2023 presentation and Q&A. We will start off with a presentation by our CFO, Pål Kildemo, followed by a Q&A session. If you want to ask questions later on in the Q&A sessions, we have a chat that you should see to your right on your screen, where you can write your name into that chat, and we will use that as a cue for asking questions. I will revert to more instructions on that later on. Before that, we have a presentation, and then I leave the microphone to you, Pål.
Thank you, Martine. Good morning, and welcome from me as well. It is a pleasure to present our second quarter results with you today. I would like to start with the key highlights. For the second quarter, we report an EBITDA of NOK 7.1 billion. Robust results, slightly down from the first quarter, as lower realized prices and volumes were partly offset by lower raw material costs and higher extrusion margins. The global economic uncertainty continues and short-term demand outlook weakens in the second quarter, we have continued the strong focus on margin management and cash release, with free cash flow coming in at NOK 3.7 billion.
We are also pleased that despite lower prices and volumes, we report a 12-month rolling ROACE of around 14%, which continues to be well above our overall profitability goal of 10% over the cycle. We experienced especially strong margin management and resilience also this quarter in Extrusions, where we continue to deliver solid results and margins despite cost pressures and demand weakening in most sectors. This contributes to us being well on the way of delivering on our NOK 8.4 billion improvement target for 2023, mainly supported by strong deliveries in Extrusions and Aluminium Metal year to date. Our commercial ambitions are also progressing well and are ahead of plan year to date.
We were very pleased to close the acquisition of Alumetal, significantly strengthening our recycling position in Europe, and with the greener aluminum market expected to outpace the general demand growth for aluminum, our position in low carbon and recycled aluminum is enabling us to capture new opportunities. We are working on growing our volumes, supported by strategic partnerships with customers across industries, which we have signed many of in the quarter. During the second quarter, we undertook a review of our CapEx portfolio for 2023, and we have raised the annual guidance from NOK 16.5 billion, which includes the Alumetal and the Hueck transaction, to NOK 20.5 billion. This is primarily driven by currency translation effects and inflation, and somewhat more return-seeking investments.
The second quarter of 2023 has seen a continuation of the economic uncertainty that has developed in the post-pandemic period. Headline inflation has come down, while core inflation has proven persistent, driven by services and tight labor markets. Central banks continue to raise interest rates, with both the Fed and the ECB indicating rates will have to be higher for longer, however, expecting that the peak will soon be reached. This impacts the global aluminum markets, where the development has been negative since we reported our first quarter result, with demand expectations for primary aluminum declining year-over-year. In addition, some Chinese supply is returning, as smelters in Yunnan are in the process of restarting previously curtailed production. While it is expected that 1.2 million-1.3 million tons will be restarted immediately, a total of 1.9 million ton has the potential to restart.
At the same time, we know that the dry season is around the corner, which may lead to new curtailments. The combination of these elements is leading to the global primary balance weakening in recent months. Both CRU and Harbor are now estimating a 2023 global oversupply of 0.6 and 0.5 million tons, respectively. In Europe, margins of European smelters have not improved in recent months, rather the opposite. We have had some smaller curtailments take place in the second quarter. Lower LME and premiums, coupled with continued high energy prices, leave all spot-exposed smelters in the red, making restarts unlikely. In addition to weaker demand outlook, there is another element impacting the LME price negatively.
We have seen a significant growth in share of Russian metal in LME warehouses. Since the war started, the share of available Russian aluminum in the LME has increased from under 10% to now 80%. This confirms fears in the market that stranded Russian metal will end up in LME warehouses, impacting pricing dynamics. We are concerned that the further acceptance of Russian aluminum in LME may put the global aluminum index set by LME at risk. We remain concerned that the continued situation, where some market participants may take advantage of buying discounted Russian metal, can lead to a misrepresentation in the overall price discovery and in defining a fair value for all participants.
We therefore believe that it might be appropriate also for LME to revisit its position in light of the most recent market developments. We have sent a letter to them stating just this. Russian metal also continues to flow into the EU, putting further pressure on regional premiums. While there has been decisive action from the EU against many products and commodities with Russian origin, aluminum has been excluded so far. While EU production has decreased by 50% over the last two years, Russian production remains unchanged and even increased since the invasion of Ukraine started. Weaker European demand, coupled with strong supply, amongst others from Russia, being one of the largest exporters to Europe in the first four months of 2023, as have taken place since last year, and led to a strong decrease in European premiums.
Similarly, in the alumina market, since first quarter 2022, and the shutdown of the Nikolaev Alumina Refinery in Ukraine and the Australian alumina export ban to Russia lost some 30% or 250,000 tons per month alumina supply to maintain primary aluminium production levels. To fill this gap, Russia first turned to imports from China. The Chinese alumina export incentive price is on average $100 per ton above PAX. To reduce the cost of alumina, Russia has a strong incentive to source alumina from any refinery outside of China. According to trade and shipping data, alumina shipments from Jamaica to Russia have increased year-to-date, and this could also partially explain why some high-cost refineries continue operation, according to CRU.
We finish the market section by moving downstream, in the second quarter, Hydro Extrusions saw a 13% decrease in sales volumes compared to second quarter 2022. As in the last quarter, we see lower volumes in all segments, bar, automotive, and HVAC&R , which largely support the automotive growth through our precision tubing business. There are unfortunately few signs of improvements in building and construction markets, whereas we continue to expect strong automotive markets, mostly based on current demand, as the effect of supply chain catch-up volumes is coming to an end. For the market, European demand for extrusions in the second quarter of 2023 is estimated to have decreased 22% compared to the same quarter last year, but increased to 1% compared to the first quarter of 2023, which also saw weak demand.
Demand for residential building and construction and industrial segments have remained weak in the second quarter, while demand for automotive is growing steadily. Some subsegments, such as solar, are also showing robust growth. CRU estimates that the European demand for extruded products will decrease 19% in the third quarter of 2023, compared to the same quarter last year, due to continued softness in building and construction and industrial segments. Overall, extrusion demand is estimated to decrease by 17% in 2023 compared to 2022, with transportation expected to grow with 4% and electrical, supported by solar, with 17%. North American extrusion demand is expected to have decreased 15% during the second quarter of 2023, compared to the same quarter last year, and 1% compared to the first quarter of 2023.
Demand is particularly weak in the residential building and construction sector, as higher interest rates are impacting the housing markets, while the automotive segments continues to improve. CRU estimates that the North American demand for extruded products will decrease 7% in the 3rd quarter of 2023, compared to the same quarter last year, mainly due to continued weak development in building and construction and industrial segments. Overall, extrusion demand is estimated to decrease by 8% in 2023, compared to 2022. For 2023, we expect slightly better volume development in our European extrusion business than the markets as a whole, and largely in line with the market in North America. Markets are more challenging, but we continue to deliver solid results and mitigate risks. We do this through increasing the robustness by improving margins, operational excellence, and also reducing cost.
As LME loses ground, we are starting to see our strategic hedging program coming into play. The program contributes to mitigate downside risk and secure a part of our margins, which is a key enabler to maintain a solid position in a declining market environment. As a reminder, we have 230,000 tons of LME sales left in 2023 at $2,200, 440,000 tons in 2024 at $2,400, and 300,000 tons in 2025 at $2,500. In addition, I'm pleased to say that we are on track to deliver on our full-year targets for both the improvement program and our commercial ambitions.
This enables us to continue pursuing the long-term opportunities, regardless of the short-term uncertainties, and Q2 has been another quarter with good progress on our Hydro 2025 strategy. I will, in the next few slides, explain a bit more about how we have strengthened our position in low-carbon aluminium, and also how we are continuing the growth in renewable energy with Hydro Rein. Let's start with our improvement program and commercial ambitions. These are core to our company and represents a strong improvement culture that has been key to our story from 2008. We are well on our way to delivering on our NOK 11 billion 2027 ambition, which is up NOK 3.2 billion from 2022, whereof NOK 0.6 billion is coming in 2023.
Despite some shortfalls in bauxite and alumina, due to the delayed switch from fuel oil to natural gas, we are expecting to deliver on the overall 2023 target, as BNA are working hard to compensate shortfall, also due to stronger than expected delivery in extrusions, where, for example, Hydro Building Systems is doing a very good job. Just as important as the improvement programs, is working on the top line with our commercial ambitions, which target NOK 3 billion in 2027. Here, Bauxite and Alumina are ahead of their plan, driven by the sale mix in their portfolio. In addition, I am as always, pleased with our greener products total sales margin target, which is delivering ahead of plan.
Our improvement program and commercial ambitions are strongly supported by Extrusions, and despite falling markets, Hydro Extrusions continue to display margin robustness through dedicated improvement efforts, and we continue to work towards mitigating the falling demand. On the top line, our commercial ambitions are ahead of target, as we are growing in the most attractive segments like automotive and solar, while striving to maintain margins on the portfolio as a whole. This is enabled by our product quality and on-time delivery, but also by our greener product offering. As our customers are increasing the demand for low carbon content, either through a higher share of renewable-based metal or through circularity requirements. This also comes with an increasing share of long-term contract with automotive customers, and over the last quarter, we have generated EUR 2 billion worth of automotive contracts with premium car producers.
We also see that the share of EBITDA in Extrusions is growing in fabrication compared to Extrusions in general. Improvements are also partly achieved through restructuring and reducing SG&A costs, where Extrusion is constantly reviewing the portfolio to improve their competitiveness by cutting costs, improving efficiency, and boosting profits. All business units within Extrusions have launched projects to streamline SG&A costs through lifting synergies and utilizing digitalization to optimize processes. Focus is to use a systematic approach for improvement and eliminate unnecessary work in a constantly changing environment. As I mentioned, Extrusion Building System is an example well ahead of the current improvement target, mainly related to increasing operational performance through measures of productivity, capacity utilization, scrap reduction, production time, and similar.
Another pillar to reduce cost in Extrusions is through procurement savings, where several steps and reductions have been achieved within packaging and logistics, to mention some, and also here, ahead of targeted ambitions. We now clearly see that these efforts bear fruits compared to our peer group, with last official reporting showing us closing the EBITDA per ton gap to our peers, despite our broad general Extrusions portfolio. It also underpins our trust in the ability to deliver on our 8 billion adjusted EBITDA target in 2025, despite tougher markets. Extrusions is one of our strategic growth areas in Hydro, and Recycling is another, where we have an ambition to more than double the use of post-consumer scrap by 2025, which is scrap that has gone a full life cycle and comes with zero emissions.
On June 30, we completed our tender offer for the Polish recycler, Alumetal, with more than 97% of the shares. The acquisition strengthens our recycling position in Europe and widens our product offering in the low carbon and scrap-based foundry alloy market, and increases our use of post-consumer scrap by 150,000 tons annually. In addition, we will increase our competence in the recycling of aluminum scrap materials, and Alumetal will strengthen its competitive position by entering the structures of one of the largest and leading global aluminum companies in the world. Alumetal contributes with a 12-month rolling EBITDA of around NOK 700 million as of Q1 2023, and we expect Hydro's CapEx and depreciations to increase a bit, and this is a result of the transaction, which was settled on July 7.
Further progress was also made to deliver on our recycling strategy. We signed an agreement to purchase land in Torija, Spain, with the aim of constructing a state-of-the-art aluminium recycling plant, producing 120,000 tons annually. The facility will further strengthen our capabilities to produce low-carbon aluminium and ensure more scrap is kept in Europe. The total project investment is currently estimated to be between EUR 130 million and EUR 140 million, included already in our midterm guiding. Within the business area, Hydro Extrusions, recycling facilities in Navarra and Sjunnen are ramping up recycling capacity with 20,000 tons each through cast house expansions. Also, the first metal was delivered from HyForge Rackwitz, which is estimated to be fully operational in next quarter, with close to 24,000 tons annually.
These are all important steps in increasing our recycling capacity by 1 million tons until 2027, where of roughly half is expected to come from post-consumer scrap. Based on run rate out of 2023, we have delivered around 60% of our post-consumer scrap ambition, but with the approved projects in the pipeline, we will deliver above our 2025 ambition and well on the way on our 2027 target. This all contributes to our EBITDA uplift targets of NOK 3 billion in 2025 and NOK 3.5 billion in 2027. We are growing in Extrusions, and we are growing in Recycling, as low-carbon aluminum is gaining ground across the globe.... This is important in these two areas, but it's also important for Hydro as a whole, and something we work on every day across the value chain in every business area.
This is our biggest differentiator. This will be one of the key enablers for increased value generation in the years to come. This quarter, we have taken several steps across the value chain to meet the increasing demand for greener products. To gain share, we need to enable greener aluminum, and we need to sell at a premium. On the enabling side, we successfully produced the world's first batch of recycled aluminum using green hydrogen as an energy source, produced at our extrusion plant in Navarra in Spain. This is an important milestone in verifying green hydrogen as an emission-free fuel to address the hard-to-abate industry emissions.
Our known recycling pathways to net zero are also progressing with our own HalZero carbon-free electrolysis process for new smelter capacity and our technologies for decarbonizing existing smelters through carbon capture and storage, with our both targeting proven concepts and first volumes in 2025. When it comes to enabling a market to ensure low-carbon aluminum continues to gain ground, then in May, we partnered up with Saint-Gobain Glass to decarbonize building facades by integrating the low-carbon solutions offered by both of the companies. The partnerships includes investments in urban mining, a method that recycles end-of-life aluminum and glass. Here we close the loop through installing the windows, taking back building scraps, and then creating new windows out of this.
We will also contribute with low-carbon aluminum, say, Hydro CIRCAL 100R, to produce the cleanest dirt bike ever, together with Kalk, Cake, and Vattenfall, where we also support the design and engineering of the bike to make use of other alloys. Also in the bike trend, we signed a letter of intent with the U.K.-based bicycle company, Brompton, to deliver low-carbon aluminum to reduce footprint and weight for their iconic folding bicycles. The partnership aims to set a standard for both decarbonizing bicycle production and also encouraging end-of-life bike recycling. Our customers are also recognizing our industry leadership in greener aluminum. On the 19th of June, we received the Mercedes-Benz Sustainability Award after we managed delivering the first batch of Hydro REDUXA 3.0 earlier this year.
It passed testing at Mercedes-Benz, which included a visit to our Brazilian assets, focusing on the total spectrum of ESG, including work to ensure human rights. Hydro REDUXA 3.0 will be introduced in large-scale production already this year, starting with the EQS and EQE series of electric cars. A successful transition to a lower carbon society is dependent on policy initiatives like the European Green Deal, which will lay the groundwork for the decarbonization of EU industries. There are several initiatives on both climate, energy, sustainability, and taxonomy that are important for the green markets that Hydro are targeting. Several will also support and foster the development of our greener business.
We see that political direction of the Green Deal and its industrial parts are aligned with our growth strategy in all business areas, and our climate footprint enables us to differentiate our products from the competition on sustainability. One very important aspect of the Green Deal is circularity and what it means for recycling of aluminium. As you know, increased recycling capacity is a strategic growth area for us. Right now, we see the issue of recycling of scrap popping up in several areas of the Green Deal, this makes it even more important to get the right policy for the right kind of recycling. Not all recycling is equal for our planet. There are two types of recycled aluminium, and to understand if your recycled aluminium is better for the environment than primary production, you need to know where the material originally comes from.
You have pre-consumer scrap or industrial scrap, which is always in circulation in the aluminium value chain. This has the same carbon footprint as the original primary metal. You have post-consumer scrap, which has gone full life cycle. When you recycle it, you avoid creating new emissions through the production of primary metal. The metal comes with no emission in itself. We are very concerned with the latest draft of the Commission's implementing regulation for CBAM, because the regulation has a loophole that could undermine its effectiveness as a carbon leakage and climate instrument. The loophole could lead to large-scale greenwashing of carbon-intensive imports, undermining the production of low-carbon materials in Europe. It concerns remelted process scrap that is imported to Europe. Under current version of the implemented regulation, such products would be classified as carbon-free.
This means that CBAM carbon costs for aluminum will not mirror the ETS carbon cost for EU industries, where all emissions are paid for. It provides an unfair advantage for imports that undermines CBAM as a carbon leakage instrument for Europe. Considering that more than 25% of all aluminum becomes process scrap at some point, we think there is a good chance that much of this would be remelted and destined for Europe, as it would avoid CBAM pricing. This is a loophole that could threaten the European aluminum industry, not just the primary industry, but also downstream companies. We see the only solution is that the EU Commission should attribute the same emissions to recycled content based on industrial and process scrap as for primary aluminum.
This is the only way to fix the loophole, and we have done extensive outreach to raise awareness of this issue. Moving over to the second pillar of our strategy, which is to diversify and grow in new energy. There is a need for more renewable energy, and Hydro Rein is maturing and growing the portfolio to meet this demand. This quarter has seen good progress on the construction of Stor-Skälsjön, Mendubim, Feijão, and Boa Sorte, where all projects report on schedule and within budget. At the same time, the development portfolio is growing, in the second quarter, Hydro Rein announced agreements with GreenGo Energy to acquire and develop four solar projects in the Nordics, which will together deliver 528 MW annual capacity starting from 2026.
Two of these are in Southern Sweden, in price area SE4, which will deliver 118 MW, with production to start in 2028, and the two most recent in Jylland, Denmark, delivering 410 MW annual capacity and production to start from 2026. Based on an overall assessment of the opportunities in the portfolio and capital allocation priorities, Hydro Rein decided not to participate in a previously announced competition to develop a large-scale bottom-fixed offshore wind farm in the Norwegian North Sea. We also actively continue to evaluate financing alternatives for Hydro Rein, and dialogues are evolving, with more visibility on the financing opportunities expected during the second half of 2023. Renewable developments will strengthen our long-term power portfolio, but so will also PPAs.
Hydro Energy signed a long-term power purchase agreement with Statkraft for the firm supply of 6.6 TWh s of renewable power over a 15-year period. The PPA will secure parts of the Norwegian aluminum smelters with renewable energy until 2038. Let's dive into the detailed results. Looking at the results and developments for Q2 versus Q1, we saw a decline in adjusted EBITDA of around NOK 0.4 billion. We have been negatively impacted by NOK 400 million in lower realized aluminum and alumina prices, NOK 200 million for each of the following: lower extrusion and recycling volumes and lower energy prices and volumes. On the positive side, we saw a decline in raw material costs, contributing with NOK 400 million in BNA and aluminum metal, as well as extrusions and recycling margins, increasing by NOK 300 million.
The negative NOK 300 million in other elimination is mainly NOK 800 million positive effect from lower losses on power contracts in Hydro Energy, positive eliminations, and fixed costs and other positives in BNA. These are more than offset by lower gains on power sales and aluminium metal, lower commercial results in metal markets, higher fixed costs, and other items in Hydro Extrusions. On the financials, if we compare to the last year, we saw a decline in revenues of 17% to NOK 53.6 billion for the second quarter. Comparing to the first quarter, we saw a 10% increase, driven by overall higher sales volumes and positive currency effects.
For the quarter, there was around NOK 3.1 billion positive effects adjusted out of EBITDA, which includes positive unrealized effects on LME and raw material contracts, some smaller rationalization costs in extrusion, and a positive currency effect, offset by other effects, resulting in a reported EBITDA of NOK 7.1 billion. Financial expense of NOK 953 million for the second quarter includes a NOK 789 million in Forex loss, primarily reflecting a loss from a weaker NOK versus Euro, affecting energy contracts and liabilities denominated in Euro, partly offset by a gain from stronger BRL versus $, positively impacting $ borrowing in Brazilian entities.
We have an income tax expense for the quarter, amounting to NOK 1.9 billion, about 28% of income before tax, mainly impacted by a high proportion of income in Norway, somewhat offset by power surtax and losses in the area where deferred tax assets are not recognized. Overall, this provides a net income of NOK 5.1 billion, down from NOK 11.1 billion in the same quarter last year, and up from NOK 1.1 billion in the first quarter. Adjusted net income was NOK 3.4 billion, and consequently, adjusted earnings per share was NOK 2.56. Let's give an overview per BA, starting with bauxite and alumina.
Adjusted EBITDA for bauxite and alumina decreased from NOK 1.1 billion in Q2 2022 to NOK 817 million in Q2 2023, mainly driven by higher caustic costs and lower alumina sales prices, partly offset by lower energy cost. Compared to first quarter of 2023, the adjusted EBITDA increased from NOK 437 million, driven by lower raw material and fixed and other costs of around NOK 400 in total, around half from each. It's mainly energy on the raw material cost side. This is somewhat better than last quarter's guidance due to lower fixed and other costs. Somewhat higher variable costs than expected due to longer lead times on caustic volumes. Higher realized sales prices also contributed positively.
This was more than offset by negative currency effects of around NOK 100 million, mainly due to the strengthening of Brazilian reais against the US dollar. For the third quarter, Alunorte is expected to remain around nameplate capacity. We expect continued lower raw material prices, given a cost release of around NOK 300 million-400 million, with energy and caustic being positive, bauxite costs pulling in a negative direction. This will largely be offset by higher fixed and other costs of NOK 300 million-400 million, where some of these are one-off in nature. In addition, current PAXC is trading at around $326 per ton, which will impact the results negatively. Moving over to Aluminum Metal, this quarter adjusted EBITDA decreased from NOK 7 billion in 2Q 2022 to NOK 3.2 billion this quarter.
The decrease is mainly driven by lower all-in metal prices, down from their all-time high levels and higher carbon costs. The decline was partially offset by lower alumina cost, positive currency effects, higher indirect CO₂ compensation, as well as positive contribution from power sales. If you compare results to the first quarter of 2023, adjusted EBITDA for Aluminum Metal decreased from NOK 4 billion due to lower all-in metal prices and lower power sales of around NOK 650 million. This was partly offset by NOK 200 million lower raw material costs, in line with last quarter guidance of a net lower cost of around NOK 100 million-NOK 200 million, where energy and carbon contributed positively, partly offset by higher alumina cost.
Last quarter was also characterized by significant currency volatility, both on the revenue and on the cost side, the net positive FF effect impacting second quarter versus first quarter was around $150 million. For the upcoming quarter, 67% of primary production is priced at $2,127 per ton, and we have booked 46% of the premiums affecting Q3 at $519 per ton, and we expect the range for Q3 realized premiums between $400-$450 per ton. We also expect further reduction in raw material costs of around $400 million-$500 million, mainly driven by alumina, energy, and carbon. However, this is partly offset by fixed costs to increase by around $100 million, partly related to increased activity in R&D projects related to decarbonization.
Overall, we expect a net reduction in costs of around NOK 300 million-NOK 400 million. We expect approximately NOK 500 million-NOK 600 million lower results on the AM buyback contract in Q3 versus Q2, from curtailments at Karmøy and Husnes on lower prices and volumes. During 2023, we had significant build-down of inventories due to a stronger than expected market. As the current market situation is increasingly uncertain and the current production is sufficient to supply our customers, we do not see any restarts of the curtailed volumes coming in the quarter ahead of us. We are closely monitoring the situation and evaluate the conditions. We will make production adjustments when the time is right.
Adjusted EBITDA for metal markets decreased in the second quarter from the record strong results of NOK 705 million in the second quarter last year to NOK 334 million, mainly due to weakening extrusion ingot markets, impacting both margins and volumes in recycling, and negative inventory valuation and currency effects, partly offset by increased results from sourcing and trading activities. If we exclude the currency and inventory valuation effects, the results for the quarter was NOK 265 million, down from NOK 434 million in Q2 2022, on lower recycling results. If we compare results to the first quarter of 2023, adjusted EBITDA for metal markets decreased mainly due to reduced results from sourcing and trading activities.
The outlook for the next quarter is, as always, characterized by volatility trading results and currency effects. We see increasingly negative market sentiment in both Europe and the rest of the world. We expect this to be reflected in lower volumes and tighter recycling margins. We also expect a positive contribution from sourcing and trading activities for the next quarter. At current prices, we maintain our expectation for the full year result in metal markets of NOK 1.3 billion-1.5 billion, although we are currently seeing results in the higher end of the range. In Extrusions, adjusted EBITDA for the second quarter declined compared to the same quarter last year. Lower sales volumes, recycling margins, and higher costs were partly offset by higher sales margins and positive currency effects.
Despite weaker markets, Extrusions strengthened margins on favorable product mix and increased sales premium. In addition, the result for the second quarter was influenced by negative metal effects amounting to NOK 110 million. If we compare to the first quarter of 2023, adjusted EBITDA for Extrusions decreased due to lower sales volumes and variable and fixed costs. This was partly compensated by stronger sales margins and remelt margins. Metal effects were negative, around NOK 180 million, and if we exclude these items, results are stable quarter-over-quarter. Looking into the third quarter, we should look towards the same quarter last year to capture the seasonal developments. If we compare to last year, we expect continued market uncertainty and soft extrusion markets in Europe and North America, which will result in lower sales volumes compared to last year.
Other negative elements, including higher variable and fixed costs and lower remelt margins, will also impact results. However, this is expected to be offset to quite a large extent by the strong extrusion of fabrication margins we have experienced, and also the continued positive currency environment compared to last year. In large, we see the same drivers driving Q3 results compared to last year, as we saw for Q2 year-over-year. The final business area is energy, where the adjusted EBITDA for the second quarter remained stable at NOK 854 million, compared to around NOK 824 million same quarter last year. The main drivers behind the changes were higher production of 800 GWh and positive net spot sales.
Those effects were offset mainly by lower prices, NOK 600 million lower gain on price area differences, and NOK 460 million loss on internal buyback contract. Compared to the first quarter, adjusted EBITDA increased by NOK 130 million, mainly from NOK 400 million lower loss on internal buyback contract with Alumetal and NOK 180 million higher gain on area price differences. This was partly offset by seasonally lower production and prices. In the second 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. The non-delivered volumes were 0.3 TWhs in the quarter, amounting to 0.6 TWhs year to date.
Looking into Q3, the price and volume uncertainty is, as always, large, and production and prices will depend on hydrological conditions. At the moment, we see the hydrological balance in the Nordics improving due to rain and low hydropower production. Based on the current outlook, we also expect lower production compared to the second quarter, but higher production compared with last year due to the improved resource situation. Furthermore, we foresee lower gains from the NO2, NO3 spread, and at current spot prices, the estimate's negative delta quarter-on-quarter is around NOK 300 million. In addition, we expect a further decrease in losses on the aluminum metal buyback contract versus second quarter, as the contract is entering its final phase.
The average locked-in price towards aluminum metal for the last remaining volumes is around NOK 1,400 per megawatt hour for the remaining 190 gigawatt hours, and the current spot price for NOK at 712 NOK per megawatt hours, would imply a loss of approximately NOK 140 million for the third quarter. We have an exciting portfolio of return-seeking investments and acquisitions. This portfolio ensures that we deliver on our strategic ambitions, which includes our improvement programs, commercial ambitions, recycling and extrusion growth, renewable energy growth, and ultimately, our growing volumes of low-carbon products at premium pricing. Most of the capital required comes from our operational cash flow. Some also comes from capital reallocation.
On April 27th, we signed an agreement with Glencore, who will acquire 30% of the Brazilian alumina refinery, Alunorte, and our 5% ownership in the Brazilian bauxite producer, MRN. We announced that the proceeds from the transaction would be used for strategic growth and shareholder distribution, that we would come back to the exact allocation. Well, now in the 2Q, we have undertaken a review of our CapEx portfolio for 2023, our overall guiding is increasing from NOK 16.5 billion at last year's Capital Markets Day, which include Alumetal and Hueck, because they have now been completed, and it grows from this NOK 16.5 billion to NOK 20.5 billion.
Compared to last year's guiding, we have some additional investments of around one and a half billion, and this mainly consists of the fact that the Alumetal bid was increased in April. There is a running CapEx in Hueck and Alumetal in 2023, planned in the business cases, but not part of our ordinary guiding last year. We have added some upstream return-seeking investments that we have decided to execute this year, supporting our decarbonization agenda with very strong returns. Last quarter, we also flagged that the current currency environment, all else equal, would lift our expected CapEx for 2023.
As you know, we report our CapEx in NOK, and with the weakening NOK since the end of 2022, there's been a large translation effect on our CapEx, where the majority is exposed to currencies other than NOK, such as BRL, USD, and EUR. Across the full portfolio, we estimate this effect to be around NOK 2.4 billion for the year. We have also experienced more sticky inflation than we expected last year, especially in Norway and Europe. An additional 4% inflation in Norway, 3.5% in EU, and just under 2% in US, is estimated to give around NOK 300 million higher CapEx. Both effects and inflation are volatile, and there are underlying effects that are hard to estimate.
For example, some of the inflation we see in Norway is inputted, imported through the weak NOK, and our understanding of the underlying currency exposures is good, but there are other effects we won't necessarily capture. For example, equipment installed in the US that is imported from EU and has EUR exposure, or Brazilian CapEx, which could have exposure to USD through imports and the like. Estimated CapEx for Hydro Rein in 2023 has also increased from NOK 2.5 billion to NOK 3 billion, and this is also purely driven by currency translation effects. As most of the CapEx increases are driven by currency translation effects, the indicative profitability of our investments, as presented at CMD, remains unchanged. There also is no further capital allocations planned for 2023.
While CapEx is increasing from a cash perspective, it is good to be able to free up operating capital, we have seen good improvements on operating capital in second quarter. NOK days is overall improving and getting closer to historical level, for second quarter, we have a cash effective release of NOK 2.9 billion. Improvements are mainly coming on the inventory side, both due to lower volumes, but also raw material prices. The absolute level and the NOK days remains above the historical average, driven by some structural supply chain changes like anode stocks and indirect CO₂ compensation. However, if we look at an absolute level, the majority of the change from 2020 until expected year-end is price and effects and the elements that I just mentioned.
Release assumptions for a year remain at NOK 2 billion. Is sensitive to changes in price and activity level, movements with since that have happened since we closed our books indicate a more positive release than this level. When it comes to the developments in net debt, it increased by NOK 9.6 billion from first quarter, driven mainly by NOK 11.5 billion dividend distributed to shareholders. Based on the starting point of NOK 1.7 billion in net debt from Q1, the positive contributions for second quarter were the generation of NOK 7.1 billion adjusted EBITDA, total release of net operating capital of NOK 2.9 billion.
Other operating cash flow adjustments amounted to -NOK 1.7 billion, with taxes paid and a reversal of derivative effects, partly offset by the reclassification of CO₂ receivables from long-term to short-term, which we spent time on the last quarter, also. Net investments were NOK 4.7 billion for the quarter, with NOK 2.2 billion upstream, NOK 1 billion in recycling and extrusion, and the rest in energy. As a result, we generated free cash flow from operations of a positive NOK 3.7 billion in Q2. Shareholder distribution of NOK 11.5 billion was paid out in May, and we had a -NOK 1.7 billion in other, mainly resulting from dividends to minorities in Slovakia and FX effects and lease. If we then move over to adjusted net debt, we start by adjusting for the following items.
In light of the falling LME prices, we now have no collateral related to strategic hedges, the unrealized mark to market on the strategic hedging program was NOK 800 million positive at the end of the quarter. Our pension liabilities are now pension assets, reflecting interest rate movements amounting in total to around NOK 800 million. Finally, we have NOK 5.2 billion in other liabilities, an increase from last quarter, driven by an increase in the asset retirement obligations for closure of the deposit return system two at Alunorte. With these adjustments, we end up with an adjusted net debt position of NOK 15.9 billion at the end of the second quarter. Let's finish with our priorities going forward. Health and safety remain our top priorities for both employees and the communities where we operate.
The total recordable injury rate is stable at a record low level of 2.3 by the end of the second quarter. We will never rest, and we continue to put strong effort into further improvements, as one injury is one injury. We are well-positioned for short-term challenges. We will continue to work on both maintaining and improving this position to remain robust in the current uncertain and volatile market price. This enables us to continue pursuing our long-term opportunities, like growing in greener aluminum at premium pricing, delivering on our recycling and extrusion growth ambitions, and last but not least, progress on our renewable energy portfolio, which is a key enabler for our decarbonization roadmap, security of the supply, and our greener product offering.
On that note, I would like to thank you all for joining the presentation, and we will soon open the session for Q&A. Thank you.
Thank you, Pål. We will then have a Q&A. As I also mentioned in the beginning of the presentation, if you want to ask questions directly to Pål, you can write your name in the chat that you see to your right. Then by accepting the invitation, when I raise your name, you will be able to log in with audio, and you can also ask your questions directly. I see in the list here that some questions are asked already. I think we will start with Liam from Deutsche Bank. See if you can log in with audio, and if not, I will ask the question for you. Just give him a couple of seconds. Oh, question from Liam on Rein.
Can you provide an update on the stake sale process? Is a deal getting close?
We are working actively on the stake sale process, and every quarter that progresses brings the deal somewhat closer, as we are still in active dialogue. We expect to be able to provide more color on the transaction and the likelihood of that in the second half of this year.
We have Liam on the line, I think.
I think so. Can you hear me now?
Yes.
Sorry, I was messing with the Just to confirm that, Pål, you expect to announce something in the second half of this year?
We expect to give more information in the second half of this year. We are still in an active process, the further this active process goes, the more likely the transaction becomes.
I mean, obviously, the commentary and the release sounds, you know, that things are progressing more than what you wrote last quarter. You have approved some additional investments, which I think you said you wouldn't do until you brought in a partner. Are you still sticking to the view that you won't progress any major investments on the Rhine side until you bring in external capital?
Yes. I think we're clear on that. We will continue to build the development portfolio of Hydro Rein. This is what the company will be doing going forward, but we won't approve any final investment decision on projects for being constructed until we have clarity on the capital raise.
Okay. While I'm on, if I could ask one other just on extrusions. I mean, I think the guidance there seems still quite firm, despite the weak market backdrop. Just to clarify your comments, though, you're basically suggesting that you know, results should be fairly similar to what we saw in the third quarter of last year. Is that fair?
What I'm saying is, as the market looks today, I think looking at the deviation between Q2 and Q2 for the quarter that we've just had gives an indication of Q3 versus Q3. As you remember from this quarter, yes, volumes are down, costs are coming up, but this is largely offset by the continued strong and even increasing gross margins, and we expect the same development into next quarter.
Okay. Thank you.
Thank you, Liam. Next question is from Sri, from RBC. Will you log in directly into the call and ask your questions? Then I will read your question. Can you please provide color on the NOK 2 billion or high return seeking CapEx guidance? How much of this is related to Alumetal and Hueck? Are there any new approved projects?
If you look at the increase and the capital reallocation that we have undertaken in the quarter, then the majority of this sits in return-seeking projects upstream. I would say around NOK 1 billion or so, to support our decarbonization agenda and ensure we have low costs of energy. These are very good return projects. The rest is primarily related to Hueck and Alumetal in running CapEx, and also the slightly higher CapEx ex-currency that we paid for Alumetal through the last rounds of increasing our bid to ensure that we could get the amount of ownership that we wanted.
Thank you, Pål. The next question we have from Daniel Major, from UBS. Daniel, will you log in?
Hi, can you hear me okay?
Yes. Hi, Daniel.
Great, thanks. First questions follow up from Liam on Hydro Rein. I think at your Capital Markets Day in December, you gave a guidance for NOK 2.5 billion of spend on Hydro Rein, which was NOK 2.1 billion this year, NOK 0.5 billion approximately next year. That number is obviously lifted for this year. What is the current rate of expected cash burn in 2024, based on the projects you've currently approved?
Well, we haven't increased any cash burn for other projects apart from the ones we approved. That would be the translation effects on the existing projects. I would have to get back to you on that, Daniel, how much that is in 2024.
Okay, thanks. The next question on the CapEx, you've not provided updated guidance for 2024, 2025. I think your base CapEx, i.e., excluding Rein and M&A in your previous guidance, was NOK 12.5 billion. Is it fair to assume a similar quantum of increase in the medium-term CapEx, that you've seen in the base CapEx, for this year, so sort of NOK 2 billion-NOK 3 billion?
All else equal, we are, we would expect the same movements in currency to impact the CapEx for next year. We haven't done a reallocation of projects for 2024 and beyond. That will be part of the ongoing business plan process, where we will give an updated guidance to the market at our Capital Markets Day. As a starting point, yes, we have a currency exposure which moves with the translation effects, and we haven't signaled that we would take out any projects as of now at least. That's a correct expectation.
Great, thanks. One more if I may? You created a new cash return framework, a couple of years ago, or last year, with the NOK 25 billion target. You then modified that target to reflect pending M&A transactions. If we look at where we are now, you've obviously got the kind of additional spend from Hydro Rein and the M&A, but you've also got the NOK 8 billion expected receipt from the Glencore transaction. Should we be assuming 25 is the number? Whatever we.
Yes
Have at the end of the year, there's no adjustments.
Yes
To be made?
There's no adjustments to it. In as a starting point, we shouldn't be making adjustments to it either. As we've gone through earlier, the reason we did it last year was because transaction just continued to prolong due to competition authority process. As we see it now, you have this year's operating cash flow, you have the proceeds from the Alunorte transaction, and then you have the situation in Q3 and Q4, how does the earnings play out?
When you add all of that together, you're left with an adjusted net debt position at the end of the year, and the difference between that and the NOK 25 billion should be the distribution to shareholders. I should also mention that in a situation where we are not able to or in a situation where earnings, for example, decline further, you should still expect us to also pay our 50% target in all scenarios. We pay 50% of adjusted net income. If there's more cash available, up to the NOK 25 billion adjusted net debt, we distribute that also either as dividends or share buybacks.
Very clear, thanks. I'll jump back in the queue.
Good. next question is from Duncan Simmons. Will you join? No, I will read the question. "Lately there has been some discussions that auto markets are softening in Europe by other suppliers. Would it be possible to discuss any perspectives you have on this as a key supplier to the segment?
This is, I guess, one of the big topics that the market in general, but also we have high focus on, how long does the automotive market keep the strength that it has seen? I think as you mentioned, there's 2 things which have impacted automotive markets. It's the supply chain effects and the backlog that you've been filling, then it's the green transition, higher amount of electrical vehicles, et cetera. We now see that the backlog from the supply chain issues has come down. The lead time on buying a new car is quite low.
We also see some signs of some factories, et cetera, maybe having a bit longer summer break or the like, but in our contracts, what we see now, we still expect strong growth in automotive in the third and fourth quarter, driven also by a bigger switch to electrical vehicles, where we are higher exposed. As I also mentioned on the call, we have over the last quarters, signed up EUR 8 billion in long-term contracts with automotive producers, and this is more or less purely to the electrical vehicle segment. There's a huge shift which will benefit aluminum more than the automotive market in general.
Next question is from Yannis, and I believe we have Yannis on the line.
Hi, good morning. Can you hear me?
Yes, good morning, Yannis.
Okay, fantastic. Good morning. Morning, Pål.
Morning.
A few questions from my side. First, on aluminum metal, it looks like costs are running above expectations for a second quarter in a row, quite meaningfully above. Is Q2 the right cost base for this business, or were there any one-offs to keep in mind?
No, it's an interesting deviation there, because the raw material costs that we expected to come out and development of fixed costs, mature pretty much what we indicated the last quarter. Of course, when you look at the total all-in cost that we put in our material, it will be impacted by such elements that we get less value on the power sales that we sell to energy than we did in the last quarter, and also, premium developments impacts the all-in implied cost. Underlying costs on the black materials, they have gone in the right direction as we guided.
We expect costs to come further down in the third quarter also. Q2 is not representing what we see in the market today.
Okay, that's fair. Second question on going back to the CapEx. It's interesting because in the past, when you had effects or inflationary pressures, you used to look for ways to save some money from other projects and keep your CapEx in check. This didn't happen this year. If anything, you're probably spending a bit more on an underlying basis. This is a reflection of that you're essentially deploying some of the anticipated Alunorte cash proceeds already or not?
Yes, that is the case. As I mentioned, you should not expect us to deploy more of those proceeds into return-seeking projects or the like. The CapEx increase that we've seen now is a combination of two elements. It's the translation effects, and yes, you are right that in some years we've been able to compensate that because the speed of project execution has not been so fast as expected. This year, we're running projects at a higher speed because we've been growing for a couple of years in a row, so it's more continuous than starting up at the start of the year.
There's less flexibility in that context, and the translation effect comes directly in. The other element is that, as you mentioned, we have reallocated some of the proceeds from the coming closing of the Alunorte transaction into other return-seeking initiatives, and we don't expect to reallocate more of those proceeds. The rest goes into the annual dividend distribution process, where we have an ambition to pay out distributions up to the NOK 25 billion adjusted net debt level.
That's very clear. Thank you so much. Just one last question from my side to clarify on BNA cost, could you repeat the benefit you expect from raw materials and the movement in fixed costs, and then the power sales in aluminum metal? How much are you expecting in Q3? Thank you.
The BNA cost relief is around NOK 300 million-400 million. If you only look at caustic and energy, I think we're around NOK 500 million-600 million, we have some higher bauxite costs in next quarter. Part of it is due to maintenance activities, maybe 30%-50% of that, part of it is also due to different bauxite qualities when you mine. A net NOK 300 million-400 million, where maybe NOK 50 million-100 million is more one-off.
On the fixed cost side and other costs, we expect those to increase by around the same magnitude for the quarter. We were lower this quarter on fixed and other costs than what we have guided for, and part of that was more one-off in nature. We also said that these would increase by around NOK 300 million-NOK 400 million, where maybe NOK 100 million plus of that is more one-off in nature.
Great, power sales, you mentioned 500, I think?
Yeah, that's probably correct.
Perfect. Thank you.
I'll get back to that.
Thank you.
Thank you.
We have two questions from Sri, as I will read them out. First one is on working capital, second on the overall sustaining CapEx. We start with working capital. "With falling aluminium and raw material prices and strengthening of the NOK, is the working capital release guidance revised in 2023?" On the sustaining CapEx part, "Of the NOK 1 billion NOK, is this structural, or is there any revision also on the medium-term sustaining CapEx guidance?
Two good questions. I think if we start with the operating capital, our guidance now on NOK 2 billion release for the year as a whole was based on figures as of balance sheet date, the 30th of June. In that situation, yes, we had seen falling LME prices, but we also had a currency rate that had depreciated quite against the dollar. Since then, you've seen some increase in LME, but not to the same extent that you've seen the currency depreciate or strengthen against the dollar.
All else equal, you should expect the release to be higher than NOK 2 billion if you use current spot assumptions. The second one was on the NOK 1 billion in sustaining CapEx. Yes. That increase is purely related to the movements in currency. As we commented on earlier, if the currency remains at the level that we've had year to date, then you should expect a similar increase in next year and the coming years. Now we've seen some strengthening of the krona, so it will probably, if it maintains at that level, come a bit down.
Since we have a lot of our CapEx in USD, EUR, BRL, and other currencies, and only I don't know, 20%-30% in NOK, that figure will move up and down with currency rates, but so does also our earnings. You should be compensated on that side for the higher CapEx, all else equal.
Next question we have from Alan Spence. Will you dial in with audio? No. I will read the question. "Can you please specify the currency rate assumptions under the NOK 16.5 billion guidance and the new NOK 20.5 billion guidance?
I think, when we, when we had our capital markets day, the BRL against the krona was around 1.9. The dollar was around 9.5. The euro was around 10. What we've had as a year-to-date figures is more around the 2.1 for the BRL, between 10.5-11 for the dollar, around 11.5 for euro. On the other smaller currencies, we've said around 10% there also because these it's mainly the weakening of the krona that impacts this picture.
Good, and then we have another question from Daniel. Daniel, I think you're still on the line.
Can you hear me out there, Oliver?
Yeah. then we move over to Amos. Will you dial in? Why did you stop the buyback in Q2?
The buyback will continue, basically it's the more or less the process of getting it approved on the Capital Markets Day, and then tendering it among banks, and then coming up with a new program, and then it will restart again after the summer. No other special reason than that.
We have two questions from Bengt. Bengt is joining. Hi, Bengt.
Hello, hello. Good morning. I'm a bit slower. Could you please repeat the gain on the power sales from Alumetal to the energy and quarter-over-quarter impact, and then also follow up on the acquisition of Alumetal, where it will be reporting?
Yeah, the acquisition of Alumetal will be reporting in metal markets segment together with our other recycling operations. We expect that to happen from the third quarter. Of course, we closed in the start of July, we the earnings in that period will be so small that we can consolidate it for the whole period. When we look at the Q3 outlook on the energy gain in aluminum metal, we expect those to be around NOK 500-600 million lower than in the second quarter. Basically, now, we have very little left.
I think it's 190 GWh between aluminum metal and energy. We will now be spot exposed to the power markets in from aluminum metal unless they enter a new contract.
Thank you.
Good. Any more questions on the line? I see someone is writing, so can just. Yeah, a question here from Jon Sandine: "How much premium do you expect for green metal in 2024?
At the moment, we are actually entering into quite a lot of contracts, which have a green premium element in them. We are growing the portfolios of greener sales year by year. I think we'll get back to this at the Capital Markets Day, where we hope to can give a bit better overview of the greener premium potential for the coming years going forward.
Then we have a question from Martin Norman. Will you log in? No. "For Q3, you have sold 67% at $2,127 dollar per ton, which seems surprisingly low, given the pre-announced hedging and the current price. Can you please explain?
Yeah, I would have to dive in a bit more into detail to see where the deviations lie. Usually, when there's a deviation between what you get externally by running, I don't know, one-two months lag, and what we have internally, is if there's been big volatility intra-quarter, which impacts the exact shipping patterns than we have and the like. This has been a quarter where there's been quite some volatility within the range. I would expect it to be that, but let's look into it, and we can get back to you a bit later.
We have a question from Yannis: "How much traction is the push for LME to disqualify Russian metal?
At the moment, it is ourselves that have written a letter, because we think that this is a worrying situation, and then we will have to see, how they respond to that. This is something we do on our own behalf.
It seems to be no more questions on the line, so I think we will run it off there. Thank you all so much for joining us today, and if you have any further questions, please reach out to Investor Relations in Hydro, and we will get back to you. I wish you all a continuous nice day and summer, and a weekend when the time comes. Thank you so much.