend strategy, and given today’s market situation we will continue to focus on the internal improvement efforts keeping a quite disciplined also course for the future.
Having financial flexibility as you know been very-very important for us weathering through top market as we’ve seen. Our strong balance sheet has been and continues to be one of the most important tools for us to be resilient in this tough and cyclical industry. A strong financial position is very important for Hydro and we have also as a follow-up strong focus on liquidity. Our cash position at the end of third quarter was NOK8.4 billion and as you may have seen in the press release we have also replaced our credit facility to $1.7 billion facility that we did have which will mature in 2014, has now been replaced with a new facility same amounts maturing in 2018 with Two 1 year expansion options.
Terms that we’ve concluded for this agreement is very competitive from our perspective, but it also reflects the very strong relationship we have with our core banks, which has been developed for many-many years; thirdly here we also have a 1.5 billion NOK bond which was issued last year and matures in 2019. The current credit rating we have is stable at BBB and I will revert through some comments as why this is very important for us to maintain as we going forward. On hedging policy, I will be relatively brief. The reason why I include this slide here in today’s presentation is just to remind you about the BRL and U.S. dollar hedged that we haven’t placed also for 2014 is also of course done to secure the cost position that we have in Brazil, which in low aluminum environment creates stability and to ensure that we have management focus on improving operational performance which is in particularly important for Alunorf given the measure taken to increase both production and robustness of the plant.
For 2014, the hedged amount is $870 million and is done roughly 241 BRL to the dollar. As a Hydro shareholder, one should expect competitive returns not only for the industry but also for the company overtime. And our top priority also for me as the CFO is to contribute to run Hydro as a company that deliver strong and sustainable long term value creations. We do remain committed to the dividend target of paying out 30% over the cycle; however, in the low earnings environment that we have had this ratio of course becomes quite large and it’s about 172% of net income over the last five years. And this is what you should expect in periods of weak earnings. According to normal procedures, Hydro’s board of directors reduced the dividend proposal in connection with the Q4 results and the post-proposal will then be announced together with our Q4 release in February of ’14.
However based on the current situation of this year and the current earnings, Hydro’s ambition is to maintain absolute dividend level for 2013. This of course is important in particular in situation where the share price development is challenging and we see it as very important to continue to deliver a stable and competitive cash return to our shareholders.
Now let’s take a look at some of the items that will affect our financial reporting going forward. As you will know on 1st of September we did close the Sapa transaction, thus creating the world’s leading Extrusion Company. As many of you will remember from the third quarter reporting, Sapa is reported as an equity accounted investment, meaning that 50% of Sapa’s net income will then be reflected in ourselves. Going forward you will find these 50% of Sapa’s net income under the line item called Other & Eliminations.
We also announced, actually in second quarter that Sapa had got their own standalone financing in place. Subsequent to closing Sapa has not paid Orkla what was due according to the shareholder agreement, leading to the fact that, and that’s all they’ve used credit facility for, meaning that Hydro’s share of the net interest of debt in Sapa is roughly 900 million at the end of third quarter.
And if you look at IFRS change, in accordance with the implementation of IFRS 11, we will consolidate the world’s largest rolling mill in Alunorf as a joint operation from the 1st of January 2014. This is more or less the same methodology as would do for proportional accounting. Since this has historically been reported as equity accounted investment, then this will have some noteworthy effects on Hydro’s reported figures.
If you look at EBIT first, there will actually be very little effect as Alunorf has been operated as a tolling arrangement where production goes through Alunorf at a breakeven level. However, the consolidation will have an effect on EBITDA as our annual share of depreciation is roughly NOK200 million to NOK250 million per year.
Secondly, it will also have an effect on sustaining CapEx, increasing it approximately by NOK150 million on an annual level from an accounting perspective. There are really no big differences compared to what we guided on during from the Q3 reporting and what we are seeing so far into fourth. However, I will remind you, just a couple of issues that we said as well as provide some additional commentary where appropriate. The LME still trading around 1750 to 1800 level, and the one year contango was still steep at the $150 per ton.
Now since Q3 standard ingot premiums have remained relatively flat. We have not seen any significant market reactions to the updated LME rules as they have been disclosed. And I am sure Erik Fossum will come back and discuss that in more detail in his presentation. We’re still somewhat down from the high levels that we saw prior to July 1st, but you should also note that the value-added premium that we are mostly exposed to remain at very solid levels and compared also to history.
For Alumina, we see that the purchase of Alumina products remains relatively stable around $320 - $325 per ton, hovering around 18% of LME. At Q3 reporting we also guided for gradually increasing production at Alunorf, and I have to say that I am very happy to see that this is taking place. [indiscernible] will take you through in more detail so to the speed we have on the measures that we take in at Alunorte, but the Q4 is off to a good start.
We talked a lot about seasonal effects in the metal business areas in Q3 and for primary and rolled products, you should still expect to see a higher maintenance activity compared to third quarter which is normal, seasonal normal. For metal markets, we should expect to see as we said, stable volumes and higher margins. But remember for this segment these results may be volatile due to its currency and hedging effects.
For energy, due to the high power production we had in Q3 and we did guide on somewhat lower production, while prices in Alunorte area where we have about two thirds of our production has so far delivered about NOK300 per mWh roughly 10% higher than what we saw as average in Q3.
I would then like to move to an area where I believe we actually have achieved great results over the last year’s which is the internal measures. This includes the improvement programs. Those were like I mentioned included net operating capital and it also included the tight capital discipline across the whole value chain.
I would like to start with the improvement that we’ve seen taking place in the primary metals area and then primarily the $300 program that we talked so much about, which has been a great achievement for the area as such. We start looking at the LME price, and if you look at the development between the third quarter for '11 until today it is quite a painful development as we all know. Hydro's price in LME fell from 2440 in Q3 '11 to 1822 in Q3 2013 which is basically a 25% decline. If you just applied the sensitivities that we've given then this should have a negative effect roughly 1 billion NOK between these periods. However, the underlying EBITAS reported has fallen from 650 in the third quarter for '11 to 337 million in the third quarter of '13, a change of only 300 million. Of course there are many factors apart from the improvement programs, affecting this, however the results we can say surely would be have been significantly lower if we'd not been able to deliver on the program. If you look at this in a little bit more detail, we can see that LME, it's clearly the biggest negative explanation factor amounting for about 1.8 billion between those two quarters. We also see some negative effects from reduced sales volumes which is partly due to reduction we've done on cost source and remelting.
On the positive side we do see some positive effects from premium development, so maybe a slightly lower than what you expect, but this is also because we're taken down the remelt volumes in the period. We have some positive contributions from the weakening NOK, as well as some somewhat alumina costs combined amounting to approximately half or 800 million. The final 800 million includes a noteworthy share of the $300 program. The estimate that we have is that this is roughly $100 per ton amounting to some 500 million in improvements between this period. So again like I said before it has been a very important program for Hydro, very important program for primary metal and without this program the results would have looked quite differently. Also in the other business areas we do see very impressive effects, in the rolled business area we have been facing cost inflation for some time, which has been weighing on the underlying results if you look at the margin development for rolled products so far in '13 I exclude currency effects, the Climb program has helped to improve the results in rolled by approximately NOK100 million. The currency effects that we incur, it's mainly through our sales in dollars while we do our purchasing of metal in euro. The assumption is that over time these currency effects would be neutralized and therefore we do not externally hedge these contracts. In 2013, these currency effects were significantly negative but if you'd looked at the same period between '12 and '11 you will see quite the opposite effect. So if you look at the results for rolled excluding the currency effects '13 versus '12, then we actually see an operational improvement year on year largely driven by the Climb program.
On net operating capital we have a strong focus and we've had for quite some time and over the years, last years we've seen quite good development both in number of operating capital base but also in absolute amounts. Reductions in net operating capital is a key focus area for us and also an area which we will work quite hard on going forward. Here we have had particularly positive developments within the primary metal area as well as in rolled products. If you look at capital which is the final topic on internal affairs and measures, we are here just showing what we call sustaining cap ex, and I'll revert to the growth cap ex a bit later. As you can see over the last five years we’ve been more or less in the range of NOK3 to 3.5 billion and we've been working quite hard in the last few years to bringing this down for sustainable level. This year's sustaining cap ex comes off at roughly NOK2.9 billion which is very much in line with what you'd guided on at the last capital market's day and also throughout the year.
However, it is also so that we have indicated, that the cap ex range is between 3 and 3.5 over time, and for 2014 there will be a number of facts which will impact sustaining cap ex, some of those are constant and some of those will occur at intervals. If we start with the fact that we mentioned before, this is basically sustaining cap ex related to the proportional accounting consolidation of Alunorte and therefore is much more of a technical accounting technicality than anything else. The next effect is realigning where you typically some swings at new smelters and then it stabilizes as time passes and the fact we will next year is the realigning waves that we will see after our news layoff. Finally there are some effects also at the bauxite alumina area, there are two factors here, first and foremost it's the fact that our current disposal area is being filled up and getting closer to end of life and then we have to build a new one. This project will continue in 2015 as well, the next time we will have to do this effort is probably 15 to 20 years into the future. We also have a similar effect at Paragominas, where we have a tailing dump for bauxite mining, this is also getting close to the end of the life, so we're starting to build a new turning down and this typically happens every five to ten years depending on the size of the dam. All these factors combine resulting in CapEx as soon as for the next sustaining capital expenditure for next year of NOK3.9 billion.
Long term guidance still remains around 3.5 billion up including the accounting effected Alunorf this is fairly aligned with pervious guidance that we have given on this topic. If we sum all of this up than we still see that the majority of the investment are directed towards the upstream business. If you look at sustaining capital down approximately 85% related to the upstream points.
For 2014, we do have couple of growth projects that we would like continue to work on. We have the used beverage can facility in the rolled products business area. We also have the operating after recycle facility in Clermont (Ph). Also here just to remind you that put/call options for the outstanding shares for Paragominas, the first launch of that is June in 2014, second part of that in June 2016.
That also remember them at the time of the purchase we did reflect our 100% of that acquisition in CapEx through other books due to the full financial exposure and consolidation that these effects will of course have the cash effect during the year. I would also like just to note that the depreciation for Hydro still significantly higher than our long term sustaining CapEx.
As Svein mentioned we do believe we have a fairly robust financial position something that we comment on I believe quite often, at the end of third quarter we had about 0.5 billion net debt so basically more or less balanced. We’ve had this for a long period of time challenge in markets and its clear results of the all the internal efforts that we have done and have mentioned so far.
The adjusted debt position consists of in addition to cash and debts also not functioned by abilities of 4.7 billion as well as some other adjustments of approximately 5.5 billion. This is because it’s primarily of operating lease commitments with also some smaller effects. Now with regards to pensions we do estimate an increase for the year end following the implementation of the new motility table complicate 2013 while with the negative effective of this will be partly offset by the estimated increase and discount rates and somewhat higher expected return on pension efforts.
We’re under process of finalizing the calculations and fund figures will of course depend on trends in interest rates at the end of the year but in total we estimate that this will have an after tax effect of roughly NOK1 billion to NOK1.5 billion. Also just like to mention our debt at equity accounted industries is included here as we do not include their shares of revenues either or their shares of EBITDA in our results.
For Quatalum the net debt at the moment in standing at approximately 5.5 billion NOK while in Sapa it is close to 0.9 billion NOK as I mentioned before. The fact that we are more or less cash neutral excluding operating capital and others but including a full year dividend at LME price approximately 1,900 is also a clear result of the improvement efforts that has been done in the company and would certainly not be the case if you had done this exercise three years ago.
We started the year with a net cash position of 1.7 billion we have delivered an underlying EBITDA of 5.5 so far this year which is up 600 million from the 4.9 delivered in same period in 2012. We have other adjustments of a negative 2 billion this relates in large to tax payments in addition to backing out on realized hedge effects from the markets business area.
We’ve invested 1.7 billion so far this year very much in line with our early guiding and this as I said mainly relates to primarily metal Bauxite & Alumina. We have dividend payment of 1.7 billion and that basically brings us to a net cash after dividend of 1.8 billion pretty much to same starting point as we had in the beginning of the year. We’ve had the negative change in that operating capital of 0.8 billion this was very much driven by effects in third quarter and has much to do with timing of shipments between quarters and quarter’s end.
And then there is some translational effects of negative 1.6 billion and some other smaller effects. Leaving us with net debt position asset of 0.5 billion at the end of Q3. If you then look at yields some of the last years as we set a decent quote payment stable and competitive dividend yield to our stakeholders, shareholders and you can always discuss what is the competitive yield level over the last four year period in the market that we have experienced.
Now, if you compare as to do those companies how are exposed in exactly the same markets as we are then our dedication to finding the shareholder return are more visible than if you only look at Hydro on a standalone basis and it also reflects our strong financial position which enables us to carry on this dividend payments.
Finally and before moving on to what you can expect going forward based on your market assumptions just a few words on credit guidance. For us, to maintain investment credit rating is extremely important. It allows us to secure access in the bond market at very competitive terms when we need that and also helps in terms of handling counter party issues in several cases. Since the start of 2011, we’ve had the BBB flat rating despite the dominant trend in aluminum prices in this period.
Finally, and then given all we’ve been through so far, let’s look at what our sensitivities are to movements in LME currency on a Hydro level. I will give you some scenarios going forward and as well as some comments as to what has changed compared to last year. Now with respect to Hydro’s earnings driver it is important to remember that the starting point when we do sensitivities is very important; for example, the higher LME would give the larger NOK dollar sensitivity, higher NOK dollar would give a large LME sensitivity models are very much simplified. Obviously, there is no accurate answer to all price and currency movements and typically a degree of negative correlations between LME and NOK over time so that’s point to the cautionary notes on all the sensitivities before we move on.
This slide gives you the main overview of Hydro’s price and currency sensitivities. The largest impact of course is the LME price as both the development in the NOK dollar. The total company LME sensitivity is roughly 2.5 billion with a 10% change in LME or a $180 change. Of this 1.5 billion is related to primary metal business area and 0.9 billion is relative to the B&A business area. The largest currency sensitivity is related of course to the dollar. As the LME is priced in dollars and we have very much cost base in other currencies. The 10% move in NOK dollar would give an effect of roughly 1.95 billion affect on our EBIT. On a longer term basis, we also see significant BRL sensitivity on EBIT due to the local cost basis that we have in Brazil and sensitivity on financial items due to some of the use dollars loans that we also carry in Brazil. We are very disappointed and we’re looking at these sensitivities. You have to remember that for 2014 the BRL use dollar is hedged and that of course is not reflected in the sensitivity here.
If we then try to give some scenarios going forward and if we use the last four quarters as the baseline for that starting point. Taking Q4 2012 including Q3 2013 as a starting point, we have LME of 1,900. We have the NOK dollar of 5.80 and haven’t delivered in this period four quarters an EBITDA of roughly 5.8 billion. Now assuming the sensitivity for the starting points we’ve tried to give you three scenarios; one, with LME 1,800, one with LME 2,000 and one with LME 2,200, the first two scenarios starting with a dollar NOK of 6 and the last one with a dollar NOK 5.70. As we noticed we only assuming differences in LME and NOK to the dollar so there are of course many other moving parts here that will also take part going forward which we’re not taking into accounts. These scenarios give us an EBITDA ratio of 5 billion to 7 billion in an LME 1,800 case NOK 7 million to 9 million in an LME 2,000 and NOK dollar 6 scenario and the NOK 9 billion to 11 billion EBTIDA in an LME 2,000 and 5.70 NOK to the dollar scenario.
There are few things that we need to manage when we show this just underlying that all scenarios are based in sensitivities and not forward-looking statements estimates for ’13. And we have highlighted some; we have significant improvement programs in place in particular the once in primary metal and business and bauxite delivery and we estimate that this will contribute positively in the years to come. We also have the consolidation of Alunorf as we’ve talked about which is not included. We have a new power contract in Slovalco. We will have changes in raw material prices and finally the premiums and the development of those will also have an effect.
We also see some of you will probably see that EBITDA scenario with LME 2000 and NOK 6 to the dollar has been shifted upwards compared to last year’s Capital Markets Day. So where do these effects come from? Well, if we start with bauxite and alumina, we do not have any ICMS taxes again this year as we have last year, so that’s a positive. But Primary Metal is really the big contributor lower materials costs, higher premiums and finally a large share of lower fixed costs again the effects of the improvement programs that we have done.
So to summarize on financial priorities; continued high focus on cash flow generation; continued work of continuous improvement throughout the organization ensuring -- throughout that this is institutionalized; good and strong focus on margin management and industrial activities that we have, which again finally should and sure support a good shareholder return going forward. Thank you.
And with that we have some Q&A and Svein if you will join me up here. We have some microphones out here when you do ask questions so if you can say your name and state the company you work for that will be great and Rikard also taking questions from the web, then the floor is open.
Let try this one, we have a question from Rob Clifford of the Deutsche Bank. He is asking innovation and full integration has been a strategy for Hydro for some time and other measure aluminum producers. This has not been a successful strategy for aluminum producers over the last two decades with market cap substantially underperforming other basic resource companies. What is Hydro think is changing structurally in the aluminum industry such that the strategy will become more efficient, effective in years to come i.e. what will stop the move of aluminum production from developed to developing countries.
Okay maybe I can start on that one because this is about question at still future for integrated aluminum companies or is it better to split up the value chain. We see from our side several advantages but there are also some challenges and I mentioned that in my presentation. It is a more complex business model because it is impossible to have the same business system, the same business model for each step of the value chain. If you’re running extrusion with the same business model as you do in Primary Metal, you will probably at least destroy the extrusion business.
So for us it has been always important and dedicated system along the value chain that fits with competitive environment that fits with the market and of course also can meet the expectation from the market from the customers. The advantage of having integrated system as long as we have very clear market driven transfer pricing between the different parts in the chain value is that we have very good competence and knowledge and also resource to support the most demanding customers in their developments. We also have a lot of examples where customers are coming to us and devolve some new products which requires new alloys and new way of production, it’s new way of costing, so we’re starting all away from liquid metal state how we’re costing these products go further downstream for example like Oliver Bell, the head of Rolled Products, have challenges to deliver also special products to automotive where we through the value chain have the competence that was needed to supply the most demanding customers with solutions that they can use for next generation automotive.
We have many other examples where we, with the long value chain, have the big advantage of market intelligence, the technological expertise and I must say I’m technological optimistic so I really see the drive among our customers in that direction. We customers that also have as I mentioned in my presentation that have pressure from their customers to make sure that they’re dealing with suppliers that have control of the full value chain and also have a value chain that is sustainable. So I think it depends very much on the business you’re into but the way we’re organized I’m quite committed that this is the right business for us to be integrated, but again be adapted to the different business areas with different business models, if not it could easily be value destruction.
Any other questions?
[Indiscernible] in the patent shareholder. Two things, the Slovalco power deal was negative you point out and the other question relates to the CO2 regime that we have in Europe and which I have seen in order has been in the discussion again, do you have any coincident? Thank you.
On the Slovalco side, yes we should expect somewhat higher power prices. The last contract was [indiscernible] back in 2002, 2003, it’s not been a lot of statistics about Slovakian power prices in that period, but if you assume starting point to Germany in 2002, 2003, you seen a price increase of about 60% in that period that will give also a percentage indication as to where you would see new Slovalco contract coming in. So it’s still competitive in the market.
The question about CO2 regime in Europe is of course something that we’re following very carefully because we’re also exposed to that in Norway, Germany, and Slovakian. It is ambition for the European Union to lift up their contribution from the industry on the GDP from less than 15% today to 20%. So in 2020 the industry should contribute the 20% of the GDP in Europe. If they are going to succeed with that, they have to continue with the system to compensate for the Cl2 cost as long as there is no global agreement on Cl2, here though we support a global Cl2 cost but there has to be a agreement where we have a leveled playing field and not the situation where we have a competitive disadvantage as the we easily cut down if we are going to pay the total of Cl2 cost under long-term basis.
Today the Cl2 cost is very low but we have seen during the last years that the Cl2 cost even in Norway has been 30% of the total price of energy which is a bit contradiction because our smelters is directly connected to hydropower stations. So we are paying for, in addition that we don’t have, so it is a, but this is a market effect. So we are following that carefully and we are also pushing together with other representatives on the energy intensive industry in Europe to make sure that we are maintaining that situation as we have today that we get the competition as long as there is not the level in playing field and as long as there is not a global agreement.
I must say that I am not so optimistic that we will get the real big global agreement short-term, but we see that several nations are building their own systems, regions that agree on having a CO2 comps which is positive and when this is built up to a certain degree, then I think also we are more than willing to pay the Cl2 cost with our position in Europe that today it creates too much competitive disadvantage.
Thank you Svein Richard, and with that I suggest that we take a short break. There will be drinks, coffee and some refreshments on the outside.
Ladies and gentlemen, it’s time to start the next section and to kick this off I would like to introduce Executive Vice President and Head of Energy and Business Development, Arvid Moss and Erik Fossum for consultation of it.
Arvid I think we eluted to you to some of the issues today already but one of the questions we very often get, that I get in all investors meetings I go to, is this market balanced and is it really going to balance in ’14 and when are we going to get into a more deficit situation where we can start to living in a more sustained market price uptake if you like and to Erik before you get on stage also this quite question around LME warehousing how does that actually work, who actually sets the premiers.
So hopefully when you through the presentations it would be I think at least highly efficient by myself and so at my context if you can spend enough time to get some insights into that.
Thank you Eivind and we will try our best to give answer to those questions as well as several others. What we will walk through today are the topics you see on this list, starting out with the macro outlook and the effect that will have on aluminum demands the primary balance that you also want me to discuss Eivind, then Erik will walk through payment development and other new situation and I’ll come back to China and Bauxite & Alumina.
So, let start with macro and correlation and one reason why we look at this because historically the aluminum demand has followed very closely the development of GDP and industrial production and if you see the blue line here that is aluminum demand, we follow GDP very closely up to the financial crisis than took a bigger hits we know that it is more volatile than the [indiscernible] but that has picked up quite well again and is now closing other gaps through GDP and as you see most stronger than the industrial production which means that’s the aluminum intensity in the applications are produced around the world is increasing so following a macro is very important, it’s a guideline for the long term developments.
The second message I would like to highlight is the relation between the metals and the blue line here is the same as to the left, aluminum demands. And you see that the only metal that is close to following aluminum metal demand point of view is stainless steel. So, up to 2009 it was very close -- that's grey line and very close correlation between aluminum and steel, they both have very good growth in the bloom years and then steel even took bigger hit than aluminum and has not recovered to the same level and the reason for that is that aluminum is used in much more diverse area applications while steel is more concentrated construction and steel construction is lagging quite a lot in several countries in Europe for example but also in the U.S. So that is the reason. So, the robustness of aluminum demand has to do with the application areas. For all other metals here you see that they are at some 70% to 95% of the pre-crisis level. So, from a competitive point of view aluminum is doing well.
Then to take look more at the sentiments of the key economies this year and then I will lead that over to aluminum. The blue line here is the PMI from the U.S. and you see a clear improvement in second half. First also the orange line here, the Eurozone, we saw a shift after summer is moving into positive trend and that is important for the whole sentiments but it’s especially important for downstream business and the metal product business we have in Europe.
For the others, China, the fear that many had for a hard line in Old China I think that has replaced with now a rather positive view on China for coming year that they were lined at our GDP between 7% and 8% and 2013 has been disappointing years for India and Brazil and that also had an effect of aluminum demand as a ratio. But a key take away for us is that Europe seems to have bottom that is improving and U.S. steady, okay.
If you then take two of the main application areas for aluminum that is construction and automotive, one of the other main application areas for aluminum is off course packing and cans and all that stuff but that is pretty stable through the cycle people drink and eat whether it’s low or high in the economy. So those are really volatile our construction and automotive and automotive indicators we see that if the blue line here, which is the U.S. car sales, is -- has ticked up year-on-year against the crisis and the green line, which is export sales of German cars, is also good as we know. If you go to China, you see a lot of very good German cars. While the car production in Eurozone, the orange line here, is now -- the best thing to say about it is that it is now flat. It’s been going down for many years now but now at least it’s stable.
More important on the absolute production actually is the aluminum content per car, and Oliver will revert to that. But of course that is really where we see also a substantial shift, which is important for us and its important now to see that there is a new CAFO Regulation in the U.S. and European commission recently that side upon new rules for CO2 emissions by 2020 in Europe. And both these two decisions will drive light metal into cars because we are there we are ready. I think Oliver will cover this more in detail.
If we then look at construction what really sticks out is the German construction survey it is a good development in Germany also on construction; Europe, still weak, still at just slightly about 60% than what it was pre-crisis; while the U.S. since January 2011 had a positive developments all the way. So there are -- the main takeaways here is that here also Europe we see that it is at least -- it is not going further down some positive signs, U.S. steady moving the right direction.
So what does this mean for aluminum demands? If we start to the left here and we start with North America, we had a very good 2012, 2013 come in at -- seems to -- as if come into the 2% growth and then we see an improvement to some 4% next year. Europe caused another disappointing year at minus 3% but more or less what we expected. But based on what we see now development since summer and the expectation for 2013 is that we will get into zero or slightly positive terrain.
Rest of Asia; as I said disappointing 2013 also due to India but we expected to come back to some 5% in 2014. That means for the world, ex-China, at the bottom there, we are at the estimate now is at 2%. That is at the lowest end of the range we estimated last year and it is [indiscernible] on that it has come down to what we was our average estimate. But that is where we see it and next year we see 3% to 4%. And then in China 2013 came in more positive than expected and we expect also the growth to be strong next year. So then which translate this into the primary supply and demands balance.
And you probably -- most of you were here last year, and if you have not looked at what I said last year I will help you. What I said last year was the following; we expected a demand growth base case to be between 2% to 4%, representing the line and going down up to a greater area; and we expected supply to go up so that we said it’s broadly a balanced market if it comes down in the high end and it could giving room for some decline in inventories. So where did we land? We landed like this, or at least we’re still one months to go, but this is more or less where we land. The demand, the blue line, came in at approximately 2% while the supply side actually came down in lower than expected. You see it here it is more or less flat production or Primary Metal outside China from 2012 to 2013. Demand influences [indiscernible] mentioned already, it came in weaker than expected in Europe but we see some positive and the soft growth in Brazil and India has taken us down to the 2%.
On the supply side, we have seen more curtailments and more project delays than we expected last year. I said last year that given that what we now expect our curtailments we can see that there is a balance, and there is may going to room for some decrease in inventories and it came in slightly below. Why has this happened? It is due to the fact that LME has been very low and demand has not coming out higher than we see here, and there is a cash drain in some of those matters. And on the project side, of course we see companies like Rusal who have a pretty challenging debt situation they are building new smelters in Siberia but at the same time they have also now decided to take down capacity in the western part of Russian to really see to that they have a better balance, so there are, let’s say there have been more proactive measures from some companies than others. And also other companies have announced curtailments and project delays this year. India also has come in at a lower growth than expected when it comes to new projects.
So for next year, we expect 2% to 4% growth in demands. We believe that there will be a positive momentum in the U.S., as I have showed on previous page, a moderate growth in Europe. And that we see some improvement in emerging and economies compared to 2012-2013, but I think the most important thing to watch for the coming year of course you have to watch the macros and demands of the macro development. But the most important thing to watch is the supply side. And let me then share this perspective with you, if we look at the -- we have a base estimate behind here as you see a slightly growing supply side some 100,000 tonnes.
If you look at the two years 2014 to 2015, what we have put in there is a total growth on new capacity around 1.7 million tonnes, that is the EMAL smelter coming into full production, they have started production this autumn and there we expect that this in this period they will come up to full speed of 500,000 tonnes. And EMAL, and also the Maaden project in Saudi Arabia which is in total 700,000 tonnes will within 2015 come up to full speed. They had some problems with the production now, but we expect that to be solved and that it will be ramped up.
Other than that we have Kitimat in Canada which we expect will come in with some few 100,000 tonnes in 2015 and we have then two more uncertain countries, it is India and Russia where we have included several 100 million tonnes of new capacity into the balance year, but we indicate with the light blue area that these are the most uncertain ones.
We have seen that projects in India are delayed due to lack of bauxite and alumina resources, lack of power or other bureaucratic items hindering them in building new capacity or starting up new capacities, there is actually new capacities standing there which is not operating. And then Russia, we really let’s say expect that the speed of development will very much depend on how the end-market develops, so it’s really in the hands of RUSAL how they will -- whether they will pursue now the projects and can finalize those within 2015 or whether they will be further delayed, so that is to watch what happens here.
And then on the current production approximately 4 million tonnes of capacity is today in loss making situation from a cash point of view, of that decisions or announcements have been made representing approximately 1 million tonne reduction for next year. So we have included this reduction here in the balance, the light green area. But of course it’s a question whether even more curtailments will come in if the prices continue at these low levels. So I think that the focus what we watch very carefully and what you should watch very carefully is really what happens on the supply side in this industry.
And as Svein Richard mentions, we do not see now new projects in the Middle East that will have any effect on the balance over the next years. And we see also other places around also in China that are -- there is very, very limited activity for good reasons and not to be of new capacity. There is approximately there is a lot of that what you call ideal capacity, but of course a lot of that is multiple and has been now, standing still for many years. If everything kicks in prices go up to a very solid level.
In the end you could see that 1.5 million tonne could come in, but we don’t believe that that is a realistic figure. We expect that’s less than half of that actually will be restarted under what you could see as a realistic price for the medium-term period. So also of course we are as many others disappointed about the price of aluminum, but I explained the reason why it is the macro sentiment is not good and has been too much supply and Erik could also explain that, but of course what has happened in the same period from over the last 10 years is that the cost base has increased.
So if you look at in 2002, the average power price to smelters outside China was at US$17 per megawatt hour. Now it is at 32. And this if you convert this into cost per tonne aluminum it’s an increase in average of $200 per tonne. Alumina has increased from 170 to 320, covert it into aluminum cost that is $300 per tonne and carbon cost has increased by $100 per tonne aluminum. So in total these three elements represent $600 more production cost for smelters outside China.
And if you then look at the cost for the 10% highest cost operating smelters, we have had this development here it is here in 2002 at the long point here. It was around 1500s then it came up and down and so. And now it is around a little bit less than 2,000. What hasn’t it increased with $600? It is partly because that the business operating cost, you have a deduction for net margin on the products. So to the extent you have now a very high premium on ingots or extrusion ingot that comes as a reduction to the cash cost. So that is let’s say, 600 minus this delta improved product premium. And there are also smaller other items.
And then you see that the LME, let’s say Svein Richard also pointed that here it was close to the same level, here it was slightly lower and now we are also more or less at the same level. So I think that the -- we should also remember now that the caution from alumina is released. Because earlier all the contracts were made as a percentage of LME. So when LME went down you have a reduction in your alumina cost, but now as alumina is priced more and more as on its own merits and so dollar per tonne their price, you don’t get this automatic, let’s say reduction in your cost. So it’s harder to support in a way due to that way that now the alumina cost is priced. So I do not predict prices. That is not our job. But you should just be aware of that this cost support is what it is and it has increased like I showed you on this page.
And with that, I leave the floor to you Erik.
Thank you, Arvid. I will talk a little bit about the premium development and the impact on Hydro. And before I try to answer your question Eivind will like to spend a little bit of time discussing the premium and our value-added products in Europe. Keep in mind that half of our global metal sales is taking place in Europe and all our production in Europe is in the shape of value-added products.
Here we see a chart going back to 2003 with a indexed premiums. We are having a observations for extrusion ingots, foundry alloys and sheet ingots in green, blue and red. And we see that we even in 2013 have certain declining and standard ingot premiums have seen a steady increase in our value-added products. As you may have been guided before there is a time lag here before the change happens in the standard ingot premium until we see it in the following premiums. But we are continuing to see strength in the value-added product markets.
Normally we are extremely careful in giving guidance forward, but I am asked very nicely, I have to give some guidance forward. And as we have good visibility and now having completed most of our sales into first quarter 2014, the premiums for extrusion ingots and foundry alloys are continuing to increase into first quarter 2014 in a modest fashion. While the premium for sheet ingots has priced at a mark-up above standard ingots and of course we will follow the standard ingot with the premium development. Of course no guarantee, that is going to continue going forward, but we are very confident that you will see solid value-added products to the markets going forward.
Then moving on to discussing the development in the standard ingot inventories, let’s say globally; excluding China and also the development in standard ingot premium. Different from what Arvid have shown you and different from what we have sold previous years, I have added on the CRU estimates of the unreported inventories on top of the reported inventories. As Arvid told you we haven’t had the metal deficits in 2013 indicating lower inventories and we didn’t recognize this in the total inventory figure going down, although the reported inventories had been moving upwards basically reflecting a new shift of inventories from unreported to reported inventories.
Looking down at the inventory days also excluding China we’re seeing this on a declining path, a little bit steeper than total inventories themselves of course reflecting a continued demand increase for aluminum.
Then moving to the regional standard ingot premiums, we saw that the standard ingot premiums for Europe peaked in first quarter 2013, and in the gray line. The blue line showing the U.S. standard ingot premium peaking at beginning of third quarter of 2013 just in line with the LME having the process of evaluating the load out rates from LME warehouses and in the green we see the Asian premiums represented by the main Japanese port premium where we see this basically moving sideways at all time high levels.
Then a little bit on the background for the LME will change in introducing new mandatory load out rates for warehouses with large aluminum stock.
On the left hand side we see the total aluminum price as split up between the LME part and the standard ingot part. We see that the standard ingot part have moved from being a rich 1% to 4% of the total aluminum price to 2013 where it proved to be 11% of the total aluminum price. When this then happened in the context of increasing aluminum inventories on at LME warehouses, the LME basically felt that it was a good thing to change this so that the aluminum could be more accessible to customers.
However, if you look at the warehouses around the world it's only two warehouses that now foreseeing the limit that LME have set, of 50 gallon base that they have to deliver out to the barrel SKU and that is in proceeding in Europe and in Detroit in the U.S. At all other warehouses around the world, customers or consumers sorry, have been able to take out metal on much shorter notice than the 50 day limits.
Then trying to answer your question, Arvid and coming to what sort of effect will this have on standard ingot premium, and on aluminum markets? The new LME rules on load out rates give a precise formula, making us able to approximately estimate how much LME NIM that will exceed LME warehouses in 2014 and also 2015 in order for it to big warehouses with 3.5 million tonnes of aluminum, being Detroit and proceeding to get within the 50 day calendar rule.
This excellent calculation tells us that in 2014 approximately 550,000 tonnes will be depending on what's going to happen until April when that load out starts to happen, and will be delivered out of LME warehouses in 2014 and a little bit more in 2015. So this equates to approximately 2% of global demand will come in addition, will come as additional supply will come out from the LME warehouses.
However there's no reason to believe that all of this will go into consumption or go to consumers. We still have at least in the short-term, U.S. interest rates staying at the very low levels. We still have a very healthy contango, steep contango care making it still profitable to finance aluminum stocks, so it's a reason to believe that some of this aluminum coming out of LME warehouses actually will go into a contango financing not inside LME warehouses, but outside LME warehouses.
Also as Arvid showed you, the metal balance for next year looks to be balanced to the deficits and it doesn't take too much of a deficit to soak up a couple of 100,000 tonnes if some of the stocks coming out of LME warehouses should go into contango financing.
So the effect on the aluminum premiums have of course could be negative when the rules start coming into effect in April 2014. However it will happen overtime and we believe the market balance and also the fact that some of the metal probably will go into storage of contango financing outside LME, will then lead the premiums to go downwards within a very neutral and gradual fashion.
So to finalize what I intend to say, a few words on our product portfolio improvement. I'm backtracking a little bit to what we said last year. We have had a strong focus on increasing the product premium margin, versus market share especially in Europe to where we have adjusted our re-melting and focused a lot more on achieving strong product premiums.
We have been shifting our product mix towards higher premium alloys, this especially for extrusion ingot we have been moving towards harder alloys giving then better mark up and a higher premium for us. And also in terms of the optimization of Quatalum, we have had very good results in 2013 and if we include the standard ingots premium which of course also has increased significantly we have more than doubled the cost sales margin for Quatalum in 2013 compared to 2012.
We'll continue to do all this in 2014 but in addition like Svein Richard mentioned we will go deeper into the post consume scrap pile, increasing our or lower out metal cost turning smelters around. And we will do full scale testing of our adjustable flexible mold technology for sheet ingots and this will give us much better capabilities to be delivered towards the automotive sector and harvesting net premiums. And we also continue the work on optimizing the primary foundry alloy at both portfolios.
So this concludes what I have to say and I hand back over to Arvid.
Okay, China. In my next slide I would like to lead the statistics bureau in China and make prognosis on supply and demand of primary end metal. Then my prognosis will be that next year it will also be balanced. Primary end supply will follow, primary demands. That's the short story of China.
But more is happening behind the scene, you have heard me telling you about China over the last years and I think that the main hypothesis shown on the previous page, that China will be balanced, primary metal demand versus supply stays. But there are big changes within China. You know that the aluminum industry is now being buildup in this province here and there is full still stand if not a reduction in the some of the production in this year.
Just to make a scale here it’s a 5,000 kilometers from here to the coastal area where the aluminum is used and the truck alumina from this area here in here and the truck metal back. So, just imagine it is -- you start with a truck in Hammerfest and you drive it on bad roads down the road and you take metal back again and you have -- you take about 5 million to 6 million tonnes of capacity being traveling that way now and they want to increase it.
Is this a sustainable solution? It depends on the eyes you look at it with. Of course this province here is a province with a low GDP per capita. So, they want to increase the GDP there. There is a lot of coal and of course that is the basis for the new capacity, the alternative is to transport the coal as coal to the coastal area, but if you look at the transport cost for alumina in and metal out per tonne aluminum compared to transporting coal, the best way to utilize this coal resources is to convert it to aluminum.
The alterative is of course to build high voltage lines and that is under construction and of course that is the cheapest way to transport this entity. So, we expect that to happen of course then you have the conflict between local value-added or export over raw material through the cable, but let them solve that. It will be as a large need for energy in this area.
We also see signs now of decline of growth to call it that for new capacity coming on-stream in this province. The reason is that the power construction is somewhat slower than expected. Second, there is lack of skilled workers or you have to pay them a very high salary, certainly the local province is not supporting so much cash wise as before and fourth the year also the aluminum price in China is now lower than before. So, cash is actually starting to burn for some of those who are building that. So, it’s really financial strain now starts also to come in here.
It’s also worse now, I was in China two or three weeks ago we have had delegations in here and to with suppliers’ alumina plants and so on. And it is again very clear signal from the central government that they want to stop the growth on new capacity in smelting. And we have seen this directors before, now they are clearer than before and in addition to the general let’s say that they have very clear on that provinces are not allowed to give subsidies. There is also now introducing environmental legislation through some of these provinces they are not here are not allowed to build new smelters and they are in a environmental standards prohibiting that.
And we see now as the first province actually in the Mongolia is introducing this and of course this is what we have seen over the last years are really the local provinces doing what the central government wants to do and we will see, so it’s to watch. But I think what is really in the ends will make a change is the money in the pockets of the private owners. They want to be rich and if it’s less money in the evening than in the morning, they will stop to invest in this industry. So, at least there are reasons, good reasons to watch this closely and we will surely do that.
So, that is -- I’m not saying that we will see a cost change, but at least there are signs there and in addition you know that the new president and prime minster and the party gathering some weeks ago also introduced now that they want to have price reforms both in the capital markets, the power markets and for the lands and of course that is one problem that we have that actually capital has been too cheap.
So, on china in summary, we see no big change this year except for the large box that import I will revert to that. So, to Bauxite and Alumina markets, first just a factual thing on the size of the traded bauxites, if we look into Alcon it is by far the largest one and we are number two when it comes to traded bauxites. When it comes to Alumina, it’s Alcoa who has the lead position while Rio Tinto use to be number one, they are number two but now after that they decided to close the gold -- the alumina refinery, they will be more or less balanced and then it’s Billiton, Hydro that are number two and three.
To China, to the left there you see the large increase in import of bauxite to China. This year so far at end of October it was up to 60 million tonnes and it’s largely increased here from Indonesia. And that is due to the expected ban which I will discuss a little bit later, but you see also that import prices to China has steadily increased over the last years, the upper here is to -- from Australia and this one is from Indonesia. But a steady increase, meaning that the cost of producing alumina in China has increased.
The other important factor is what is happening inside China. There has been a recent study that we participated in by a group called CM. And they made a similar study in 2009 and they have a new study now. And we see that the reserves in China are going down in size, it’s going down in alumina content and it’s going down in quality on the silica ratio. So that resources, these net reserves and not the same quality as before. So that is of course also important for the long-term outlook, the cost increase to convert it to alumina when you have average quality.
The third thing -- it’s the import price it’s quality and the third thing is the free market for bauxite in China and this is also a new trend. We see now that there are around 50% of domestic bauxite is sourced from third-party players, that means that there are local traders who are actually travelling around in China, and buying bauxite from small miners and selling it to refineries. And they want to make money as everyone want to be rich in China. So of course they want to price the bauxite at the same level as import prices the parity pricing. So we see that the third-party pricing in China is substantially higher than the cost of producing it from the mine. So that will also push up cost of producing alumina in China to the extent you are not physically integrated into the chain.
So to Indonesia; I think this is of course the main uncertainty for this value chain over the next years. It’s been up to 40 million tonnes of export of bauxite over the last years, and the speed this year is even higher. They have announced an export ban from 1st of January. I think very few believe that they will be able to do that and it will also have an impact on the economy and the work places in Indonesia that we do not think they will accept.
So, we say that the total export restriction is unlikely and we expect that those who commit to do studies on alumina refineries or to build an alumina refinery will be allowed to export a certain amount of bauxite in addition. So, we just have to wait and see. It’s not a long time until January and of course China has built an inventory now, almost for one year’s consumption so this will now have any immediate effect in the market but it will be important to watch what is going to happen here.
So all-in-all for China, this is what we expect of domestic production, still increasing. But we see also steady increase in imports over the next years. And of course if something dramatic happens it should happen during this year this will be a very tight situation, but we don’t expect it to be a full ban, it will be hopefully at a steady acceptable level for all parties.
On alumina in light of time I will be very short but the main message is really that given that China has now built up huge overcapacity in alumina, they actually balanced the market for both alumina and bauxite if the alumina price in the west goes up they import more bauxite and use that for in their internal system and vice versa. So we see here when the alumina price outside China went up in 2011 the import of alumina to China went down almost to zero. And when the price outside China was lower than the parity price then they imported more.
So as long as they have this overcapacity in alumina and as long as there is not really, what I would call value pricing of bauxite outside China, they will have this advantage. So it’s really -- what happens to the bauxite pricing and bauxite supply is really very important also for the development in China overall in alumina.
I will skip this one. Long-term outlook; this is I went back to the estimated 2010 just three years ago and a lot of things have happened since 2010. We have had the euro crisis and we have had different development in different regions. But if you look at the estimate for demand of aluminum, it does not really change very much from the forecast we have now.
In 2013, you see that the current estimate is approximately 1 more million tonne more demand both in outside China and in China. And also if you go up to 2017 or 2020, the expected demand is more or less the same as CRU and others saw three years ago. So the properties of this metal and the urbanization of all of the things that’s going on that all the results are very productive it really is driving this demand in a very robust way. And this is just to confirm that we expect China to be continued importer of raw materials.
So to sum up, robust demands long-term and also a good growth next year we see more curtailments now starting to kick-in and delayed projects, but remember we come from very high inventory level. Erik told about the solid premium developments and really to watch is really how will the pricing of bauxite and alumina on its own merits how will that stick going forward.
So with that I leave the floor to Oliver. Thank you.
Thank you, Arvid. Good morning also from my side. We have learned a lot about metal, supply and demand and the LME premiums. Now I would dive a little bit deeper into the markets and we of course all know this is what is really driving the demand, it is market, it is customers, it is products which are creating customer value and we’ll give you a glance into the drivers for that. Secondly, of course why we believe in the future world why aluminum will be a solution. And certainly I will try to link that a little bit to our direction we would like to move rolled products in the next years, so it’s not all about rolled products but if we tie it up with that.
So first of all I think you all know the megatrends are still intact. We will see till 2030 an enormous growth in population to 8 billion, urbanization will be one of the trends, 60% of the world population in 2030 will live in cities and of course we will have increased in welfare in the world. There will be a new middleclass also 60% will be accounted for in this new middleclass having the buying power to buy aluminum product because according to the S curve, I think the income is an important criteria for the creating demand for aluminum products because aluminum is of course a little bit more expensive compared to alternative products at least in some applications.
But besides that growth we still will have just one world, one planet earth, and of course this will challenge environmental requirements for the solutions of the future. And the world will ask for solutions and we believe aluminum products will provide these solutions. First of all when you take a look in food production, people will live in cities, food will be not around a village there will be no fields, it needs to be transported it needs to be stored, 30% of the world CO2 emissions are counted for in the food production so an aluminum foil for example will ensure that these food which needs to be transported are not rotten during the transport and can save CO2 cost by that.
Secondly transportation, the new middleclass will of course ask for transportation, new cars, which need to be fuel efficient and transportation accounts for 25% of the world emissions. And another example is of course building, urbanization is of course one of these drivers and we need to have energy efficient buildings for that.
So the conclusion is, yes megatrends will give us tailwind. I think they will drive aluminum demand and I think there is good reason for believing that aluminum will provide this greener product.
When I take a look here this is the semi-development on the left side. The semi-developments till 2022, solid growth driven by the elements I have mentioned and of course this semi-demand needs to be cater for with metal and on one side we will have -- we need to have a sound primary production, but of course due to the environmental requirements we will also have an increase in recycling which is good. But it goes hand-in-hand because with all the recycling and with the increasing recycling rates, the volumes you can get back from the market will not be sufficient to cater for this enormous growth in demand for aluminum products.
And when you look on the right side you will see; why is that because in the applications there is only one segment where you have really a fast return of the metal in the packing area. It can come back after 30 days and then as we re-melt it ready for new life. All the other applications transport, construction, electrical machinery all these segments have of course much longer lifetime, a car 10 years, in a building aluminum window 25 years so even longer implying so you can imagine. It takes a long time so that is the reason why even with the increased recycling rates, it will not be sufficient to cater for this growth. So we need to have both a very efficient recycling system of the end of life material and secondly a sound primary production to cater for this growing demand.
Looking a little bit more in my business, flat rolled products and what I see here is a solid growth in consumption 6% and when you look on the world scale, okay I think pretty much all the segments are moving into the right direction. Of course transportation speaks out and as it was mentioned, the semi, the rolled product business is of course very much driven also by packaging, yes make it a very solid business and not so cyclical as for example the extrusion business.
When you look a little bit more into Europe, it looks a little bit different. We all know Europe is not really the growth machine in the world. But 3% I would say for flat rolled product is pretty decent. But here you can clearly say the segment which really sticks out is transportation and that is of course what we are looking at. And there is one segment in transportation which is really sticking out enormously. And it is not because of the car production. Because you see the car production in the next years is increasing, but the growth rate is just 4%. And in Europe and in North America it’s just 2%. But the growth rates for body-in-white application aluminum for the outer shell of the car is of course, shows a different picture it will increase every year by 24%. This is enormous.
And when you see the different regions, so China okay no surprise everybody believes in growth in China. But it’s starting from a low level. Europe pretty solid, you might be disappointed when you look at 13%, but 13% growth is quite high. Europe was in the forefront but what is really amazing that America is kicking in enormously. Here you see growth rates by 35% and how come, why is that happening? There is really a strong drive in America to make a really a fundamental shift away from steel and towards aluminum and there is one car you probably not know about that it’s the F-150, it’s a Ford light weight truck.
And Ford has decided to transfer that from a steel construction completely to aluminum. And only this car accounts for an increase of 340,000 tonnes, just one model per year 340,000 tonnes of additional need for aluminum. And the assumption here, I would consider pretty conservative when I look at the U.S. market. There are other studies which show not an increase here to that level, there is also assumption it would even double. Because if one manufacturer makes a decision to have a light-weight car, to have a fuel efficient car, and Ford is in the forefront, what’s going to happen with the competitors. What is going to happen with the GMs, with the Dodge also the Chinese manufacturer, need to offer something there, and this is only partially here accounted for.
And of course I believe also if this trend continues maybe these numbers are little conservative. But I still feel confident to show these numbers because I believe this is already pretty solid and should trigger some direction. But of course aluminum in cars is pretty new. When you compare it to steel; steel was always there. Steel is there for many years. They have developed with a; there was R&D, this product continuously further, and it’s still a competition. There is a competition between the materials and steel is not sleeping. It’s not just coming because we have the physics on our side. It is because we have to constantly develop our product further.
And there is challenges, forming limits, it’s a challenge for aluminum. Aluminum has an advantage when it comes to weight. But when it comes to formability steel has also some advantages. So it depends a little bit on the applications. And this is an example, here you have all aluminum parts, single aluminum parts, very nice, but not so attractive for a producer or OEM because they have to -- have joining operations for all these elements. So of course if this would be one single piece that would be a strategic advantage, but for that you need to develop an alloy. Because the formability of these in one piece, that is the challenge.
And I think that is the key advantage also for our business and here I relate to the Hydro’s roll products business because we have focused very much with our R&D efforts on this kind of challenges coming from our customers to us. We have 120 people dedicated for R&D in our facility in Bonn, concentrating to develop these products further to a next level. And we have come up with a new alloy here which we are going to patent by the way which is providing this solution. And that is the key advantage.
And of course if a material is penetrating an application more and more, it gets more momentum because joining different materials in a production process of a car is a challenge and if you provide this kind of solutions, this makes also the selection of the roof material much easier. Because the roof is connected to this sidewall and if the sidewall is aluminum the roof will be aluminum or at least it is very likely. So that is one of the key drivers here.
And of course we talked about recycling. And it is a very important that you design the alloys according to the end of life requirements in the recycling. And the alloy here is a very complex one. It is not just one aluminum slab. It is a combination of different alloys which are, how to say it, glues together, in a very simple way, sorry, I am not a technician that will I know the process, but I can't explain it now here. It would take a little bit too long. But I think you’re combining different alloys which is challenging then at the end of the life cycle to recycle it, and I think with the combination we have chosen there, the end of life recycling is not as issue, very easy to recycle.
And that brings us here to a more fundamental question, Svein Richard has mentioned that in his presentation already, I think you are from the financial side, at least quite a few of you, and I think life cycle analysis is really like an investment. When you take a look here in the production you are heavily invested into a product with a lot of energy. So that might not be so nice in the long, at least at the first glance, but you have an enormous payback in the use phase, constantly dividends are generated and at the end of the life cycle you get a nice value back and this needs to be positive. And this is positive and some of you, two years back I gave a presentation, I have the example here on sustainable packaging. Because everybody of you feels okay, packaging, no, I don't want to have too much packaging, it’s not good for the environment. But packaging has first, has a function, it protects what's good. Now it's a slogan from a packaging company but I think it's right on the spot because it really protects what's good.
And secondly the CO2 emissions related to the packaging is really minor, and we have the example here with a cup of coffee. When you split the CO2 emissions of a cup of coffee you drink every morning, into these four segments, production of the coffee, transport, brewing the hot water and the packaging and relate the CO2 emissions to these four steps it looks like that, production of coffee, transport, brewing of hot water, packaging, very small. And for that you get protection, and the material is not rotten and you don’t have waste.
So that was one example, foil for packaging one kilogram saves 76 kilogram of CO2, because just of avoided cooling. You don't to cool the milk, the juices, and these kind of things because it is protected, every liter in this kind of packaging is protected by one gram of aluminum, so that is resource efficiency. And when we talk about aluminum in cars, one kilogram of aluminum saves 20 kilograms of CO2, if it's replaced, if it's replacing steel, because it's much lighter, and lastly, relating to buildings. We have roller shutters and this is just one example, because there're plenty, but also there we save 36 kilograms of CO2 with one kilogram of aluminum.
That was the use phase, coming now to the recycling, and some from the financial side and being from UK know that once a famous lady said, 'I want my money back', Margaret Thatcher in Brussels. We can say, we want our metal back, for sure. And they have good reasons why, because it's of course important for the climate protection, it is also a prerequisite for creating a green image of aluminum because the life cycle analysis without aluminum doesn't look too good, because in the production phase, very intensive but when recycling you get all this energy back, because it just takes 5% of the energy from the primary process to recycle the material and get it back into the loop into the second life.
And last not least and that's what we're also here for is of course because it's an attractive business. If you do recycling right it can be very attractive and that is the reason why we also want to do that, and how do we do that, of course first, we as a industry and as a Company we're supporting recycling schemes. We're setting really stretched targets, 75% recycling rate in Europe for our cans is our ambition by 2015 and we're supporting recycling schemes also in other countries, in Eastern Europe we are promoting that. Because we want our metal back, and look at the trend, it's much better than any other explanation, it shows the trend.
So we're constantly increasing the recycling rates, and we want our metal back, and we want it back in new facilities and Svein Richard has mentioned that we're looking into a very interesting project right now to recycle used beverage cans. This brings us a little bit to the direction we would like to move as for products of course the upswing business and the downswing business are different models, that's for sure. The downstream business is very much about cost, cost position, and also you can try to differentiate but the movement for that is of course more limited, when it comes to products, it's of course easier to differentiate, it's also about costs, you need to be in certain window, to be considered to be a supplier, but it's of course very much about differentiation, creating customer value and supplying the needs for the customer's customer, and that is also our direction.
We would try to create customer value through innovation. We have the ambition of one step change per year for every product we would like to serve and we have certain markets we have picked, we have in some of those products, we’ve an excellent track-record likely to have achieved where we believe we are benchmark in the world by constantly developing this product further. We supply the litho sheet but its litho sheet for last year because we have changed that and that is the reason why we still supply litho sheet also into China, Asia and U.S. from Europe because we have the competitive edge on the innovation side.
On top of cost quality it is a must, we need to be the quality leader and we believe that we are very solid that in that is the second element and last not least service, of course service is increasing but service everybody talks about service. It is about customer relation, getting interconnected with the customer in the planning and having long relations and I think that is the direction we’d like to move. And when you look at our costumer portfolio we have quite a few long lasting customers where we have built on trust this interconnection.
When you look that markets, of course I have mentioned that transportation is the key market, we will move into that we are currently expanding our existing capacities and we have other project, we are trying to mature and I believe that is an interesting market. Thirdly, assets Svein Richard has mentioned that, we have the largest conversion mill in the world, we have potential there for debottlenecking, we have an excellent platform from that in combination with our 50% share and largest rolling mill in the world, sitting close together with R&D, with the primary production, this cluster is unique and this we will further develop and under recycling its clear. It’s both, it’s the recycling is needed first, to create customer value. Customers are asking for green product, if you can’t provide the recycling, closing the loop the customer is not a happy customer we want happy customers, we need those.
So, the recycling is for two elements important, first providing customer value, secondly to support the business because there is a business case behind that and it’s a good one. So, the ambition for us is number one, in Europe and benchmark in the world, sounds a little bit stretched I assume it’s a direction we would like to move in some products we are there, in some we need to develop. The way how we would like to do it I have shown to you. The automotive business is one of those areas and we see R&D competence and how we have developed over the last years we are making good progress towards that direction.
So, but I’ve talked about differentiation but it’s also little bit of cost of course, but for us its improving the net cost level because we need to take in consideration what products we are producing. And this is of course we have quite a few different products. So you can’t say what is your cost per tonne for a road product, this doesn’t make sense. You have to look at the different applications. So, we need to take that in consideration but the message is basically we have introduced a client programs some years back, we are well on track and we deliver, you see these improvement.
There is of course also some negative trends like cost inflations but at the end of the day we have shown a nice improvement in a difficult market and over a long period and making decent results, excellent cash flow, positive cash flow and we have developed nicely. Of course we as a unit we try to protect our margins because we are a margin business, the margins are protected by we would hedge, we hedge our business internally, this is not accounted for unfortunately in the numbers you are getting, unfortunately. But okay, that is the reason why this is shown but the CFO knows it, the CEO knows it now you know it.
So, actually we are moving in that direction but okay this is accounting things yes okay anyways. To conclude on that the megatrends will drive aluminum products and I believe aluminum for reasons as I explained are part of the solution the direction for us and I believe also some other who closely look into that of course, transport is the key growth market. And I believe with a position we have established over the last years and the platform we are having from the asset side and from the RSD side, we are well positioned to capture that. Thank you.
Thank you, Oliver. And I can always, in lieu of time I apologize, we’re slightly behind schedule but let’s at least do a short Q&A. Start questions in the audience. Any questions from the audience or maybe the webcast Rikard?
I have one question from Luke Hess. Presentation is greatly focused on aluminum demand potential which nobody disputes really. Don’t you think there is needs for some production discipline? And little has been seen in effect as of today? And a related question is Quatalum phase two definitely frozen?
Well, I can just give some further comments to that. As I showed in my presentation, there has been announced a number of curtailments this year from different companies and you saw that the production incurred actually this year is -- outside China is flat compared to what we expected and we see also next year that capacity will be taken out as it looks like and there is limited new projects coming or are now being done. So I think that there is a -- every company of course has to make its decisions but it seems to be that limited interest of course in the current market situation and price to launch new projects. So I think that there is a change in modes so to say and in outside China and on China I made some comments on what I think is kicking in there, and on Quatalum too I think there is no rush to do anything on that as from our side as it looks now.
Bengt Jonassen - Carnegie
Good morning. Bengt Jonassen from Carnegie over here, one question for Oliver, on your improvement program it seems like almost 60% of the improvement so far has been even at the cost inflation out of the remaining 700 million crowners how should we look at that going forward when it comes to cost inflation do you look at it at a similar level or should cost inflation come down?
Well of course the ambition is to act with the client program to the bottom-line. The cost inflation is part of the game we need to offset that. So that is the whole idea behind that. What I think was the challenge that we don’t show the full lever from the client program in the bottom-line is of course that we have sometimes negative market effects. But I believe when you look at the track-record of rolled products it is a problem with the currency effect of course which makes a little bit difficult for you to follow. We see a positive trend of the rolled products business. And I think that is also for the next year I believe there is more to come. And we’ll stick to the bottom-line.
Okay, any further questions? Then I suggest that we take a quick break, stretch our legs have a drink there of coffee and then we will combine here in a short period of time. Thank you.
Okay, then we are into the last part of today’s program, although a very important part of the program, and then I have the pleasure of inviting Hilde Merete Aasheim, our Executive Vice President, and Head of Primary Metal to the stage.
Thank you Eivind, and good afternoon, I hope you’re still interested to listen to us. I will talk about our efforts and achievements in Primary Metal in relation to improving their business of our portfolio. You have already heard a lot about primary metal, but I hope that I can add some comments to how we have worked and how we have achieved our results. But let me do a recap of the portfolio as such. As of today we have 11 smelters in the portfolio representing in total 2.2 million tonnes of consolidated capacity.
We have five fully-owned smelters when I include Kurri Kurri which is north poled representing roughly 1 million tonnes of capacity. We have six joint venture smelters which represent 1.2 million tonnes when we consolidate these smelters into Hydro. We also have recycling and re-melting capacity, in the seven standalone re-melters, where we have five in Europe and two in the U.S. which adds on another 1 million tonnes of capacity, so all-in-all this portfolio represents in terms of capacity, roughly 3 million tonnes which we can go to the marker with.
My presentation will focus on how we have worked in order to increase the robustness of our portfolio. I'll talk about the $300 program, which you have heard a lot about already. I will talk about the improvements in the joint ventures which now starts to give effect. I will in particularly talk about Quatalum and the last year's performance and then I will also mention the value creation that we have in terms of working in the market, positioning ourselves in the market.
I will briefly mention technology and innovation which is a really important muscle in terms of positioning us long term but also using that competence on existing assets. And finally I will talk about how we work to secure a competitive energies supply to the smelters.
Let me then start by the $300 program, I've been talking about the $300 program, I think it's the fourth time on Capital Markets Day and I must say that I'm very happy to say now that we have achieved the $300 program. Just as to recap, the program was started in 2009, it is about the four Norwegian smelters, Holsbru, Herva, Vasstøl and Rjukan it is about focusing on areas where we can influence the class can influence, where we don't take into account, simply market’s effects neither in the raw material market, neither in the increase in ingot premium in premiums, nor changes in currency. And all the initiatives has been measured in these terms, and now that we have achieved the $300 program we're talking about a total annual improvement of NOK1.4 billion for the four Norwegian smelters.
As I said, we have worked in areas where we can influence, which is illustrated on the left hand of the graph. I can give some examples of the achievements in this program. Since 2009 we have reduced fixed cost by roughly NOK650 million which represents a 20% reduction on our fixed cost asset base for these smelters, we have worked on improving operation and roughly 200 million is improved in terms of improved operation, which is also about productivity and the productivity in the same period has improved by 15%.
In this program we have focused a lot on cost discipline but also on cash discipline, and in terms of sustaining CapEx we have reduced sustaining CapEx by 35% since 2009. Without that I would say not jeopardizing the integrity of the assets because that is a fine balance. In this program we also have reduced logistics cost with NOK250 million, it's a lot of material going in and out of these smelters and we're focused on the flow and on capitalizing on huge effect in the market.
We have also worked on the Kassel's margin but not accounting for increased ingot premiums and product premiums, but rather how we work in the market, how we have, how the mid phase and using the capability in each casthouse, we have also done some restructuring, close down, partly but also focusing on getting more out of the casthouses.
This way of working has also given us positive improvements in areas like safety statistics, in terms of environmental performance as well as customer satisfaction. I get a question these days so will there be a new program beyond the $300 program. My focus is now, the most important now is to sustain what we have achieved because there are forces working on this cost base everyday in terms of salary increases on inflation on accelerating these cost base, so in order to sustain the $300 program we need to focus to continue to improve in order to sustain the $300 program.
I would like to give some reflection on the program, as such, this has not been a primitive cost cutting program, this is a way of working, we have introduced what Svein Richard mentioned the aluminum metal production system, it is a way of working, where we use our competence in a more structured way, in a more systematic way and where we engage the whole organization in dedicated teams in anchoring the targets and making it, the people have the ownership for the targets.
This illustration is really a summary of the philosophy of the production system, because what we're focusing on is to reduce instability and understanding the processes so well that we can operate stable and that we know what does it take to be in control and capable. And then we reduce instability, we reduce inefficiency. We take out waste in the process and ultimately we reduce cost. And when you are stable you are also in a position that we can think about taking us to the next level. And that is also why we have targeted new areas for improvements. Why you want to sustaining what we have achieved.
We are right now testing out lower cost raw materials but the test is that that should not jeopardize stable operation. We can simply not just use any lower cost raw materials and risk on jeopardizing this operation. So, to master both using other types of raw materials, lower cost raw materials but at the same time being able to operate stable. We’re also now testing technology spinoffs from our technology program we’re testing also right now new design of a cut out the lining of the pot in order to be able to increase and pitch further reducing volumes and then improve productivity.
Right now we are also testing out larger amounts which will make us come further to increase current efficiency more. And we are also working with the market people, with our customers in order to target even more value-added products from the casthouses. So, yes but to the question will there be more improvements, yes we simply have to because the Norwegian smelters are located in a high cost country like Norway and we simply have to fight inflation, we have to simply fight salary increases by increased productivity, by increased use of our competence in taking us to the next level using energy solutions, using our organization to take us to the next level. So, yes we will continue to improve also for the fully owned smelters sustaining the 300 program and hopefully improving also further.
Then let me talk about the joint ventures, as I said six joint ventures turned really large scale, we talked about Quatalum, Albras, Tomago, Alouette and then Slovalco and Søral. Also in the joint ventures, we have now improvement programs more or less like the $300 program embedded in the plants organization authorized or worked on from each of these Boards and follow that every month by the joint venture Boards.
Hydro is in three of these smelters, the industrial partner, Quatalum, Albras and Slovalco. Where we have, where we provide our competence, where we now facilitate introduction of the aluminum metal production system. Where we are close to the joint venture organization supporting their improvement efforts, while when it comes to Alouette, Tomago and Søral we work close with the majority of Rio Tinto which also are eager to provide their competence and their experience into supporting the joint ventures improvement programs.
When we summarize these programs, these six joint venture programs, we total these targets off to an improvement program of roughly $180 per tonne in returns. We started in beginning of 2012, and I briefly mentioned it on the Capital Markets last year. Now it’s firm improvement programs in each of the joint ventures. As I said more or less in the same areas that we have worked on in the $300 program it’s about fixed cost, it’s about operational excellence and it’s about the casthouses.
At the end of this year I expect that we will be able to reach $70 per tonne of this $180 per tonne. So, quite some good achievements, 40% should be within reach this year and I hope that we will see the improvements coming through for the next year so that we can be able also here to say at some later Capital Markets Day that we did it.
I would like to say a little bit more on Quatalum, I go there every month and I see the development from the very start, we are happy about the performance of Quatalum now. The production is consistently above nameplate capacity, above 600,000 tonnes a year and we are also happy that we now can confirm that Quatalum has a cost position in the first debt side. And Quatalum has a quite an aggressive improvement programs now having been in full operation for two years and in particular we are impressed by how fast they have been able to take down fixed cost which is coming through in the numbers now, we have to see in 2013.
Quatalum is also benefiting from high product premiums just also for the fact that Quatalum is delivering very good products to the market. Very well positioned both in Asia, in the U.S. and now also to the GCC countries with very good products very well received in the market and Quatalum produce now 99% value-added products just 1 standard ingots.
You’re probably seeing the results from Quatalum as we reported here as for third quarter this year, a strong cash flow despite low alumina on Hydro’s surface to present portion and EBITDA are more than NOK1 billion for the first three quarters of the year. It was also a milestone to receive the check in terms of dividend for the first time after we have spent a lot of money building the plants where we had $35 million coming on as of October. So Quatalum is coming very well and we hope to see also more improvements coming from Quatalum going forward.
When we work on improvements programs we are following up activities, we’re following up progress when it comes to doing what we have said we should do. But at the end of the day, improvement programs have to come through on the bottom-line. And that is the case when it comes to the $300 program, and that is also the case now that we see improvements coming in from the joint ventures. It’s also good to see that our efforts is making a change when we compare ourselves to the peers.
This is not a very accurate slide, but it’s taken from the external reports from our peers where we look at the EBITDA per tonne. And where we see the relative improvements half-by-half starting from the left on the first half 2011 where Hydro was at the fourth position in the middle of the cluster. During 2011 and ’12 and also in 2013, it’s encouraging to see that we have improved in terms of our relative position, which means that we have a speed of improvement, which are better than the competitors. And it’s good to see now that we are among the -- in the best half and that is encouraging to see that focusing what we can influence give effect and we use that also internally to encourage also improvements going forward.
Then let me say a few words Erik has talked about the market and other people also been talking about the market. What we have seen in terms of product premiums and positioning of our metal in the market and now we work as one team there is primary metal and metal market, which is also good because we bring the customer perspectives all the way back to the casthouse in the plants. We see that we are well positioned. We have a strong position in the extrusion market, in the rolled market and we’re in the sheathing growth market, in the wire rod market and also in the foundry alloy markets.
Our strategy has been for many years to produce value-added products rather than ingot and that has been a very successful strategy I must say. And that is also the strategy going forward in continuously working on high grading the product portfolio. And we, as Oliver was talking about, we like to work with the most advanced customers. Because the most demanding customers is also making a step forward in terms of more difficult product, more advanced products, and that fits us very well because we believe that we have the competence, we have the skills, in order to listen to the new ideas of the customers and produce the more advanced products.
We believe in a high cost country like for example Norway but also some of the other places where we have the smelters that we have to be in the forefront when it comes to capabilities and not competing on the commodities on the standard ingots. As a few examples, which already have been mentioned, we see the development towards the automotive sector that Oliver was talking about and we would like to position ourselves even better in terms of providing metal to the car body. And right now we are testing our technology the adjustable flexible mold which should be bring us in a better position to provide this difficult alloy to this segment.
We’ve also seen the trend from customer wanting green metal. And that is why we have used quite some time in terms of developing our capabilities when it comes to using post consumed scrap to bring the post consumed to the re-melters. We are about to convert the re-melters to focus more on recycling and to get the post consumed scrap back to the re-melters to provide recycled friendly alloys to the market where there is a need. As well as creating higher margins on utilizing low grade scrap.
Svein Richard has so it’s good to have a PhD as a boss Svein Richard has already talked about technology and innovation as one of the most important levers for us wanting to be the best in the industry. And technology and innovation is about continuously developing competence in order to understand the processes better in order to be able to provide an even more productive -- to produce based on an even more productive sell with as low energy consumption as possible with the lowest footprint as possible.
This is a continuous focus and has been also in the $300 program, focusing on the operating parameters like energy consumption. And we would like to have the chance also to demonstrate the technology development that we have had for a number of years in a new possible pilot. We have had some test sells in order the last five years, which is producing on a sale which is 30% more productive and what we have in Quatalum and in Søral at a much lower energy consumption.
The Søral and the Quatalum is roughly at 13.5. The sales in Søral has come down to a level of 12.3 but that has only been on the few number of sales. The possible pilot at Karmoy we would like to demonstrate these sales in more at full scale. And we hope to be able to do that but there are some prerequisites we need the fuel support from ENOA we need competitive power resource for the pilot and we need to see that the market comes into balance before we invest in new capacity.
But this is important to show the muscle that Hydro has in terms of this competence, to show that we are the best in the industry when it comes to the core of the core which is about the electrolysis in Primary, but it’s also important for the competence development for the existing assets because we continually pick elements of this development and get that competence into use into cash on the existing assets. I mentioned power as an important lever for realizing that the pilot to have robust power coverage is obviously important when you’re in the smelter business. Currently, we have full power coverage until 2021 for the smelters we have today and two-thirds of that is based on Hydro power which is good.
Already, the Slovalco contract has been mentioned. We have been working on that during 2013. Slovalco is a good client, good origination, have had very favorable power contract in the past. We have a source now power occluded on the power contract for Slovalco, but as I think Eivind said, if you -- there are no official price of power in the Slovakian market. But if you refer to the German market, we have seen substantial increase in power cost in the German market, which is also reflected in the new power contract for Slovalco.
We have also started to work on power supply for especially then region smelters after 2020 that is 7 years, it’s a short time, and we need to make sure that we have a good competitive power source going forward when we plan for smelters going forward. And I think it’s fair to say Eivind that based on expectations that we have for the energy balance in the Nordic market, we believe that there are a good chance that we could be able to get a competitive power source for the Norwegian smelters also by on 2020 in Norway. So that is an important focus area for us going forward in order to sustain the robustness of the smelter portfolio.
That concludes my presentation and my final comment would be, yes we have improved the robustness of the smelter portfolio throughout the last years, but we will continue to focus on cash cost improvements further. We will use our commercial expertise in the market to create even more values in the market, and we will use our technology expertise to prove that we are best in the world when it comes to smelter operation. Thank you.
Thank you, Hilde. Then it is the last business area that I would like invite to the stage, it will be presented by Johnny Undeli, who is Executive Vice President and Head of Bauxite & Alumina. And he will also be joined by Alberto Fabrini the new Head of Operation in Bauxite & Alumina during his presentation. Johnny the stage is yours.
Thank you, Eivind, and good afternoon to all of you. The whole organization in Bauxite & Alumina is engaged and striving for operational improvements. With the ambition to lift the performance in our world-class asset base and of course in the end it’s all about us building trust and delivering on our overall improvement program from B to A, and again the lying on the turnaround program that we have now established in Alunorte. In third quarter, we guided on gradual improvement of production in Alunorte, so far in fourth quarter, we’re in principal at the production levels we had ahead of the power outages.
Operational improvements is of course very much about cost reductions, minimizing CapEx, reducing net operating capital, and really focusing on cash flow as well. We do have ambitions on lifting the production levels in our assets going forward. It’s about stabilizing at improved levels and then, reach from there. All our energy now is on internal measures where we can make a difference. And as you have heard earlier today, for external factors it is also very important for us now that we have hedged the currency at roughly 2.4 reels to the U.S. dollar reducing risk and vulnerability in the period 2014.
Alunorte, we will have the opportunity to make a deep dive with Alberto Fabrini later on. But we are now focusing very much on process improvements, and let me give a couple of examples, availability of the plant, focusing on operational equipment efficiency, and in particular on the yield in the precipitation area. We’re now running around 89-90 grams per liter. We know there is potential to improve and for you, as a reference, one gram per liter difference improvement means around 70,000 tonnes production on annual basis.
Some very key areas to focus on, and follow-up on a continuous basis; mitigating actions, gradual improvements, improving the robustness around us in Alunorte, I would like to share with you one example. When we had the power outages on May 18 and June 2nd, we had response times around one hour from the emergency until back in production. The threshold for solidification and precipitation times is around 15 minutes. What we have done since we, in a detailed definition set up the turnaround program is not only to improve equipment and the robustness around Alunorte but we are very much focused on our own organization as well.
Strong implementation on more maintenance and overhauls of main equipments, but in addition training and drilling our operators and the organization in full, meaning that when an emergency happens it’s our duty and responsibility to be back on stream within 15 minutes. The combination of the robustness around us and with our internal measures we are now running very frequent drills and we are able to deliver on that ambition, to avoid setbacks going forward. And as I said we are gradually improving. We are now at the production level we had before the outages.
Let me share with you a couple of words on how to operate in this emerging market, and come to Brazil. The Hydro way we put a lot of emphasis on dialogue transparent open and listen to all stakeholders. This is about building trust overtime and we already start to see ways of harvesting from that.
On the environmental and climate side we have clear ambitions. When we open new mining areas and we reforest as we move along the area, by 2017 we will be balanced on that issue, meaning that we reforest as much area as we open for new mining. And then overtime we will improve the overall situation.
As another example last week we signed a very important biodiversity agreement between the University in Oslo and some Universities in Belem. This is about bringing mined areas and the reforest station back as close as possible to the original rainforest. Not only the situation before we started mining but the situation some decades ago before mankind started de-bushing the area, a very interesting and inspiring program, getting a lot of attention from a lot of stakeholders around us.
Let me look a little bit into Paragominas. We had a year 2012, 9.2 million tonnes production, of course ’13 suffering from a low production in Alunorte as the only sole customer, but we have taken the opportunity to improve efficiency and for example a 15% reduction in permanent mining.
In addition we have installed what we call our pumping station number two in the middle of the pipeline making the whole logistics and transportation system more reliable and sustainable for the long-term. So we have spent the time 2013 well to improve the competitive and reliability of the Bauxite transportation system. If you look at the commercial side, it’s of great interest to see that the fight for scarce natural resource is intensifying. We have seen this year sizable contracts to China, where we have entered on a very attractive commercial terms with clear premiums based on our bauxite quality.
And in addition to Paragominas we also have top quality bauxite out of MRN, so for the next several decades to come, we are well positioned, top quality bauxite, meaning, the gypsite type, high alumina content, low reactive silica content.
Let us look a little bit into commercial aspects of alumina, the commercial change process over the last couple of years. I think you agree with me it is going smoother and faster than most expected. What do we mean by that? We came from a pricing regime of medium long-term contracts for alumina linked to LME. We started changing that more into an index priced, spot oriented price of alumina on its own fundamentals, on its own merits. And we see that the alumina index is trending in a positive upward direction, today fluctuating around 18%-18.5% of LME, and I can share with you, if the whole portfolio, the sales portfolio bauxite alumina had followed the index pricing of alumina during this year, our bottom-line would have improved by approximately NOK2 billion for Hydro net, NOK1 billion. It is significant, and in that respect for us at Hydro we are strong believers in pricing our attractive products in bauxite and alumina on own merits and own fundamentals going forward. It's an interesting attractive potential.
So we will pursue a strategy for transforming our sales portfolio and you see here back in 2010, the combination of the existing Hydro sales portfolio and the Vale portfolio, very much trader commodity oriented. We are now shifting this portfolio into more strategic customers end user consumption which is of course index priced and more oriented in the commercial direction. We also take the obligational delivery safe turns so this optimization is ongoing, and I would like to share with you here that if we look at our external part of our customer base, we see that by around 2017, we will be and we expect to be around 50% impacted on the index as such for the external portfolio, and this developing more towards 85% of the total external portfolio, around 2020. These are interesting dimensions and will have impact also performance-wise going forward.
Internally we operate at arm’s length meaning that internally overtime the mix should mirror what we achieved in the external market. Then I have the pleasure of inviting my colleague Alberto Fabrini and you are all aware that we have not only changed top management in the plant Alunorte, but we have also brought on-board a new head of operations who is Alberto Fabrini, welcome Alberto.
Thank you, Johnny. We will talk about some of the situations we have in Alunorte and what we’re doing to overcome that situation. As you know the temporary production setback was basically triggered by the power outages that we have, and not only that but the fact that the power outages were in a sequence, May and June, what even gets the situation worse, and why it does. Well we moved in this refinery around 750,000 cubic meter of mass, 10,000 cubic meters per hour of liquor so when you have a power outage, things go bang and everything blacked out and everything stops.
Pump stops and everything stops, so it's a very serious situation for a refinery that size, the problems for us is not linear they are exponential, so what are we doing? I am going to jump to this. So, one of the key things is to improve the robustness against the external power outages. That's very important for us and what we have here, this is a matrix, I'll explain briefly. We have this backup power generators for all lines, for line one to line 7, but they only dose to the precipitators and as Jonny said, to go to all these precipitators in a huge refinery is very difficult.
Remember we are blacked out. So, to take this in 10 to 15 minutes as it is the time required to turn the impellors on the precipitators a key component of the plant running is quite difficult. So, we you are doing, what we’re using, what we have the cogeneration here, we have 85 megawatts cogeneration capacity. This is given by three high pressured boilers and three turbines. And what we have just recently did, we only had this, covering lines four and five and through analytical installation and automation, we also extended lines six and seven.
What means, what we want to do is operate in these lines as we go refinery in ideal mode. So, they will be self-sufficient whenever a power outage happens. So, as you can see we are two-thirds protected now. And then we concentrate our effort and get lines one, two, three back in operation whenever we have a power outage. This makes us much more robust in case we have new power outages.
However, we are not completely out of the woods on that, we still have things to do in our turbines in our boilers but the situation is much better now than it was before and that’s very important for us. And we also have ongoing studies to install new equipments, boiler and another turbine, we are studying the case and we do that then all lines will be operating in ideal mode. What means we’ll be practically self-sufficient from the grid in this situation so all of this is ongoing.
We are accelerating all the studies and the projects show that we can have our refinery protected against the power failures. Going back as I said, one of the main issues when we have a power outage is the settled hydrates. After 10 to 15 minutes the hydrate settles on the bottom and the impeller is stuck on the settled hydrates.
And that situation is very difficult in recovery. We are focusing heavily and put all the precipitators back in operation, fully and we are working -- the way we do it is through costly cleaning, mechanic removal and also we’re doing full maintenance overhauls.
And I think we have been successful in doing so, this is the total height of solids and tanks, this is how we measure it, it’s one of the way we measure it. So, as you can see we can from this one to this one and here is the target. We still have some work to do, but we are getting there. So, the efforts that’s been put by the people working there, the techniques we are using is proving to be successful and when we do that you can see the effect of the production levels combine it with other enablers that I’ll be talking in a moment. So, you can see clearly there is a pickup in the level we were before and we believe that that is a fruit of what we are doing, the enablers and the measures we are taking.
And what are they? Basically what we have here is our main in a macro way enablers to improve what the precipitation yields, the precipitation productivity that is comparable to current efficiencies for a smelter. This is how we measure our efficiencies and our full availability, which is comparable to the amperage for a smelter. So this two combined give us the production we want to have and what are the enablers. First aligning the organization, these enablers, I would like to say that they are completely aligned with the implementation of our bauxite and alumina business system which is the foundation of what we want to do, do aligned organization is the dedicated teams one of the process and tools of this system. We are aligning organization by process. We are aligning organization from by digestion, precipitation, calcinations, power house and electrical system.
Why? Because we want to improve the expertise on these systems, we want to make people chain it, develop it to understand the principle, to understand the fundamental of this. So, that’s why we are aligning the organization. We have done it.
We even anticipated that, it’s concluded. Power stability and process control, well if you don’t have power stability you don’t have process control, forget it. You first have to have power stability and then you go process control and we are working heavily on that in both. Developed competence further, we’re brining experienced people and this experienced people with the people that are there are very good combination, diverse combination that we bring outsiders and bring people with different eyes with different experience to operate a refinery and together with the people that are there we are making a very good a very robust team. This is also very important.
And then continuously improve maintenance and reliability. In a refinery of this size we have to split this maintenance in three basically areas; one the overhauls the major overhauls work of sign a digester and some other big equipments that we have. The second is to improve the predicted maintenance for our rotated equipments, that is also being implemented and the third is eroding maintenance. Having mechanics and electricians capable of acting in a routine basis so that we can keep and improve the stability.
So, by doing that those are the enablers and those are the foundations. By doing that we are sure that we will achieve the acute and the flow. Therefore we will achieve the production we want to have. So I believe that's basically it and I would like to invite back to the stage Johnny.
Thank you, Alberto. Let me basically sum up by saying that Bauxite Alumina, we are clearly now dedicated to operational excellence and focused on the improvement programs. Taking that in combination with the ongoing commercial change process, that together with harvest can bring further value. And in the end it’s all about filling trust and delivering on the commitments that we have already done and that is by 2015 compared to 2011 improve the performance of Bauxite Alumina by NOK1 billion and we have set out the target for next year, NOK600 million. It engages the full organization, have a lot of cost reduction measures lifting the assets in combination with commercial improvements. Thank you very much.
Thank you, Johnny. Then we're getting the last Q&A, and Alberto and Hilde if you can join me on stage. Is there any question to the B&A and the primary side?
Bengt Jonassen - Carnegie
Bengt Jonassen, Carnegie again. On the cost cutting beat today, the 1 billion program. Do you have an estimate of how much of that was realized during 2013, if any? And second question on the production ramp up again. Do you have an estimate of when you expect to be at nameplate capacity?
As I said the overall improvement program first of all includes the whole parts of the organization, we had a very good start in 2012. Due to the production setbacks in Alunorte basically 2013 from that perspective is a lost year. Now we have committed and gone back to the original schedule for 2014 maintaining the original ambitions and we see by the turnaround program and the lifting of the assets that we will be able and to deliver on those ambitions. That is basically for the improvement enablers as such.
When it comes to the outlook for Alunorte I would basically say that what it's now all about is to stabilize and improve the situation. Firstly to return and stabilize at the levels we have seen before and then secondly to reach beyond there. And then of course we have the ultimate goal of the nameplate capacity, but it's more important now to build robustness, stability, avoiding new setbacks. That is our priority going forward.
Hans-Erik Jacobsen - Swedbank First Securities
Hans-Erik Jacobsen from Swedbank. Given the rather strong prices we are seeing in open market now for alumina, and given the strong demand that we expect in the years ahead. Does CAP project move further ahead now?
I think we can be quite direct on that. We made a decision 18 months ago, postponing the CAP project. I think everything we have heard today about capacity in the value chain and that goes for alumina as well. There is no reason to pursue short-term the CAP project.
Any further questions?
James Gurry - Credit Suisse
It's James Gurry from Credit Suisse. Just got a quick question on MRN. How do you see the joint venture partners and everyone playing out there, would you be interested in acquiring more of MRN, if it was available from not only Vale but the other partners that are involved there?
First of all of course we have been already historical wise in memorandum and we know it pretty well from that perspective. The reason of course I love to read in the media from time to time on the topic as well. And there are discussions in the JV about the future mining plans and development long-terms and we are pursuing that agenda, we are on top of the agenda. So let's see what the develops into. But there is no doubt that we put priority on MRN long-term.
Any further questions? If not, I'll say thank you for your presentation and answers. And I would like to leave the floor to Svein Richard to sum up this thing. Thank you.
Thank you very much Eivind. Today we have discussed Hydro from different angles and perspectives, and we hope that you now had opportunity to get a good insight into our drivers and priorities assisting your understanding of the company. Our overall agenda for 2014 is reflected in our key priorities as is listed here. We will continue our improvements as you have heard today. Especially we will make sure that B2A program in Bauxite Alumina comes back on track.
Johnny and Alberto Fabrini is on the top of that. Hilde Aasheim is working on the joint venture program, $180 per tonne potential and that is the target for us. That is a very important part of our focus for 2014 and we will make sure that we continue our technological development and innovation together with the most demanding customers, where we can also create more value from our products, whether it's metal products or gold products. And due to the weak market situation, it is very important for us to maintain the financial strength and flexibility going forward, so all-in-all we continue to lifting the performance across Hydro.
In all business areas, in all units, in all plants and we have a solid platform and strong track-record and we start everyday with a goal that we should do better today than we what we did yesterday lifting the bar. Thank you very much for your attention and enjoy the lunch. Thank you.
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