Good morning. Welcome to Hydro's first quarter 2023 presentation and Q&A. Our CEO, Hilde Merete Aasheim, will start off with a presentation, followed by our CFO, Pål Kildemo. After the presentation, we will run a Q&A. If you want to ask questions during the Q&A, please put your name in the chat that you find on the bottom right on the screen. You can start putting your name here already now, and we will use this as a queue. Before that, we have a presentation, and I leave the floor to you, Hilde.
Good morning, welcome from me as well. It's a pleasure to present our first quarter result today. I will start with the key highlights. For Q1, we report an EBITDA of NOK 7.53 billion, while free cash flow came in at NOK 1 billion negative. We report a continued positive trend in the 12 months rolling ROACE of 18% in Q1, well above our overall profitability goal of 10% over the cycle. I believe we deliver a robust result despite increasing volatility in the market and weaker demand in some sectors. Aluminium markets are largely balanced, and combined with falling raw material prices, this means improving margins. Hydro's position in low carbon and recycled aluminium is enabling us to capture new opportunities in a market expected to outpace the general demand growth for aluminium.
I will revert to some examples of recent developments in Hydro's positioning in this growing market. Recycling is an important part of our ability to serve the market for greener aluminum, and an area where we are making several strategic investments. This week, we relaunched the tender offer for the acquisition of the Polish recycler Alumetal S.A. after the first offer expired during the European Commission's extended merger review, which is still pending. We also continue our strategic growth in extrusions. The acquisition of Hueck, which was finalized in February following approval from German and Austrian competition authorities. This acquisition strengthened Hydro's foothold in the German and European market and is expected to bring strong operational and commercial synergies. Finally, yesterday morning, we were pleased to announce that we have signed an agreement with Glencore to further develop our Brazilian alumina refinery, Alunorte, together as partners.
Before I continue to report from the first quarter, let's have a closer look at what this transaction entails. Glencore will acquire 30% of Alunorte and our 5% ownership of the Brazilian bauxite producer, MRN. Glencore will also acquire an additional 40% of MRN currently owned by Vale. The 40% stake will be acquired by Hydro from Vale and immediately sold to Glencore on a back-to-back basis. The strategic rationale behind this transaction is to adjust our long position in bauxite and alumina to match our smelter capacity. Hydro will continue to be long alumina, but now more balanced in relation to the demand for alumina from our aluminum smelter portfolio. The proceeds from the transaction will be used for strategic growth investments according to our Hydro 2025 strategy, as well as for shareholder distribution.
Additional information about this will be provided when we close the transaction. Alunorte remains a core strategic asset for Hydro and will continue to be a key source of low-carbon alumina supply to the adjacent Albras smelter and the Norwegian primary aluminum smelters. This transaction will have a total enterprise value of $1.15 billion, which shall be adjusted for Alunorte's net debt as of June 30, 2023. After the transaction, Hydro will remain the largest shareholder of Alunorte with 62% ownership. Glencore will own 30%, while the remaining four minority shareholders will collectively own 8%. Hydro will, after this transaction, no longer have an ownership position in MRN. However, bauxite from MRN will continue to supply around one-third of Alunorte's bauxite needs, while the remaining share is supplied from Hydro's fully owned Paragominas bauxite mine.
The transaction will have no impact on the physical supply contracts or cost to Hydro Aluminium Metal. Let me then continue the Q1 report and talk about health and safety, which is our most important priority in Hydro. Our ultimate goal is to have an injury-free environment for our 32,000 employees around the world. I'm happy to see the number of total recordable incidents continuing its steady decline, and we are seeing the same development in terms of high-risk incidents, where the number of incidents is coming down to record lows. Even though I'm happy for these numbers and the efforts which has been made throughout the organization to create a safer work environment, there is no time to rest when it comes to safety. Our target is zero, and safety requires constant attention every hour and every minute of the day.
Let's move to another area where the whole organization has mobilized to deliver results. I'm talking about the improvement programs. Let me start by saying that a safe working environment and stable operation is the fundament for our continuous improvements. You can simply not improve if you are in a firefighting mode. Our business system support us in having the focus of being in control and capable, supporting stable processes. Traveling around in the company, I'm impressed about all the initiatives ongoing to continuously look for ways to improve in the areas that we can influence. The improvements come from improved operational parameters at our plants, efficiency improvements through robotization and automation, large procurement savings, and much more. Our ambitious improvement programs and commercial initiatives are expected to deliver on our 2023 targets.
The continuous improvements strengthen the robustness of our portfolio and earnings, and we have an ambition to deliver NOK 0.6 billion in additional improvements in 2023, supporting our overall 2027 target of NOK 11 billion. For BNA, the majority of improvements come from changing from fuel oil to natural gas at the Alunorte refinery. Unfortunately, the Ukraine conflict has caused an upheaval in the global gas market, which will delay the dry docking of the FSRU that will service Alunorte, the Golar Celsius. However, the Celsius is now in the shipyard in Singapore, and first gas will be delivered in December this year, around a half a year later than originally forecasted, which will stretch our improvement program as this needs to be compensated by other improvements.
On the ground in Barcarena, the FSRU terminal has been completed, and both the gas distribution infrastructure and refinery conversion are on schedule and on budget. Let's take a look at the market developments the last quarter and start with the alumina market. The Platts Alumina Index increased through the first quarter to current price levels of around $355 from an average of $317 in the fourth quarter. Prices have been supported by alumina production curtailments in Australia due to a natural gas supply shortage and bauxite mine permitting challenges in Western Australia. Following a period of low refinery margins outside China, the main raw material prices has now come significantly down through the first quarter and are now closer to Chinese price levels, increasing margins for non-Chinese producers, including ourselves.
European thermal coal prices have declined significantly since second half of 2022 following natural gas price trends. The coal sticks prices have remained resilient over a longer period, weaker than anticipated demand in China has resulted in more caustic soda being made available, pressuring prices in Asia, resulting in imports into Europe, leading to price pressures also in the US market. In the bauxite market, we are seeing significant developments with curtailments in Western Australia and with the Indonesian bauxite export ban to start in June. Moving on to the aluminum markets, we expect these to be largely balanced for 2023. Due to the high energy prices, we have seen continuous curtailments of aluminum production in Europe, with two more smelters recently announcing curtailments.
Far, 1.3 million tons of smelter capacity has been curtailed in Europe, which represents more than 50% of total European capacity. We expect another 500,000 tons to be at risk of curtailment. Even though energy prices have continued to fall, we do not expect any major restart anytime soon as power prices remain too high for smelters, as well as falling LME and product premium pricing. Demand in China has disappointed for a while, as many were putting a lot of hope on the pre-COVID recovery after zero-COVID measures were abolished. The ongoing hydropower crisis in South China is also leading to primary cuts, here exemplified by water levels at the Three Gorges Dam.
As we see it, the water crisis in Yunnan is getting worse rather than better. There has been nearly 2 million tons of annualized production cuts in this region. In the longer term, the consensus in the market is that the aluminum market will be balanced or in deficit towards the end of the decade, with the risk of oversupply if Indonesia is building more capacity than currently anticipated. On the price side, the 3 months aluminum price remained fairly stable throughout the first quarter of 2023, starting the quarter at $2,378 per ton and ending at $2,413 per ton. Ingot premium have recovered from their lows at the end of 2022, driven by better than expected demand and rather tight supply situation.
U.S. premium have lost some ground recently but remain elevated. In Europe, billet premiums have stopped their downturn and are increasing again, mostly due to improved demand conditions and tight recycling margins. Let's finish the market section by moving downstream, where our Extrusions business saw a 13% decrease in sales volume in Q1 compared to Q1, 2022. European demand for Extrusions in the first quarter, 2023 is estimated to have decreased 18% compared to the same quarter last year. Demand for residential building and construction and industrial segment have continued to weaken into the first quarter, while growth in automotive demand is gradually improving as supply chain issues are easing. Some subsegments, such as solar, is also showing robust growth.
CRU estimates that the European demand for extruded products will decrease 14% in the second quarter of 2023 compared to the same quarter last year. Due to continued softness in B&C and industrial segment. Overall demand is estimated to decrease by 7% in 2023 compared to 2022. North American extrusion demand is estimated to have decreased 10% during the first quarter of 2023 compared to the same quarter last year. Demand is weakening in the building and construction sector as higher interest rates lead to a softer housing market, while the automotive segment is improving as vehicle production is picking up. CRU estimates that the North American demand for extruded products will decrease 6% in the second quarter of 2023 compared to the same quarter last year, mainly due to development in the B&C and industrial segment.
Overall, extrusion demand is estimated to decrease by 3% in 2023 compared to 2022. We expect largely similar developments in our extrusion business, with a slightly better performance in Europe. When we launched our strategy towards 2025 back in 2020, we defined a set of strategic priorities where we saw that we had the potential to seize opportunities following megatrends in the macro environment. We have executed on this strategy, and I will in the next few slides explain more about how we have strengthened our position in low-carbon aluminum and taken initiatives to grow in energy solutions. Return-seeking capital have primarily been allocated to ensuring a low-cost and carbon position upstream, selective growth in recycling and extrusions, and supporting the development of our new energy growth areas until we have raised capital for Hydro Rein and Hydro Havrand.
The recently announced transaction to sell 30% of Alunorte and 5% in MRN will support further allocation of capital to our strategic growth areas. One of the most exciting developments we are seeing in the market today is the pull for increasingly greener aluminum. The automotive industry is a good example of how demand for aluminum has followed the industry's effort to improve fuel efficiency, reduce emissions, and ultimately transition towards electric vehicles. Weight is a key lever for improving the efficiency and performance of vehicles. Looking forward towards 2030, we expect aluminum usage in cars to increase further. In particular, the need for more advanced solutions following the EV transition contributes to accelerating the use of extruded solutions in automotive during the same period.
We are also seeing increased attention among many of the world's leading companies when it comes to the climate footprint of the materials they source. With the advent of Scope 3 reduction targets, we experience customers increasingly requesting materials with lower and lower embedded emissions from mine to metal. Towards 2050, we expect demand for aluminium in Europe to increase by some 5 million tons, much driven by increased demand from EVs as well as electric infrastructure following the green transition. This, combined with increased attention towards Scope 3 emissions, give rise to some exciting opportunities in the market, which favor those who can deliver low and ultimately zero carbon materials. Let's have a closer look at one such example through this video.
This week we signed a letter of intent with Porsche to work together to reduce the carbon footprint of Porsche's fleet by using recycled and low carbon primary aluminum from Hydro. In addition, we signed a collaboration agreement to explore an innovative value chain concept for battery materials and recycling. On the battery side, we'll cooperate on developing a roadmap to produce and recycle battery materials in Europe, where one of the key elements will be to investigate how to build efficient closed loop solutions for Porsche's EV batteries. We are really excited about this partnership because it represents a trend we are seeing in the marketplace, where customers are increasingly looking for long-term partners to drive down emissions and lift sustainability in their value chains.
In December last year, we signed a similar agreement with Mercedes-Benz and have for some time already worked together with Polestar as a material partner as they plan to produce the world's first carbon neutral car by 2030. Being one of the few fully integrated aluminum companies in the world, Hydro are uniquely positioned to serve these customers, utilizing the full effect of our capabilities in the whole company, going to market as one Hydro, and by that, capturing the expected increase in demand and premiums for greener and ultimately green aluminum. On that note, our customers, along with society at large, is becoming more and more focused also on the broader sustainability agenda in addition to climate. To succeed going forward, we need not only to provide a credible path toward decarbonization in our operations but also a credible agenda for contributing positively to the environment and society.
Again, being a fully integrated company like Hydro, we have from mine to metal. Hydro is in a position to provide full transparency of what comes embedded in our products, be it CO2, impact on nature, human rights, or other societal impacts. We have everything under one roof. Speaking about CO2, we are making good progress on our technology roadmap to zero carbon aluminum production. On the primary side, we are investing in two technologies which we are confident represent a credible path towards reducing and ultimately decarbonizing our primary production. Carbon capture and storage will enable us to take out the carbon from our existing plants. Last year, we decided to invest and partner with the US technology company Verdox, which is developing a capture technology suitable for our off-gases with low CO2 concentration.
Our first test of the technology were run in Sunndal in 2022, with promising results, leading us to take the next step and commission a test facility for CO2 capture which will go live this year. In parallel with testing the capture technology, we are also rolling out our capture-ready cell technology, which is an enabler for more cost-efficient capture, as this technology will increase the CO2 concentration in our off gas. We believe we are on track to reach our targets of industrial scale pilot volumes based on CCS by 2030. We're also seeing good progress being made on our proprietary HalZero technology, which we believe will enable us to produce primary aluminum with no CO2 emissions at all from the electrolysis.
Lab-scale testing has been a success. We are preparing now to build a test facility at Herøya in Norway, which has also been granted NOK 140 million from the Norwegian government via Enova, with construction expected to start in 2023. In parallel, we have already started early preparation for a third stage test facility. In this stage, we plan to increase the scale of volume and optimize the interconnection between the four process steps of the HalZero process, the chlorination, the separation, the conversion, and the electrolysis, to further mature the technology towards industrialization. With this, we should be able to deliver small test volumes of HalZero aluminum by 2025, and industrial scale volumes by 2030. I'm very excited about these technologies initiatives, and I believe HalZero is our most groundbreaking technology initiatives to date.
Moving from the longer horizon to the shorter horizons, the third leg of our technology roadmap towards net zero aluminum is recycling. Increasing the use of post-consumer scrap is the fastest way to ultra-low carbon content, and we are continuing to develop this concept in parallel. We want to grow in recycling, and we have now relaunched the tender offer process for the acquisition of 100% of the shares of the Polish recycler, Alumetal S.A. The tender offer was first launched in April 2022, but expired due to the European Commission's extended merger review. The tender offer process is for 100% of the shares, representing an aggregate equity purchase price of approximately PLN 1.2 billion, which is around EUR 260 million.
With the transaction, Hydro will strengthen its recycling position in Europe and also widen its product offering in the low carbon and scrap-based foundry alloy market. If we are successful with the acquisition, we will increase the post-consumer scrap usage with around 150,000 tons per year, and by that, exceeding our ambition of doubling the use of post-consumer scrap by 2025. Speaking about our recycling growth strategy, let's have a look at how we are progressing here. Global aluminum demand is expected to grow by some 2.7% per year towards 2030, with consumption of recycled aluminum expected to outpace primary aluminum with a factor of around 4.
Hydro's strategy for growth in recycling entails adding some 1 million tons of new recycling capacity to our portfolio by 2027, making us well-positioned in Europe and North America to capture shares of this rapid demand growth. This is both increasing our recycling capacity to bring back clean scrap from our customers, first and foremost, to increase our use of post-consumer scrap, which amounts to roughly half of this capacity increase. The increase in recycling capacity is taking place both in Extrusions as well as in Aluminium Metal, with a number of projects now ongoing, such as a new greenfield plant in Cassopolis in the U.S., as well as the new cast house in Hungary. In line with our climate target of delivering net zero products, our approved project pipeline will more than double PCS usage towards 2025 and 2027.
Likewise, we are well on track to more than double EBITDA uplift by 2027. Extrusions is an important growth area for Hydro and has delivered strong earnings improvements over the past eight years, from NOK 1.9 billion in adjusted EBITDA in 2014 - NOK 7.7 billion in 2022, and is well on the way now to deliver NOK 8 billion in adjusted EBITDA by 2025. This has been driven by sustainable improvements like portfolio optimization, pricing, productivity gains, and growth in recycled volumes and margin. Despite current weaker markets, margin are continuing to improve, partly driven by favorable currency, but also based on our strong improvement and commercial drive. Several initiatives have contributed and will further contribute to the positive development. Efficiency and cost-saving programs, including procurement, automation, and technology development.
Commercial activities leveraging position to grow in selected segments and improve product mix through value-added activities and customer partnerships. Also realization of the sustainability agenda, including CIRCAL and EcoDesign. The recent Hueck transaction will strengthen further and is expected to bring operationals as well commercial synergies. To the second pillar of Hydro's strategic growth agenda. The past year's energy shock, especially in Europe, following the Russian invasion of Ukraine, have illustrated the critical role of renewable energy will play going forward, both in terms of decarbonizing industries and society, but also its importance in lifting security of supply and driving energy independence. Hydro continues to execute on our strategy to grow the new energy areas, including renewable energy production, battery value chains, and production of green hydrogen. In Hydro Rein, four projects are under construction, three in Brazil and one in Sweden. They are progressing well.
In total, the gross capacity is 1.7 gigawatts, and our ownership share in these projects represent almost 1.5 terawatts. Hydro is an active owner in these projects and participates with key competence in project management, HSE, CSR, commercial aspects, financing, and procurement. All projects are on time and on budget. The plan remains for Hydro Rein to be capital light, and the process to raise capital is ongoing. Hydro's green hydrogen unit, Hydro Havrand's main focus, is to mature the world's first pilot of green hydrogen in aluminum, now in Høyanger in Norway. Havrand will then continue to focus on decarbonization opportunities within Hydro in our cast houses, as well as in our recycling facilities, subject to overall attractive profitability. Batteries continue to develop its portfolio.
Hydrovolt has successfully continued to ramp up the nameplate capacity, while Vianode has started to construct a pilot plant at Herøya to qualify materials for customers. In addition, Hydro recently announced an investment in a 12% share in Emagi, a developer of silicon anode materials, as well as a 12% stake in Lithium de France, exploring novel lithium extraction in France. These investments will strengthen Hydro's portfolio within sustainable battery materials. Here I will end my presentation and hand over the word to our CFO, Pål Kildemo , for the financial update. Please, Pål.
Thank you, Hilde. A very good morning from my side also. Let me start with a detailed walkthrough of our financials for the quarter and the developments from the fourth quarter of 2022. Adjusted EBITDA for the first quarter of 2023 was NOK 7.5 billion, up NOK 0.3 billion from the fourth quarter in 2022. On the positive side, we had NOK 0.4 billion higher results from 7% higher realized alumina prices and 2% higher realized LME prices, partly offset by 13% lower realized premiums. Extrusions and recycling margins contributed with NOK 0.4 billion positively and NOK 0.6 billion from seasonally higher volumes. Positive currency developments, as the NOK further weakened against the dollar, contributed with another half a billion.
In addition, we had NOK 0.3 billion in higher CO2 compensation and NOK 0.5 billion in other effects across the portfolio. These are mainly related to stronger results from our sourcing and trading activities in Metal Markets, partly offset by higher eliminations and negative effects from currency hedging on corporate level. Variable and fixed cost developments in total for the portfolio are quite stable over the quarter, the increased positive impact from sales of power from Aluminium Metal to Energy is largely offset by larger losses on sales of this power from Energy and into the spot market. On the negative side, lower upstream volumes reduced results by around NOK 0.7 billion. This is driven by lower production, sales volumes, and also inventory valuation effects in Aluminium Metal on curtailed capacity at the Norwegian smelters and lower bauxite and alumina volumes.
Energy, lower area price differences and lower prices, partly offset by higher production, reduced EBITDA further by NOK 0.3 billion. Finally, we had NOK one and a half billion lower results from mainly sales of power from Slovalco, which supported our results in the fourth quarter. If we then move to the key financials for the quarter, then year-over-year revenues increased by around 4% to NOK 48.5 billion for the first quarter, mainly due to large unrealized losses on strategic hedging positions in the first quarter of 2022. Compared to the fourth quarter, the revenues increased by 10% on higher prices and volumes. For the quarter, there was around NOK 1 billion negative effects adjusted out of EBITDA, which includes mainly negative unrealized effects on LME and raw material contracts, partly offset by a net foreign exchange gain.
There were also some smaller rationalization costs in Extrusions and transaction-related costs related to the Hueck and also the Alumetal transaction process. This results in a reported EBITDA of NOK 7.5 billion. Moving on, we have adjusted depreciation and amortization of around NOK 2.2 billion in the quarter, resulting in an adjusted EBIT of NOK 5.4 billion. Financial expenses of NOK 2.2 billion for the first quarter includes NOK 2 billion in net foreign exchange loss, reflecting a weaker NOK against the EUR, affecting EUR-embedded energy derivatives and other liabilities denominated in EUR, partly offset by a gain from stronger USD versus NOK, positively impacting net USD assets. We have an income tax expense for the quarter amounting to NOK 0.9 billion, around 43% of income before tax.
This is impacted by higher power surtax and losses in areas where deferred tax assets are not recognized. Overall, this provides a net income from continuing operations of around NOK 1.1 billion, down from NOK 6.4 billion in the same quarter last year and up from NOK 158 million in the fourth quarter. Adjusted net income was NOK 3.3 billion compared to NOK 6.8 billion last year in Q1 and NOK 2.4 billion in the fourth quarter. As a result of this, adjusted EPS was NOK 1.70, down from NOK 3.17 in the first quarter last year and NOK 0.99 in the fourth quarter of 2022. Give an overview per business area. Let's start with Bauxite & Alumina.
Adjusted EBITDA for Bauxite & Alumina decreased from NOK 1.3 billion in Q1 2022 - NOK 437 million in Q1 2023, mainly driven by lower realized alumina prices and higher raw material costs, primarily caustic prices. This was partly offset by lower port expenses and some positive currency effects. If we compare to the fourth quarter of 2022, the Adjusted EBITDA increased by NOK 300 million. This is mainly driven by higher realized alumina prices and commercial margins, which lifts results by around NOK 600 million. These effects were partly offset by lower alumina and bauxite volumes. Raw material costs were largely stable overall, a bit higher than guided, mainly driven by caustic soda, which has taken a bit longer to come down than what we expected last quarter.
Fixed and other costs have come down more than what we guided for. As a total, come down around NOK 200 million. For the second quarter, Alunorte is expected to remain around nameplate capacity. Based on current market prices, we expect a good release in cost of around NOK 400 million with a somewhat higher share from energy prices than from caustic prices. Fixed and other costs are expected to increase around NOK 150 million. If we move on to Aluminium Metal, adjusted EBITDA decreased from NOK 4.8 billion last year to NOK 4 billion in Q1 2023. The decline was mainly driven by lower all-in metal prices, higher carbon costs, and lower volumes, partly offset by positive contributions from power sales related to curtailed capacity and higher CO2 compensation.
Around 130,000 tons of capacity is curtailed at Karmøy and Husnes in the first quarter, and the resulting gain on power sales from Aluminium Metal to Energy was around NOK 1.5 billion. If we compare the results to Q4 2022, then they decreased from NOK 4.8 billion due to lower all-in aluminum price, lower sales volumes and stock effects, and lower power sales of around NOK 700 million due to no sales of power from Slovalco being partly offset by higher power sales from Karmøy and Husnes. We experienced lower raw material costs of around NOK 400 million, in line with our guiding of around NOK 400 million-NOK 500 million lower.
However, the composition has changed as carbon costs are $250 million higher than guided due to higher realized prices compared to what was expected at that time. This is partly offset by lower alumina and energy costs. We also experienced lower fixed costs of around $200 million in the low range of our guidance from last quarter, and this is mainly periodical as our full year estimates for fixed costs remain the same. For the second quarter, 69% of primary production is priced at $2,287 per ton, and 53% of premiums affecting Q1 are booked at $513, and in total, Q1 realized premium is expected to be in the range of $425-$475 per metric ton.
Compared to the first quarter, we expect higher sales volume on stronger markets. At current market prices, we expect somewhat lower raw material costs, mainly driven by carbon and energy, partly offset by higher alumina costs, but in total, lower costs of around NOK 100 million-NOK 200 million. Fixed costs are expected to remain largely stable, and we expect around NOK 600 million-NOK 700 million lower results from sales of power on lower locked in prices towards energy at NOK 2,100 per megawatt-hour in Q2, versus NOK 3,800 per megawatt-hour in Q1.
Adjusted EBITDA for Metal Markets increased in the first quarter from NOK 525 million in Q1 to NOK 669 million due to higher results from sourcing and trading activities, positively supported by a reversal of an inventory impairment and reevaluation reversal effects in line with what we guided last quarter. Results from recycling are down by NOK 260 million, with around 25% of this driven by volume and 75% of this driven by lower margins on falling sales premiums. Excluding the currency and inventory valuation effects, the results for the quarter were NOK 38 million down from NOK 630 million in Q1 2022. Looking into the next quarter, as always, remember that trading results and currency effects in Metal Markets are by nature volatile.
Based on the current market, we expect lower recycling margins but higher sales on somewhat stronger markets than expected. At current prices, we expect full year results in Metal Markets, excluding currency and inventory effects, to be around NOK 1.3 billion-NOK 1.5 billion, which is NOK 300 million-NOK 500 million higher than what we expected last quarter, which stood at around NOK 1 billion. This is due to better markets than expected and commercial, which you know also fluctuates quite a bit. In Extrusions, adjusted EBITDA for the first quarter slightly decreased compared to the same quarter last year, driven by 13% lower sales volumes and lower recycling margins. This was partly compensated by higher sales margins, positive currency effects, and around NOK 100 million in one-off metal effects on higher American premiums.
Compared to the fourth quarter of 2022, the adjusted EBITDA increased due to seasonally higher sales volumes, stronger sales margins, and NOK 300 million in positive metal effects. This was partly offset by lower recycling margins. Looking into the second quarter and compared to the first quarter, we expect higher gross margin and higher volumes. These we expect to be more than offset by lower recycling margins and higher variable and fixed costs. In addition to this, we also expect a lower metal effect of around NOK 200 million on the current market premium pricing. In Energy, adjusted EBITDA decreased from NOK 2.2 billion in Q1 2022 - NOK 0.7 billion in Q1 2023.
The net loss on an internal fixed price contract entered into in early October with Aluminium Metal to sell the power from their smelter curtailments in the market accounted for around NOK 800 million. Lower production and prices contributed negatively, in addition to NOK 300 million lower gains on area price differences. In the first quarter, external power sourcing volumes were affected by a disrupted delivery of volume from a long-term power purchase agreement in the northern part of the Nord Pool area, and the non-delivered volumes were around 0.3 terawatt-hours in the quarter. Compared to the fourth quarter, the majority of factors were similar, except for higher production, partly offsetting some of the negatives, and price area gains were around NOK 100 million lower, and loss on internal power contracts was NOK 600 million higher than in the fourth quarter.
Looking into Q2, the price and volume uncertainty is, as always, large, and production and prices will depend on hydrological conditions. At the moment, we see largely balanced hydrological balances in the Nordics, up from around 13 TWh negative at the end of Q4. In addition, we are expecting large ramp-up of nuclear capacity with, among other, the long-awaited Olkiluoto 3 coming online. Based on the current outlook, we expect lower gains from the NO2/NO3 spread differential. At current spot prices, the estimated negative effect is around NOK 100 million compared to the current quarter. In addition, we expect a significant decrease in losses on the Aluminium Metal buyback contract versus first quarter as the average locked in price towards Aluminium Metal is around NOK 2,100 per MWh for around 394 GWh.
The current estimated NO2 price for Q1 is around NOK 812. We have a NOK 30 million hedge gain on system price, which in total results in a net loss of around NOK 470 million, NOK 370 million lower than in Q1, based on current estimated NO2 prices. Let's end with the developments in net cash, which turned to net debt during the quarter. Based on the starting point of NOK 1.3 billion in net cash in Q4, our overall net position declined by NOK 3 billion quarter-on-quarter to NOK 1.7 billion in net debt based on the following. As we have been through, we generated NOK 7.5 billion in adjusted EBITDA in Q1. Net operating capital increased by NOK 1.1 billion due to higher sales volumes increasing receivables.
We can NOK increase in balance sheet values, and this was partly offset by lower inventories on finished goods stocks. Last quarter, we guided for a NOK release of around NOK 4 billion in 2023 following a NOK 2 billion release in Q4. Unfortunately, that is now estimated at around NOK 2 billion, mainly due to developments in aluminium, metal, and Metal Markets. This includes NOK 1.3 billion driven by higher changes in currency rates and NOK 0.6 billion in higher volumes than expected across the portfolio.
Other operating cash flow adjustments amounted to NOK 3.6 billion, mainly driven by NOK 1.4 billion in taxes paid, NOK 0.8 billion in performance-related pay, NOK 0.9 billion in accrued CO2 compensation, which impacts long-term receivables, when it's more than a year until delivery, and NOK 0.5 billion in interest, mark-to-market reversals, and others. Net investments were NOK 3.9 billion for the quarter, with NOK one and a half billion upstream, NOK 1.3 billion in recycling and Extrusions, and NOK 0.8 billion in Energy, and NOK 0.4 billion in others. As a result, we generated free cash flow from operations of negative NOK 1.0 billion in Q1. We are still sticking to our CapEx guidance for 2023.
In the current currency environment, the large depreciation of the NOK against the USD, all else equals, increases the expected CapEx for 2023. In the quarter, we bought back shares of NOK 0.6 billion, completing our NOK 2 billion share buyback program after the termination of the government's proportional share. Finally, we had a negative NOK 1.4 billion in other, mainly coming from new leases of around NOK 1.3 billion and NOK 0.5 billion in currency effects on debt and cash. We also had NOK 0.4 billion in many other smaller positive effects. If we move to adjusted net debt, we start by adjusting for the NOK 1.9 billion in collateral included in the net debt per Q1. This is mainly related to strategic and operational hedging positions, and this is NOK 0.7 billion lower than last quarter.
All else equal, you should expect this position to decline in stable markets as all new hedges are being rolled over on uncollateralized mandates. The next adjustment of NOK -4.7 billion reflect, among else, asset retirement obligations as well as assets in Hydro's captive insurance company that are not available to service Hydro debt. This has increased by NOK 0.2 billion from last quarter due to increased provisions for ARO. We have a small pension liability of NOK 0.1 billion, which has decreased NOK 0.2 billion from last quarter's assets on remeasurements of pension assets and decrease of deferred tax on pension assets. With these adjustments, we end up with an adjusted net debt position of NOK 8.5 billion at the end of Q1, up NOK 2.5 billion from the end of Q4.
With that, I would like to give the word back to Hilde to end the presentation.
Thank you, Pål. Let me then finish off with some final reflections. We are in the midst of a more unpredictable and volatile macro environment in the short term. I believe that Hydro is well-positioned in this environment to tackle the short-term challenges, but then to capture the long-term, exciting opportunities that we see in the market. First of all, we are in a robust position due to continued execution on our improvement programs, long positions in the energy market, and a low carbon product offering, which is increasingly valued by the marketplace. This enables us to continue pursuing the long-term opportunities regardless of the short-term uncertainties. To achieve this, we will continue to build on our unique positioning to secure premium pricing for our greener offerings. We will continue to execute on our improvement programs and commercial ambitions with unwavering focus and dedication.
Finally, continue to drive down emissions in line with our pathway to net zero while upholding our commitment to deliver on our portfolio of profitable growth projects, including new energy. With that, thank you, and over to you, Martine.
Thank you. We are now ready for our Q&A. Just as a reminder, if you want to ask a question, please write your name in the chat that you should see to your bottom right. You can also write the question into the chat like I see some of you have done. We will raise your name when it's your turn to ask a question, and you will be able to accept and join the meeting with audio to be able to ask the questions directly. I think we're ready. I see that we have some names and some questions in the chat already. First question is from Daniel Meyer. Oh, okay.
I see Daniel has written down some questions in the Q&A. I can read them out loud. First one, you continue to build working capital in Q1. Is guidance still NOK 4 billion working capital release for the fiscal year 2023?
Thank you, Daniel. As I just went through, for the full year, we have reduced our guidance of operating capital release. We have taken it down by NOK 2 billion. That is mainly driven by Aluminium Metal and Metal Markets. The continued depreciation of the krona against the dollar accounts for the majority of this. As I also mentioned, we have seen somewhat stronger markets. The increase in sales volumes compared to our original expectations of course contributes positively on the EBITDA, negatively on the operating capital. Our full year estimate for release in 2023, based on market prices, all else equal, is NOK 2 billion now.
I think, do we have Daniel on the line? I think the second question is from Daniel as well. No. I read that one as well. Can you give any indication on the timeline for restarting the 130,000 tons of shuttered smelter capacity in Norway? Do you expect other restarts in Europe at current forward power prices?
Well, we are obviously following the market very closely, and at this point, we have not taken any decision to restart. As I said, the market is volatile and so we are evaluating, but no decisions has been made, and it's hard to give any indication of timeline. We have to see how the market evolves.
With respect to restarts in the continent in general, we still expect the environment to not be positive for bringing back capacity. As you saw from our presentation today, when you take the average smelter margins, given the movements that we've had in LME and premiums, and also the developments on the energy side, margin is still negative for an average smelter. We've seen more curtailments take place during the quarter, both in Germany, but also in other European countries. Our expectations now is that there is still 500,000 tons of capacity at risk in Europe.
The next question is from Liam Fitzpatrick. Liam, will you join the call or should I ask the question? Just give a second. Very good. Liam?
Sorry. I'm just checking whether you can hear me?
Yes.
Yes.
Perfect.
Okay. I'm the leader on IT. There you go. Sorry. I've, I had to do this on my iPad. I just on the, on the working capital, Pål, you gave us some good color there. I just wanted to, to recheck that other line. You gave us the component parts, but I take it this is just timing and that won't repeat later in the year. Then just to be clear on the, I guess the normal working capital based on what you're saying for the remaining quarters, that's a NOK 3 billion release. Is that gonna come through in Q2 or is it just gonna be steady through the year?
As we see it now, we expect parts of it to come through in Q2, a sizable share compared to what we normally expecting in Q2. That is partly periodical, as you say. We've sold a lot more than what we thought in the first quarter. Then you typically see a positive development in the fourth quarter of size. Q2 and Q4 are my best estimates of the good release quarters as the market stands today.
Okay. I've got two more questions if that's okay. On the Extrusions, I heard the guidance clear in terms of, you know, it's gonna be lower quarter-over-quarter. I mean, if you could give a little bit more granularity in terms of the quantum, I mean, will it still be kind of north NOK 2 billion? You know, that would be helpful. Just on Aluminium Metal, that seemed to be the one division that missed expectations, which I think was mainly on costs. You had been guiding to lower costs in Q1, so why didn't that come through? Apologies if I missed it, but what sort of quantum of cost reduction could we see in Q2? Thank you.
Yeah. I think if we start with Extrusions, then we are benefiting a lot from the stronger margins now. There is also cost pressure, and especially in the recyclers or remelters, we see that margins are getting more squeezed as the lower premium is gradually flowing through, and not seeing a fall on the scrap side to the same extent. How I would think about Q2 as we see the world today is that the positive effects from margins, et cetera, these will be more than compensated by impacts on fixed and variable costs.
In addition, you have, for example, 200 million in lower Metal effects. So, Yeah, you, if you take this quarter as a starting point, there is at least a downside by these 200 million, potentially a bit more, but not significantly more as we see the world today. In Aluminium Metal, you are right. Our developments were not fully as expected. And that was primarily on the carbon side. So, even if we were a bit into the quarter, the anodes and other raw materials for our anodes are partly priced upon delivery based on price developments in the quarter.
Here, the price became higher than what we had expected. Carbon is the main deviating item. On the other side, this was partly compensated by alumina prices a bit lower, as you have seen this trend down in the market, and also energy prices a bit lower. Looking into the next quarter, we expect to get the carbon costs more flowing through. We are probably around NOK 100-200 million lower on the variable costs in Q2 versus Q1 as we see the market today. Fixed costs we expect to be pretty flat between the periods.
If I could be cheeky and just ask, one more. Just on Rein. It's the, I think exactly what you told us, three months ago. Can you just tell us where that process is? I mean, should we be expecting something fairly soon or is this just gonna be kind of more of a medium term sort of event? Thank you.
What I can say on that, Liam, is that we are working on the capital raise. The process is ongoing, and I cannot say anything about the timeline, but that we are committed to have Rein as capital light. We will not take any new FID investments or decisions when it comes to new project before we have a finalization of the capital raise for Rein. It has taken time, yes. There are reasons for that, particularly in the market. I can confirm that we are working on the process, and we will have to report when we have something to report.
Okay. Thank you.
Very good. thank you, Liam. next one, Christian Kopfer. Do you want to join with audio? Should I ask the question? I ask the question. just for reference, is it fair to say that your sensitivity scenarios, those communicated at Capital Markets Day with different EBITDA indications for 2023 and 2027 are still relevant ballpark-wise?
Yes. Ballpark-wise, they are. Of course, there are changes to the composition of the portfolio, which may have matured during the year, which would impact that. The biggest things which impacts the sensitivity is of course the starting price on prices. If you look at, for example, our LME sensitivity, that was based on the LME price at the time of our Capital Markets Days. We are very visible in disclosing what that price was. If you were to use that sensitivity based on, for example, first quarter results, then you would need to make an adjustment for the price changes since that time.
That adjustment is done in our quarterly book that we update every quarter. High level portfolio composition correct. To get the exact details on prices and currencies, I would use our Q1 book as a guidance.
Some further questions from Daniel. Does the delay to the fuel switch mean that Hydro will not realize the guided $80 per ton per quarter cost saving until 2024?
Yes. That is what it means, so although we're with a caveat that today, that figure is not $80 million. It was $80 million at our Capital Markets Day. In Q4, we took it down further. I think if you use current market prices, this is more to the tune of $20 million-$30 million per quarter. The benefit depends on what is the fuel oil price and the natural gas price at any given point in time. If you first take the price adjustment, you should expect around $30 billion, no, $30 million, in positive effect in the rest of this year because you were supposed to ramp up during 2023.
Now you move the ramp up out till the start of 2024. You, all else equal, you lose around $30 million from the delay. That is the reason why we say the improvement program is a bit stretched.
We have another question from Daniel. You say the NOK 8 billion of proceeds from Alunorte will help fund new energy growth. Should we therefore expect additional spend M&A above the NOK 2.5 billion guidance for spend in Rein in 2023? Any changes to your NOK 25 billion net debt target in your modified cash return policy?
Well, Pål, you can answer the net debt question. I can comment on the proceed. We said yesterday that the proceeds will be distributed in the sense that we will look at how we can allocate capital now to the growth areas that we have early communicated in our strategy for 2025, which is, we are very much interested to invest more in recycling, selective growth in extrusion, and then we have the new growth areas in Energy. Having said that, when it comes to Hydro Rein and to Havrand, we stick to the capital light.
As I also said on the question from Liam, that we have said that if you're not able to raise capital for Hydro Rein, it will be a NOK 2.5 billion CapEx, but we will not go by on that. We will not take any more in any more few decisions that increase that number before we have a solution to the capital raise. Then you can comment on the net debt.
No, the net debt target remains, and the thinking of how we operate around it should also remain.
We have a question from Amos Fletcher. Will you join with audio? No. We, then I read the question. Why has the Alumetal acquisition price increased 15%?
First of all, Alumetal has done well in their markets. Also we see Alumetal as a very interesting acquisition in terms of expanding our product portfolio in terms of recycled aluminum, particularly in the foundry alloy area. And we see how now the market is developing in terms of green premiums. We see even more prospects in terms of having the opportunity to bring Alumetal into our portfolio. That is the two main reasons why we have increased our offer in terms of hopefully being successful in including Alumetal in our portfolio.
Very good. Next question is from Yannis. Will you join with audio? No. I read the question. Extrusions quarter one EBITDA margin of 10% was exceptionally strong, especially in the context of weak volume development. Can you talk about the underlying drivers and whether this is sustainable in Q2?
Well, I, in my, one of my slides, I talked about the evolution of the margins in and the EBITDA development in Extrusions. Over the years, the Extrusions organization has worked really hard to optimize the portfolio, to make the portfolio more robust, but then also to target specific market segments, like automotive, but then now also infrastructure. It's a sum of hard work in terms of improving the whole Extrusions systems. We have more concentration on market platforms in terms of leveraging the local plants, but at the same time working towards targeted customer segments.
We believe that the extrusion portfolio is more robust and also better positioned to deliver on the NOK 8 billion target that has been set out for 2025.
Next, question from Bengt Jonassen. Do you want to join the call with audio?
Yes, I can. I have two questions. One is, let's say, a repeat. If there are any loss gain on the power sales from Alumetal Energy, you had NOK 800 million in the first quarter. Are there any similar effects in the second quarter? Maybe elaborate a little bit of why there is seems to be an increased time lag on the carbon cost. It seems that market prices are down, it seems that there is a longer time lag before you realize them in the same magnitude as maybe the earnings sensitivities suggests.
Well, that's two good questions, Bengt. I can start with the latter one. There is probably a bit longer time lag on the carbon and anode side. As you may recall, when we closed our Aluchemie factory, we also said that we would increase inventories of anodes somewhat because we had the supply chain constraints in the world. There's increased risk from a geopolitical side. In general, we're running with a bit higher inventories on both black materials and alumina for the time being. That might change going forward, but that's the only structural change that we've undertaken that could impact the lag profile somewhat.
Okay.
When it comes to the estimated loss on sales of energy in the second quarter, these are around NOK 450 million-NOK 500 million.
Thanks.
Thank you.
we have time for one last question. Srivathsan Manoharan , do you want to join with audio? No. I read the questions. I believe 70% of your smelter portfolio is powered by renewable power. There we have Sri. Hello. Hello.
Hey. Yeah. Can you hear me?
Yes.
Yes.
Yep. Thank you so much for the call. Three quick questions from me. Firstly, a strategic question. I believe 70% of the smelter portfolio is powered by renewable power. Are you considering divesting your stake in any other smelters that do not produce green metal? Or in other words, do we have any non-core assets in your portfolio? Secondly, are the improvement programs for 2023 on track given the delays to the Alunorte fuel switch project? The last question is on adjusted tax rates, which came in at 35% for Q1. How should we think about taxes for rest of the year? Thank you so much.
Thank you. I can start with the first question. Thank you for that. We have in our portfolio, we have 9 smelters and 5 of them are in Norway, which is based on renewable. Then we have Qatalum, which is based on gas, and then we have Alouette, 20% stake in Alouette in Canada, which is based on renewable. And then we have 12.4% stake in Tomago, which is based on coal. I would say that the marginal asset that or the position we have in Tomago in Australia is the one that is exposed to particularly to the high carbon.
While Qatalum has the gas, which has a carbon footprint of 7 compared to the 4 that we have for the renewables. Here we're working together with our partner, QatarEnergy, to see if there are opportunities for solar energy going forward in order to reduce the carbon footprint. When it comes to your second question on the improvement programs, which I said in my presentation, yes, we when you have a delay in the Alunorte fuel switch, that of course creates a gap in our program, that makes it stretch, but it's early in the year yet. We have areas in other business areas that are over the plan.
We still believe that we will be on track at the end of the year. I will not relieve any pressure on the organization on that.
When it comes to the tax question, it's a bit special situation we are in when it comes to taxes in the first quarter. As you know, we have a high resource rent tax in the energy portfolio. The underlying energy results which are eligible for the resource rent tax are of course quite a bit higher than what we deliver in EBITDA because we have the large losses on the buyback contract from Aluminium Metal. This results in a higher effective tax rate than what you would otherwise have expect.
In Q2, you get a bit of the same picture, because there we're still having the buyback contract in place. All else equal, second quarter results in Energy, are usually lower on lower prices and lower production. We should gradually trend more towards our guided rate of 30% towards the year as a whole.
Thank you so much.
We need to round it off here. Thank you so much everyone for joining us today, and don't hesitate to contact us if you have any questions. Contact Investor Relations for that, and I wish you all a great day and a great weekend when the time comes. Thank you.