Norsk Hydro ASA (OTCQX:NHYDY) Q2 2012 Earnings Call July 24, 2012 10:00 AM ET
Inger Sethov – Head, Communication
Svein Brandtzæg – President and CEO
Jorgen Rostrup – CFO
Owen Scarrott – Goldman Sachs
Tim John – Redburn Partners
Svein Richard Brandtzæg
Rob Clifford – Deutsche Bank
Welcome to Hydro’s earnings presentation on the presentation of the Second Quarter 2012. My name is Inger Sethov, and I’m the Head of Communication in Hydro.
The presentation material that we will use today and the second quarter report is also available on our website hydro.com. Today’s presentation will as usual be given by the President and CEO of Hydro, Svein Richard Brandtzæg and the Chief Financial Officer, Jorgen Rostrup. As usual we’ll have time for a Q&A after the presentation and if you’re following us on the webcast, you may ask questions also over the web.
Before we start, I would like you to direct your attention to the cautionary note in relation to forward-looking statements that are provided in the presentation material.
And with these words, I’m pleased to hand over to Svein Brandtzæg, he will take you through the first part of the presentation.
Thank you very much, Inger. First of all I must apologize that I have to leave in about 30 minutes. I’m going to CNN for a direct interview and that I will finish my presentation and Jorgen will take over and then we’ll also answer the questions.
First of all, our concern is across about macroeconomic situations and still we believe the fact that countries are de-leveraging and rebalancing of economies. We expect that the growth will remain low at least for a while and also below pretty cautious level. We see that the recovery in the U.S. is losing some momentum and the growth in emerging markets is slowing down also in China, that means that we have to test for tough markets, which require those measures and we are continuing our efforts with an evaded strength and we had now also done presented a program that will yield 2 to 3 billion, which include our improvements in the next two to three years.
The most important program so far has been the $300 program in Primary Metal, but we’re continuing that program but then also introducing improvement program in Bauxite & Alumina and also in Extrusion Eurasia and Building Systems and I will come back to them later. So these programs and the improvements are very important and in the future, it is important for us to continue to improve our competitive position and in the test market itself and it’s a lot to get through the future.
The highlight for the quarter is, first of all EBIT at similar level as the first quarter, it was 1.3 billion we declined below the second quarter last year. The prices actually was somewhat higher than in this first quarter in books – involved in somewhat higher than the previous quarter, that volumes in Primary Metal markets is lower than in the first quarter. And we had lower operating cost in energy, the production was lower and also lower prices due to high production in metal market.
We have also done and decided in the quarter to take down the remaining two footprints in Australia and now with Kurri Kurri shut down, introducing again a charge of 1.5 billion, which is then also a part of the reported result this quarter.
If you take a look at the downstream business and the development since the close of the quarter, you know that the first and second quarter normally our strongest quarters, second quarter the strongest, but there is still only 1% improvement in the volumes sold in the second quarter compared to the first quarter.
Price stable in oil products and probably lead to packaging and building about the Strip and sheet and general engineering. Sheet may change and volume was down due to lower automotive sales and we have 8% improvement in the – due to higher demand in Europe, Middle East and Asia.
In coal products, oil extrusion, Extruded Products 3% improvement in the first quarter, 6% improvement in the billing system is coming from very weak level, 2% improvement in the Extrusion Eurasia. It’s seasonal also weak development that normal second quarter, a fairly stable in position in fact, a bit down in Europe and in U.S. And then Extrusion in Americas, which means U.S. market and ultimately transport, general engineering posts a key development also strong development and good demand in South America.
If you compare it with the previous year 5% down since the second quarter last year in oil products 6% down, but we have decided to exit some products in real terms, corrected for that, it’s minus 3%.
Extruded products minus 4% compared to the second quarter last year, 6% down in Extrusion ratio, 3% down in Building System reflects fairly deep market in Southern Europe. Stable and position in Extrusion Eurasia stand full at the strongest market. This slide shows the supply-demand balance in the growth outside China and the green areas shows that we have had the stronger demand in the second quarter at the same time as the supply is going down.
In total, 1.2 million tons of capacity has been announced curtailed in Extrusion Eurasia. We expect that 700,000 tons would be in effect in 2012. On top of that there has been some destructions, strike in Canada, operational problems in South Africa, which had $400,000 tons with 1,000,000 less production this year due to this situation.
With the outlook, we see – now we expect the total growth outside China 2% this year, and we expect the growth for the market to the balanced in 2012.
The curve on the left side is the development of the inventories in fact in total, inventories has been fairly in inventories base outgoing some metal due to higher demand. But this metal is not physically available in market. That has resulted in Ingot premiums for P1020 standard ingot. This again shows that the physical market is tight. This graph shows the import/export balance in China, a young strong input of bauxite and alumina in the first two months in this quarter, because we have only half shown at the April and May import and export. In fact, we saw a slight connected change in June numbers which came yesterday, a steep reduction in import of bauxite and alumina. So we are coming back to what that means for the industry. But in general, a stable input of scrap and also fairly stable export of semi-fabricated products.
In total, we see that China has been balanced in Primary Metal, and we expect that to be also balanced going forward in this year. We expect Chinese demand to be both increasing about 8% to 9% in this year. So we have a situation where the net level is stably inventory, that’s going down standard ingot premiums are going up. So it’s not physically available in the market.
China continued to import and also we have fairly balanced aluminum market. I wouldn’t be surprised if the aluminum price went up. But in fact, aluminum price is going down in the quarter from 2,140 to 1,850 approximately. The realized price in the quarter was $2,167 per ton and we have three months for low pricing as YOU know, and you have to add another two days due to cost sales production. So at these levels we have now, it is a challenge for the industry. It is not enough for the industry to give adequate returns to the shareholders and also some of the industry is now below water.
Speaking of the alumina price development, it has been quite stable during the last quarters in dollars, but in percentage of LME, it is going up. So this is a market that has been stable. It is still a situation where China is importing and helping the market, which we assume is somewhat oversupplied. There has been announcement of curtailments in this market. So when and if that is implemented, the market in alumina will also be in balance.
China has imported a lot of alumina and increasing alumina amounts in April, May. Different picture in June by the way, but so far they have been probably also influenced by the increased uncertainty related to export of raw materials, bauxite from Indonesia, which increased a lot during last year whilst Indonesia has decided to introduce a tax on bauxite import, that was in May this year, and also they did impose ban on export of bauxite from Indonesia to china from 2014. So it remains to be seen the total effect, but I think there are some uncertainty in China, we do have to import the raw materials in general.
We delivered weak results in our bauxite alumina different scenario, very much in terms on the development on LME, of course, weak LME, but also in terms on the increase in cost of production in alumina. We have showed index price and also index cost cash flows for the different main elements that is a part of the cash cost from Alunorte, the alumina refinery in Brazil, and we have seen that their cost has gone up 8% the last year.
In bauxite, we had higher price. Bauxite from MRN, but still the cost of bauxite has gone down 3%. This is related to improvement in alumina although bauxite mine.
In Alunorte, we’re seeing a 9% or in fixed cost, 9% cost reduction. We’ve seen better performance in Alunorte unless we talk about currency, by the way. In raw materials, however, energy and also caustic soda had up to 21% higher raw material cost. That has been the main reason for the 8% higher cost of production in alumina. At the same time, the price is gone down 15%, the variance is led up – this is a margin pressure and it’s a challenging situation and it is most difficult to deliver to other terms in alumina and bauxite alumina business in this situation.
So this new area as long as we are not able to influence on alumni, you can see it from the elements, which we can’t encounter so we have established improvement in bauxite alumina which we are at 1 billion along next two to three years. And we are targeting the alumina in the commercial area. The next tangible element, several actions as they are going to be implemented and first of all, in Alunorte we are targeting the main packet of 6.3 million tons, also specific issues related to maintenance related to the boilers and all the elements that will be offered at one, alumina also there targeting the main capacity of 9 million tons, increased productivity and there will be demand in the commercial area we are targeting more industry parting although we are looking into the facts, people of – until 2015 and can be reproduced from that.
But we have also increased the flexibility, the logistical flexibility of our bauxite for our commercial activity in Alunorte. And primarily we continue improving the product, a $300 continuous and about $200 until the end of last year, and the target for this year is $35 a ton, which is now under pressure due to a situation in cost process.
If you then take a look at the cash cost, however, the cash cost has gone from 2011, a $135 a ton, the cash cost in 2011, reduced cash cost in 2012. And $75 is related to lower alumina price and $100 is likely deductible, cost improvement and also affect I mean, catalyst to the picture and also some currency elements into it. But I’m happy to see that the cash cost is down most significantly during this period and again, 1825 was for the cash cost for the first half of this year.
I mentioned that we see that in cash cost margins and we had been emerged in business area, primary metal and metal markets and then had the organization together, that’s running the primary casthouses and bringing that cost together. The three metals are fairly flexible and the big primary casthouses are linked very much also to the system. So we see a big opportunity to optimize the total casthouse system, optimize the product mix and reduce cost of product.
In addition, we have again closed Kurri as I mentioned and this is also then having some implication on the market price for us.
In Qatalum, we reduced tube speed at the annual capacity of 600,000 tons, which is both capacity. We are happy to see that we delivered on our performance test on the – technical performance test that was carried out with lower energy consumption and also consumption that was the guaranteed numbers as part of the technology package.
Also, talking about the insurance case, I’m happy to again confirm that the insurance coverage was good. Jorgen will come back to the numbers there and the result we see with the cooling tower that haven’t got much. This is now well underway to be reconstructed and we’re well in to restock at one steam turbine and the second turbine before the year-end. So this is moving fast and according to our plan.
In Extruded Products, we have raised our additions. I mean, we have about €80 million improvement for them for 2012 and 2013. More than half of this is already delivered in 2012 mainly in dealing system by the way but also increasing rates as part of this program. We have closed more than 58 distribution centers and sales offices, then ideal three presses and closed two presses on top order. And we are using in the mining so far 770 people in these two business – in these two sectors.
We continue the operational improvements over the logistics too on our own plants. And again, take the necessary steps to deliver on these improvement programs. And of course, we continue to grow in the emerging market. So our investments that we have really simply done in Brazil and Shushu in China, we will continue as planned and also while we take our opportunities to grow in emerging markets.
Then I leave the floor to Jorgen.
Hi. Thanks Brandtzaeg. Okay, then I get the pleasure of taking you through some numbers for the quarter. And we start as usual with the underlying EBIT slide showing the limits of areas and in totality. As Svein said, its $549 million underlying same level as last quarter, I will get back to that – to the various business area.
I’ll just comment on under on eliminations here. Its underlying negative $166 million, it was $137 million, so difference of some $29 million quarter-on-quarter. This is all due to these eliminations of being internal gains and losses on inventory. So there the charge for common services and other businesses were approximately just below $150 million. And that is in line with our $150 million to $200 million guidance. So there is not much more to say about that.
If we look at the high-level quarterly analysis, as we said, it’s stable quarter-on-quarter result to our limited changes, as we see it from an aggregate level on the earning elements for the group. We dedicate $0.1 billion in changes on the aluminum prices. There are costs with a total benefit of $0.1 million also a limited affected primarily within the primary metal and a little bit on rolled products as you probably have noticed. And then, the effect of lower production and lower prices on energy is $0.2 billion, but fairly it’s not to the changes that has taken place the landmines the low earnings for us and the low earnings in the aluminum industry that is at least for the management – the big issue well I assumed for UFO.
Chief financials $21 billion unchanged on the revenues again very stable from last quarter there are some minor adjustment more from the aluminum side and then had revenue generated from the energy side but it’s a fairly stable picture also on the revenue side. Then we have reported EBIT some of underline, but reported EBIT negative $720 million which means that we have excluded negative items on the – items excluded of a little bit less than $1.3 billion and I’ll obviously get back to that in a little bit detail, but it’s mostly related to (inaudible) and then payment charges and the restructuring that implies that.
So I will get back to that in a minute. And then we have financial expenses of $968 million a large negative number this quarter but $883 million, by far a large portion of that is related to the appreciation of U.S. dollar and versus Brazilian reais and versus Norwegian krone on the dollar debt. That we’re having, you might recall that we borrow most of our debt, we don’t have much that – that we have is mostly in dollar simply because our revenue line is so heavily impacted by the dollar strength. And when dollar is appreciating towards Brazilian reais, Norwegian krone then you get a hit year and eventually on an isolated basis we should get the benefit on the revenue side obviously from this side. And 883 out of this, so the remaining are more than the normal items there is a table in there for you, that you can get deal full.
Income before tax 1.7 close to $1.7 billion negative reported as there are some minor tax expenses simply because even though their negative results, the power serve tax in our way. It could be paid in a separate tax area and it’s to be paid from the revenues and income in the energy area.
Reported net loss of $1.7 billion and underlining net income of $268 million the later much in line with the previous quarter at debt. So then if you look at item excluded as I said there is a charge of $1.3 billion in the quarter compared to that – to an income of $108 million in the previous quarter. This chart has a few elements, the three top elements that we see in the tables are the same as you have seen before, it’s all driven by commodity prices.
What has happened in this quarter is an increase in LME level as we know, a decrease in coal indexes. There has been a slight opposite effect by the increase in dollars, but predominantly LME and coal indexes has taken down the power contract that we have as derivative contracts and that created a gain of $300 million too and this is fluctuating on a continuous basis (audio gap) depending on those commodity, the $408 million – more than three quarter of that is related to Kurri Kurri and the remaining is related to the products.
Europe and then we have about $1.175 billion in impairment charges, all of that except $20 million, but all of that is then related to Kurri Kurri closure of two production lines. And as Svein Richard said, line number two – the line number one was closed in first quarter, line on the two is closed now and the last line we believe will be out in within third quarter. So it’s a rapid closure when we decided to do this.
Okay, then – and let’s visit the business areas for a while, underlying areas of 108 million negative in bauxite and alumina and EBITDA of $250 million positive, decrease in EBIT level of $44 million compared to last quarter. Many similar elements as though as compared to last quarter sales is a little bit up, production is a little bit up, we are at the production level of alumina at approximately 6 million tons in yearly production level. So it’s moving towards inside factory level that the main capacity is 6.25 or whatever and that’s what we’re aiming at in a stable fashion throughout the year. Production in Paragominas is a little bit down due to scheduled maintenance. And also the alumina price level, fairly stable prices quarter-on-quarter. Cash cost as well as you can see from the apparent alumina cash cost is stable.
And obviously the strength in dollar or opposite the weakened reais should lead to lower cash cost we should assume. And we do see that development in our books, the positive effect from depreciation of the business all is lowering the cash cost. But this is offsets by increase in the cost of fuel. The increase in cost of fuel is related to the ICMS taxation in Brazil, which is VAT tax on state, on state level not on federal level but on state level. There is a change on policy in part of states as of – executed as of March, I believe.
And they have changed the charging place for those taxes, it has moved from the distributors of – has an exemption of this tax. We have an ICMS tax exemption approved many years ago and being an exemption that is once again verified. So when the distributors were responsible for charging these taxes, they excluded it from. Now that the refinery themselves are responsible for this, selling the product to the distributor. The distributor is not exempted for it and have to pay it and therefore, it doesn’t show up as an item excluded so to say on the invoice residual, we then are paced with the total bill and therefore we have for four consecutive months paid this.
We were hoping that we would be out of the situation in the second quarter, we haven’t so far succeeded. The effect of the 50 million and we should turn on month and as you can understand, we are in dialogue and we hope to get that of the situation soon and we will get back to you when that happens through portfolio.
Going forward, continued operational focus that will obviously be – continues item on the agenda and then to move on that cost program that we have talk a little bit that is addressed. We see stable material, raw material cost meaning that we don’t see softening in the raw material market and in significance and we also see an increase or decrease in realized prices for next quarter. The realized prices in the legacy contracts are mostly dominated by the LME, aluminum price with one-month lag. The current price environment on the LME represents approximately 10% decrease and this will obviously have a significant effect on earnings next quarter.
Primary Metal a good improvement on still low levels, but a good improvement in result of $210 million up to $240 million for the quarter, somewhat higher prices of 2% reported in Norwegian terms and origins, premiums were broadly unchanged in the quarter.
Sales volumes as you’ll see decreased a little bit of approximately 2%, it is obviously due to Kurri Kurri closure, but the effects of lower fixed cost both on Kurri and on other assets more than due to the effects of this loss of sales volumes.
Pet coke, some relief as we have talked about last quarter and this quarter, some relief approximately $40 million effect of relief on Pet coke side and we expect to seeing the type of relief also in third quarter so pet coke prices are as we anticipated coming gradually down.
Going forward, I’ll comment on Qatalum on the next slide, so going forward we had sold around 80% of our production excluding Qatalum of our production on forward prices for third quarter at 20.50, $2050 per ton and the remaining 20% will, as you see the price level today, we sold at somewhat lower level.
And then, if you look at Qatalum as Richard said, we have not only stable, but we also have what we recognized as high production of Qatalum above nameplate capacity and that is, we are very pleased with that. These numbers are the same table as you saw last quarter on a 50% basis so it’s the kind of the breakdown of our share of Qatalum.
Underlying net income of $80 million, EBITDA, underlying EBITDA up $120 million, and underlying EBIT up $80 million. So they are somewhat higher depreciation this quarter, that is we’ve changed the depreciation profile on a very minor asset element in the plant, and there are some catch-up effect from that from the two previous quarters. So depreciation level will come down towards the depreciation level in first quarter but not expect to all the way down there is very minor adjustment with our catch up effect in total $40 million deviation. Then if we look into the $80 million change, this is predominantly because of one-time effect and then we don’t have to take it through the insurance case.
We have two cases remembering Cappello. One is the incident in 2010, which is the power outage that (inaudible). We said at that time that we believe they had robust insurance coverage and we have taken in insurance proceeds on their gradual basis. Now we have closed the case and the net effects on their final compensation is $140 million which in Krona use of share.
In total user share on the insurance proceeds has been 600 million, so $1.2 billion in total for the company Cappello approximately 500 of this is charged through or has been income on the underlying level and approximately 100 on our share has been ultimate exclusive, these relates to fact that the hundred relates to write-down of assets and therefore it was taken as underlying, while the 500 is our share of compensational business loss, loss business. So it’s an insurance against loss the business which is obviously affecting the down the line income level.
So that is $140 million that’s why and then we have a negative impact by the latest incident that the fire in the cooling tower of approximately $78 million, which is $68 million more than last quarter. This is related to extra purchase of electricity in the quarter so that’s brings down the net effects of these two elements of around $70 million explaining most of the – should I say at least $120 million change on EBITDA level.
We expect that cost for cooling tower our extra purchase of electricity in third-quarter to come down 20% and to be neglect able in fourth-quarter due to the effects of than we should be in operation on this interval.
Then metal markets, very briefly I think basically we can say that the change in the results $44 million from $87 million dispute to higher currency effects on the sales in Euro versus buying the metal in the dollar. So excluding these currency effects, the performance in the business is $117 million versus $116 million. Last quarter it states the same overall performance.
Volumes in our smelters were taken down by 67% in that quarter as mitigation for a somewhat lower demand in Europe. But this was offset by increased results from sourcing and trading activities. We believe that we will have stable remelt volumes for the third quarter and except from that this is kind of a volatile business area. We’re trading currency effects as we are in the road.
If we then, move into the two downstream business areas they look quite different still. In rolled business, I’m pleased to recall after rolling, this has a fairly large exposure towards the global market either through overseas sales or through at least the contract based on global pricing mechanisms and somewhat longer contract while the extrusion business is a very local business, very shortly timed and very much influenced by this very, very local markets. And you see that also in the results. And it’s for the rolled underlying is $204 million is actually up by 30% in the quarter, although volumes are fairly stable as we can recall from some of those discussion.
So the effect here is cost basically. It’s lower cost in a quarter. Some of it is the effect of the program that we’re running. But I would say that the major part of this cost improvement in the quarter are more sum of all kind of long time effect that came in the right way this quarter. So I’m not warning on the increased cost next quarter. I’m just saying that some quarters we have the elements staying in the right brands and this was one of these quarters. We have been warning about decreasing margins. We have seen that in Europe that on the other hand we have gained higher margins due to the strength of the dollar and overseas sales in the quarter. So that has kind of leveled out in a nice way.
Next quarter we believe in stable volumes here, for this means business is not delivering very strong results, obviously, we are affected by the weaker economy but it’s holding up much better than the next business area, the Extruded Products business area. Where we still have weak results – I’m just saying a very weak European markets, fortunately our programs are starting to give some effect, but we don’t see any improvements in the Southern European markets on the freight. Underlying result 53 million up from very, very low result run through 14 million, and last quarter it’s a 40 million improvement it’s a 3% improvement from a seasonal point of view. You should expect that kind of direction and 3% is not a significant improvement from Q1 to Q2, it’s on the freight also there. There is no single to be more optimistic for the quarter full, the way we see it.
So going forward, somewhat lower results in Q3 and we are done working on what we can do given the fact that we don’t see the market getting better. We don’t see however, I should probably mention that we don’t see however a weakening in the more Germany process. As I said, we have a very short lead time here, so I’m not ruling out that could show in our books eventually. But I’m just referring to the discussion that we see in newspapers and other places these days about where Germany going and what’s happening. We don’t see that in our books as of now.
Then I’m not going to take you into a lengthy discussion on manage the business but since its good weather in London today, I thought it may sense to show this graph and well just a minute with it. Again, remember this is hydro power business in the Nordic market. I have said a few times, it is surprisingly stable year-on-year in earnings because it is very volatile on a quarterly basis. And you can see the earnings, but you can also see how volatile it is from one year to the other when it comes to prices and volumes. Now we are entering a situation with high production and low prices.
You can see that prices are 50% down compared to last year second quarter, some 20% down from first quarter this year. While production here illustrates that with the water reservoirs but protraction what actually 40% quarter on – last year’s quarter – second quarter. And here you see the large reservoirs to the right, high reservoirs above normal this year and you also see a small curiosity on those. If you see the shift in the angle, you saw that in week 13 last year. And this is an illustration of when the snow melting in Norway.
And you see the snow melting starting later this year in the mid of second quarter which means that we’re late in snow melting, which means that we still melting snow in the mountains and the least high reservoirs that in throughput, we give that the meaning that we should be prepared for lower prices in the first quarter because there are still more water coming in to the vessel. This is just a fascinating volatility with energy business and one to keep on it’s not particular in the few line that will say in energy in the first plant. But our energy results seem good numbers $362 down $194 at the same level besides with a very different mix in drivers from the second quarter last year.
We are having one third of our large production system house of July and August for some significant upgrading and their loop come just on which is now meaning low production in Q3. But also probably with low prices. So that is the guidance for third quarter.
Cash situation in total $0.8 billion cash flow from operations similar to the investment level in the quarter. And then we have paid dividends to our shareholders in the quarter. And also there is a small effect in that number of 1.7 of – from minority dividends going to a joint-venture partner 13 dividends from a consolidated company into the group. But all in all, this leads to a debt situation of $0.4 billion. So we’re close to zero in net cash or net debt.
In these numbers is $7.2 billion in cash, we did in June re-enter the bond market. This was with a $1.5 billion Norwegian kroner seven-year maturity and coupon rate of 5.4% bonds. We experience quite high interest for that bond, it was closed in an hour or so. And for me that was a fascinating exercise. Why we did this, as we said couple of times, we see diversification in the financing. We would like some longer maturity on our financing, and to reestablish ourselves in to bond market to get the kind of a feel – a feel for it. We see the bond market has some natural source for financing jointly with banks also going forward.
If we decide to do more this in the future, I would anticipate we would go for a larger chunk, maybe over the longer horizon and most likely a U.S. dollar market and a U.S. dollar bond. It happened with our philosophy around a dollar debt price. And then we have the revolving credit facility, with that suspend by facility we haven’t withdrawn on that all and it’s ten facility that we have a robust financial position also going forward.
So, I guess what we are alluding to is that we don’t see any firm signals pointing out any specific directions since last we told. As Svein said, there are definitely things on the aluminum sides to be least somewhat pleased about a better balance, high premiums, tight fiscal markets, et cetera, and maybe if you read it carefully, also see some positive signals from the inventory side. But on the other hand there are so many macroeconomic signals that also give a different flavor of it.
But the landmine aluminum history is obviously the fundamental that has driven down the aluminum prices overtime through a very low and very tough level. We obviously spend some time on that, but we spend much time on doing what we can, and for us it is continue to improve our operation. That’s what we keep ourselves busy with.
Okay. That concludes the presentation. So, if there are any questions (Operator Instructions).
Owen Scarrott – Goldman Sachs
Hi, Jorgen. Owen Scarrott, Goldman Sachs. On cash cost, when should we really get expect to get that cash-cost down from the kind of 1,500 level that we were hoping for?
Well, first of all, at least for those who have spend less time on it, let me just give some back onto your questions. We are stated some years back and we’ve restated that, that we are aiming for cash-cost level of as you’re alluding to between 1400 and 1500 depending on what the LMEs level in the market is, and that is same because of the cost of alumina. Then you should, you should use, when you do your calculations you should use probably a two months LME price on the income side. There is Qatalum is influenced by two months aluminum price.
And we believe we are very close to that level and if you do your calculations, we think you will see that we are very close to that level. But we, but you know so we’re close to that 5000 level actually. So close that we believe that the program through this year will take us into that space. But this is, you know this is again this is working on the cost elements and working through the plans on fine adjusting all parts of that, it’s a good job. But that’s why we also have been so detailed on the insurance and the extra cost on the fire to help you do that calculation.
Owen Scarrott – Goldman Sachs
Tim John – Redburn Partners
Tim John from Redburn Partners, just continuing questions on the portfolio with Kurri Kurri out placed are there any aspects of the Hydro profile that give close to concern or is smelter is now sort of on the right side of the cost cuts?
Well, a quick answer would always to be in this time than worried about old assets but they are no assets that we are secretly planning to close around the next corner.
We think we’ve done what we should do, so you know we are concentrating on the performance of all assets with various types of programs et cetera, et cetera, but on the primary smelting side on the large asset side, there are no new things coming up the way we see today. And then we will swiftly communicate with different things, but they are no, no such things on the block now.
On the downstream side, our slower assets it’s obviously a continuous restructuring program in execution, but I hope you’ve seen most of the book effects there. You know on the execution duration there might be some more, but it’s a different scales obviously than Kurri Kurri.
Tim John – Redburn Partners
And please ask a, how disappointed are you that you’re not seeing more response from the wider industry that we’ve seen lots of remissive plants in Australia like Point Henry, other things in Brazil which people are saying that it should be in place to closure, government stepping in with various office on power on other things, you know how disappointed are you in the Western world?
You mean scale from one to 10.
Tim John – Redburn Partners
If you would state...
Svein Richard Brandtzæg
No. I think I should concentrate on what he Rostrup was saying. And we are very much occupied with – do what we need to do and talk about it and then do it and very concerned about deliver and what you say we should do and I think we announced just before Christmas that the current carrier just after the Christmas, sorry. The coding culture of the first line and said we would fight whatever we could to see if we could save the two of the lines and then we took out first line and then we said no we can’t actually prevent from taking two other lines and now it’s out and last line will be out in a few weeks time. So the industry has not handled supply demand in a very good way. I think that, I should stop the comment for that.
Hi, I am (inaudible) from Bank of America Merrill Lynch. Just a question on sort of costs and where you can see them going in the second half of the year and also to what extend will be kind of cost of these improvement programs be permanent and toward – some of they become temporary.
First of all on costs. I’ll show that slide saying that the cash cost of our primary metal business has come down for some various reasons our program currency effects, alumina effect, and a inclusion of copper alumina, which is also an important part because it brings our portfolio down on the cost curve, which was the intention from the beginning.
And I’m not going to give any precise guiding about where we are going next. But it will continue – we will have a continuation of the cost program. So that element should be there and that is including the cost in copper alumina and then alumina prices will obviously still to a large degree due to the contract that should be dependent on whether metal price is going. Again, we are launching a fairly substantial, we are about to launch a fairly substantial cost programming in the units in Brazil, the mine and the refinery, we have so far concentrated on getting production, we’re not done with that but we feel it’s time now to move over to also bring to work more in cost. And you will see effects of that but I don’t believe you will see significant effects of that in the second half.
Then an important question, on your side how permanent are these?
Svein Richard Brandtzæg
The strong intention and belief is that the cost measures that you see in the upstream part of our business, they are permanent and let me put that some cautious around they were permanent here. Because in the long run nothing is permanent, obviously but they are not very influenced by volumes so to say, if the intermediate period. And then obviously inflation all the things will challenge those measures and we have to do more of it. On the downstream side, however, you could believe that some part of that is volume dependent and that if volume are changing, highly revenue stream is picking up again that you’ll link your cost because it’s also taking our ship and that’s kind of.
Thanks. (Inaudible) from UBS. I have just a couple of more general questions on the aluminum market, I guess. And early on the presentation it was mentioned there is a lot of production is underwater, just in your opinion how much of global production do you think is underwater. And also you said, currently considering any further closures, how bad would have to get, how much further would aluminum have full deeply reconsider the closures? Thanks.
Svein Richard Brandtzæg
That’s two very tough questions. I’m hesitating to give you a percentage of how much is underwater. First, what is not being underwater if that is zero, a bit are whatever. Then you have quite good premiums on the (inaudible) because it was pointing to, we would typically say a significant part whether that is 20% or its more, I don’t know and these numbers are, they are hard to get hold of because the cost curves that are around are actually not showing the full uptake.
To me the point is not how many percent it is, to me it is, the point is that it is a significant part of the industry and of the volume. It’s by far be enough part that if those assets get hired of being in the (inaudible) then things will come to an important milestone to put it that way. And then I am not able to guide you on whether that will happen or not. How bad will you have to get to across? Again I’m not going to give you any number in 2009 – 2008, 2009, we saw a decline from all the $3000 to $13,000 for a short while and then it’s (inaudible).
The situation this time is different. So far it has been more gradual step down and then much more stable situation at low levels that’s also very, very low level. I don’t believe it will come down to the very low levels, but it might happen. But I don’t believe it will because I think then more players will suffer more quickly, they’re not coming from high revenue streams before hands, but they are coming from a more tougher financial situation before they are getting into that.
We will – I can just promise you that, we will continue to restructure when if we – we think we have to. At the same time, it’s worthwhile to fight for an asset. The resulting loan from pipeline assets that has a fair opportunity to survive in the longer picture. But this should be within reason. We will also fight for an asset that we think we should keep for the future.
Rob Clifford – Deutsche Bank
Hi. Rob Clifford, Deutsche Bank. Two questions on strategy. The first one is around combining middle markets and probably metals. You split to the part not very long ago.
So I suggest you didn’t get the benefits that you’re after from that, where did you fall short you think. And the second question on strategy is on the upstream business. You put billion of dollars into the ex-wire assets and now you’re also making an EBIT level. So legacy contracts, you’re selling alumina below the market prices by definition into customers who are also your competitors. So I think that you’re subsidizing competitors to keep producing aluminum which is affecting the pricing that you’re saving. That doesn’t sound like a particular good strategy. What records you have to say, when we’re making loss, we can’t keep selling at these contract prices to right negotiate those?
Yeah, two obviously very good questions again. First of all, I would say to the contrary, I believe the opposite, I understand your question on metals market and primary metal. But to me this situation is opposite. We split it out because we felt it didn’t work as it should work. And we wanted more focus on two elements, two very obvious and important elements.
We wanted a much tougher stand to the operational aspects of our metal i.e. we wanted what led into the $300 program, we didn’t know that was what we – I may ask that we’ve also something that will help substantial impact on the factors and as we talked about a couple of years back, I think I even said that – I think we have to admit that we haven’t done our full job that we should have done over sometime and we need to get those metrics back in shape. That was one of the reasons why we did the split up.
And at the same time we wanted that much more considered focus on margin management in the metal park and the market part of it. So, now I think we have at least succeeded in parts of that and therefore, I think we can go one step not back for the one step further. We believe now that there are so many interfaces that done in the right way and then it depends literally we’ll able to do at the right way, but down the right way we think now it’s time to bring it together to extract those benefits from whole of the interfaces there are between those two (inaudible).
So I see this more as a natural next step and a various good thing to do. But then we have also decided to keep the reporting separate, actually to prove to ourselves and to you to be transparent and not try to kind of look how opportunity to hide anything. So we have decided to keep it for going forward as through the reporting side. So it’s going to be an interesting journey to the workshop.
Both side alumina, first of all we think that strategic rationale for the acquisition is still there and has been – it’s not proven at least there has been indications in the market that the rationale is there, we look we have fee income.
We have seen a somewhat higher alumina price in percentage points, obviously as Svein said that will also happen when you get a very weak metal price, but still there is a higher spot price of alumina we have seen reaction and responses in Indonesia, we have seen a more stress in the market, we have seen that other players had either paid more or invested more per ton that were repaid for these assets.
And we have seen that fortunately although at the cost obviously for the shareholders’ that’s fortunately we paid with some something that at least moved in parallel, so that we didn’t pay wall a whole lot more than what aluminum industry kind of allowed for in the valuation perspective. Then you further into dilemma, yes, to our legacy contracts I don’t think going back and negotiate those today, it’s going to work right above, I think we will have to live with them and gradually move volumes over to more liquid parameters than short of contracts and we’re doing that as soon as you have the opportunity, but most of that comes to company down the road.
The earnings are not satisfactory, that’s quite clear, but remember we did this acquisition in a third year old whatever perspective. I can’t disclose that we used a higher aluminum price as an assumption than what we see today I think that is no secret and the earnings are not satisfactory, what is satisfactory is that we still believe in the strategy behind it that we also see that we are improving production, and then let’s hope that we will eventually see market prices that are lifting this to a reasonable level.
But it’s the earnings right now are not good but we don’t see that we can always discuss timing et cetera but remember that this was a point in time where no one, others were able to take a move like that.
We believe that we were gradually coming out of the situation in 2009, which reportedly were but then we have new challenges in the industry after that. So I understand the question, it’s fair, we need to improve our earnings and we have to live with such rising competitor to a couple of years, and I think the long run, I of course believed in long run, it will show off to be a good move.
(Inaudible). There are a very few big aluminum suppliers, there is very few iron ore suppliers what haven’t you got the same amount of clouds as the iron ore suppliers determining the price?
I’m not going to speculate on that, we have been a significant alumina supplier for a little bit more than a year and we’re working hard in being a good alumina supplier both for customers obviously and also for ourselves.
And we will see how this develops, but I think there are changes in this market not because others have done it, but simply because a commodity like alumina deserve a pricing on this whole merit and not to piggyback from other products. There is no reason why you should have a commodity or a product like alumina being priced on something else although you will always have a link between alumina and aluminum. And you should still have a pricing on its own, and that has happened in – (inaudible) I mean take the simplest one in gas pricing in Europe, it was price on 30-year contract oil index and suddenly changed. So this is just a way markets are developing and I believe that the aluminum market is going in this direction. And certainly, we are very much promoting that from our end. Okay.
Any other questions then? No.
Svein Richard Brandtzæg
Thank you for your attention and I will be here after the refresh.
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