Norsk Hydro ASA (OTCQX:NHYDY) Q1 2012 Earnings Call April 27, 2012 10:00 AM ET
Rikard Lindqvist – IR
Svein Brandtzæg – President and CEO
Bent Andersen – Head, Corporate Financial Reporting, Performance and Tax
Heath Jansen – Citi
Luc Pez – Exane BNP Paribas
Good day and welcome to the Norsk Hydro Q1 Conference Call. A Q&A session will take place at the end of the presentation. Questions can be submitted by the phone and the Web. Today’s conference is being recorded.
At this time, I’d like to turn the conference over to Mr. Rikard Lindqvist. Please go ahead.
Welcome to the conference call of Hydro’s first quarter 2012 results. I would first like to direct your attention to the cautionary note in relation to forward-looking statement which is provided in the material. With us today to present is Svein Richard Brandtzæg, President and CEO; and Bent Gary Andersen, Head of Corporate Financial Reporting, Performance and Tax.
Then, I’ll leave the word to Svein Richard.
Thank you, Rikard, and let us start with the headlines for the quarter. First of all, the quarter started with seasonally better demand than the last quarter of 2011, but weaker than the first quarter of last year. There are geographic differences in underlying demand, reflecting a multi-speed global economy. The European demand is influenced by the situation in Southern Europe, where we see year-on-year weaker demand on several segments.
I’m pleased to confirm that we have stabilized production in our strategically important assets in Brazil at higher levels and Qatalum is running at full speed above nameplate capacity with an annual speed of 600,000 tonnes per year.
The underlying EBIT of NOK557 million is about 50% down since fourth quarter. The results reflect lower prices both for alumina and for aluminum. The seasonally stronger quarter resulted in higher metal volumes. Alumina sales, however, were lower due to timing of shipping – shipments and also lesser third-party sourcing. Energy delivered a solid result with a record high production.
Let us then take a closer look at sales and demand in the quarter compared to the fourth quarter for the downstream business. All in all, the sales increased 7% in the quarter compared to the previous. And if we take a look at rolled products, there are several market segments showing improvements.
General engineering separate from destocking in the previous quarter; that is not finished. In extrusion, we see a good demand development in extrusion Eurasia, in Americas and also Precision Tubing. However, the building system market is challenging, especially in Southern Europe where the demand is very weak at the moment.
In total, Rolled Products improved 6% compared to the previous quarter on volumes and Extruded Products 10% compared to the previous quarter. If you then take a look at the quarter compared to the first quarter last year, so a year-on-year comparison shows 6% down this year compared to the first quarter of 2011. In Rolled Products, down in several important market segments, double-digit, as lower volumes can lead to better in total for Rolled Products, 7% down compared to the first quarter last year.
Extruded Products, good development in Americas, which reflects – the market in the US is definitely improving. But weak development in building systems especially where again it is Southern Europe that is the main challenge, 2% down in total in Extruded Products this quarter compared to the quarter last year.
There are two factors that you should keep in mind. First of all, that the first quarter last year was very strong due to rebound effect and that second half of last year was significantly weaker than normal seasonal variation. And we expect that this year the second half will be more normal, with better volumes than what we saw last year.
If we then move over to the price development on the London Metal Exchange, the quarter started at around $2,000 per tones, ended up at $2,140 per tones. The average market price in the quarter was $2,216. And the realized price that we achieved – and then we have to take into account the three months forward pricing – it was $2,155 per tonne compared to $2,439 per tonne in the previous quarter. This price level is too low to give adequate profitability in the industry. And in the current situation, we continue our improvement programs and I will revert to that later in my presentation.
With the growth outside China and the supply/demand balance, we see an improved situation during the quarter, but there is still over-production in primary aluminum business – a seasonal increase in demand, but also lower production. There is announced about 1 million tonnes primary aluminum capacity for curtailments that will come during this year and partly some of it is already taken out.
In our case, we have curtailed the first – one line in Kurri Kurri and there are still two lines in operation, in all 120,000 tonnes that we are evaluating for possible curtailment or if we are going to continue to run that. But in general, there is now a situation in the industry where there could be more curtailments going forward – further on.
If we take a look at the growth perspective for 2011, we have previously communicated 3% to 5% growth outside China for 2012. We are now seeing a development closer to 3% in the world outside China. We expect zero growth in Europe, about 5% in North America, and about 4% in other countries outside Europe and North America and outside China.
We expect China will have a growth of 9% in aluminum consumption this year. So all in all, with 3% growth in the world outside China, the total global outlook for us seems to be 5% growth when all markets are included.
Our estimates are, of course, very much dependent on – particularly the European development throughout the year. We are basing our analysis on a more normal development during the year. As I said, more normal second half this year than what it was in 2011.
Inventories are still increasing due to the overcapacity and we saw about 200,000 tonnes additional volumes in stocks. But if you take a look at regional ingot premiums, there are still tight physical market. We saw higher premiums both in Japan and the US Midwest market, which is now approaching the level of European market around $200 per tonne as standard ingot premium.
The slope on the forward curve in combination with the interest rates and warehousing costs continues and allows for financing deals to be rolled forward.
Let us then take a look at the alumina price index. We saw a quite stable price level in the quarter in the range of $315 to $320 per ton. The price stabilized at this level after a decrease in the previous quarter. The price, as a percentage, has mainly been in the range of 14% to 15% with the recent increase due to the decrease in LME price.
The alumina market has experienced a somewhat softer demand due to smelter curtailments. However, the demand was in the first quarter supported by increased export to China. So far, there has been limited alumina closures announced for curtailments. However, more announcements may be triggered when the smelter closures come into full effect.
If we then go to China and take a look at the import/export balance, China still continued to import large volumes of bauxite and we saw a significant increase in import of alumina to China this quarter. It is too early to say that this is a break of a trend and we will follow this carefully going forward, of course.
Primary metal in China are quite balanced and there are less export of fabricated and semi products, which is in line with previous first quarters and it can probably be ascribed to the Chinese New Year in this quarter.
We have talked about the raw material cost challenge for quite some time. And if we can compare the first quarters of the last three years development and then take a look at LME development from the first quarter 2010 to the first quarter of 2011, it was the 15% improvement of LME, but we had 84% higher petrol coke price in the first quarter of 2011 compared to the first quarter of 2010. And we had 72% higher caustic price than in the first quarter 2011. So there has been a shift significantly on the raw material side.
If we take a look at the first quarter of 2012 compared to the first quarter of 2010, there was 67% higher price of petrol coke and 127% higher caustic price. This is, of course, an important reason why there is a squeeze in the aluminum industry where we have low aluminum prices and at the same time high raw material prices.
The development in raw materials is not sustainable for the aluminum industry. And at today’s LME prices, there is a lot of aluminum capacity that is losing money on each tonne sold. So one of the reasons for this losses is that aluminum price is lagging significantly to the price development of raw materials.
In bauxite/alumina, I mentioned already that we have stable production at higher levels. This continues and we aim to keep stable production. We are now attacking the cost levels going further. But we at the same time see that there is lower alumina prices and also the sales this quarter was influenced by timing of shipments that came into the second quarter instead of the first quarter and also the fact that there is reduced third-party trading sales.
We have already communicated that we have postponed the CAP project due to uncertain short and medium-term market balance. Our long-term view, however, is unchanged and we consider the CAP to be one of the most attractive projects in the industry. However, in the shorter term, we do not think that alumina market needs more alumina capacity.
The $300 program in Primary Metal continues and our target this year is to add another $35 per ton to the cost reduction program and we have so far delivered, after 1 January this year, $200 of the $300 program. This program will continue until the end of 2013.
If you take a look at the cash cost, we had a reduction of $100 per ton from 2011 to first quarter of 2012. This can be ascribed to lower alumina cost mainly. But the $300 program is progressing according to plan. And with the LME price we had in the quarter, the EBITDA margin was $250 per ton compared to $475 per ton in 2011.
As I mentioned, in Qatalum, we have stable production above nameplate capacity. So the plant is now running with 704 electrolysis cells at 600,000 tonnes capacity – production on an annual basis. We’re now focusing on bringing the cost down to the level where we are aiming for and optimizing production.
Unfortunately, we experienced fire in the seawater cooling tower on March 17. We had no injuries, but we had to stop the steam turbines that leads the cooling tower to be in operation. The gas turbines are unaffected by the fire. This is, in fact, also the case for steam turbines, but they cannot be operated without cooling water. And there is no effect on metal production from the fire. However, we are processing some additional gas and power from the grid and we are, thereby, incurring some additional cost until the situation is solved and that will take some months during 2012.
In Energy, the Nordic electricity spot prices have been volatile in the quarter, starting around NOK0.25 per kilowatt hour, almost doubling in the cold weather period in February and then coming down to around NOK0.20 per kilowatt hour when the temperature increased again. The decline in prices was also influenced by high reservoir levels and high production in the period. Water reservoirs in Norway decreased during the quarter from 80 to – between 50% to 60% for Southwestern Norway, which is significantly higher than the same period in 2010 which was a year with high prices, low reservoirs and low production. However, this represented 13% above normal levels.
(Inaudible) combined water and snow reservoirs were at the end of the quarter in a similar situation as the average for Norway. And due to maintenance in (inaudible) during this summer, we expect high production in next quarter, although lower than the very high production in the first quarter.
We have mentioned a couple of investments and upgrades in our Energy business and we concluded one of the larger projects, the Holsbru project during the quarter. Holsbru is taking our normal power production from 9.4 terawatt hour to 9.5 terawatt hour, by adding 85 gigawatt hour (inaudible) and production at Holsbru was started 1 April and the project was thereby concluded on time and within budget.
As I mentioned, the prices on LME is not adequate to give sufficient return for the industry. But no matter, we are continuing to do what we can to improve our position. So for Bauxite & Alumina, the main priority is to stabilize and improve the production. This continue to be a number one priority. However, we do see that the focus on improving the cost position, especially with a challenging raw material price development, as I mentioned earlier in the presentation, has to be continued and we also support and promote the pricing of alumina on its own fundamentals, which we believe is the right way to go for the industry. So index price will be promoted by Hydro going forward.
Primary Metals number one priority is to deliver on the $300 program, additional $35 per tonne. And together with optimizing the production in Qatalum, these initiatives will be very important for the competitiveness of the Primary Metal and Hydro.
In the Rolled Products, the Climb 10 program is continuing. This is going over several years with a broad range of improvement initiatives, all with a focus to improve the cost position and the profitability of Rolled Products.
Extruded Products is experiencing a difficult market, especially in Southern Europe, and we have a €40 million improvement program in Building Systems. This is progressing according to plan. However, volume in Building System continue to fall in the segment, so profitability is not improving as planned.
Extrusion in Eurasia has also initiated cost-cutting efforts based on the development in the markets, and we also see a strong need to adjust the cost base in – to the market. The market imbalances are creating some challenges for us. However, I feel confident that we are doing our best to improve the factors which we can influence on ourself. Thank you.
Thank you, Svein Richard. And then let’s turn to the first quarter financials and starting with the breakdown of quarterly underlying results. So the underlying result before financial items and tax amounted to €557 million in the first quarter. This is down €576 million, or about 50%, from the fourth quarter of 2011. On the total level, the quarter is negatively affected by reduced alumina and aluminum prices, somewhat offset on the positive side by increased sales volumes.
I will get back to more details on each business area later in the presentation, but when it comes to the Others and Elimination segment, you see that we have a charge of €137 million in the first quarter, including largely neutral elimination effects. This compares with a positive contribution of about €90 million in the previous quarter, which then include €250 million in positive eliminations.
Then, adjusting for these elimination effects, which mainly relates to internal gains and losses on inventories, we see stable charges for common services and other businesses between the quarters and within the range of NOK150 million to NOK200 million per quarter, as we have guided on as a normal run rate.
Then let’s move to the high-level variance analysis. As we just saw, we have a total negative development of around NOK0.5 billion. Energy is up NOK0.1 billion on higher power production and spot sales volumes. The power production is up about 0.5 terawatt hours in the first quarter.
Then we have a positive volume effect of NOK0.2 billion; and behind it, there is a positive effect related to higher aluminum sales, increasing by 5% to 6% in the quarter. Alumina sales, on the other hand, is down about 9%, so the net effect of this is positive by NOK0.2 billion. Then we have some relief from reduced variable costs in Primary Metal, and this is mainly related to lower alumina costs due to the declining LME.
Then on the negative side, you see that we have NOK0.9 billion in negative price effects. This is mainly relating to lower realized LME in Primary Metal, which dropped in dollar terms by about 12%. We also have a significant negative impact on lower prices in Bauxite & Alumina, which I will get back to. And then there also, obviously, a number of other smaller effects that are netting each other’s out.
Key financials, revenues are stable between the quarters at NOK21.7 billion. Reduced aluminum prices are offset by increased sales volumes. The underlying EBIT is at NOK557 million, as we just discussed, and then we have excluded positive effects of NOK108 million from underlying EBIT, giving a reported EBIT of NOK665 million. I will revert then to the items excluded shortly.
Net financial items are positive with some NOK430 million, mainly reflecting currency gains on US dollar debt positions and translation of inter-company balances.
Income before tax is at NOK1.1 billion. And we have an income tax expense amounting to NOK530 billion in the first quarter. And this gives a high tax rate of around 45% for the quarter, reflecting that we have a high share of earnings in – from power production in Norway, which are subject to surtaxes on top of normal income taxes.
So this gives a net income of NOK585 million and an underlying net income of NOK256 million. There are more specific information on financial items and tax available for you in the handout. So I will then move on to explain the items excluded.
As I just referred to, we have excluded positive effects this quarter, NOK108 million is compared with NOK1.5 billion in negative effects excluded in the previous quarter, of which the impairment of the Kurri Kurri smelter in Australia was the biggest item of about NOK1 billion.
The first three line items in the table are mostly driven by changes in commodity prices and currency rates. In total, these items amounts to around NOK260 million positive, then reflecting shift in the LME price and the exchange rate developments.
Rationalization charges include NOK112 million of costs related to the curtailment of potline 1 at the Kurri Kurri smelter and about NOK20 million in restructuring costs in Extruded Products.
The impairment charge of NOK30 million represents Hydro’s share of the write-down of fixed assets relating to the fire in Qatalum that Svein Richard just referred to. And then we have a NOK40 million gain on divestments that relates to the sale of Hydro’s 20% share of the solar company, Ascent Solar.
Then turning to the business areas, starting with Bauxite & Alumina. As Svein Richard pointed to, we are reporting a weak result for Bauxite & Alumina in the first quarter, with an underlying EBIT loss of NOK144 million. This is down around NOK300 million from the previous quarter. And if we add back depreciation charge of NOK475 million, EBITDA is positive with NOK330 million.
Production performance in both Alunorte and Paragominas was relatively stable between the quarters, with annualized production of 6 million tonnes of alumina and 9 million tonnes of bauxite.
Alumina sales, on the other hand, were down with some 180,000 tonnes or 9%, and this decline reflects partly that we have sourced less third-party volumes due to expiry of some contracts end of last year, but also that we have shipped less volumes from Alunorte due to timing of shipments.
The average realized alumina price dropped by $13 per tonne, primarily due to lower LME and lower alumina index prices for those volumes that were sold with a linkage to the Platts index.
Then, in addition to the decline in alumina price, we should also remember that the strategic hedge program entered into in connection with the Vale transaction expired end of last year and these hedges had a positive impact of around NOK100 million in the previous quarter, which are now absent in this quarter.
So the decline in realized alumina prices together with expiry of the hedges represents the main factors explaining the decline in results between the quarters.
If we then look forward, we are, as Svein Richard pointed to, strongly focusing on stabilizing and improving production further. We see a fairly stable raw material cost picture into the next quarter, but then, of course, we will be highly sensitive to the LME and the currency-related elements.
Primary Metal, we report an underlying result of $30 million for the first quarter based on a realized LME price of $2,155 per tonne and NOK12,400 per tonne. Primary Metal production was down somewhat in the first quarter, whereas sales volumes increased due to higher utilization rates of the cast houses.
If we look at the variance from the fourth quarter, lower realized prices and somewhat lower product premiums had a negative impact of around NOK700 million. And this negative price effect was then partly offset by some relief on raw material cost side and somewhat higher sales volumes of metal products from the cast houses.
On the outlook at the end of the quarter, we have sold forward around 80% of our primary production for the second quarter at a price of around $2,200 per tonne. We also see some further relief on the petroleum coke costs in the second quarter. Pet coke prices were slightly down in the first quarter, but we expect to see somewhat larger effects in the second quarter based on contracted volumes.
Then, as we mentioned, the fire in the seawater cooling tower at the steam turbines in Qatalum, as the steam turbines are taken out of operations due to this incident, we do expect some increased cost in the coming quarters for additional gas and power from the electricity grid.
So we expected to see some increases there. When it comes to the incident, we have insurance covering both the property damage and business interruption. But as you all know, there will always be some additional costs for such incident and we expect to see that this will have some impact in the next quarter. The insurance case will have effect when the settlement for that is agreed.
Then as have promised, we are now starting to give more detailed information on the Qatalum from the first quarter 2012. The table here shows Hydro’s result from Qatalum based on our 50% share in million Norwegian kroner. If you look at the underlying EBITDA for the quarter, that was positive with NOK226 million, while a relatively high depreciation of NOK240 million gives a negative underlying EBIT of NOK14 million.
And to qualify a bit more on the depreciation charge, you can start with a total CapEx of $5.8 billion as the total CapEx and this gives around NOK34 million on 100% basis. The depreciation rate is around 17 to 18 years, which then gives you a yearly depreciation charge of just below NOK1 billion (inaudible).
Underlying net income was down NOK56 million from the last quarter and the decline in result is mainly due to lower realized prices in the quarter.
Result in Qatalum is affected by the LME spot price, with a two-month lag. We have previously mentioned M minus one as our pricing. But if you then take into account also inventory effects, we say now that about two months is probably a more reasonable estimate. Sales volume and production were stable from Q4 to Q1 and we expect also that to be stable going forward.
Metal Markets, first quarter underlying EBIT amounted to NOK87 million including negative currency effects of around NOK30 million. So then – if we then exclude the currency effects, you can see that there is an improvement of about NOK35 million from the fourth quarter and this improvement is mainly driven by increased volumes in our re-melters, which were up by more than 16% from 131,000 tonnes to 152,000 tonnes. Much of the volume increase is due to seasonal effects, but we saw improvements both in Europe and in US.
Going forward, we expect fairly stable re-melter production for the second quarter. However, we see some pressure on product premiums and margins. And as normal, we remind you that results for Metal Markets can be volatile, in particular due to currency developments.
Rolled Products had an underlying EBIT of NOK151 million in the first quarter. The improvement of NOK65 million is mainly explained by increased sales volumes. The volume increase was about 6%, following a decline of 6% in the third quarter – from the third quarter to the fourth quarter last year. So there is some recovery there and some seasonal effects.
And as we pointed to earlier, volumes in the general engineering segment improved in the quarter, giving some signs that the significant destocking that we experienced in the previous periods is coming to an end. If we compare the first quarter results with the same period last year, we should then remember that the first half of 2011 was influenced by very tight market situation and very good volumes in most product segments.
Outlook. Our order books now indicate somewhat higher sales, mainly in the second quarter mainly due to seasonal effects. But then we need to keep in mind that margins are under pressure, given the current market situation and that the market is very volatile.
Extruded Products, underlying EBIT at NOK14 million in the quarter. This is, obviously, still a very weak level, but there is an improvement from the NOK90 million loss in the fourth quarter of 2011. Sales volumes were up 10% in a seasonally stronger quarter, after dropping 11% in the fourth quarter. Volume is then the main reason for the increase in the result.
Construction markets in Europe are still considered very weak, and in particular in Southern Europe, impacting both our building systems operations and also our general extrusion business in Europe.
Operating cost per tonne fell somewhat in the first quarter due to increased volumes and productivity improvements in the general extrusion segment. We also recorded very solid results for our precision tubing business in the first quarter.
On the outlook side, demand situation in Southern Europe is still considered to be a very significant challenge. However, outside of Europe, we see some positive signs in the Americas. And also into the next quarters, as Svein Richard pointed to, rationalization and restructuring efforts continue with full strength in the coming quarters and we expect to see some more effects of that going forward.
Energy, underlying EBIT of NOK556 million, this is up NOK150 million from the previous quarter. So this is, obviously, a very strong result, reflecting then record level production in the quarter, up 0.5 terawatt hours from the previous quarter. Prices have been very volatile in the period due to variable weather conditions, but spot prices were in average at about the same level as we have in the fourth quarter of 2011.
We expect somewhat lower production in the second quarter, but still much higher than normal for the season. Prices, we expect to decline somewhat when the snow melting starts and the weather becomes milder. And then the hydrological situation is also strong for Hydro, with surplus on the reservoir side compared with normal and about the same level as for power producers in Norway.
That was the business areas. Then let’s turn to the developments in net cash. You can see here that the net cash position was largely unchanged end of the first quarter compared with the end of 2011. Underlying EBITDA amounted to about NOK1.9 billion in the quarter. Then we had that working capital build-up of NOK0.7 billion, reflecting somewhat high volumes downstream and also some increase in Bauxite & Alumina.
Other adjustments of NOK0.6 billion include tax payments and adjustments for other accruals and provisions.
And if we then sum the three first items here, you can see that we have a positive cash flow from operations of NOK0.6 billion. Then we have invested NOK0.9 billion in the quarter. About two-thirds of those investments are in the upstream part and we had then some smaller items of NOK0.1 billion positive, mainly related to translation effects, giving them a net cash position of NOK1.5 billion end of the first quarter.
So with our very strong financial position intact, we see a reduction in adjusted net debt of NOK0.7 billion to NOK19.2 billion end of the first quarter. There are small changes to the items that we adjust for. I should only mention the reduction in our share of debt in equity accounted industries, which is then mainly Qatalum, and this reflects the depreciation of the dollar and a lower value of our share of debt in Qatalum.
Thank you so much. Let us then – just we go to the priorities for 2012. We will focus on the $300 program that we have communicated previously, streamline the Qatalum smelter and, of course, also then improve the cost position and focus on stabilizing the production in bauxite, alumina in Paragominas and Alunorte (inaudible).
We will then respond with appropriate measures in our downstream business where we have already initiated programs in Extrusion in building systems and, of course, we are not talking about cost cutting exercises, but also on taking out capacity from the market.
I’m happy that Hydro has a solid financial position level, with the challenging markets, raw material pressure and lower prices. In relatively low visibility, we are very much focused on cash consolidation and capital discipline. And an example of that is the decision to delay the CAP project.
Thank you, Svein Richard. That concludes the presentation and now we will open up for questions.
Thank you, gentlemen. (Operator Instructions) We will take our first question today from Heath Jansen from Citi. Please go ahead.
Heath Jansen – Citi
Yeah. Good afternoon, gentlemen. You mentioned that you are evaluating a further two potlines at Kurri Kurri. I’m just wondering if you’ve got any sort of timing in terms of when you’ll make that decision. Also, any indication in terms of the impairments that you might be taking on that facility?
And then just secondly, you talked a little bit that you are seeing some abatement in terms of what you’re seeing on coke prices at the moment. I’m just wondering about other raw material prices, particularly caustic soda. Have you seen sort of any alleviation of those input prices? Thanks.
Thank you, Heath. With regard to Kurri, we are currently evaluating the further actions on Kurri. We have actually set one potline out of operation. The remaining two potlines is now in question, if we are going to continue with that. And this evaluation is not finished yet. And it will take still some times, but in the coming months we will make a decision on Kurri. I cannot give you a specific timing on that.
With regard to the development of the raw material, of course, we are following carefully the development. The coke price has been softening a bit, but still in the first quarter didn’t contribute very much, due to the fact that we have inventories with coke that was priced on the higher levels. This will improve it a bit in this quarter, but still we feel that there is a significant raw material pressure.
In bauxite/alumina, especially with respect to caustic soda, we will probably see an effect, if there will be curtailments in alumina production going forward. That’s a result of the fact that we will be taking out almost 1 million tonnes aluminum primary capacity in the coming months. That will influence the market in the end. But it’s too early to say the real effect of that today.
Heath Jansen – Citi
We will take our next question today from Luc Pez from Exane BNP Paribas. Please go ahead.
Luc Pez – Exane BNP Paribas
Hi, gentlemen. First question on the cost side, actually. Perhaps if you could elaborate how you would expect trend moving on – going forward – as far as raw material costs are concerned, of course. And associated question would be, where you would see room to improve your cost position, on the alumina side in particular? Thank you.
Thank you, Luc. With regard to, again – as I mentioned, we are expecting some softening in raw material going forward. We have seen some development in the petrol coke for anodes in primary metal production, but this is still under development and we follow that carefully, of course.
With regard to the cost reduction programs in bauxite/alumina, we will revert to that in details. But, for example, we will reduce the use of contractors in Alunorte to a significant extent. And there are several elements of the cost reduction program that we will revert to, but that will have an impact, in the end, of the cash cost of alumina production, which is necessary also to adapt to the fact that we are not creating value from this part of the value chain.
So this is a program that has been started. It’s ongoing, and we will revert to more details later.
Can we have the next question, please?
We will take our next question today from (inaudible). Please go ahead.
Hi. Good afternoon. And thanks for taking my question. Look, as a shareholder, the one thing that gives me some concern in the longer-term is really the capacity build-out in China and, I guess, local subsidies provided to the industry. So I just wanted to get a view from you guys on, in the long-term, if you see this continuing and putting sort of a floor – or sorry, rather, a ceiling on the price?
And then, I guess, second question, just on the stake that Vale have; can you remind me when that rolls off, and any thoughts on what they might do with that stake? Thank you.
With regard to China, we have seen that there is an increase in import of alumina. China is a heavy importer of bauxite. And we know that some of the sources they are dealing with has a limited lifetime.
So China will definitely have to go further and take a broader look for raw materials for their aluminum production. We know that their aluminum smelters is not in the best quartiles on the cost curve. In fact, most of them are in the third and the fourth quartile on the global cost curve. And we also know that there are several other factors that is really raising a question about their policy in developing the aluminum – primary aluminum business in China, to the extent that they have done so far.
We know that there are voices in China also that are questioning the fact that the aluminum industry is using today approximately 7% of the total energy consumption in China in a situation where China will need that energy for many other purposes.
We know that there are a lot of logistic cost involved when they are moving capacity from Southeast to Northwest. And of course, so the fact that China is importing bauxite, which is a quite expensive exercise in itself, instead of importing alumina, it’s also a factor that you can question, is that really sustainable long-run. At least, it is not very competitive.
So, all in all, I think there are several factors that are pointing to the fact that China will, in the end, start to import more primary metal. But that is a statement that has been said from the industry for quite a while. And so far, they have been able to balance their supply/demand balance.
So I wouldn’t, in a way, count on a short-term effect on this. But longer-term, we are more optimistic about the situation. And in general, I would say that, on behalf of the aluminum industry, I am optimistic with regard to the demand going forward. There are significant demand in connection with the urbanization in the fast growing economies and also the drive from automotive, especially, and transport – well, there is a drive to reduce energy consumption and the CO2 emissions.
So with regard to the balance and the growth going forward, I think short-term we are in a squeeze. China is not supporting very much the industry with the imports of primary aluminum, but China will see, increasingly, problems to keep up the industry with the aluminum prices that we see today. They are not really competitive. And with the moves they are doing in China today, the competitiveness of the Chinese smelters is absolutely not improving.
With regard to the question about Vale and timing, the time is – the date is 28 February of 2013.
Right, okay. Just going back, if I can just follow-up just on the first question, do you think that – what sort of timeframe are you looking at before – maybe those – I guess the stranded power in the Northwest provinces, they’re able to, I guess, get that plugged into the grid elsewhere and then really redistribute the use of power from the production of aluminum to other sources, other users. Do you see that as being a very – like the long-term view, or what’s your view on the time span?
I cannot be very specific on that. But we have seen in other provinces where they have built up infrastructure which is developed rapidly. And with what we see in this part of – in these regions in China today, we will expect that there will be an alternative value for the coal resources in Northwest of China. But we still believe that there will be some time before this is now in – I would say, they’re in competition with other markets. So there is some stranded energy that they are taking benefit of, but we feel that this is not the long-term situation.
Right. Okay, as I was hoping thank you.
(Operator Instructions). We will take a follow-up question from Heath Jansen from Citi. Please go ahead.
Heath Jansen – Citi
Yeah, good afternoon. Just a follow-up question, just on the whole situation with bauxite imports into China. There was a proposed ban on Indonesian exports of bauxite. I think they sort of export about, 35 million tonnes, 36 million tonnes a year to China. Have you got any insights on that, and how you think that’s going to play out? And I think, secondly, if you are taking a longer-term structural view, how does that fit with the CAP development in Brazil, whether that will influence your decision or not? Thanks.
With regard to the situation in Indonesia, we have had a delegation that has taken a closer look at it, and we see that the authorities is quite clear on their statement. They will – introduced a ban, but we also think that there could be some problems to control the export. There are several players, small mines. But we also see that the quality of these mines are deteriorating, and they are also limited resources.
So this is not the long-term situation for China. And that’s why China is also now looking broader. They are looking further, where they can find raw materials for their aluminum smelting industry. So we know that there are some limits with regard to transport cost, as it is today, but we believe that Brazil would also be a alternative for China in the longer run. So we believe that we are in a very good position with our assets in Brazil, both with regard to bauxite and alumina.
With regard to the decision on postponing the CAP project, that is very much due to the supply/demand balance. We feel that the aluminum industry has been in the forefront of developing assets and building capacity even faster than the development of the demand, and that is something that we will not contribute to going forward.
And that is why we’re also now postponing the CAP project, which we are convinced is one of the most attractive alumina projects globally. It is very well located. It will have a very efficient logistical solution with regard to bauxite supply from Paragominas. But still, we believe that it’s better for Hydro to postpone that project.
Heath Jansen – Citi
Okay. Thank you.
(Operator Instructions). There are currently no further questions over the telephone.
Okay. Thank you. That concludes the phone conference. Thank you all for joining the conference.
That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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