Good morning and welcome to Hydro's Capital Markets Day 2018. My name is Stian Hasle and on behalf of my colleagues Olena Lepikhina and Aud Helen Halvorsen, I am responsible for investor relations in Hydro. We are very happy to welcome all o f you here today to the Andaz Hotel as well as all of you following us on webcast.
As you all know, 2018 has been an eventful and challenging year for Hydro. We will obviously during the day provide an update on the situation in Brazil. As well try to keep an eye also on our long term strategies and priorities, as well as updating you on the main achievements during 2018.
First, let's start with safety. There are no scheduled fire alarm tests today, so if the alarm does go off, please listen to the announcement and follow the instructions. The nearest fire exits is just out there to the left or to the right. Follow the green running man sign to the nearest exits.
Also before we start, I would l ike to draw your attention to the cautionary notes related to forward-looking statements which can be seen on the screen as well as in the presentations in front of you.
Let's move over to the agenda w hich looks as follows. We will start with CEO followed by CFO, t hen a Q&A. After the break we will have a market update as well as an update on the situation in Bauxite & Alumina and also on Hydro's main priorities within corporate social responsibility. Another Q&A. The third and last session of today will be four different business areas. It will be Rolled Products, Extruded Solutions, Primary Metal and Energy, talking about their key priorities and achievements and how we are stronger as an integrated aluminium company.
We have another Q&A before a short summary by our CEO. Obviously we have lunch here from 1:00PM to 2:PM and I hope as many of you as possible can join us for that.
With that I would leave the stage to our President and CEO Svein Richard Brandtzæg. First, let's take a look at this.
I was born to change the world. My ambitions are high, my talents many. I'm light, strong, flexible and infinite. My true strength lies in my ability to combine, adapt and create new solutions. Breaking free from established truths, proving wrong that who say it can't be done. Nothing comes for free. To make the impossible possible requires courage, care and collaboration. There are no shortcuts in life. To get ahead you need to go that extra mile. I know that my higher purpose is to help Hydro engineer the future and lightweight our planet. I'm not able to do this on my own. To reach my full potential, I lean on my global family. A family of 35,000. Together we unite to create the products and solutions for a better tomorrow. We are Hydro. We are aluminium.
Good morning and welcome to all of you following us here in London and also welcome to all of you followers online. It is no overstatement to say that 2018 has been an eventful year with a lot of focus in Brazil. It's also an obligation for us as leaders in Hydro to take good care of the rest of the company. That's why my title today is Navigating challenging times while maintaining long-term focus. Let us move over to the conclusions from the capital markets day last year where we highlighted the importance of maintaining financial strength and flexibility and also continue the value creation and providing attractive returns over the cycle. Continuous improvements have always been important for us and we are continuously strengthening our competitiveness through our activities differentiating to the fact that we are an integrated, fully integrated aluminium company.
Last year it was just weeks after we acquired the Sapa company which we now have integrated and Sapa continues to deliver better results to our Extruded Solutions business area today. We also talked about innovation and sustainability and how we can take leadership in that respect. Safety is always first priority and let us take a look at the safety performance of the company as we see it today. We have over the last years made several improvements but we have also seen that the number of accidents has been quite stable over the last years. We have a total recordable injury rate around three which is still among the best in the industry. We are still not satisfied with what is the status. Two weeks ago we also had a tragic fatality in our extrusion plant in Hungary.
These are of course the accident should never happen at the worst thing that can happen in our company. We have now to continue our efforts to strengthen the safety work through our fatality prevention work and reduce the number of high risk incidents and of course also reduce the total number of accidents in here to going forward. Sustainability and innovation is now an integral part of business decision processes and all aspects of sustainability, people, planet and prosperity as a part of our strategy. We also reporting according to the United Nations sustainability goals where they are relevant in the company. We want to be a leader in innovation and sustainability, not a follower. That's why innovation and sustainability is also a clear framework for the strategy for the company going forward.
If you take a look at the main developments this year, I start with Extruded Solutions. As I said, Extruded Solutions is delivering better and better results. That has been the situation through the whole year. We acquired two extrusion plants in Brazil also this year. The Conix plants in Brazil is now integrated in the company with 7 presses, one cast house and one tool shop. We also upgrading the Cressona plant, the biggest extrusion plant in the U.S. with a high performing press to serve the U.S. automotive industry. In Rolled Products, we have seen pressure on margins and Rolled Products have started restructuring in foil. We are increasing the sales of body- in-white to automotive. The automotive strategy is a very important part of the high grading process in Rolled Products.
If we take the volumes sold from Rolled Products during the 3 first quarter this year, compared to the same period last year, it was 27% higher sales to automotive from the automotive lines. We are operating in Germany in Primary Metal. We are very happy that we have now had a successful ramp up of the technology pilot at Karmøy and we can already today say that we are now producing aluminum with the lowest emissions and lowest energy consumption the world have ever seen at Karmøy. We are now also taking benefit from some of the technology elements in the Husnes plant where we are going to prepare for a restart in 2020 and that is a part of the investment schedule next year. We are taking a build decision on Husnes this year.
In energy, it has been important for us to secure competitive power contracts after 2020 when the large Statkraft contract expires. We have already this year added the portfolio with 2.2 terawatt hours for the next years after 2020 and 1.4 terawatt hours. That is wind power. In the Nordic market it's a very good combination of unregulated wind power and the regulated hydropower that fits well together. Energy is also developing the solution for the Sunndal plant which is for reversion in the end of 2020 and that is also moving forward in Bauxite & Alumina . We are all aware that there is an embargo on Alunorte which has a direct impact also on Albras, the neighboring smelter and also Paragominas, the bauxite mine. We are operating Alunorte at 50% capacity today and we will come back to that in my presentation later.
We have signed technical and social agreements with the authorities in Brazil, which is an important foundation for finding a viable path forward to resume full production in Brazil. We have been through with you previously the midterm Goals in Hydro and I will give you an update now. As you can already see it is more colorful than what we have had previously. It is highly impacted on the cities situation in Brazil. If you start from the top, safety is red because of the fatality we had in Alunorte two weeks ago. The ambitions to increase the volumes in Paragominas and Alunorte is also red. The Brazil situation also impacts the Better program, the improvement program. That is also now in the red color.
We are however according to plan with regard to pricing alumina on PAX, on the PAX index and with regard to the technology pilot economy we were some days late on starting the ramp up. Even more importantly we finalized the ramp up within time the first half year in 2018 that was a part of the Better program. If you look at the Better program, we have ambition to have 200,000 tonnes creep capacity in primary metal. We have identified 160,000 tons towards 2025, 43,000 tonnes it's already delivered. The remaining 40,000 tonnes is a question mark. This is due to the business case. It could well happen, but it depends very much on the development of the business case for that volume going forward.
That is now yellow in the Rolled Products, the body in white capacity as I mentioned is moving in the right direction with increasing volumes. Also the same is the case with the UBC, the used beverage can recycling line in Germany. Both are red due to the fact that we have been behind plan on volumes. Although there are significant improvements that we have delivered this year on the green up part we are at plan or even ahead of plan with regard to achieve carbon neutrality from a life cycle perspective in 2020.
We can achieve that already in 2019 on the recycling of post consumer scrap, that is also now red because we have seen that it has been a better business for us to remelt process scrap at higher volumes than to increase more than what we have done so far on the post consumer scrap. Again this is red due to the business case and not because of the volume capacities that we have in our remelters. On the rehabilitation in Brazil, that is a one to one rehabilitation of the in the bauxite client that we are talking then we are talking about reforestation and that is according to plan. Quite the mixed picture and heavily impacted by the situation in Brazil.
Let me then move over to Brazil. I'm sure all of you are following us closely and therefore I will devote now some time to describe the situation in Brazil. What has happened in Brazil, what is its current status and also the way forward. Let us just take a look at what we have done in Brazil and the history for Hydro in Brazil. In fact, we have more than 40 years experience. We entered into MRN with ownership in the MRN bauxite mine in 19 74. In 2000 we acquired 34% ownership in Alunorte refinery in connection with expansion. In 2011 we acquired the Vale assets. Then we got Brazilian extrusion plant through the acquisition of Sapa. Now Extruded Solutions also have acquired two new extrusion plants in the southern part of Brazil. All in all, several assets.
If you look at the balance sheet and the capital employed Brazil represent now 31% of the total capital employed in the company. If you look at the contribution on underlying EBITDA from Brazil and the numbers from 2017, it is 42% of the total underlying EBITDA of the company. If you take a look at the situation this year, it is 32% of the underlying EBIT in the company. Still a very important part of the total business in the company. That's why it is also very important for us. That's why we also work in day night to find a viable part for resuming production as soon as possible in Brazil. If you take a look at the refinery and the bauxite residue storage areas that has been influenced focus.
We have the old bauxite residue storage area DRS1 where that is now operated together with filter press. We decided on a filter press and a new area for storage of bauxite residue DRS2 already in 2014. The old technology drum filter was the normal operation until October. Now we are operating with a filter press and the DRS1. There is an embargo on DRS2. I will come back to that. All the water that comes from these bauxite residue areas is collected and is treated in the wastewater treatment plant where it is neutralized and cleaned before it is discharged according to license into the Pará River. Also the rainwater from the refinery area, which is quite large. All the rainwater from that area is also collected and is then transferred to the wastewater treatment plant.
That is where we had unlicensed discharge during the heavy rainfall in February. If you take a look at what happened there and which also created a situation, it was extreme weather that led to strain on the wastewater treatment plant and the management in Alunorte decided to send water through an old channel Canal Velho, which was previously used for discharging rainwater. We did not have a license for that when this happened. It was also some islands unlicensed water that came from roof which was covering cold storage. It was a cold storage roof. Also in one of the corners we had a flooded area where it was some discharge pipes that was going out of the area that was blocked by concrete. One of the disused pipes had a crack, so some rainwater was seeping out of the pipe outside defense.
These are the three unlicensed discharges. What is important to note there is that both internal and external investigations have found no evidence of any significant lasting damage. That has also been confirmed by the federal environmental agency IBAMA and also the state environmental agency SEMAS. That is important to note. What are we now doing to increase the robustness of the plant? There's been several minor actions with related to pipes and pumps and valves. That is already in place. We are now finalizing a project which will increase the water reservoir capacity with 350%. This will be finished in the end of the year. On top of that, we are adding capacity to wastewater treatment plant that will increase the capacity there with 50%.
That together makes the plant very robust. With regard to future climate changes, as you see, the communities are in the north and the river is in the west. In the future we will close the old bauxite residue storage area and then only use the press filter together with the DRS2, the bauxite residue storage area DRS2. It's also important to note that when we decided to invest in a new area and a new technology for storing bauxite, we choose the most advanced available technology. This is the best technology in the world to handle bauxite residue. It is a much safer way to handle the bauxite residue. This bauxite residue storage area and the way we are handling the bauxite creates a lower environmental footprint and also a drier and safer material.
If we look at the current status, there is no embargo of meaning we are producing 50%. The embargo was by federal court on request for Ministério Público and also by the state environmental agency SEMAS. That is on the production side. There is an embargo on DRS2, the new bauxite residue storage area by the federal court. Also that on request from Ministério Público and IBAMA, the federal environmental agency lifted that embargo early October. We have filed a petition to the court for lifting this embargo and that is now has been delivered with regard to the press filter which was also under an embargo after the heavy rainfall that has now been lifted by the Federal Environmental agency IBAMA early October. That is now in operation.
The way forward from producing 50% capacity, we are now increasing the water reservoir capacity with 350% that will be finished, as I said, in the end of December, second quarter 2019, we will have 50% higher capacity on the water, the wastewater treatment capacity, and we have now eight filters in operation, and we see that that could be a limiting factor on the total capacity, we are adding a ninth filter that will be ready in the second third quarter next year, on the social side, we have a good dialogue with the local community, we are continuing to distribute water and also supply health services, and we have updated the emergency preparedness plan for the society and Alunorte.
We are committed to deliver food components for community surrounding Alunorte. Longer term we have agreed on a special agreement with the authorities to invest and support sustainable urban development and infrastructure for our neighbors. On the social environmental investments side we are also then contributing to the Sustainable Barcarena Initiative that is a 10-year program that we are committed to also to deliver on. Timing for resuming 100% production is still uncertain. If we add up the investments that we are doing on operations on environmental and social areas it adds up to BRL 1.1 billion. We have a continued good dialogue with authorities. For us it's important now to find a common platform, common viable platform, a viable part for resuming production. We are ready.
We have the capability, in fact, we have the best organization for running alumina production operations in the world. We are eager to start and with improvement initiatives and increased robustness that is now in place, we think we should be ready any day to resume production, full production, moving from Brazil and then over to the financial framework and competitive position. Let us now start with how we allocate capital in our company. I said in the start that is very important for us to keep a solid and flexible situation on the finance side, keep a solid balance sheet and liquidity.
This is of course very important in a cyclic industry not at least to avoid actions of last resort but also to have speed of navigating the company to have a speed for improvements and also to have the opportunity to t ake a ttractive opportunities when they appear. We are operating in a capital intensive industry and with regard to capital expenditures we will have to have a part into sustaining capex to maintain and develop and make sure that we have safe and lean operations.
We also using capital for attractive profitable growth profit projects going forward as you also have seen in the past. It is also a commitment from our side to deliver predictive and competitive dividend to the shareholders over the cycle. Independent on where we are in cycle and when the cycle moves on the positive side and we create excess capital, we also are ready for organic growth projects for M and A and excess capital will also be distributed to the shareholders when the conditions is right.
If you take then a closer look at the balance sheet and the debt situation, we have a target on adjusted debt to equity ratio below 55%. As you see here, we are now well below 30%. If we keep an eye on our competitors, you will see that we are well positioned as a company with a very strong balance sheet, and I think that is very important. That would be a priority for me and for Hydro also going forward. If you take a look at the uses of cash, I know we are talking about the period from 2015 up to the third quarter this year where we are NOK 45 billion in cash generation, and there are also some other cash sources.
Almost NOK 50 billion in that picture you see almost 50% is going towards sustaining CAPEX and growth projects. 25%. As you see there is M&A and most of that is the acquisition of Sapa shares and 20% is the dividend to the return to shareholders. If you take a closer look at the dividend we have been able to increase the dividend over the years during last years, this year we paid NOK 1.75 per share for 2017 and the average payout ratio in this period has been 70%. The dividend policy is 40% of the net income over the cycle and we have NOK 1.25 as floor for the shareholders.
The process with regard to dividend is that the board recommends dividend and that will be communicated in connection with the fourth quarter presentation in February and the final informal decision of the dividend will be done by the general meeting in May next year. Let us take a look at the competitive position we have upstream we are comparing Hydro with our peers according to the Alumina business operating cost curve and on the Metal side smelt, our business operating cost curve on the alumina side. You see, we are well positioned in the first quartile and this is based on the calculation where bauxite is transferred at market price. If we transfer bauxite at cost, our position will be even more robust. We will be even lower in the first quartile than we have shown here.
With regard to the smelter business operated cost curve, we are here in the second quartile, well positioned, very competitive. Here we have transferred energy at market price. If we transfer energy at cost, we will be in the first quartile also for the smelter. Being in the first quartile with our business is not the sleeping pillow for us. We will continue our efforts to improve our operations to reduce cost and focus on improvements continuously. It is not only the fact that we have made improvements. In fact, over the last year, since I took over as a CEO up to 2017, we have improved our business with NOK 6 billion. It is also the fact that we have been helped by currencies and we have not control of currencies. We have to continue our improvements in midstream.
We are comparing Hydro with our peers with regard to value added products which comes from the castors. 83% of the liquid metal that we produce in our electrolyzers in our smelters are transferred into cast houses which produce metal products like extrusion ingots, sheet ingots, primary foundry alloys and wire rod. As you see here, we are well positioned in our industry and have very strong market positions in metal products. In downstream, it's more difficult to compare Hydro with our peers. As you see on the upper part there, Extruded Solutions are delivering better and better results. Egil will come back to the strategy which is value above volume that have been consistently successful over the years. If you look at all products there they have had. In all products we have had a strategy to high-grade the product portfolio.
Automotive is a very important part of that. You can see that over the years we have increased the volume sales to automotive and that will also continue for the coming years. If we move into the Better program and as I said, we will continue to improve our business. During the last years we have done significant improvements and we had a target to deliver NOK 3 billion in improvements with the base year of 2015 up to the end of 2019. The Brazilian situation creates difficulties. Although there are improvements in Alunorte, in Primary Metal and Rolled Products. The total picture is that now that all the improvements we have done is now wiped out. That doesn't mean that there are improvements ongoing. As I said, in all products there is a contribution of NOK 0.4 billion accumulated up to now in Primary Metal.
That business area has been impacted by the fact that Albras is running at 50% capacity. Also the fact that we are now introducing other qualities of alumina which creates also some issues related to lower current efficiency and higher energy consumption, which impacts also the cost development in Primary. The accumulated delivery so far is only NOK 0.1 billion. All in all it is very clear that the situation in Brazil are now impacting us heavily. If we could go back to full production tomorrow in Brazil, this picture will change of course dramatically. We will then calculate in the benefits that we have accumulated. We cannot promise that we would be able to deliver NOK 3 billion because it takes time to ramp up and also to get back to normal operations after such situation that we have had in Brazil.
With that let us move over to the market. The interesting situation both with regard to macroeconomy and also the global politics. Aluminum is a very important ingredient in the modern society and we are heavily impacted by the politics ongoing. You are probably aware of the sanctions against Oleg Deripaska and Rusal which created quite some volatility, especially in April and May this year. Also the import duties to of aluminum to us has also had a big impact especially on the standard ingot premium in the North America, in the U.S. market, but also in China we see that there are introduction of capacity. We have the Blue Sky War and we now see that the growth in primary production is much lower than what we have seen for many, many years.
We expect that the growth of primary production this year will be between 0 and 1%. Next year we estimate 2 to 4% growth in supply. Also the climate change and ambitions to deliver on the Paris Agreement is impacting our industry. I will come back to that also later in my presentation. We are expecting 2 to 3% growth in demand or primary metal in 2019. 1 to 3% in the world outside China and 2 to 4% growth in China. Still aluminum will continue to be the fastest growing base metal, but now at lower levels than what you have seen in the past. If you then take a look at the supply demand balance, we talked about that in the third quarter presentation and show you that in 2018 we will end up with a deficit between 1.5 and 2 million tonnes.
We see now that there will be next year a small surplus in China and a significant deficit outside China. All in all, we expect that the deficit in 2019 will be between 1 and 1.5 million tonnes. This deficit is of course also impacting the global inventories. We see the volumes are now coming down. Also in inventory days we are now between 50-60 days approaching. There's still some way to go, but it's nowhere approaching the level we had before the finance crisis. With lower growth in China, continuous deficit reduction in global inventories and global inventory days, that also give an indication of what will happen in the markets next year. If you take a longer term view and look at the next 10 years, of course that is with some uncertainties.
We still expect that the growth in primary metal demand will be 2-3% going forward for next 10 years. 3%. Semis and recycling will increase even more. The driving forces will be the traditional segments. Automotive transport will be the fastest growing segment with 3-4%. Packaging, building and construction and electrical will also contribute significantly to the growth of aluminum for the next 10 years. With that let us move over to the direction of the company and of all strategy in the company has been integration that Hydro should be an integrated company. We will continue to develop our position as integrated aluminum company going forward. We added the bauxite and alumina part in one part of the value chain in 2011. Last year we added extrusion in the other part of the value c hain.
Between there there are also a lot of opportunities to develop our business going forward.
The framework for our strategy has been the aspiration to become better, bigger and greener. We have updated that aspiration where better is not only about cost reduction, it will still be about cost reduction. Now we are also focusing more on the market and the customers to raise performance and do an even better job in the marketplace. On the bigger aspiration, we are expanding the use of aluminium and of course also strengthening our platform for further growth. There are several elements into that and the green. Our ambition is to lead the transition towards a low carbon circular economy sustainability very important for us going forward. As you see here, we are a fully integrated company. This is a quite complex model. The secret behind operating such a model is to have different business models along the value chain.
Under one Hydro umbrella we have a more centralized business model upstream and more decentralized as we move downstream. Meaning that in Extrusion, it is a much more decentralized business model than for example in Primary Metal or in Bauxite & Alumina. We are selling products to customers in different market segments from different parts of the value chain which gives us a unique market intelligence. For example, in the automotive segment we are delivering products from Primary, from the customers, from rolling and from Extrusion. That gives us a unique base of information that we are using to adapt the development of the company upstream. It is very much about cost reductions. Of course performance is also important downstream, but there is more important with margin management and customer offering. Of course innovation will be important along the whole value chain.
Recycling is in a way covering the end users and the fact that we can take scrap from the customers and sort it and bring it back to the market as value added products. If you take the summary then of the strategic focus areas going forward in Bauxite & Alumina , it is very clear to resume full production as soon as possible. Bring the Bauxite & Alumina operation back on track and continue the collaboration with the key stakeholders. We have an interesting fuel switch project in Brazil where we are going to replace gas, replace fuel oil with gas. This is of course important for the power state that they have a player like Hydro that can then provide infrastructure also for other businesses. For Hydro it represents a huge opportunity for cost reductions and also reduction of emissions.
Here it's a very good example where climate and business goes hand in hand in energy. As I mentioned, the solutions for the Sunndal power station for reversion. That solution is now worked on and will be very important going forward. Energy is also developing new businesses as for example acquisition in the Corvus Energy company. Arvid will come back to that development later. Of course one of the important responsibilities for the energy business area is to secure competitive energy sourcing for the other business areas. They have done that very successfully over the years in primary metal. We have now the current technology pilot at full speed and we are now utilizing spin offs from the pilot to our smelters gradually. The first one will be Husnes that will be restarted in 2020.
Some of the technology elements that we already have tested out at Karmøy will be utilized in Husnes and Husnes. Smelter will become more competitive and more efficient than it was before we curtailed the smelter which was done during the finance crisis. Of course bringing Albras back on track is a priority that depends very much on what happens in Alunorte. Primary will also do more on recycling. That is something we will come back to later in all products. Further expansion into the automotive. The automotive customers are asking us for more and more metal. We are qualifying metals as metal qualities as we speak. Recycling also here very important. Today we have capacity to take 20% of all aluminum cans in Europe into our system, recycle and bring it back to the value chain.
Of course high grading of product portfolio will continue to be important as there are some pressure on some of the market segments, as for example Foil as I mentioned. Therefore restructuring of Rolled Products is also important job forward for Rolled Products. Extruded Solutions will continue with a value above volume strategy. Of course there also selected growth opportunities in extrusion, not only to increase press capacities or buy more presses, but there's also value added activities beyond the press. Egil will come back to that in his presentation later today. Innovation, technology, digitalization, very important. I will come back to that also in my presentation. Sustainability I already touched upon that is a priority for us.
Of course differentiation commercially and continuous improvements will also be very important factors for us to strengthen our competitiveness and increase value creation in Hydro going forward. Let us take a look at some examples within innovation and sustainability. This is a very important part of our strategy and that is also where our strongest competitive advantages lie. There is also a good example where the integrated model holds the strongest potential for us to differentiate. Hydro is a high-tech, high competence company and we would like to contribute to strengthen and to contribute with a more viable society. If you look at the CO2 footprint of Hydro and the CO2 footprint of the metal we produce, we have the lowest CO2 footprint in the whole aluminum industry in the world. We have a very good starting point to continue our efforts.
I would say this is not a position we are satisfied with because we know we can improve our position even better. We also know that our customers and the future market will ask more and more for aluminium with low carbon footprint. We have a very strong position in that respect. Also on innovation, we have already taken a leading position in primary metal production in cast house technologies, also in material science, within several market segments like automotive. We have number one position that is based on several years of research and development. It is one area where we did not cut any cost during the financial crisis and that was in research and development.
We will continue to take good care of our leadership in technology and we have good cooperation with the research institutions and universities where we have several interesting projects that will help us also to strengthen our position for the future. The fact that we have the most ambitious carbon climate strategy among all players in our industry also have a direct impact on how we are investing in edo. That's why, for example, we invested in the Karmøy technology pilot to be able to test out the technology that is reducing the energy consumption and reducing the emissions. We have already seen that we are now achieving our targets. As I said, we are now producing aluminium with the lowest emissions and the lowest energy consumption in the world. [inaudible] , recycling will become more and more important.
As you saw also on the previous slide, the growth in recycling is even higher than the growth in primary demand for primary production products. That's why we also investing in sorting technologies. We have already the world leading sorting technology in aluminum, where we can very efficiently sort out aluminum from other materials, but also now developing a sorting technology where we can differentiate different aluminum alloys from each other and bring it back to the value chain. We are very happy that Angela Merkel and the Norwegian Prime Minister Erna Solberg visited us last year to open up the automotive line, because automotive will be a very important market segment for us. We are already now producing, As I said, 25, 27% more volumes to that industry, in the body in white market than the year, the 3/4 the year before.
Renewable energy is a very important part of energy sourcing, of course also going forward. I'm very happy to see that we also succeeded with competitive energy sourcing that we will utilize after the Statkraft contract, as I mentioned, expires in 2020. A significant part of that sourcing is renewable energy from wind turbines. It's quite interesting that in the Nordic energy market it is a very good combination of the underregulated wind power and the regulated hydropower. We can take a hydropower station from full speed to zero in 2 minutes and from zero to full speed in 2 minutes. It's a very flexible system that we know also get additional value out of. As you see, the climate strategy is moving us in the right direction.
We are now going to be carbon neutral from cycle perspective within the next year, probably during 2019, we will achieve that target. As I said, this is not another sleeping pillow for us. We will continue to reduce our emissions to be even better positioned for low carbon circular economy in the future. Last year, we launched two new products, the 4.0 product, which is again a product that is certified and guaranteed produced from hydropower with a footprint less than 4 kilo CO2 per kilo aluminum. Also the 75R product was launched which is a product containing minimum 75% post-consumer scrap. We see that several market segments are now asking for this. The first market segment that was really eager to get low carbon footprint products was packaging. Now automotive is the next one.
We also see in building of course construction that the architects also now certifying buildings not only with regard to emissions or energy consumption of buildings, but also the carbon footprint. That becomes more and more important going forward. We are strong support of Aluminium Stewardship Initiative and of course a founding member. We are now certifying 15 of our sites across the value chain, enabling us to sell 100% certified metal from our value chain. Automotive have been a driving factor for many years with regard to substitution and more demand for aluminum solutions. Now with electrical cars we have also seen that also that segment will have substantial demand for aluminum solutions. Batteries are heavy and the cars need to be made lighter, so demand for aluminum will increase.
For electrical cars, a battery package contains of aluminum and a normal battery box will have 130 kilos of aluminum. The total amount of aluminum that goes to battery driven cars are varying depending on the size. Like example 170 kilos for Nissan LEAF and 650 kilo aluminum in the Tesla Model X. Here there are very good opportunities for aluminum going forward. We also are combining now our competencies in extrusion and roll products when we are moving into other market segments like marine, offshore construction and also large structural components like train carriages. This combination of competence in material science and also process knowledge is very useful when we know discussing with these big customers. These will be also important market segments for us going forward. Digitalization is very important for us and we have succeeded quite a lot with several projects and initiatives.
I will probably spend the rest of the day if I go through everything here. One example is the digital twins that we have developed in Primary Metals. Hilde is responsible for that. We have succeeded to now operate our production with digital twins, which means that we are producing aluminum digitally based on advanced deterministic mathematical simulation models, where it is again based on fixed physics, chemistry, thermodynamics, real science. The data from these simulation models is exchanged with the physical production. That means that the physical production is becoming even more efficient. It was quite interesting earlier today when we introduced a new alumina quality at one of our plants. Normally this new qualities are disturbing for the aluminum production and we create new variations, new variability that has to be handled.
In the plant where we had already introduced digital twins, we saw that the digital twins handled that situation better than the best engineers we had in this part. That is just showing that there are huge potential in this technology also going forward. This is something we are going to utilize broader in our company going forward. Building and construction also very important market segment. We see very interesting development in this market. There are new regulations on energy efficiency of buildings for good reasons because buildings represent 40% of the energy consumption in the world and 40% of the emissions. Something has to be done with these buildings and with aluminum solutions and solutions that we have already developed. We can deliver already today very energy efficient building solutions.
Even in combination with photovoltaic solar energy, we can deliver buildings that is energy positive. There are also other parameters that our customers are asking for. We have already developed the technology which is improving the acoustic performance, thermal comfort, daylight design, and there are several other parameters where the flexibility and the competence and the capabilities of Hydro is going to be utilized and which is very interesting for further value creation in this market segment. Let me then conclude. First of all, it is important for us, as I said, to find a viable path forward together with authorities to resume production in Brazil. We will continue to prioritize our balance sheet and have maintained a strong financial position maintaining strength and flexibility.
Going forward, make sure that we are providing attractive returns over the cycle to our shareholders and also strengthen the competitiveness to several improvement initiatives that we are now working with along the value chain. Overall ambition is that we would like to contribute to engineer the future and lightweight our planet. Thank you very much for your attention. With that I would like to introduce CFO Eivind Kallevik, please.
Thank you, Svein Richard. In my financial update today I will take you through Hydro's financial framework and I will also discuss long term earnings and return potential on the different pricing scenarios. I will then finish up the presentation with our longer term financial targets as well as aspirations. Keeping in mind the Alunorte situation, I will also try and illustrate and quantify the curtailment effects on Hydro's financials from several angles. Let's start with the financial framework. Hydro's financial framework is really our stronghold to manage the commodity cyclicality and to maximize our long term value creation potential for our owners. It also very much lays the foundation for capital allocation across the business areas of the company.
We do strive to lift the potential for cash flow generation from operations by continuously optimizing costs, improving efficiencies and productivities, leveraging synergies between the business areas and high grading the portfolio to strengthen our margins. In addition, we also have a high focus on net operating capital and in order to reduce the cash which is tied up within the business. We are as many of you know adamant about maintaining an investment grade credit rating. This we do through a strong balance sheet as well as strong liquidity and we do believe that this is the best way to manage the volatility within our industry. We also strive for disciplined and return driven capital allocation as all times now. This involves maintaining and improving our asset base to ensure operational excellence as well as safety.
We also grow selectively and respond to our customers' needs in our attractive market segments to increase the high value add share of our business in lower parts of the cycle. Our strong balance sheet also gives us opportunities to act on M&A opportunities that arise. Our philosophy is also to offer competitive and predictable dividends to our investors which we strive to maintain throughout the cycles as long as we remain investment-graded. We would much rather supplement the payout ratio with special dividends or share buybacks than to cut dividends in tough times. Our goal is to pay out 40% of net income over the cycle and we do have a dividend floor of NOK 125 per share. We paid out NOK 175 for the financial year of 2017 based on the strong financials we had and the strong market outlook we saw for 2018.
For this year, the Board of Directors will propose the dividend for 2018 in connection with the fourth quarter results and the AGM will decide on that in May in 2019. When it comes to the cyclical nature of our industry, we do believe in being exposed to commodities volatility allowing us to benefit in full from the upturn in prices while protecting the downside with a strong financial and competitive situation position that we do have as well as the flexible and diversified business model that we have in the company. We do secure margins through operational LME and currency hedging. We use limited financial hedging overall. We see historical correlations between commodities and currencies indicate a natural hedge over time.
Let me go into the framework in some more detail then if we start with the bigger picture painting Hydro's uses and sources of cash since the year 2015. We have in this period been quite balanced in how we have allocated our funds. The main source for Hydro's Capital has really been the operating cash flows supplemented by cash from the balance sheet as well as some smaller divestments. We've used 35% of the generated cash on sustaining capital. We've spent roughly 40% on value creating growth either through MA, where Sapa is of course the biggest deal that we've done since 15, but also through value creating organic projects such as the Karmøy technology pilo t, the Automotive Line 3 and several recycling projects. We've also returned roughly one fifth of the cash generated back to shareholders through increasing dividends in this period.
The remaining 5% has been invested in our own balance sheet, strengthening our liquidity and reducing net debt. In addition, we've generated positive key free cash flow in every year on average NOK 6 billion per year. This has of course also been strengthened by the Sapa acquisition, which has contributed positively already from day one. We then move to the underlying EBIT drivers since 2015 and as mentioned by Svein Richard, the ongoing improvement efforts and consequently our earnings have been negatively impacted by the Alunorte situation as we have experienced in 2018. We start with an online EBIT of NOK 9.7 billion in 2015 and remember that this already includes a benefit of NOK 4.5 billion from Hydro's improvement efforts since 2009.
Over the years, Hydro's improvement culture has really been an important tool to strengthen our relative industry position and earnings by working on issues that we control ourselves, that being operational and commercial excellence, efficiency and productivity, in order to manage what is outside our influence, for example currency inflation and commodity pricing. Since 2015 we have experienced significant positive product price development, lifting our earnings by roughly $12 billion over this period. This is mainly due to higher alumina and alumina prices, but also higher spot energy costs or energy prices, and this has been partly offset by somewhat lower product premiums in this period. Extruded Solutions had also added noticeable upside to our earnings driven by significant margin expansion and this of course includes the $1.2 billion in online EBITDA improvement in Sapa before it became a part of Hydro.
We're also well on track on the Synergy Capture Program that we announced together with the acquisition. So far in Q3, we have delivered NOK 100 million. The Sapa consolidation effect is also positive and represents a change from equity content investments reflecting 50% of net income to fully consolidated online EBIT. This number then also includes the additional excess value depreciation. On the other hand, we also seen a significant increase in raw material costs in addition to much higher alumina costs in Primary Metal and Rolled Products, both carbon, caustic as well as energy costs have all increased since 2015, taking the results down again by approximately NOK 12 billion in this period. In addition, we've also had some negative impacts from inflationary pressures and some minor other net results.
The underlying EBIT for the company, if we exclude the Better program initiated in 2016 would have been NOK 11.8 billion. Up until this year we've made good progress on the Better program, realizing NOK 1.8 billion in improvements in the year 2016 and 2017, almost a targeted NOK 3 billion which were to be delivered within 2019. We did see some progress in 2018, a net improvement of NOK 300 million which was primarily delivered by the downstream business areas. However, all of these improvements have been offset by significant curtailment effect of NOK 2.6 billion affecting parameters both in BNA as well as in Primary Metal. As a result, the accumulated Better program in 2018 is negative with half a billion NOK reflecting the worsened program parameters within our upstream divisions.
With the uncertainty around the lifting of the embargoes in Brazil, it is also quite clear that we will not be able to catch up and deliver on the ambition in 2019. Let me assure you as Svein Richard did, we will continue to work hard and the opportunities will not be lost and we will recapture these as soon as the situation is resolved. As such the underlying EBIT for 2018, including the negative curtailment effect on our improvement program is NOK 11.2 billion. Of course it is also so that the year to date third quarter underlying EBIT annualized does not reflect our expectations for the Q4 2018 figures with the exception of the ALBUS power sales which we did not annualize, indicating that the earnings for that so far this year has been much higher than what we expect to experience in Q4.
We do see also cost pressures coming into Q4. We see somewhat lower alumina, we see somewhat lower LME prices which will affect the revenue side. In Primary Metal we do expect to see significantly higher alumina costs coming into Q4 and remember that those prices are lagging the spot prices with about two to three months also on the downstream side. Let me again remind you and underline that the Q4 is the weakest quarter for our downstream operations and reflecting then the demand situation and the maintenance pattern and all of this together then indicates some downside for Q4 earnings compared to what we realized so far in the year. If we move on to the key value drivers by the business areas and we start with downstream and Extruded Solutions.
I'm of course very happy to see the continued year-over-year result improvement in Extruded Solutions representing an impressive CAGR of 22% cumulative revenue annual growth EBITDA per ton since 2014. The improvement here is largely driven by the value over volume strategy, thus resulting in a good and solid margin expansion. As we see here on the middle graph, the net added value per kilo has increased by more than 50% since 2014 and at the same time the volumes have remained relatively stable, clearly indicating that Extruded Solutions are now able to gain much higher profitability for every kilo they extrude and sell. Also importantly is that the story does not end here. Extruded Solutions do see significant improvement potentials going forward with ambitious goals to deliver a 10% online EBIT growth per year over the next three years.
This ambition is of course based on a further increase in value or volume, so, solutions simplifications as well as collaboration across the company. We also see some good selected growth opportunities entailing smaller bolt-on acquisitions and customer-driven projects when it comes to capital for Extruded Solutions. Even with these growth ambitions, we expect the CAPEX to remain at or around the 2018 CAPEX levels. In addition to the result improvements, the integration plans that we did set out following the Sapa acquisition over 1 year ago has been progressing well and are clearly on track. We have realized NOK 100 million in synergies by the third quarter this year and we are confident that we will also deliver the next NOK 100 million over the next two years. We then move to Rolled Products.
It has been quite clear that 2017 was a very challenging year. We have made good progress in rolled during 2018, there are still some issues that needs to be resolved. Kjetil will go through these in some more detail. I will only summarize these from a high level perspective. At the Alunorf Hotmill as well as in Hamburg, the operational issues we had last year they were resolved at the year end 2017. During the third quarter this year we did start to experience some issues around the Cold Mill part of Alunorf which impacted operational performance and production. We are working closely together with our joint venture partner Novelis to fix these issues. They are being solved over the next period.
When it comes to the UBC line, the 2018 performance has improved quite significantly compared to last year, mainly due to the modifications we did in 4Q17. However, we do need to do some further modifications to take care of the dust issue we have at this plant that will be taken care of in the middle of 2019 and as such the full speed will not be reached until the tail end of 2019. The key focus for Rolled Products today is really to resolve the outstanding operational issues to strengthen and stabilize the asset performance of the plants that we do have. At the same time we will continue to work towards more healthy margins in Rolled Products to deliver on the earnings upside potential.
We will continue to further improve the product mix execute on the selected product restructuring such as foil and high grade the portfolio through fully ramping up the UBC line and the automotive line 3. If we then turn to upstream and as we said the results here has clearly been impacted by the Alunorte situation. I would then like to visualize the curtailment effects on both BNA as well as in primary metal and to illustrate what our underlying EBIT would have been if we were producing at full capacity, both with realized prices as they have been during the year, but also with alumina prices as they were prior to the curtailment situation. As a disclaimer on this slide, the effects on these slides are simplified calculations and sensitivities.
In addition, they are also dependent of course on the assumptions that we do use and may look different and will look different depending on the different sets of assumptions that are applied. As such, the figures here should be viewed as single, simplified and indicative. Let me start with talking about the assumptions that we have used. The curtailment effects are calculated based on the year-to-date Q3 2018 actual production levels, the realized prices, the variable cost margin as well as the exchange rates. The fixed costs for 2018 are assumed to be on the same level as they were in 2017. Now since alumina prices would unlikely have been where they are today if Alunorte was producing at full capacity. We have also used our average Q1 realized PAX prices prior to the curtailment and we have not assumed any changes in LME.
Keeping this in mind, let's start with BNA. We begin with year to date Q3 annualized online EBIT of $2.4 billion. We add back the net effect of the volumes lost due to the forced curtailment of Alunorte. We also add back $100 million in non-operational costs related to the curtailment. The total curtailment effect at realized prices adds up to $5 billion, meaning that our year to date Q3 annualized underlying EBIT would have been $7.4 billion if we had full production at the realized prices.
If we apply price sensitivity to adjust the EBIT from the realized price of NOK 460 on alumina to the prices we had in the Q1 this year which was NOK 390, we get to an underlying EBIT which is taken down by NOK 2.8 billion which indicates that we had a significant positive price impact in BNA this quarter or this year with the adjustment in PAX prices. The underlying EBIT on an annualized basis would be NOK 4.6 billion which is more than NOK 2 billion higher than the actual results. If we use the same logic for primary metal, we start with NOK 3.1 billion as the annualized year-to-date Q3 EBIT. We reverse the curtailment effect reflecting the 50% reduced production in Albras.
The Norwegian smelters had to compensate the volume short term from Alunorte with different alumina qualities that had some impact on operational parameters impacting the cost and productivity situation. That effect is also included here. At the same time as we've mentioned, we have sold excess power from Albras on the market and due to the high spot prices in Brazil in Q3 we had a significant gain on power sales. We've also backed this effect out from this calculation. The total curtailment effect is then for bringing year-to-date Q3 result with full production at realized Q3 year-to-date Q3 prices to NOK 3.3 billion. The main negative effect for Primary Metal is of course related to the increased external alumina sourcing at higher prices resulting in significant higher alumina costs.
If we again adjust the PAX price back to what we realized in Q1, $390 per tonne, we would see result improvements in Primary Metal of NOK 1.7 billion. To sum this up, we do estimate that the annualized on-line EBIT for PM and Primary Metal and BNA combined would be roughly NOK 4 billion higher if we were able to produce at full capacity. If we also add the impact this has had on the Husnes smelter in Rolled Products, which also is a roughly NOK 200 million impact, the total result of Hydro would be in the range of NOK 4.3 billion-NOK 4.5 billion higher than what we've realized so far. Let's take a quick look at net operating capital development.
As you can see from this slide, the working capital days have increased some three days and the actual level has increased with roughly NOK 3 billion Norwegian kroner.
This effect is driven basically by two factors. One is that the actual physical inventories are somewhat higher compared to what we saw last year, but they're also impacted by higher raw material prices. One of the key drivers behind the higher physical inventories is of course the uncertain geopolitical and market environment that we've been facing so far, including free trade concerns through SALT sanctions. Of course also the situation. Optimizing working capital in this situation means that it's more important for us to secure and ensure that we have sufficient alumina units as well as metal units in order to ensure business continuity rather than to run with the lowest possible inventories. This is not to say that we will not be working hard to reduce our net operating capital.
Do remember in Q4 we do expect to see a reduction in operating capital as we normally see. From a seasonal perspective, if we look to the balance sheet, we believe, as we've said many times before, having a strong balance sheet is important and I think in the uncertain market conditions that we currently have, this is even more true. To be investment grade rated is a high priority for us, not only because it allows us to access debt markets at competitive terms, which we did see after the Sapa acquisition last year, but also it means that we are a trustworthy and creditworthy partner in certain business transactions that we do take. Since 2011 we have had a BBB credit rating which we aim to maintain with a stable outlook, giving us one notch headroom to make sure that we stay in this credit rating.
There are two key financial targets that we do follow. One is net adjusted debt to equity which has to be below 0.55 and the other one is funds from operations to adjusted net debt which should be above 40%. I think looking at the graph, I'm very happy to say that we have stayed well within these ranges for many years and more or less unchanged and in particularly happy to see this continuing in light of the Alunorte decision situation that we currently have. When it comes to the adjusted net debt which is in the basis for the ratios, the only big change from Q3 2017 to Q3 2018 is then the reflection of the Sapa acquisition. Let me also just take a minute to inform you about the upcoming change in the IFRS 16 standard regarding leases.
This of course requires that all leases are to be reflected on the balance sheet. The new standard is estimated to increase our net debt with roughly NOK 3 billion. This effect will be partially offset in the adjusted net debt as operational leases will be reduced for an assumed tax benefit and as such the net effect is expected to be roughly NOK 1.5 billion. If you look at the impact that this will have on the ratios,
the funds from operations to adjusted net debt will be some 64%-65% as opposed to the 68% that we have currently. The adjusted net debt to equity will go slightly up to 28%-29% from the 27% that we have today. Only a marginal impact. When we look at this from a ratio perspective, we then turn to capital and start with sustaining capital. Of course our sustaining capital includes normal maintenance capital needed to keep the assets in the shape they are today, but it also includes investments which leads to a better performance, efficiency and safety of the current asset base. Now what you can see from this graph is that the sustaining CAPEX level for the next four years is somewhat higher than the historical levels and it averages around NOK 6.5 billion-NOK 7 billion.
The majority of this is allocated upstream, driven by selected projects in Brazil such as pipeline replacement and heightening of the Paragominas' tailing dams. We also have high relining activity within primary metal over the next coming years and those numbers are also impacted by higher carbon and realigning material costs in the market. In addition to this or included in this, we also have the $1.4 billion in additional investments. When we talk about improving the Alumina of the robustness for 2018 in isolation we are coming to $6.4 billion which is somewhat below our previous guidance and for 2019 we estimate around $7 billion-$7.5 billion. If you exclude all of the robustness investments, we would very much be in line with our guidance from Capital Markets Day last year.
Please note, remember also, although this seems elevated, we're still well below our annual depreciation level of $7.5 billion per year. If we complete the CAPEX picture and also look at the growth projects. As you will remember we have completed several very important growth projects over the last couple of years. This includes the Karmøy technology pilot, includes the flexible adjustable molding and Primary Metal, includes the UBC recycling line as well as the automotive line in Rolled Products. At the moment we do not have many new large organic projects in the pipeline, we do however see several smaller opportunities for portfolio high grading and efficiency improvements all across the value chain and this of course will result in incremental growth and generate additional cash flows over time.
A large share of these incremental growth projects are driven by primary metal related to capacity grip, capacity creep as well as strong Industry 4.0 initiatives in primary metal. In addition, in Extruded Solutions we have identified several options for profitable customer driven growth. These include smaller M&A bolt on acquisitions which will secure their value over volume strategy but also very important in terms of supporting the 10% online EBIT growth per year over the next 3 years. Finally, the Husnes restart with a total CAPEX of NOK 1.4 billion has now also been included in the numbers. The current growth figures is somewhat higher compared to previous estimates and it's really the latter two items that I've just mentioned, the Husnes restart and the growth opportunities and Extruded Solutions which were not included in last year's guidance.
We turn to sensitivity towards Hydro's commodity prices and currencies and also discuss the long-term earnings scenarios on this slide. This gives us an overview of the Hydro Group exposure to price and currency flow and I think this also clearly exemplifies why risk management is imperative for a company like ours. If we first look at LME in USD which have the largest impact on our earnings and these sensitivities are based on full production at Alunorte and Albras here we clearly see that the 10% change in LME has an impact on $4 billion in recent quarter to Hydro's underlying EBITDA. This is a net effect of both the cost side as well as the revenue side.
Most of this about $3.5 billion comes from the Primary Metal business area, roughly $200 million from the BNA area and the rest coming from the Rheinwerk smelter in Rolled Products. Changes in dollars against the Hydro currencies, the NOK, the EUR and the BRL also have a significant impact on our earnings as the prices both on LME and PAX are quoted in dollars while the majority of our costs are in local currencies and here we can see that the 10% change in the dollar has an EBIT impact of $4 billion. I am of course also aware that the sensitivities of full production at Alunorte and Albras doesn't really reflect or accurately reflect the effects of price changes on our results today. That's why we would also like to show you the sensitivities and how this would look like in a 50% curtailment scenario.
Again please remember that the adjustments here are simplified and does not take into account all the movements in underlying exposures due to the curtailment. This calculation simply reflects the change in heater sensitivities with a full year Alunorte production reduced to 50% and Alunorte alumina production reduced by 1,200,000 tonnes. We also assume that all the lost alumina production affects only our PAX financial exposure and not LME, thus suggesting that the LME linked alumina sales and purchase contracts remains unaffected. With this in mind, the sensitivities that affect the Alunorte curtailment, LME standard ingot, petcoke and pitch are reduced by roughly 10%. The sensitivities reflecting the Alunorte curtailment are reduced by approximately 50%. It's really the PAX sensitivity where we see the most significant change.
As a result of the curtailment Hydro's net financial exposure to PAX changes from a long position of roughly 1.7 million tonnes to a short position of roughly 1.1 million tonnes and again it changes the PAX sensitivity from a positive $610 million to a negative $400 million given a 10% change in PAX. Let's now take a look at the long-term earnings and returns potential on the various price assumptions illustrated with our usual scenarios. Since the scenarios are long-term, we will use a constructed year-to-date Q3 annualized EBITDA with full production year-to-date Q3 2018 realized prices except again for the PAX alumina index which is adjusted back to the average we realized in Q1. These calculations are based on the same assumptions as the ones I've just went through to explain the curtailment effects of BNA and Primary Metal.
This constructed underlying EBITDA is NOK 23 billion, almost NOK 4.5 billion higher than the actual figures year-to-date. This will be used as the basis for the scenarios. Also, important to mention that the full production scenario assumes that we would have delivered NOK 2.3 billion in the BETTER program, NOK 1.8 billion as realized in 2017, the half a billion NOK that we expected to realize this year. As always, these scenarios are simplified. This is an illustration on the relative changes in earnings with and without the remaining improvement efforts under the different LME scenarios. All other assumptions are constant with several positive and negative additional factors influencing earnings which are not taken into account. We do start with online EBITDA of NOK 23 billion taken from the previous slide and full production Q3 2018.
This is the great scenario in the middle with year-to-date realized LME of $2,200, NOK 8, BRL/NOK 2.2, and PAX adjusted to $390. By keeping all the variables constant, we create a low price scenario of $1,900 which is around spot prices and the high price scenario with LME of $2,500. Again, these are not all price forecasts but just simply reference points indicating in downside and an upside. First, the spot price scenario with NOK 2.3 billion in Better program gives us an online EBITDA of roughly NOK 17.5 billion. The LME $2,500 would lift online EBITDA to NOK 28.5 billion. Now if we add the remaining Better potential on top of the assumed NOK 2.3 billion in improvements, this creates an earnings uplift in all the EBITDA scenarios of roughly NOK 700 million.
Let me move to the last chapter of my presentation and briefly comment on the targets and aspirations. The focus here today is understandably on the challenging situation we have in Brazil. This of course is affecting the performance in several of our business areas. I would like to assure you that we always have long-term strategies, Shareholder Value Creation as a key priority. Hydro is not only in Brazil. We do also have many other promising projects to drive value creation across the company. Let me reiterate our thoughts on how to manage and allocate cash to create the most value for our shareholders that Svein Richard has already touched upon. I cannot emphasize enough that in our volatile industry having financial muscle and flexibility is creating crucial for being able to navigate through the cycles.
A strong balance sheet really protects us against the actions of last resort such as fire sales or dividend cuts and allows us really to concentrate on performance and to pursue attractive opportunities which may appear as other companies are struggling. We do operate in a capital intensive business. CAPEX is necessary in order to maintain and improve our position in the fast-paced and competitive environment. These include maintaining existing assets as a prerequisite for safe operations. They also include selective investments in project allowing us to keep our market share, strengthen our margins and improve our cost base. The next priority is really to deliver competitive and predictable dividends to our shareholders regardless of where we are in the cycle. As long as we maintain our balance sheet requirements. As the commodity cycle improves, so does our funds from operations.
More options for capital allocation becomes viable over a longer term. We do aim to create shareholder value through growth by reinvesting excess cash flow into organic growth projects or pursuing attractive M and A opportunities. In the absence of profitable organic growth opportunities, we will return excess cash to all shareholders. To conclude, one of my key tasks at least today is to ensure that we do remain financially agile and robust as a company to make sure that we do have a strong and solid balance sheet and strong relative industry position. This has enabled us to keep focus on resolving the issues we have at hand and to pay predictable dividends to shareholders and to pursue attractive opportunities within our marketplace.
We do maintain our focus on driving long-term shareholder value by leveraging also the recent Sapa acquisition and executing on smaller growth projects throughout the value chain. Thank you.
We open up for questions for Eivind and Svein Richard. Svein Richard, can you please join us back on stage? There are 2 microphones in the room here, so please wait for it before y ou ask the question so the ones on webcast can hear us as well.
You had a high focus on sustainable products for some time now. Can you give us some insight to w hat's the benefit for Norsk Hydro? Are you being able to grow faster than the market?
Are you being able to achieve higher prices? Are costs lower? In other words, what's in it for Hydro?
Thank you very much. When I meet automotive customers for example, they are eager to get more volumes from us. They are also talking more and more about the carbon footprint of their products because their customers is very eager to see what is the emissions of cars, what is the range of electrical cars, but also know what is the carbon footprint of the car and then it will be very different if aluminium come from a coal-fire energy production or if it is renewable energy, as I mentioned was packaging that started that process automatically continues. We see that also now in building and construction where architects have to label some of the new buildings coming up. With regard to what is in it for us, first of all we get contracts.
We believe that we get better contracts than what we get without having this position. If we measure now also for example the low carbon products, the 4.0 and 75R, we see that there is a small upcharge on the 4.0 and bigger one on 75R. There is a market for these projects or products already today. It's obvious that in the future low carbon circular economy this becomes more and more important and that is why it is important for us to position us already today and not in the last minute for that market situation. As I said, we have the best situation today but we are the lowest carbon footprint in our industry and we are going to take good care and develop that position also going forward.
Morning Liam Fitzpatrick from Deutsche Bank just on Alunorte. Co uld you comment on the court ruling o vernight and how that potentially impacts the Timing and what you put out today.
Linked to that. Is the strategy still to try and lift the embargo on DRS2 before moving on to the production cap, or has that changed with the ruling overnight? Thank you.
I think I didn't get the first part of your question, but I think that the starting point for us now is really to get the lifting of the DRS2 as a priority, because that is utilizing the best technology and the lowest environmental footprint that we can have on our operations. That's a key parameter for us to do. Of course, we will work hard to get back also to full production. That still needs to go through the court system. As Eivind Kallevik also commented on his slide.
It's Dan Major from UBS. A couple of questions. Firstly, on the dividend, you've mentioned the importance of the robustness of the balance sheet a number of times. Would it be fair to assume, given net debt's higher now than it was last year, if there isn't a resolution of Alunorte by the time that you report your fourth quarter numbers, we should assume the base of NOK 1.25 per share is our sort of starting point. That's the first question.
We have said also and communicated previously, that NOK 1.25 is the floor. That is what we are committing to going forward. Again, the board of directors will give a recommendation and that will be communicated in February. No decision has been taken yet. It is the general meeting in May that will make the final decision. We will come back to that in February.
Okay, thanks. The second question, this chart you showed with the Rolled Products EBIT including and excluding the Husnes smelter suggests it's been EBIT negative for quite a long period of time. Is this something that fits in the portfolio for you? Why are you keeping the smelter in the portfolio if it's consistently EBIT negative?
The Rheinwerk smelter is an integrated part of what we call the Golden Triangle in Germany, which is the neighbor of Alunorf, which is the biggest hot rolling mill outside China and where the metal goes to Grevenbroich, the biggest cold rolling mill outside China. This is very much linked together and there are some strong logistical benefits, some product flexibility benefits here. Of course now with the new power contract, it should be also a better opportunity for Rheinwerk to create better value. You are right, it has been a negative contributor so far. Of course there are also a lot of improvements ongoing there. We also see that so far up to now, it has been not very positive contributor to the workforce business area if you look at the bottom line and the contribution from Rheinwerk.
It has also other advantages to connect this meltdown directly into the business area of products.
I think, Daniel, just to give an additional comment, remember that the let's call it very high alumina price that we've seen so far in 2018 on the basis of Dollar Loft, the situation and result sanction also had a significant negative impact on Rolled Products. If you had assumed what we had on average in Q1 of 2018 of $390 per tonne, the results would have been $2 million-$300 million better in Rolled Products just on that basis. That would certainly take you into positive territory.
Okay, great. In a normalized alumina environment, based on the current cost base, the smelt is not cash negative.
Correct.
Okay, thanks. Finally, last question, just trying to reconcile your earnings sensitivity is running up 50% capacity on I think it's slide 53. You share that you've effectively got a net neutral alumina position if you include the offtake contract from Rio Tinto. Yet you've got a negative impact of higher alumina price. Can you add a little more color to that? Surely if alumina goes up based on the chart on page 53 that just gets passed straight through to customers because it's external sales, you're effectively fully covered on your own alumina requirements, including the Rio contract.
Yeah, we are effectively fully covered. Remember that the LME or the sensitivity that I showed was related to the PAX index, not to LME related contracts. The Rio Tinto contract stems from early 2000s at which point there were no PAX index. That is fair to assume that that has a higher LME relative part of it.
Yeah. I still don't quite understand. If you source 2.6 million tonnes in the market and you sell 2.6 million tons in the market, why do you have any external exposure to the PAX price? Because internally you consume the same as you produce. If you include the Rio contract that isn't exposed to the PAX price. You understand what I mean?
Yes, there are also. We could do it in more detail tomorrow. I mean there's also certain force majeure effects in there depending on how you and who you supply.
Okay, understand. Thanks.
Hello, Ai Ling Ong from Bloomberg Intelligence. Thank you for your presentation. My question relates to the aluminum market ex China. You're forecasting a huge deficit for 2019 of 1.5 million tons, but then also 1%-3% demand growth next year. My question is that c ould you comment on how Hydro could actually increase on the marketing efforts and also sales opportunity to tap into this market? Admit all the challenges that you've mentioned e arlier, like for example, like the Brexit and the sanctions.
Thank you.
Well, we regard taking, if you are thinking about taking market shares. We are ramping up the Husnes smelter which will add 95,000 tons capacity and that will be ready for restart in 2020. That has been smelter that was 50% curtail since the finance crisis. Beside that, we have been through a very long period now with oversupply and high inventories. Finally we see inventories are coming down. We are in a deficit situation this year and we see that the deficit will continue next year. We expect next year 1 to 1.5 million tonnes deficit in the global aluminium market. There are still obviously changes that we will see very much depend on what happens in China. This supply situation in China is now also much better due to the international capacity quotas. There are different initiatives, environmental Blue Sky War and so on.
It remains to be seen how much of the capacity will be impacted by that. I think for us, if we should add additional capacity beyond what you are doing now, we need to see a more stable situation over longer time. Also that the business case should be significantly improved compared to what we see the situation is today.
Okay, last question from Jatinder.
Okay, perhaps I can take a question here also.
Ioannis Masvoulas , just a couple of questions on Alunorte or how do you perceive the authorities thinking here? Do you believe that authorities are waiting for the water treatment capacity investments to be completed before the embargo on DRS2 is lifted? Do you think that authorities are thinking that now? I suppose the raining season starts within soon in Brazil, that that needs to be over before the embargoes are lifted. If you can give your thoughts there, please.
We should be careful to speculate too much about how the authorities are thinking here. It is of course crucial also for us and also for authorities, but that we have safe and sound operations in Alunorte. With the actions that already have been taken. Alunorte is much more obvious today. We know that climate change could lead to more heavy rainfall if not been last time that we will see extreme weather in Barcarena where we have our refinery. Then you can really speculate if it's the water reservoir that should have to be in place before we get the embargo lifted.
I cannot add more to that than of course this will be a very important step for the robustness with that, with the 350% more capacity on water reservoir, we will be able to take huge rainfall and avoid that like happened in February. The Canal Velho, for example, we used for discharging rainwater to protect the water treatment plant which was very occupied with handling the water from the bauxite residual areas, which is the critical part. Again, we have done quite a lot already and we have the best organization in place to handle this situation. We are eager and ready to start anytime. We are of course following up with authorities and the dialogue is constructive. I'm convinced that we will be back in full production someday. I cannot give you the exact date yet.
Thanks. Jatinder Goel from Exane BNP Paribas, a quick follow up from Liam's question before. A federal judge ordering prosecutors to respond within 10 days about lifting the embargo and also lifting the embargo on production and also on DRS2.
What's your take on that? Can that get ruled within 10 days or is that just a procedural element? We are still waiting for all the audits and everything else that's been in the media before and from your side as well. Thank you.
The way I understand this, because this is a difficult word, but it's the homologation have been taught by the lawyers which is being conducted now. It's a pure legal step in the process. I don't see that this will necessarily have an impact on the overall timeline.
Thank you.
Good. We have t ime for one more question from Cedar over here.
Thank you. Cedar Ekblom from Bank of America Merrill Lynch. Two questions.
One, can you comment on the Rusal situation, particularly around Alumina coming into pricing negotiations? Is it business as usual even with the issues around Rusal, or are you actually seeing any real distortions in the market? Secondly, can you talk a l ittle bit about M&A. How you look at your M and A opportunities going forward? Maybe contrasting primary aluminum bauxite alumina versus your downstream opportunities.
How do you evaluate that in your capital allocation strategy with regard to M&A?
We have several internal activities as we are moving forward. Of course we are not commenting on M&A before it happens. In general, of course, if we should grow in primary production, it will not be in areas where there is non-renewable energy sources. This is a clear strategy and that also we will follow going forward. With regard to the other areas
like downstream, for example, in Extrusion there are several opportunities, M&A opportunities, these are not a huge company maker $1 billion acquisition. It's more bolt-on acquisition that can help for example add some of the technologies that we need to develop opposition further where there could be synergies across or it could be also access to markets that we are not into now. That is obviously an area where we are looking into and we see that there will be more opportunities going forward. It will be speculation from my side to give too many statements about that. Now the process has been postponed. The new date is 7th of January. Of course it must be difficult for this company when it is under such a situation.
With regard to the alumina market for example, it will have a big impact in the Atlantic region if the refinery in Ireland that Rusal have there is not anymore available for customers in Atlantic market. Of course if you look at also the metal production of Rusal 4 million tons, 1 million tons domestically, but 3 million tons is exported to markets where we also are competing. If there is no solution, we have to find other ways of channeling that into customers in the outdoor markets that will have a disruption of value chains and of course it could give new opportunities for Hydro. It remains to be seen what is the final outcome of the Rusal process going forward.
Good. That concludes the first session of today. There will be obviously time to ask questions for these guys also during break and l unch later on today. We'll go for a 15-minute break and should be back here at 10:00AM
Welcome back to the second session of t he day, starting with a market update by Head of Strategy and Analysis Kathrine Fog. This is followed by a presentation on the Bauxite & Alumina business area and the activities in Brazil by Head of B and A John Thuestad before Head of CSR Anne-Lene Midseim takes you through the corporate social responsibility priorities for Hydro.
Before that let's start with Kathrine.
Thank you Stian. Good morning everyone. I will take you through our market outlook this morning covering macro and trade downstream markets, primary metal, bauxite, alumina and ending with our long-term market outlook. As usual this is an entertaining piece hopefully or engaging piece. Let's start with macro and trade. The macro outlook is moderately positive as we see it, but we're also seeing increasing uncertainty created by intensifying trade actions illustrated here also by the PMIs on the left-hand side. On the right-hand side we see an expectation that the U.S. remains relatively strong. An expected outlook of some 2%-3% GDP growth. Europe is stabilizing but at a lower but still positive level. China 2018 is expected to come in around 6.5% reflecting probably a managed slowdown from previous year's levels.
One can always speculate whether real numbers could be somewhat lower. India expected to continue its strong performance. We should however not forget that these numbers may be somewhat skewed to history and that I think also in this room there's this shared sentiment of a possibility of a certain slowdown coming also in the future and again especially caused by general uncertainty and trade tensions. Let's look closer at trade Sanctions, tariffs and duties are impacting global flows of aluminium. As you see here it's been a busy year on the trade scene. Last year we were discussing intensifying Chinese semis export and we have seen that these exports volumes have increased somewhat but partly to destinations and partly for reasons that we didn't quite foresee this time last year.
In general terms China has continued to increase its exports in line with capacity growth but also based on somewhat lower domestic demand and also positive arbitrage with world outside China. In response the importing regions as you see here are increasingly establishing tariffs and anti-dumping duties to protect their markets. We are of course in particular seeing this in the U.S., but we are also seeing that other regions such as Europe, India and South America have or are considering tariffs or similar trade measures. Let's look at some of the development in some more detail. Section 232 impacting U.S. metal premiums. In March 2018, the U.S. administration imposed a so-called Section 232 on aluminum and steel imports to the U.S. applying a 10% and 25% tariff respectively. 10% of aluminum.
Section 232 is a WTO measure to be used if national security is deemed to be threatened. In this case we're seeing it used to be aimed at re-establishing a certain level of US domestic metal production. The tariffs were generally effective in May 2018. Canada, Mexico and the EU were added in June. The two exceptions Argentina which has accepted a quota and Australia with no tariff, no quota. There is also speculation that Mexico and Canada takes could eventually become exempted maybe with quotas following the USMCA agreement, the one taking over from NAFTA. On the left hand side of my slide you see the US market has a large underlying metal deficit. Even with tariffs and expected restarts the US metal market is expected to be severely under supply going forward.
If all possible restarts come into play, the US domestic production could increase to some 1.5 million tonnes. We expect that we will see some additional 650,000 tonnes in the period from now through 2022, but this still remains far below the overall market demand which is in excess of 5 million tonnes. The tariffs have therefore primarily resulted in increased prices and in particular higher premiums in the US market. You see this in the middle graph where you see how the Midwest premium has on average increased by some $250 per tonne, which is largely reflecting the tariff. This will of course incentivize some smelter restarts, but the overall potential we believe remains limited.
The increased premium seems to largely be passed through the value chain, which means that the tariff is increasing cost for the next processing level as well as being passed on ultimately to the consumer. This is of course a long-term effect that we should and might be concerned about how escalating trade conflicts might eventually influence GDP growth as well as aluminum demand. As if this isn't enough, the Rusal sanctions leading to price volatility. In April the aluminum market saw another upheaval when we saw the sanctions by the U.S. authorities on Rusal owner Oleg Deripaska. Under the sanctions, entities are banned from dealing with Rusal, such as entering into new contractual relationships and taking or delivering spot volumes.
The sanctions are also exposing financial institutions, meaning that any financial clearing or financial deal with results of any agreement is becoming somewhat toxic in the financial markets. The initial very short wind down period has since been extended several times and as Svein Richard mentioned now to the 7th of January next year. This is while OFAC, the U.S. authorities are considering whether the measures that are announced or planned or have been taken by Rusal and its owners. If this is sufficient to alienate Rusal from Deripaska, on the left hand side we see how prices reacted. Both alumina and aluminium prices reacted to the initial Rusal sanctions, but after following the postponed deadlines it now looks as if the market has largely priced in that sanctions may be lifted. On the other hand, if sanctions were to become effective this would have large implications on the market.
Both the U.S. and Europe are large off takers of Rusal metal. This would need to be replaced by other sources. As you see also in the pie chart in the middle, about half of Rusal's volume is actually added or value-add products which is not as easily replaced in the market, but equally important and was already touched upon in the questions before the break. Europe relies heavily on aluminum supply from the Aughinish refinery in Ireland. Sanctions would have large implications for European smelters. Should we expect the sanctions to become effective, what are the likely implications? I for one would expect that the Rusal capacity would continue to produce even if the sanctions are becoming effective. The metal would on the other hand need to find new traveling routes.
This means that exports of some 3 million tons or a large share of 3 million tons would have to find new routes largely going eastward through and to South Asian countries as well as China. In Europe and the U.S., regional premiums would likely have to lift in order to attract the replacement volumes. Importance Chinese limitation on scrap imports Leaving more scrap In North America and Europe, China has imposed restrictions on scrap imports. 50% tariff on imports of scrap from the U.S. to China. This is partly a retaliation of U.S. import restrictions on Chinese goods. As a consequence, year-to-date Chinese scrap imports are down some 23% through lower U.S. imports than you see here on the graph. Following the duty scrap from Typically the U.S. and Europe need to find new markets. We see them primarily going to Asia, Malaysia and India.
We're also seeing scrap coming from the U.S. into the European market. More scrap is also left in the originating regions than having to find its being placed and handled domestically. This will affect to a certain extent demand for primary aluminium as more recycled metal enters the supply stream. In the middle graph we're also seeing partly the price effect. Sheet scrap prices have decreased sharply compared with sheet ingot for the U.S. market. This of course is also increasing attractiveness of remelting in the U.S. Chinese semis exports are increasing in 2018. Less volumes are going to the U.S. as mentioned initially, Chinese semis exports have continued to increase in 2018 and you see this in the middle graph here. Year to date Exports are up 19%. In October alone the increase was 38% year-on-year and with adding up to some 484,000 tons in October.
The increase is a consequence of slower domestic demand and higher export arbitrage. It is also due to somewhat increased VAT rebate on Chinese exports. As you see on the left hand side, Chinese exports to the U.S. have dampened. This is due to the 10% tariff on 232. It is also due to anti-dumping duties, countervailing duties which are applied on defined products going from China to the U.S. For aluminum, this is for example hitting sheet foil and is now being contemplated or evaluated for wire. There is also the Section 301 which is targeting $200 billion-$250 billion of Chinese exports to the U.S. Tariffs under Section 301 are starting at 10%. They will increase to 25% early 2019 unless there is progress in talks between Chinese and U.S. leadership, meeting probably or hopefully at the G20 meeting in Argentina this weekend.
301 targets aluminum products such as aluminum wheels. The development in exports from China to the US are clearly visible here. On the left-hand side we saw a huge boost just before the import tariffs were being applied. We've seen in the later part of the year a large decline. As a consequence then, export pressure is increasing in other markets. Most of China's exports are going to Asia. About 50% are going to Asia. This share is increasing. We are also seeing increased Chinese material in Europe. This is my macro and trade coverage. We'll move on to the downstream market. Aluminum continues to be the fastest growing base metal. Aluminum demand continues to outpace GDP growth as well as that of all the metals as you see over on the left-hand side.
This is of course because aluminum supplied across the economy in the investment phase and we see several examples here, but also in the consumption phase. It's also a result of continued substitution into aluminum from other materials. This is seen as strong from steel to aluminum, but we also see it from copper into aluminum and we see it across markets and across geographies. We know it from Europe and the U.S. our main markets. We also see it in China where there is a strong push for aluminum in transportation but also aluminum going into large growth markets such as renewable energy and power transmission. Substitution trend in automotive is progressing. Substitution in automotive continues to be supported by the trend towards lightweighting of cars as well as other vehicles. We see positive U.S. development for aluminum use in this segment on the left hand side.
We also see in Europe that aluminium in transportation is increasing and continues to gain ground. Substitution is reinforced by regulations aimed at reducing emissions, increasing the mileage through lighter vehicles. The effects on demand in North America and Western Europe across both rolled and extrusions are illustrated in these two graphs. On the right hand side, the U.S., and I'll come back to this a little bit later, is expected to slow down after particularly strong 2018. In Western Europe we continue to see strong growth especially for auto body sheet. Extrusion demand in the U.S. and Canada is strongly impacted by expected moderation in the truck and trailer segment. Close to 50% of extrusions in the U.S. and Canada are to truck and trailer segment.
As you see in the pie chart on the left hand side in the middle graph we see that demand for extrusions into passenger cars is relatively stable over time. We also see that the demand profile into trucks and trailers is quite a different one with 2018 being a very, very strong year due to some one-off effects. Therefore, we expect that the growth will be slower in 2019 and potentially even being negative growth after high growth in 2019. The main reason for the 2018 boost is new working regulations for drivers, limiting hours on the road for the truck driver and then consequently you need an increased number of trucks and trailers to be able to move the same amount of goods. This of course came on top of a booming economy.
Let's move to another trend that we as aluminum producers are quite pleased with. The increase in E mobility and why it is favorable for aluminum. E mobility is gathering strength across automotive markets in jurisdictions as diverse as Europe, the U.S. as well as China. You look at the left-hand side and this is large group of external analysts, we see that they all agree on the direction electric vehicles are expected to take off around 2020 and increasing shortly. Sharply thereafter, an increasing number of countries have launched targets for the share of new sale cars to come from non-conventional technologies. These targets are typically between 50%-100% of new car sales depending on the country and to be achieved somewhere in the area between 2025 and 2040.
We see it in Norway, we see it across Europe, we also see it in certain states in the U.S. and being undervaluation in China as well as India. We can of course debate whether these targets are realistic or not. The most important issue is that we see that the trend is similar across jurisdictions, across geographies and it is a drive towards lower emissions and non emission cars. Of course this demand is driven also largely by incentives and support schemes. Again, those of you coming on from Norway are quite familiar with those. We also see these taking place for example in China, which actually has the largest range of incentives for electric vehicles in the world.
For example, there's ease of access to license plate in large cities, you don't have to enter the lottery and instead of driving on odd or even dates, you can actually drive any day of the week, which is not unimportant. Why is it important for aluminium? Svein Richard has already covered some of this. The range society for EVs is a key constraint for wider adoption. To balance the weight of the batteries, the body and structure of the electric cars needs lightweighting in at least the same extent as the internal combustion engine car. On the right hand side we see that this places aluminium as a favorite material for electric car models. Of course we also need to take into the equation that as we move away from sort of traditional cars, we also lose some of the market in the castings area.
Emerging softness in key housing market indicators. Moderating growth rates. The building and construction is an important segment for aluminium, especially for extrusions. Although extrusions in mature markets such as Europe and the U.S. are less construction driven, this is still an important effect for extrusions. Consumption development as we see is moderately positive for both regions as we see on the left hand side. We also seen strong growth over the last years. We expect some moderation into 2019. This will of course affect the demand of both extrusions and rolled into this segment as we see on the right hand side, Chinese extrusion. Demand growth is also forecasted to moderate in line with slowing development in building and cost construction. Takes me over to primary metal market. First I'd like to recap what we said last year.
We expected a relatively balanced market between subdued supply growth in China and continued positive demand outlook. Growth for both supply and demand was foreseen in the order of magnitude of 4%-5%. What are we seeing now? Global primary market in deficit in 2018. We see demand progressing largely in light with what we expected, some 4% while supply is falling short looking towards 1% in 2018. This is especially caused by successful supply-side reforms in China. We also see supply shortfall due to delays of expected U.S. restarts. Higher costs and lack of access to alumina may be some of the reasons. Here we are looking at the global market to be in deficit of some 2 million tons for 2018, and we expect the same effects to be prolonged into 2019, continuing to affect supply and demand balances.
With supply picking up demand growth, we expect to be moderating somewhat. Overall we expect 2019 supply growth in the area of 3%-4% and demand growth around 2%-3%. The main drivers on the supply side are Chinese ramp ups such as in southern provinces like Guangxi and Yunnan. At the same time we do hear from sources we talk to in China that state owned enterprises are not likely to grow very aggressively anymore. The time of rapid growth for privately owned companies, that's really over. The authorities have set their mind on the maximum capacity number for aluminum. They will develop this closely correlated to demand development. Other areas for additional supply are U.S. restarts limited in our yield to some 650,000 tons between now and 2022.
There are also some known projects outside China, most notably the Alba smelter which is expected to add 300,000-400,000 tonnes in 2019 or of its overall 570,000 tonnes addition. On the demand side, our expectations are strong demand growth in the transportation segment, gradual slowdown in demand sectors in China, typically construction as well as transportation, and moderating demand growth in the U.S. and Europe. Looking at the cost and profitability side, high input costs are challenging smelter profitability. Input costs have increased with Chinese smelters dominating the high end of the cost curve. The cost curve as you see has moved up throughout 2018. This is caused by fuels as well as alumina and we see this the different elements on the left hand side and I will come back to alumina in the next section.
Carbon products or petcoke here has moderated in 2018. This is following very strong hikes in 2017 when winter cuts reduced supply. High coal prices have increased power costs. This effect is most visible in China because of the need for imported coal in China, which has affected domestic prices then also transferring into smelter power costs. As we see on the right hand side here, the cost curve has risen consistently over the last years. This is hurting smelter profitability at current input costs and current LME, about 40% of smelters globally are cash negative. As a consequence, we are seeing smelter curtailments, particularly in China. We now expect closures of somewhere between 1.5 and 2 million tonnes by the end of 2018. We're also seeing certain smelters outside China being at risk.
Why don't we see more closures or more curtailments? Well, one reason could be that integrated players are not necessarily as exposed to the day by day alumina prices as they seem to be in the cost curve. There are also other closure costs and the stickiness of the curve that tends to postpone decisions. Most exposed would be independent financially weak smelters. You probably all read about TMET taking down some of their production over the last days. Primary supply in China is impacted by policy and cost and captive power market reform is influencing power costs. As we've discussed already, the supply side reform put in place throughout 2017 was quite successful seen from our side. For the aluminum sector it took out approximately 3 million tonnes of production capacity. Similar reforms are actually seen in other industrial sectors.
We see it in steel, in cement, we see it in coal. The objective is to fundamentally restructure these industries and take out overcapacity. We're really seeing or seeming to see that the authorities seem to be quite serious about this. The reforms do continue. We see this here on the left hand side where the expected supply projections have been taken down over time. For aluminium, the effect is that project ramp ups and previously planned projects are either postponed or have been abandoned altogether. New projects will also face higher costs due to the requirement to purchase replacement quotas. This needs to reflect a similar decrease in capacity elsewhere in China. With regard to winter closures, we expect limited effect in 2018, 2019 winter season and this is even compared to the relatively low numbers we saw last year, around 300,000 tons.
We have seen a recent announcement from Shandong just the last few days, which takes the expected winter closures to somewhere between 150 and maybe upwards to 250,000 tonnes on an annualized basis. Decision to curtail has been transferred to regional authorities from central authorities as the regional authorities now have more responsibility over the Blue Skies initiative. This also then adds some uncertainty to the enforcement of restrictions. Let's look at the right hand side of this graph. This is another factor that has negative effect on smelters. The ongoing power market reform. This is also hitting captive power production. You may remember on those of you with good memories, I talked about the power market reform at Capital Markets Day 2 years ago. This time around we're seeing this really coming into play for producers with captive power.
They will also be required to pay tariffs and renewable charges. In Shandong we have Xinfa and Weiqiao as large producers with captive power and grid. If these charges are fully levied, it's a big if. The additional charges will add some $20 per megawatt hour, which sums up towards $250 per tonne to smelter costs. This of course would imply a significant cost increase for these players and therefore we probably shouldn't be too surprised if there could be some modifications to the original proposal. We are also seeing a quite interesting range here. When we met with CNIA recently, which is the Chinese Nonferrous association, they were deeply concerned about these new measures and the effect that it might have on some of these very large producers.
The key takeaway from us or for us is that we expect pressure to remain for containing smelter supply expansions and keep supply largely in line with demand. China expected to be largely balanced in 2019 global market in deficit if you take all of these factors into play. Translated into the 2019 Outlook, we expect the deficit ex-China to prevail but at somewhat reduced levels. This is balanced by the Albras expansion and also U.S. smelter restarts. We are also expecting the restart at Bécancour as well as Albras. We expect production outside China to increase by some 3%-4% while demand is expected to grow by 1%-3% in China. 2019 supply growth will expand partly picking up the slack from 2018, which is virtually 0 net growth in China. We're primarily seeing additions in Yunnan, Guangxi as well as in Mongolia.
We're also expecting supply growth to remain quite low. Seen in historic context, demand growth in China continues to decrease in line with slowing GDP. Combining this we see the deficit in the RoW ex China and a smaller accumulated surplus in China leading to a global deficit between 1.5 billion and 1 billion tonnes. Stocks outside China continue to decrease. The supply deficit outside of China has led to further build down of stocks throughout 2018. Inventories have decreased significantly over the last couple of years from the peak some years back. On the right hand side we see the reported stocks at lower end estimated now to some 2.5 million tonnes outside China. The unreported stocks which are more uncertain of course we estimate to around 3.5 million tonnes.
On the left hand side we see the Chinese stocks have also come down throughout this year from 2017 rather higher levels. The reductions in stock levels is also affecting inventory days outside China. Inventory days are positioned to move gradually below pre-crisis level of some 60 days throughout 2019. This also implies that Chinese semis e xports are not fully filling the demand deficit outside China as metal continues to be taken out of inventory. Let's move to bauxite and alumina and this year starting with alumina. Alumina we have volatile alumina market due to supply disruptions. 2018 has not been a boring year for alumina. It's been a roller coaster year, not the best ride that we've had in Hydro and well, we'll see how that proceeds.
At the start of the year we expected enrollment markets with world outside China to be slightly long alumina with export to China at normal levels around 3 million tons. As you see in the graph here, it turned out completely different. In addition to the Alunorte embargo removing some 3 million tons from the aluminum market, there have been other disruptions. We had the strike in Alcoa's refineries in Australia. We have denounced sanctions against Deripaska and therefore Rusal. As most of you have probably forgotten now, we did see some closures of Chinese refineries around the middle of this year. The chart here just shows how these different events have affected prices, making it a very volatile year for alumina producers and even more for buyers.
International Alumina Price increase triggers Chinese exports. To mitigate the very tight situation we saw coming into the second quarter this year, Chinese players reversed their normal Alumina import situation and actually started exporting, which is a historic first, at least this order of magnitude. The driver, of course, is the price signal. As you see on the left hand side, the resulting arbitrage between outside China and the Chinese price. Here we use the Henan, the Shaanxi reference. The graph indicates a positive arbitrage from February March. We typically see exports only when the price difference includes well above a 50% margin for the cost for exports. The PAX levels in spring and early fall did incentivize exports. We've seen large volumes of Alumina leaving China during six months. We saw volumes up to 130,000 tons leaving China in September.
The October number just came out early this week at 460,000 tons. The Q4 estimate is for some 800,000 to 1 million tons of alumina export from China. We also see in the picture here that alumina exports are not without challenges. It requires debagging, logistics facilities are limited and there are also quality issues for the receiving smelter similar to for smelters. The effect of winter cuts on alumina refineries is expected to be limited this coming winter. Even again with the recent announcements from Shandong, we expect close to 500,000 tons of alumina to be curtailed in Shandong annualized figures. There is also in China a continuing shortage of domestic bauxite. This is a structural issue, but is also due to continued inspections from central authorities on environmental grounds. What does this mean and what should we expect going into 2019?
The main uncertainties remain production output from Alunorte as well as Alunorte. We've also seen that Chinese producers seem able and willing to make alumina accessible if the price incentive is sufficiently attractive. If you look at the global alumina supply demand balance, first let's look outside China in line with last year, we expect limited new capacity additions. We are seeing the EGA Al Taweelah refinery expected to start up in Q1 2019, other projects such as the Indian ones are still slow to materialize. The Friguia restart in Guinea starting in 2018 is also rumored to be proceeding quite slowly. To the extent that there are new planned projects, we're seeing them as largely China based, Chinese based. We're seeing them in Indonesia by Chinese owners to feed Chinese demand, potentially also to be swing producers if the price incentive is there.
We're also seeing more refineries in China. These serve really two purposes. It's partly new capacity to feed new smelter demand, but it's also refineries relocating from inland China to the coast which will have an effect on cost. As we will see in this slide. Overall input costs have increased and this is affecting refinery profitability. On the left hand side, fuel oil has increased sharply, which is reflecting oil prices largely. Of course, over the last weeks we might expect a certain drop in those. We're also seeing Chinese bauxite prices continuing an upward trend here. The Henan index on the other hand, we're seeing that caustic prices have slowed after the sharp increases that we've seen last year in the U.S. gulf caustic price. We expect that the drop is largely reflecting the lower consumption from Alunorte on the right hand side.
These drivers are translated into alumina cost for the global industry. We recognize an upward trend over the last years caused by caustic and fuel. It's also worth noting, and we like this better, that this curve is steeper than the one that we see in the smelter. In the smelter part of the business. The higher end of the curve illustrates the effect of sharp increases in Chinese domestic bauxite prices caused by genuine shortages, deteriorating quality and depleting reserves. This takes us to a recurring theme. China's increasing reliance on bauxite imports and how to increase the necessary bauxite volumes will be sourced. The left hand side graph should be familiar.
I've showed it here for quite some years and this year I think we can state with even more confidence still with a disclaimer because it's forecasting China, which can be tricky, but we seem to be reaching some kind of a tipping point where domestic bauxite is starting to yield to imported supply. The share of imported bauxite is now about 35% of demand. This is the estimate for 2018. This is expected to reach approximately 75% by 2025. Australia remains a baseload supplier quite important. We see smaller volumes coming from other suppliers to typically in Southeast Asia. It's no surprise it's really Guinea which is the large and increasing supply source. Let's take a larger look, a closer look at Guinea on the right hand side. Production has increased from some 18 million tons in 2015 to an estimated 55 million tonnes in 2018.
This number is increasing. Most of the volume is going to China. In 2018 the Chinese bauxite imports from Guinea are expected to reach in excess of 35 million tons. This means that about 50% of Chinese bauxite imports are now coming from the Atlantic region. Most of this is delivered on integrated or semi-integrated supply chains controlled by large Chinese players, privately owned as well as state owned. We know that Richard has been the pioneer but only a couple of weeks ago Chalco had their groundbreaking ceremony for their state-supported project. Guinea is also an increasing supply source to players outside China, EGA with a GAC project which is Yanjiang project, in addition to the CBG volumes and CBG also expanding. Last year our perspective was that new refineries are increasingly built on the coast to access imported bauxite.
We now see that more imported bauxite is also going to inland refineries. This leads to price escalation even for poor quality bauxite in typically Henan and Shaanxi as you see here on the map inland China and we see how the prices are converging on the left hand side and these are quality adjusted for ease of reading. Imported bauxite is becoming competitive with domestic sources also for inland refineries. Year to date close to 2.5 million tonnes have been imported into these locations. What are possible implications for this shift? I'm probably not allowed to speculate, but I do have the stage. One reflection may be that the expected Chinese bauxite deficit will definitely be filled.
There are several suppliers. Guinea bauxite is increasingly important, and I will tend to say it's going to be decisive in order to supply the Chinese refineries going forward. This shift also means that dependency on international freight markets, therefore on fuel is increasing. To wrap up, let me share our long-term market forecast. We're seeing strong growth market drivers except cross segments providing a solid demand outlook throughout 2018. We're still seeing encouraging demand outlook from a strong base across most sectors. We're also seeing demand growth levels converging between China and outside China. As you see on the lower right-hand side, long-term demand for aluminum is expected to remain quite solid based on its fundamental drivers. Aluminum will continue to profit from substitution taking market share especially in transportation and the electrical segment.
The strongest demand growth overall is foreseen again in transportation but also machinery and equipment across all segments. We expect demand growth in line with GDP in sectors or segments with strong substitution cases. Growth will exceed this growth in global same demand creates opportunities for both primary and recycled material. We forecast solid growth for both semis primary and recycling. Our global semis demand growth outlook is a long-term CAGR of 3% for the 2018-2028 period with more post-consumer scrap entering the loop. We expect recycling to grow at approximately 4% on average and primary is expected to grow in the range of 2%-3%. This takes me to the key messages for market development. We're seeing solid long-term demand outlook, but trade disputes and geopolitical tensions are adding uncertainty, especially at the short end.
Global primary market is expected to be in deficit both in 2018 and in 2019. Chinese metal exports are facing headwinds in key consumer regions. China is increasingly dependent on import Bauxite Guinea is the key supplier and we see recycling growth accelerating with increased generation of post-consumer scrap. This concludes the market presentation and I would like to welcome on stage my colleague John Thuestad EVP of the Bauxite & Alumina business area.
Okay, thank you very much. I think that was an exciting introduction to what I'm going to talk about. My name is John Thuestad. I am in charge of the Bauxite & Alumina business. To me, you know, it's an exciting time in Brazil, but it's also a time where the circle is closed. I started my career in Karmøy at the Søderberg plant and you know it warms my heart that we have started on our pilot replacing the old technology. I know I got the opportunity to go to Brazil and head up the Bauxite & Alumina.
That's a great pleasure.
I'm saying that because to me, you know, the assets are of course important and we have a value chain in Brazil from bauxite to alumina which is extremely well positioned. I think that was explained thoroughly earlier by Svein Richard. I'm also absolutely sure when I look at it I've spent a lot of time both in Paragominas and in. I also from my previous life was in charge of the Alcoa primary and bauxite and alumina business for a while. I actually started the mine in Juruti some seven, eight, 10 years ago. I can, you know, wholeheartedly see that our assets are good. More importantly, we also have a very strong organization in Brazil. Not because I also picked those guys when I was in Alcoa and I don't find them in Hydro.
I'm absolutely sure that we have the world's best operating team, which is a key factor for solving the issues in Brazil. Without a stable operating organization, it will not be possible to convince stakeholders that we should get back to full operation. I will try to use care, courage and collaboration to explain somehow, you know, the starting point of where we are and my take on the path forward to full operation. It's very important for everybody now to understand that, you know, this is a journey. For the last seven, eight months we have been creating a common understanding that we did not have a serious pollution to the environment from the deposit areas. We as Svein Richard have had and treated rainwater that we let go to the river.
I think in the circumstances in Brazil, where you had some Marcopper accident a few years ago, it's also a perfect storm where, you know, with the unclarity and the uncertainty in February, it created a lot of commotion. We had to build and rebuild trust with the stakeholders. That takes some time. I absolutely sure that we are on the right track. I'll come back to that. I would also like to say that our organization handling this situation showed both care, courage and collaboration because they did exactly what they had to do to protect the environment, to use their competence, to show courage and make the right decisions and then make sure that the whole organization was behind it. I'm not saying that we did everything right.
I think we have understood that our operations had a certain lack of flexibility and capability to collect rainwater. I also think that we have learned that we could improve our connections to certain stakeholders, especially the communities around the plants. Here Hydro has 100 years or more of very good experience. Now I'll try to walk us through where we are and my take on the path forward to get back to full operation. It's important to start saying that we have been operating the plant and we've done that in a way where we have said with the cash cost position of a lot of variable cost, we have protected our flexibility relative to startup and balance that with not shutting down potlines and or curtailing potlines because the benefit of that did not give us a necessary reason to do it.
It will be more valuable for us to keep flexibility and be ready to start. I think the payback is more than one year by shutting down and it will also slow us down and create a lot of uncertainty and ramp up. As you see here from the energy savings and the fixed cost savings, the ramp up speed is tremendously important.
Here I also would give a lot of credit to the organization because this is the world's biggest refinery. It's a big machinery, seven lines, so it's more or less five refineries in one. To adjust that down to 50% in control and captivate, giving a product quality and no harm on the environment is equally challenging as running it more or less at full speed. This is a daily embargo. This just shows you also the bench strength of this organization. Alunorte refinery is operating well and they are prepared and ready to go for the bauxite sourcing. We have a somewhat different starting point because here you have more fixed costs and here the organization have secured improvements on cost.
15% cost improvement, adjusting down 100 beneficiation lines and they're operating at 50% but they're also ready to ramp up immediately when we get the go ahead. The organization also here has taken this challenge very well. I actually spent time over the last few days in Paragominas and in Alunorte with both stakeholders and with my team. I'm absolutely sure again in the bauxite mine we have a very good starting point. A lot of good initiatives on cost Industry 4.0 and it's really the organization is using the time to continue to improve the cost position in both plants. I know that we talked about improvements relative to some targets that were set in 2015. I think both Svein Richard and Eivind talked about it's not possible to compare apples and apples anymore.
I think in 2015 we put the target of NOK 1 billion for B&A and already year 1 in 2016 we delivered NOK 900 million. The target was increased to NOK 1.3 billion and then in 2017, NOK 200 million were delivered and we are continuing to deliver improvements. Like I said, you know, this is a very volume dependent business. It's not possible this year to compare apples and apples. The culture is there that I can assure you. Going back to the learnings, I think I said that one of the learnings were that we were not robust enough relative to water collection. Immediately after the rainfall event, we decided to increase and to improve our flexibility relative to collecting and treating water. Enrique talked about that. We are putting oil in place, water storage capacity of 350% more than we had originally.
This is a huge project. We are also putting in place pumping capacity and flexibility in handling water and water treatment capacity more than 50% increase. This will give us a very robust position and it will give us a capability to handle more than double of the rainfall we had in February. I think it's more than a 5,000 year event and what we had was less than 2,500. We are really putting a lot of efforts and I saw myself on Saturday that we were putting the May branding . This will be finished by year end and maybe we'll have little look at the time lapse. Just to put things in perspective, this is an extremely big swimming pool. You see the dates here. 1033-1010-1019-1910-25, 11-7-14. You see the size of the trucks.
We'll be ready with this at the end of the year. That's extremely critical for our capability to run a safe operation and be ready for the ramp up. I'll come back to some other elements that's also. We are lining up to make sure that all stakeholders understand that we are ready. I think technically we have now this big project, this BRL 700 million investment. We also had a necessary process with the Brazilian authorities with SEMAS, the state authority for Environment and the Ministério Público, both at state and federal level.
We managed to close an agreement with both authorities on a TAC, which means that we have a common understanding of what we need to do, both with regards to further strengthening of the operational robustness, but also a plan forward for better monitoring of the effect of the plant and a better connection to communities and emergency plans. This is also a very big job. It is 1,617 work streams, 500 actions. We have a separate program office running this. As we speak we are on plan with everything. This is reported on a weekly and bi-weekly basis with the authorities. It creates a very important starting point for again building the trust and the credibility. Without this it would not be possible to get the other elements in a potential full operating situation for the plant.
I've talked about the TAC. The other smaller wins that we have had is also that all of the authorities are now agreeing that we did not have a harmful exposure or environmental situation from the depositorials. We actually controlled that well. We have taken in a way the responsibility of releasing water. We have also put in place countermeasure to control that at the next rainy season. What also was very important for us is that Hydro positioned Alunorte for the future by actually in 2014 making a decision to transition all of the deposit systems from a wet base to a dry base.
As we saw that deposit area number 1 was running out of space, we decided to go for best available technology press filters to create a dry base filtration process and a compacting and a deposit area technology which will give us a 40% reduction in landfill and more than 10% reduction in water base and create a much more stable deposit area. Unfortunately, this was embargoed. As you all know, we had then a very tough situation in beginning October when we were running out of deposit on the drum filters. We got the understanding with all of the government parties that we needed to open the press filter technology. We also have now the understanding with the authorities that Deposit area has the necessary commissioning licenses.
What's left now is to get the court system to also agree that we have a solution for the future for the plant relative to deposits, and also to get the authorities to agree that we have a production system which is in control and capable going forward. We actually today have a third-party report for a very renowned university called confirming that we have safe operations. That concludes all of the filings of data confirming that we as an organization are ready to resume operations. Of course, this long-term focus of Hydro just shows us that we are the right partner for this region. I have to say that in my dialogue with all the authorities, with the politicians, you know, they start to understand that Hydro has made the right decision.
I met with the Minister of Environment when he understood that we were actually front runners in the industry of using new technology, immediately there was the support to release the press filter technology. This, like I said, was done very early. I would like to show you that this was a very bold move. It delayed us, this embargo delayed us eight months in the commissioning of this technology. You're now running the technology at 50% and improving it day by day. Maybe we can have a quick look at the. I think that's one example of making the right strategic move, being in position already early to actually be an industry leader. That's also great when you talk about our credibility with the government and also building a path forward for keeping a competitive position.
Another very important project is also the fuel switch project, because it's clear that we are one of the largest consumers of fuel oil and to actually transition or calcination process to gas and further on, then work with the boilers will take on the overall CO2 emissions and also position us much better for the future relative to having this fantastic value chain. Because there's one thing that becomes clearer and clearer to the whole Brazilian society. With all of the utilization of resources, mining wise, a lot of these resources are moved out of Brazil. While our value chain actually captures all of the value creation from bauxite through alumina, aluminum primary to our extrusion plants. We are in the whole value chain which is more and more valued by everybody, including federal and state politicians.
We then go to the last leg of creating a common platform for reopening or returning to full operation. It's corporate social responsibility. It's more than that because it's an environmental kind of impact understanding which we have already worked with with Red Cross and other stakeholders to absolutely make sure that we understand potential effects of an industry in this region. Barcarena is a region that has grown more or less since 1995. It's a huge infrastructure challenge. We have kind of two kind of thoughts here. One is the short term cooperation, social corporate responsibility by actually helping people for a better life.
And w e have the longer term creating space for education and development of jobs outside our industry. The so-called Sustainable Barcarena Initiative. We'll talk more about that part. I personally have had quite a bit of meetings with the community leaders since I started. I have to say I have a short white here. The white hair is because of the alumina, but the shortness is most probably because I was beaten up pretty much of these community leaders. In the beginning we did not do enough. Hydro was not anywhere to be seen. I think this is important perceptions. This week I was back with 15, 20 of these leaders and they were very happy because we had helped them to get better infrastructure. We have fixed five, six soccer fields so the kids have an alternative to roaming the streets.
We have put in place a second shift of teachers to teach the kids how to play different sports and so on. Medical help, which we have 100 years of history in Hydro for actually understanding and knowing how to do. I think maybe we had a little bit of a situation where we thought maybe the government and the state and others would take more care of it. That's not the case. Now we'll have to work both stages. This is a very important part also of having the support for restarting. I can tell you that these communities have actually also filed a lawsuit against the embargo of the plant. They have ring fenced.
I'm also very proud when we saw the demonstrations, when we had to make this very, very tough decision on closing in October, that all the communities rallied around supporting Hydro. I see that continued support now as we speak. This part is something we know how to do and we are doing that. I think that's extremely important for the restart process. In summary, we have, piece by piece, put all of the pieces together to file in the court system a case where we say we are ready and capable. Technically we are ready and capable relative to taking a responsibility with the society. We have a very strong organization. I think that we have an understanding that we actually know a particular in place a plant which can handle the next rainy season.
We have worked in parallel to keep this plant cost competitive. Thank you. I would like to introduce Anne-Lene Midseim to talk about further this.
Well, as we've just heard John say, Hydro can only succeed as a company if the societies around us are viable and that our stakeholders support and trust us. The unfolding of the February events, let's see if this works, exemplifies the risk of losing the social license to operate. Social responsibility is important to us. It's in our DNA. It's an integrated part of our business today, and it has been since the company was founded 113 years ago. At the beginning of the last century, our founding fathers understood that workers who have decent living conditions have good health and provide for more stable and productive labor. 113 years ago, Norway was a poor country and the Norwegian government was struggling to provide basic infrastructure and the needs in society. Today in Barcarena, the communities face several challenges.
The Human Development Index is low, for example, people do not have access to basic services, for example, the share of people having access to sanitation in Barcarena is less than 30%. Shallow wells are common, a key reason why people get sick during the annual rains when flooding happens. The area also struggles with close to 40% teenage pregnancy rates. Only approximately 5% of the population completes education beyond secondary education. In addition, the area is suffering one of the highest levels of violence in the world. In 2015 and 2016, it became more and more evident to us that whilst we had a number of quite successful social investments in Paragominas, where we have delivered to the municipality clean water treatment plants, aid clinic, vocational schools, etc. We needed to step up and increase our efforts.
In Barcarena, we saw that we needed to contribute with infrastructure that made significant impact on the development in the area. In 2016 this was seen as so important that we actually put it on Svenrica's KPI scorecard. In the subsequent period, we revised our global CSR strategy. We decided to dedicate more effort and resources to deal with the complexities of Barcarena. In addition, we restructured the CSR organization in Brazil to corroborate this commitment. In the strategy work we have established priority areas where we would like to focus our efforts. In doing that, we have selected what we believe are some of the most fundamental drivers of long term development. However, investing in quality education, decent working conditions and economic development in local communities we believe are also fundamental to our social license to operate.
Social surveys conducted in the area by the Peace Research Institute Oslo in 2017 has also shown that the local community's key expectation to us is local employment. We also believe that strengthening education is one way of living up to that expectation in addition, obviously to reducing the social the operational risk for the company. Furthermore, we have to work consistently and efficiently to promote human rights and worker rights not only in our own operations, but in our supply chain and joint ventures. When we are promoting sustainable solutions, we have to document that we promote sustainability in all parts of the value chain. Bringing local stakeholders together in Barcarena we also believe that we can be a catalyst for social change if we manage to contribute to more dialogue between stakeholders and less conflict.
This will be positive not only for the inhabitants of Barcarena, but for all the companies in the area. All the priority areas have a common denominator education and increasing knowledge and awareness. The strategic goal for 2030 encompasses this. In this goal we commit to contribute to quality education and capacity building for 500,000 people in our communities and for business partners from 2018 until the end of 2030. It's a count goal, but it's imperative that we support this with underlying goals reflecting quality because quality and impact obviously matters the most. How we structure the CSR work in our social investments is based on the local context, taking into account which impact our activities have in the local area, in the host communities and the social needs of the area.
Therefore, it will not look the same whether we are in Norway, India, Brazil or Germany. Whilst we feel that we have an ambitious CSR goal and while new initiatives will be developed to reach it, there is also a range of ongoing efforts throughout the organization already contributing during 2018. Let me just mention a few of them. We have a supply development program in Padar and in 2017 and 2018, Bauxite & Alumina, in collaboration with a local partner, trained approximately 50 suppliers on topics such as HSE, CSR and compliance. 350 audits have been conducted with more than 1,000 follow-up actions. In Alupuram, India, we have partnered with the workers union and introduced the tablet learning lab and the results were so encouraging that we have opened a second lab in India teaching English and logical thinking which is beneficial for entering into secondary schools.
In Grevenbroich in Germany, we are partnering with the German Government for their refugee initiative. We together aiming to assist long-term integration of refugees. There we are supporting language courses, integration workshops and apprenticeship opportunities. In Norway, we're a main partner to the research factory, a social entrepreneur in natural sciences. The research factory aims to improve children's interest in natural sciences and math through direct teaching as well as teaching of school and kindergarten staffs. In 2017 they provided 20,000 course places for children and trained approximately 1,000 kindergarten staff. The list goes on. Common to all of these initiatives is that the corporate social responsibility and the social programs is not about donating money, it's about trying to make a difference and contributing to stronger societies.
With the benefit of hindsight, it's easy to conclude that we should have increased our efforts in Barcarena even more sooner. The February event showed us that apart from our own employees, very few in Barcarena, in Pará or in Brazil saw it in their overall interest to listen or to defend or even help us. We have increased our efforts substantially in order to restore our social license to operate. As John said, we have to rebuild the trust and we will do so, focusing on three different elements. What we do inside the fence. Nobody in the local community should have to worry about whether we operate in a manner which is safe for our own employees, for the climate, the environment or for the local environment and local communities.
Outside the fence, we meet the local communities and seek transparency and openness both with respect to how we impact the local communities. We need to introduce mitigating activities, social programs and volunteer programs and then bringing the stakeholders together. The third element in reducing conflict and facilitating local development. Immediately after the rainfall in February, we started, as John also mentioned, providing water and doctors to the local communities. The doctors have had more than 6,000 consultations and we've delivered out more than 15 million litres of water. We have also, as John mentioned, 700 volunteers going around into the community and fixing football pitches or whatever the need may be. It's about being a good neighbor, showing the face of Hydro outside the fence. The TAC and TC has been duly mentioned, but just some more detail on the TC.
We have committed 150 million reais to projects supporting sustainable urban development in the area. All of this work will be conducted in accordance with IFC Performance Standards. The plan is that we will develop project plans together with the local authorities for housing and urban infrastructure. Alunorte will then construct and donate these houses and related infrastructure to the state of Pará and they will then be responsible for further allocation handling, also following the IFC Performance Standards. Obviously we have local programs giving assistance and training to local family farmers and approximately 300 families are benefiting from this. As part of our efforts that I've mentioned already in Barcarena, we had started in 2017 a project on conflict resolution. Not soon enough, unfortunately.
The aim was to reduce conflict, the conflict level locally, but also to reduce social risk and the risks for our operation. This has now been further developed and we have allocated BRL 100 million to the Sustainable Barcarena Initiative. It's an independent process with a long-term perspective of 10 years. The aim is to bring all stakeholders together, academia, employees, other businesses, the unions, authorities, to share concern, discuss and prioritize key needs of the Barcarena area. We believe that this will contribute to reducing risk and has the potential to drive positive change and development. We have committed to funding the initiatives or the projects that comes out of these discussions. With BRL 100 million over 10 years, as I said, it will be a separate organization with permanent employees.
Obviously we need sufficient time, as this is a long-term approach, to have a thorough process where everyone, all stakeholders are involved and heard. It's an innovative approach for us, well known within organizations such as the UN and the World Bank. We are learning from other initiatives in Brazil and elsewhere. It's challenging and complex in its implementation and it will take time to rebuild the trust. It can be hard to involve stakeholders that are not yet willing to come to the table to talk to us. However, we have chosen to do this because we believe it's right. It's a good investment because business cannot succeed in societies that fail.
Thank you. Thank you.
We will have another Q&A. John and Katrina, if you can, please join us on stage again, there are two microphones going around. Please wait until you get one before you ask your question.
Hi, Conor Rowley, Credit Suisse. Just one for Kathrine. On the your China supply forecast for aluminium, clearly we've seen this year that you would forecast maybe 4 or 5% supply. That hasn't come on. Prices are now lower than they were this time last year. Demand forecasts are lower. Cost pressures are probably the same or worse. What's different now than last year that tells you the same supply is now going to come on when it didn't in 2018?
I think I want to go ahead for your question, but I'll try my luck and then you see if I'm hitting it. What's different in China going 2019 versus 2018? Why should we see a buildup or an increase in supply? Okay, well partly what we've seen this year is a postponement of projects. Some of those are relatively underway. They are expected to, they're kind of in line to be there in the 2019 period. At the same time, we are, of course, there is the balance of capacity being taken out partly for cost reasons. As you point out, somo, those news are coming out quite recently. There really is that balance. We're seeing some relocation from.
The replacement quota system is being played out with some smelters moving to typically Yunnan, which is a hydropower region and Guangxi that also has some incentives to increase capacity. Was that ballpark?
Hi, it's Dan from UBS. Follow up on the market side. You say you expect 1 million-1.5 million tonnes of production curtailment in China by the end of this year. How much have you actually recorded at this point?
Good question. I don't have that number in my head exactly. I think so. Can I come back to that? Am I seeing you tomorrow?
Yeah.
Good
we can cover it tomorrow. A follow up on the Alunorte. You're continuing to rotate the 7 production lines. Is this an indefinite arrangement? What would it take for you to? permanently curtail the 3 production lines?
No, I think what we've done, we've analyzed the benefits and also the advantages and the disadvantages. For now, you know, we are pushing forward to get back in operation. Like I tried to outline, we technically were there, you know, with the licenses. We are there. When there's a break even point now going forward for one year or more, we'll continue to do that.
Thank you, Evan. DNB Markets. Two questions both on the market. Firstly, on the global market and days of consumption, what is a comfortable level of inventory days for the value chain? What levels would trigger price movements.
Secondly, aluminum demand has historically trended above the GDP growth as you showed but for 2019 you have a lower aluminum demand growth than GDP. Can you elaborate on why you see this relationship breaking down? Thank you.
Okay, you go back first on. Sorry. First you said
days of consumption.
The days of.
Sorry.
Dates of consumption. Yes. Inventories. We've seen and there's probably not you know a right or wrong answer or level on this. If you go historic terms, we've seen the pre-crisis levels. We saw inventory days around 60 days has been kind of the historic level I think in world outside China. This is where we've seen a certain previously a certain market reaction which you know we'd be playing out a lot of different factors. I'm not necessarily saying that you reach 60 something happens would be nice, but doesn't. Don't necessarily believe in that.
I also like to underline that we're not necessarily seeing that happening right away but we're seeing a movement in that direction with inventories having come down and with the supply demand balances that we are seeing into next year on the overall consumption we're seeing different consumption levels in different segments. In general we see aluminium growing in line with GDP and as I think I emphasize that where we see strong substitution we expect demand to grow higher than GDP levels in global terms. We're seeing in GDP China, both construction and transportation slowing from historic levels.
The jury is still a bit out on potential incentives in China in the transportation area for passenger cars. We've seen that having a positive effect on demand previously. We're also seeing we've had strong demand effects outside China both in construction and transportation over the last years. We see a lower relative growth in the next year after those high growth levels.
Any further questions?
Hi Ai Ling Ong from Bloomberg Intelligence Research. Question for Kathrine, please.
Just before the substitution question, could I ask what students your estimate for the substitution rates for copper and steel into aluminum, if you can, and also for the ex China market, which market do you think are you forecasting the strongest demand growth? If you can give details on the Europe and the United States demand growth for 2019? Thank you.
The last. First, the strongest demand growth we're seeing in emerging markets and outside China typically in Asia and including India with the U.S. and Europe, as I said, you see some of the stronger segments having somewhat lower growth expected next year because we've seen very strong growth in 2018 and before that the substitution rates. I don't have a figure, sort of general figure. It might be that some of my downstream colleagues will be able to pinpoint that one for you. They're smiling a little bit uncertainly on that one. Of course it depends. It varies between markets. I mean in electrical segment you see China moving aluminum into copper sectors is a quite strong driver in long range transmission and that's something it started in China.
You're not necessarily seeing it having quite caught on in other regions but you are also seeing that technology being exported to other regions, typically Asia also into. Into Africa.
Thank you. Another question for you Kathrine.
The picture you showed on China's import of scrap was quite interesting. Would you say it's more driven by taxes etc. that is sort of limiting the inflows of scrap or is it also environmental policies in China triggering less imports of scrap? That's a question. Also another question on that one. How much of China's future speed is coming from this?
Yeah, aluminum scrap.
Well, on scrap import sort of in general I think we're seeing regulations or other restrictions being put in place by Chinese authorities across a whole range of materials where they're limiting or forbidding scrap or waste to come into China. I would expect fair share of that being environmental reasons in aluminum in particular. This restriction is interestingly on U.S. scrap to China. Quite a different maybe political box wherever rates originating. I would see it partly as a retaliation from tariffs on Chinese products going to the U.S. scrap rate or this scrap share of metal supply in China I think is in the order of 20% ish, which is lower than what you see in for example in Europe and the U.S. where it's quite a bit higher.
Of course it's a market that has a couple completely different growth profile over the last years and they're just starting to generate some of the longer term or the scrap from the longer term uses. Good.
That concludes the second session of today and we will go for another 15-minute break and we should be back here at 11:45AM
Welcome back to the third and last session of the day containing presentations from four of the business areas on the main achievements throughout the year as well as priorities going forward.
In addition to how Street Hydro is stronger together as an integrated aluminum company, we will start off with Head of Extruded Solutions Egil Hogna. Move on to Head of Rolled Products Kjetil Ebbesberg before Head of Primary Metal Hilde Merete Aasheim and Head of Energy Arvid Moss.
Moss comes after that.
First, Egil, the stage is yours.
Good morning, everyone. Welcome. My name is Egil Hogna and I'm responsible for Extruded Solutions, which used to be called Sapa before the acquisition by Hydro 1 year ago. Value over volume, that is our strategy. That means that we are not very much focused on the tons. We are focused on the value. We are able to add to every kilogram of aluminum before we sell it to our customers. We are the world's largest extrusion company and we're the only global one. We have 22,000 employees around the world and we're organized in 4 business units. The 2 largest are Extrusion Europe and Extrusion North America. Each of them close to 40% of our total business. The other 2, Precision Tubing and Building Systems, are more differentiated.
Precision Tubing sells smaller extrusions going into typically heat exchanger applications which require a particular level of preciseness in order to satisfy customer requirements. While Building Systems produces facades, windows and doors for the world's most beautiful buildings. What the four business units have in common is that they have very strong market positions. Extrusion Europe is the market leader in Europe, the same for Extrusion North America in North America, while Precision Tubing is the global market leader in its segment. Building Systems is the market leader in many European countries, but number two in Europe overall. Let's have a look at the key events. Since we met here last year, we have made two small but very important acquisitions. We acquired our Conix Extrusion activity in Brazil in April this year.
A bit later we acquired our first company in the accessories for Building Systems business in Germany. We also decided and started the construction of a very high performance press in Pennsylvania in the U.S., fitting well into our existing plant there in Cressona, focusing on the automotive sector, where we continue to see a large substitution from steel to aluminium. Finally, and most recently in this month, we have, as the first extruder in the world and the first unit in Hydro, received our Aluminium Stewardship Initiative certification. Demonstrating and verified by independent auditors how we satisfy environment, social and governance goals, ensuring our customers that they get aluminium from a responsible supplier. Let's have a closer look at our acquisition in Brazil.
Brazil is still a challenging market. We have followed an ambitious plan in order to restructure our system in the south of Brazil, which now counts three plants. We have done a number of activities to specialize each of the plants in respective market segments. One focusing on building and construction, another one on automotive and industrial, and the last one on industrial customers. We have charged all of the restructuring costs to our EBIT, but we are still a bit more negative than that. However, for 2019 we expect to be positive as we are seeing that the market is showing some signs of improvement. The name of our Building Systems accessories company is [notr]. It's a small company but it is important to us because with this company we are developing a new and common so called hardware platform for all of our Building Systems.
Hardware or accessories for windows is hinges, handles, sliding systems and so on, which are very important for the functionality of the windows and important for the branding because this is a key opportunity for us to put our beautiful new logo on all of the Building Systems we supply. Continuing with Building Systems, we have a strong and important cooperation with Hydro Primary Metal. Hydro Primary Metal is the only entity now able to produce something which is actually not primary metal. It is an alloy based on more than 75% post-consumer scrap. Post-consumer means that it's based on used beverage cans or aluminum wheels or old windows which are then recycled and remelted.
We produce this excellent alloy which has the same properties as primary metal because it has a uniquely low carbon footprint, allowing our windows from a life cycle perspective to outperform other materials when it comes to the CO2 footprint. Our first customer which is now erecting the building you see here on the top right side is the Kuwait Gulf Oil Co., which is putting up a new headquarter where this alloy is in the facade. We are happy to have purchased all of the volumes available of this alloy from primary metal until the end of next year. We are charging a small premium on this, but it is a small premium because in this case we are building the market.
We are a trailblazer both for our own business, but also for primary metal to be able to sell this alloy to a larger number of customers when they are ramping up production. My colleague Hilde Merete Aasheim will revert to this later in her presentation. Let's have a look at the total market and here I've taken a historical look at how the market has been growing in Europe and North America over the years. As you can see, the long-term growth is actually not that big. It's 1%-2%, while over the last decade it's been 3%-4%. We believe in the short-term it will continue in the range we see here, but for the long-term, our expectation going into our forecast, which I will revert to are for not a particularly high market cross. We are living from substitution.
We are living from our ability to innovate and demonstrate to our customers that aluminum is a better choice than steel, plastics, wood and so on. Copper for example. I'd also like to remind you, those of you who are analyzing and trying to predict our results, that we have a substantial seasonality in our business. When you look at our quarterly results, you should compare with the same quarter previous year rather than the previous quarter. This is due to the fact that we see reduced volumes during the vacations of summer and end of year, and we also have substantial maintenance stops during these two periods. The third and fourth quarter are the weakest of the year, while the first and the second quarters are the best quarters. Our work is based on our value over volume strategy.
Sometimes we call it from extrusions to solutions, meaning that we are trying to move away from standard products, constantly aiming to please our customers better, making their life simpler by having better lead times than the competition, better on time delivery, and also upgrading our profiles through bending, through cutting, punching, surface treatment, friction stir welding, and sometimes even assembly with some other materials before we supply to the final customer. We try to find how we can add the most value to our customers after we have added our own cost. That is what we strive for with every single customer we have. However, we also focus a lot on simplification, which is of course linked to delivering value added.
One of the things we are doing is that we are looking into how we can focus our plants to become particularly good in the areas where they have competitive advantages. For example, we have today, or so far three plants which only focus on producing roof rails and trims for automotive companies. We have other plans focusing on building and construction and so on. That is how we simplify and then we collaborate across our global network, sharing best practices to make sure we have a better production and better productivity than our competition. Finally, we have the main focus of our growth is again not in order to grow volume, it is growing in order to be able to add more value to our products.
We are growing in our capabilities to further upgrade the value of profiles, getting closer to the end customer. Our track record to add value is a good one. Over the last 3 years you can see that we've had a nice improvement across our business units. There is 1 exception to that though, and that is Precision Tubing this year, which is affected by the 2 plants we acquired in Brazil, which have had so far a lower net added value per kg of aluminium than what we have in the rest of our system. Our ambition is to lift the added value produced in those plants as well according to what we achieve in the rest of our system. Going forward, we have a strong ambition to continue to simplify our system, to focus it and to add more value to our customers.
Our goal is to over the next 3 years deliver an average annual EBIT growth or minimum 10% per year. That ambition includes smaller bolt on acquisitions like the 2 examples I've mentioned to you today. Larger acquisitions would of course come in addition to this goal. Our return on capital is today above cost of capital and needless to say, we aim to continue to be above and better going forward as well. Now it's time for a little bit of innovation. I'm proud to present to you something which you'll find underneath your chair. If you put your hand there, my management colleagues on the first row, you don't have it, but those of you further in the back put your hand underneath your chair and see if you can find a little plastic bag.
It's attached with tape, it might be, you know, sticking a little bit. If you open that plastic bag, you will actually find the smallest and highest precision multiport extrusion as far as we know in the world. It consists of a large number of cavities which makes this probably the most effective heat exchanger in the world because it's made of aluminium, which has excellent conductivity. With this kind of precision we're able to produce really small air conditioning systems or heat pumps and so on, typically going into automotive and mobile applications. One cast with a casting table like this of 50 tons is able to become 1,800 kilometers of this profile. I think you understand this is not about the tons, it is about the value.
It's about the value created for our customers and the end consumer by the performance of the final product. The only way we can produce this unique precision is because we have super clean metal. That super clean metal is produced by Hydro primary metal based on a low pressure casting technology and a ceramic foam filter, which is unique technology provided by Hydro. I hope, Hilde, we will be able to continue our cooperation to further develop exciting new solutions which our customers will benefit from. Another example of innovation is in the automotive sector where I'm contributing, where I'm cooperating with the next speaker from Rolled Products and battery boxes is something we spend a lot of time on because we see those becoming a very key part of tomorrow's and today's electric vehicles.
A battery box needs to protect the battery from collision. It needs to be able to heat the battery when it's very cold to cool it during operation. In order to do this in the most efficient way, you need to combine extrusions and flat roll sheet in a creative and innovative way. This is why Kjetil and I cooperate on all of these projects in order to make sure our customers get the best possible offering combining the best of both extrusion and the rolling world. Finally, I'd like to summarize our three key focus areas for next year. Number 1 is and will remain safety. We have more than 22,000 employees in our operations. There are risks there. We have a clear ambition and goal to reach zero injuries. That is an ambitious target.
Our aim for next year is to have a considerable reduction in high-risk incidents and in the total number of accidents as well. Our financial goal is to provide minimum 10% average annual EBIT growth over the next three years based on product mix change, simplification, and cooperation across our system. Finally, selective growth through bolt-on acquisitions. Thank you. I then like to introduce the guy you may have seen on the video outside. He's a fantastic assembler of aluminum sofas. I hate to say it, but you beat my team and myself in assembling the sofa even faster.
I'm sure if you try it again, you will beat me also. It was a very easy sofa to assemble it. Fantastic design.
Thank you.
Hi, good afternoon everybody. It's a pleasure for me to give you enough update on Rolled Products and also a flavor of our priorities going forward. I would just like to start with the financial situation for Rolled Products. As of third quarter, we've seen improvements compared to last year. Improvements driven by high grading. By improving margins on our existing products and also additional volume, we have further improved our cost position. We have fixed some of the issues that we had last year. Hamburg was a big issue operational-wise. That is fixed. We have further improved on some other challenges we also faced last year in terms of performance of the automotive line number three, the UBC Centre and also our operations in Alunorf. As always, there is inflation and tariff increases in our industry.
We are heavy in Germany and tariff settlement this year. For this year in Germany gave a 4.1% increase in wages. Of course, this is pulling results also down. We need to continuously improve. We have also improvement from our new power contract in Rheinwerk. It has been questioned also here earlier the impact on Rheinwerk on our business. It is quite significant, actually. It should have been even more significantly positive this year. Because of the situation with the aluminum market and the price situation, results are at least NOK 200 million not too low or impacted negatively this year. If you compare against the PAX during first quarter, that means the NOK 526 million should have been above NOK 700 million. NOK.
Because of our situation with the issues we faced last year, we also then faced a decline in the progress on our Better program. We have said before, and we repeat again, we will be one year delayed in delivering on the full 900 million NOK improvements from this program. We will deliver that by end of 2020. Progress this year, however, is good and in line with our ambitions. Looking a little bit on our market positioning. We have a determined nation to be well positioned in our selected product areas. We want to be number one and number two in Europe on these selected segments. Starting with automotive, we are on our way. Growing at a very fast speed. That has been also noted by Svein Richard and Eivind earlier. Growth this year on body in white almost 30%.
We expect also around 30% growth next year based on the new automotive line. Number 3. Automotive is a superior margin product for us. We see it historically with also good profit from our automotive business. We are now quadrupling the capacity with the new automotive line. Profitability. The margin is at the level where we expect. Profitability as of today is not where it should be and not where it was 3 years ago. Simply because we are still in the ramp up phase on the new automotive line. I would assume today we are in a range of 60%-70% total capacity utilization which is not yet yielding the profit on the bottom line that we expect. That will come when we are fully ramped up.
Our basis here is of course a strategic position with the most demanding OEMs in the world, the German OEMs who we are also supplying to their assembly lines in the US, it's a core part of our hybrid strategy to grow this business. FOIL is in the other end of the scale in terms of profitability. Basically, we are having a subscale profitability in this area. You can split our foil business in two, where one part is quite profitable and following our cost of capital, whereas the other part is actually negative. That is why we have established now a restructuring process to restructure that part of our business. We will by the end of next year, phase out and exit the converted foil business in Germany.
Here also we are targeting to maintain our number one position on the high end foil. We are investing and innovating in new products such as in the electric vehicle segment where there is also growing demand for foil in advanced applications. Beverage can is actually an area where we are quite certain we will grow into number two position next year based on the contracts we already signed in Europe. Historically we've had a large part of our beverage can business overseas. We see more attractive margin opportunities by having that business in Europe. That is why we have targets also to grow our position in Europe. In fact, this is also an area where historically up to now we've seen that we have penetrated with aluminum solutions to and replacing steel solutions.
We've had a growth level in this market over around 4% the last years. What we see now actually is that we are also substituting plastics, so PET bottles because customers and consumers have less and less preference of using plastic because of all the issues that is surfacing now with plastics on a global scale. We have quite strong hopes that we will see continued strong growth and maybe even accelerating growth in this area going forward because of this situation and aluminum being in the more sustainable solution. Also here, lithography we have a number one position globally and we intend to strengthen that position. As you may know, lithography sheets is not a growing market, it's rather a declining market, particularly outside of China. However, we have had seen several of our competitors exiting the market this year.
Novelis and Alcoa have both exited the litho market. There are fewer suppliers which also opens up for further growth for us in this still attractive market for Hydro. Finally, Special Products is a group of different products where we targeting niche segments with above average margin opportunities, better growth opportunities and we want to be number one or number two in those segments. Typically we are talking about 8-10 such niche segments and up to now we've seen growth level around 10% on our account which is significantly above the market growth. We are taking market shares in these attractive segments and that is what we continue to do when I talk about automotive line number three, we have been in a qualification process for quite some time now. It's now really starting to take off.
During second half this year we've seen a significant confirmation of releases from OEMs in terms of allowing us to produce components on the new automotive line. The ramp up has really started to take off during second half. This process has confirmed the quality both today and also the quality potential of our new and advanced Automotive line number three. We will be able to produce the most advanced products in this line going forward. Overall, we are in line with our ambitions on growth in automotive. Although we have needed to spend more of the old capacity to deliver on it because of the delay on the Automotive line number three. During 2019 also the Automotive line number three will be in line with the targets we set when it comes to the original invest decision.
When it comes to the UBC line used beverage can line, we also here have seen progress. We've made modifications at the end of last year that solved some issues and we've ramped up. The production curve now shows that in the cold sorting part of this line we are at design capacity. The hot part is at design capacity when operating stably. As Arvid also referred to earlier today, we still have accumulation of dust in the system which is preventing us from having stable operation. You know, week after week, month after month, which means we every second month we need to stop the line, clean out the dust and restart it again. We don't have a stable situation yet.
That's why we need to make some further modifications to the line to get back to a stable situation and deliver according to the volume that is in line with the design and the decision when we made in that decision. That will happen after the modification in second quarter next year. We will expect to then see a pace out of next year in line with original target. Talking about recycling, we see growing share of aluminium supply in the future coming from recycled aluminium. As has been noted also before. We see also this is not only from a supply side, but also our customers are expecting or even demanding us to supply them, offer them recycling solutions also to cater for their own scrap in their processes. Rolled Products will increase our business in recycling.
We are increasing volume-wise by additional 30,000 tonnes in our targets for next year, which will be good for our bottom line. Also good for our customers and the society as such. Really this development is based on the aspiration we have embedded in our better, bigger, greener aspirations to be taking a leading role when it comes to creating sustainable solutions. We are also here developing new technology. We have a laser-based technology called LIBS which we are now developing to be able to sort advanced alloys from automotive scrap so we can distinguish between different type of 6000 alloys and so on to be able to really maintain the grading of this automotive scrap when we bring it back from our customers and finally also from post consumed when these aluminum-intensive cars are being ending its life and coming back for recycling.
This technology we are developing also together with our colleagues in Primary Metal and also Extruded Solutions when it comes to innovation. Further to what has been said by Egil, the changes in urbanization and mobility challenges, coupled with the climate changes and the energy transition we see requires new solutions. Some of these solutions are seen in the development of electric vehicle concepts. Electric vehicles are ideal for aluminum because as material we could be key material into large part of these vehicles. We have a concept study together between our three business areas developed what you see here down to the right concept study called L7e Electric Vehicle, where we basically applied aluminum in all the different components that could think use aluminum and it's quite successful.
That is a study which is going to be a platform for further penetrating the automotive and electric vehicle applications with aluminum. We're talking about aluminum not only on the body and in the structural components inside the car, but all the way into the heart of the electric vehicles. The batteries and battery is containing both battery housing, connector plates, cell housing and battery foil inside the cells. Altogether, just the battery of electric vehicles can contain as much as up to 125 kilos of aluminum, which will be a major driving force for demand for aluminum. Going forward with the assessment of future demand for electric vehicles, this will represent a significantly higher share of the total assembly in Europe by 2030. The forecast is ranging between 3 and 5 million cars up from today, which is around 100,000 units.
Multiplying the weight of aluminum in the batteries with the number of units assembled, we can come to a total demand just for the battery of around 700,000 tons of aluminum. Of course this is an opportunity that we are going to take and grasp with both hands. Just to round off our products, our focus and priorities. First of all, safety. Our safety performance is not only a license to operate, but also a foundation for good operating performance. We are focusing on operational excellence, on production reliability and further develop and deploying our Rolled Products business system. We are increasingly focusing on commercial excellence. That's not only high grading, it's also being even better in serving customers and gaining opportunities which will give win-win solutions to both us and our customers and maintain a further improving margin in our business.
We will have a special focus next year on exiting of touch of the foil business, the foil converter business, alongside with development of new technical advanced foil applications to complement and high grade our foil portfolio and continuing to ramp up both the automotive line 3 and the UBC Center. Thank you. Then I would like to introduce my colleague Hilde to give an update from Primary Metal.
Thank you.
Good afternoon to all of you. During the day we have talked a lot about Brazil and Alunorte and how that has affected the business area Bauxite & Alumina, but also indeed Primary Metal in challenging times. It's important to stay focused, to work on what we can influence. That is what we have been doing over the last year to work on what we can do something with in order also to shape the future. Our strategic priority stays the same as previous year. We are continuously working to become better and bigger and greener. Being head of Primary Metal on the better agenda. The most important for me is safety. Nothing is more important than that. It's about cost. It's about our cost position.
We are continuously working on the influenceable parameters in order to be even more robust and have higher profitability. To the left here you see the CRU global cost curve where we see our position as primary metal on the 34th percentile. On this curve to the right here I try to illustrate what are the most important parameters that actually influence our relative position. It's about power cost, it's about naturalization cost, which is actually the cast house margin. Then it's about labor cost per ton. I have to then add that both when it comes to power cost as well as labor cost, these elements are also influenced by currency which can easily move us on the cost curve. Coming back to power cost, we have a good position. We have favorable power contracts in particular in Norway, Qatar and Canada.
Over the last few years. We have been working quite hard together with the Business Area Energy in order to secure power competitive power for the Norwegian system where a big contract, the Statkraft contract expires in some few years. I'm sure that Arvid will talk more about that in the next session. It's about net realization cost, which I said is the cast house margin that we earn in the cast house producing value added products which has a premium above ingot. The fact that we can do that 83% of our production is value added products. It's really about our capability and competence in order to continuously to provide demanding customers with more and more advanced products. Also here we have a good position when it comes to smelter labor costs.
We don't see that favorable position even though we have smelters that are further to the left on the curve. The smaller plants located in high-cost country has a disadvantage. That is why we continuously are working to improve our productivity and to reduce our cost. That is the agenda that we have had over many years now in Primary Metal to continuously work on our cost position. Some of you would recall that in the period from 2010 to 2016 we took out NOK 3 billion of cost improvements in real terms. In 2015 we established a new target of NOK 1 billion to be delivered in 2019. When I was standing here last year, I reported that we were halfway towards the NOK 1 billion we had realized roughly NOK 500 million.
Unfortunately, due to the Alunorte extension effect, these NOK 500 million are wiped out. In terms of the fact that we have had to curtail Albras 50%. It's a real volume effect. We also see instability in the fact that we are now taking in much more and many more different qualities of alumina to the plants simply because we have had to source externally due to the Alunorte effect. When it comes to 2019 improvement speed that will be significantly impacted by the timing of the Alunorte restart. I can assure you that we are committed to deliver on the NOK 1 billion target. It's just a question of when we are back to normal because we are continuously working to find more improvements, to realize more improvements.
I see a lot of opportunities still in terms of operational excellence now, particularly related to spin-offs from the technology pilot. I see a number of potentials in terms of Industry 4.0 which I will come back to. Then we continuously working to high-grade our portfolio of products. Technology. It's a very important enabler for continuous improvement when it comes to operational excellence. It's not a revolution. It's an evolution of development of competence and understanding of how to operate at even accelerated levels. The technology pilot at Karmøy is exciting in that sense because this is something that we have learned over years and which we now are realizing in full industrial scale. I'm very happy that I can report that we are on track to verify the world's most climate and energy efficient electrolysis technology. The 60 cells are in normal production now.
We are fine tuning in terms of process parameters, pot tending equipments and best practices. Already now we see one third of the cells at very good levels at almost 95% current efficiency and energy consumption at around 12.4. We said that the target was between 12.3 and 12.5. I also would like to remind you that 12 of these cells we have targeted energy consumption at around 11.5, 11.8 kilowatt per kilo produced aluminium, which is the lowest in the world. We are now preparing for performance tests to be scheduled during 2019 and 2020. The technology pilot is not only to build a technology that should be ready for a new build. The technology pilot has a number of different technology elements that can be used in existing plants, which we find very exciting.
The spin off elements are already now at least what we know today are now an integral part of the improvement programs at each plant. Some of the technology elements contribute to creep. That means to squeeze out more metal from the existing plants, but it's also about energy consumption and to run the cells at an even higher efficiency level. When I was standing here in 2014, I put up a creep program. I introduced the creep program indicating a potential of having 200,000 tonnes more out from the existing plants in 2025. It was. I also argued that that was cheap capacity. We indicated a level of $1,000 per tonne in terms of realizing these creep potentials.
I have to say that I was cautious to say that every step we should take have to be a good business case. Now we see we have concrete plans for the 150,000 tonnes up to 2025. I heard my boss was saying 160,000 tonnes, so he's challenging me all the time. We have concrete plans for the 150,000 tonnes. On the last 50,000 tonnes we question simply because of the business case, simply because we see that we need more investments to take out the last 50,000 tonnes. At the same time I see more opportunities in the energy consumption and to operate more efficient. Simply because we learn now from the new control platform in the Karmøy technology pilot, as well as the good experience for having introduced a digital twin at the Sunndal plant.
We see very good results from that which we can also retrofit to the other smelters. The potential in terms of energy consumption and energy efficiency can more or less compensate for the lost 50,000 tons. Having said that, the 50,000 tons potential is not lost. We simply need to see a better business case. Talking about business case, we see an attractive business case of bringing back Potline B in Husnes to full speed. That Potline was curtailed back in the financial crisis in 2010 and has been idle since then. The restart has an attractive business case also for the fact that we are now implementing spin-offs from the Karmøy technology pilot in Husnes, which will make us produce 13,000 tons more than that pre-curtail level. Husnes is a good plant. It's based on the renewable power.
We are now working also to high grade the portfolio of value added products from Husnes, which will move Husnes from the third quartile position on the cost curve to the second quartile on the cost curve. Industry 4.0. Here we also see a number of opportunities. Right now we have 40 ongoing projects related to digitalization, to robotization and modernization. Main objective is to use new technology, new tools in order to accelerate operational performance and to reduce costs. Every project has a clear EBITDA effect. The basis for a number of our initiatives is that we now can use much more of the data we already have. The new thing is that this data can come into use into analytical workbenches, into dashboards, which gives the operator much faster feedback in order to control the cell.
What is even more interesting is that with the use of all the data we have and combining that to our fundamental models, like Svein Richard was talking about our real deep understanding of the processes, then we can start to predict the cell and that we have tested now at Sunndal in the D2 cell twin and we see very good results. When we combine that again with the control platform at the technology pilot, this is the first step towards an autonomous cell without manual intervention. That is a very exciting journey in terms of the future smelter operation. These opportunities is now built into our next improvement program by on the 2019 in terms of operating at an accelerated, but also, let's say, changing the role of the electrolysis manager, the role of the operators working even at higher levels.
Coming back to the 4.0 initiatives, we also see a lot of good potentials in terms of maintenance. We have introduced a lot of sensors technology, we have introduced a lot of new tools in order to be able to increase the uptime of critical equipment, to increase the preventive maintenance rather than firefighting, and then also to extend the lifetime of critical equipment by simply using sensors, using new tools to monitor critical equipment. Finally we also have several robotics and automation projects that improve safety, that improve quality as well as reducing cost. Better and bigger is not only about cost, it's also about how we go to market. I have already talked about the significant value creation through producing so-called value-added products.
We are continuously driving innovation in order to sustain and develop our market position and also increase the application of aluminum in new products. To the left I show a graph showing the premium that we have achieved above standard ingot in our three product areas. Extrusion ingot, foundry alloys and sheet ingot above standard ingot index from back from 2003. It's a volatile business partner, but it shows also the potential of producing value added instead of achieving a standard ingot premium. To the right here I show a couple of examples in terms of positioning. Some few years ago we were producing unalloyed standard unalloyed sheet ingots and more than 40% was going to the lithographic industry. We realized, we looked for other market segments where we could gain a higher premium.
We challenged our technologists to come up with a technology that we could produce it and go towards more advanced market segments. Automotive was one of the market segments. We developed the technology, we introduced the technology and now you see that the portfolio of standard ingots towards the different market segments has changed quite a lot and with a much better profitability. Another example which was what Egil was talking about. We are now producing very high quality products at Conway with the use of our own technology. Low pressure extrusion ingot casting which allows us to produce much more advanced product. Precision Tubing has been mentioned. We produce extrusion ingot that allows Egil to extrude extremely thin walled material to the heat exchanger market segment and which is also a good sign of a good collaboration between the two business areas.
With the new technology at Karmøy, we are also able to produce more advanced products for the automotive segments like here. High gloss applications, the roof of the top of the car and also more high strength alloys for automotive. Because the extrusion ingot is now more and more going into structural components of the car. The last slide I would like to use is to talk about recycling. We have five remelters in Europe and two in the U.S. within the primary metal business area. Historically we have used them for remitting standard ingot and also bringing back scrap from the customers as part of our customer offering. Now we would like to take a much stronger position towards the post-consumer scrap to bring the used scrap back in the loop.
We have the capabilities, we have the competence to bring that scrap back on the furnaces. We have also recently invested in sorting and shredding facilities in order to dig deeper into the scrap pile. With new technology we see that more and more scrap can come into use. We also see that on the scrap costs here illustrated in % of LME, we see good returns. We have now a separate business unit of recycling within primary, and we see that over the last five years we have had a rupture of 12%, and which is a good margin, which is a good return in the margin business. That is why we also want to grow in recycling.
We have recently decided to invest in our Azuqueca plant in Spain building on the learnings from Clervaux which now produce 75R for Extruded Solutions and which will make also Azuqueca produce another 25,000 tons of 75R. We have upgraded our Lucé remelter to be more robust in terms of taking conversion scrap from the customers but also to be ready for using post-consumer scrap. The same rationale where we now are going to build a remelter furnace in Slovakia, taking care of the customers in Central Europe by bringing back the conversion scrap from their customer and strengthening our position in Central Europe. Finally, I would also like to say that I'm very excited about the collaboration with Extruded Solutions when it comes to 75R.
I believe Extruded Solutions is very well equipped to promote 75R and also defend our metal towards other materials competing with PVC and wood in the building industry. I sincerely see a lot of opportunities in that collaboration. Also going forward, I close my speech by focusing on our main focus areas for the next year. Safe and stable operation. That goes without saying. Preparing for Albras. We are ready to restart as soon as Alunorte comes back and then also prepare for a good Husnes restart and then continue to sustain and improve our competitive position, staying focused during challenging times. Thank you. I would like to invite my good colleague Arvid which we work close together sourcing power for the smelters. Arvid, the floor is yours.
Thank you. Good afternoon. Today I will focus my presentation on competitive sourcing and on business opportunities that we see from our business area. First let me just share with you what has happened over the last year in business area energy. We have continued our sourcing efforts in Norway and by now we have for all practical purposes sourced this metric in Norway until 2030. Main sourcing we have done over the last year has been wind power. Of the 2.2, 1.5 is wind power. The rest is one hydropower contract. We also continue to upgrade our assets. In addition, we have taken two positions in what you could call new business in energy. It is a 34% share in Nordex, which is a wind development company.
As I said last year, we have made an investment in the Corvus Energy company producing battery system for maritime sector. Recently the board there made a decision to build a battery factory in Bergen. That's the main events in 2018. Let me then share with you the perspective of the changes in the energy market that we see going forward. The main changes are going on in Europe. Gradually this will happen also all the places in the world. Traditionally we have had a flexible power generation, especially coal fired power plants have had the flexibility to serve flexible consumption. In between there you have had the grid system and you had markets that through the price signals have balanced this market.
As we now move forward, we know that more and more of the coal-fired power will be closed down. We will have solar and wind as the main source in Europe within a few decades. That of course then you have production based on weather conditions. Of course that requires more flexibility on demand side. There is a limitation to how much consumption could vary with weather conditions. Which means that we need something more in the middle here. You need more and new types of storage, being it batteries, hydrogen or heat storage. That is really what's going to be necessary to solve this equation now between the flexible or the new kind of production with consumption.
In addition to that, we see that with what is going on now with data aggregation, the way we can now combine information from a lot of different sources, make it possible to take ownership and control over this data and really optimize in a different way than before. It's a new business opportunity in itself to be, let's say, controlling the data. Why are we so focused on this? Because we are out here as a very large consumer that needs stable delivery of power at balanced and the right stable prices. What we are at risk for is of course if we do not really get something that can balance here between this and this one. Where is that we have an unstable delivery at squeezed margin. We really want to be able to control better.
What, how and at what level are we going to take in the power and energy to our plants also going forward? Let me share with you how I see this now for us, power generation, you know this picture from before, we have the 10 terawatt hour of hydropower in Norway. We have the reversion in a few years time. We are working on solutions there. We will come back when time is right on that. What we have worked a lot on over the last year is really the new sources we have, together with partners, developed a lot of new wind parks in the Nordic area. Based on that, we could represent a solid offtaker of the wind power and they have been able to secure financing at very attractive terms.
The point is here that you've really been able to create a completely new business concept where let's say the type of business that we represent can be give a fixed income to the owners of these wind parks or solar parks for the whole lifetime of these parks. That gives a very solid ground for developing them. When we look forward now for Hydro, when we look at how are we going to get new production into the system by others or by ourselves, we will look at sources that have a green footprint like you see on this screen. Let me then explain a little bit better. Why is wind so interesting and so feasible in the Nordic region, especially in Norway? This is. The prices here are from Statnett. The price level is not really the interesting thing.
It's the relative level in 2020, if you say in Norway that the system price is 30, then an average windmill will get an average price over the year that is 3% lower. The wind is blowing. You have to produce when it's blowing. If it's blowing a lot, then the hydropower producers can keep back on production so that you don't get this cannibalization on prices. If you look to Germany in 2020, a windmill there will get 17% less income than the system price because there is not the same flexibility on the supply side. You cannot pull back on a nuclear power plant. It means that as more and more wind is coming into the market, then the prices that the windmill will receive will be less and less.
If you go out to 2040, even if there are a lot more windmills in Norway, they will still get almost the same as the average system price, while in Germany they will get only 2/3. This is really the beautiful thing about hydropower reservoirs. It's storage that is there already and you can flex it, keep back production when the wind is blowing. There are very few other places in the world where you have this advantage. That means, in sum, that the reason why we have got these competitive PPA terms in Norway is that you have good wind quality in Norway. You have a very low cannibalization of price. At high wind production, you can build bigger wind farms than many other places. There are very good ground conditions which give lower capex.
There are companies like Hydro Alcoa, the Facebooks and the Googles of this world that are actually interested in entering into these long term PPAs and that allows for a lower financing cost. You get this combination of a low cost PPA and good income for the equity owners. What is with Hydro is that we are both a large power consumer and producer. We understand the market risk and we can take this win as produced because we can flex it with the market or own system. Of course we are a solid company to do business with an attractive counterpart. I would say it's a very innovative way that we have developed this with the project owners in Norway and we see possibilities to do this also other places as we move along.
The interesting thing here is that you are not negotiating with power companies, you are negotiating with pension funds. We're discussing yield, not expectation of future power price. It's good, it's been good. Let's be then move to energy consumption. We are quite the large power consumer in the world, mainly in Europe, but also other places. We use gas in the Middle East and in Europe, but of course here in South America, in Brazil we also have a large consumption of coal and fuel oil. That's where we see the most urgent need also to change the energy metrics as we move forward. If you look at the.
If we want to really look at aluminum, as we said many times it is aluminum is energy in solid state and as I said before, it represents 50% of the cash cost to produce metal is really energy but also downstream it is a part, important part of the cost. If we want to develop even more sustainable and cost and improve the cost of energy supply we have to work on the framework conditions with the governments. We have to ensure that we have a greener mix going forward and we have to work on security of supply to ensure that the smelters at any time has the power it needs.
We as the business area Energy, we are working across and supporting all the business areas with sourcing of power, sourcing of gas, sourcing of other things, but especially working across on all these parameters that in the end will be so important for us. In that respect I'm happy with the cooperation we have. It gives a lot of value to Hydro. Let me move to market and then grid. We have seen a development of the market prices over the last year. That has been quite a big change. This is the forward price for coal and for CO2 and the Nordic power for the 2019 products. You see that all of them have gone up. We said several times that the Nordic price is really pending the CO2 price and the coal price.
You see that in the Nordic now we have had a doubling of the 2019 price in just 1 year. A doubling. That is of course, if you had been without contracts in this period, it would have meant a lot to the profitability of Primary Metal. Let me share with you a few comments regarding what's going to happen in the middle and what are we doing in Hydro to prepare for that. We have made the investment in Corvus, as I mentioned you, which is a battery system company serving primarily the maritime sector so far. Why is this so interesting? Well, batteries in Europe is expected to grow with more than 30% annually for the next seven to eight years. The market for batteries in the maritime sector alone is expected to represent $5 billion-$6 billion in 10 years.
Today Corvus has a market share of 50%. It's the leading company in this area. We believe that to be part of this we can. First of all, we see that our competence can contribute to make this business even more industrial. We contribute now with our competence when they're now building a new factory in Bergen. We also see that we get a key learning from this ownership and can take that into our own industrial system. We can also see how will such a battery system, how will that connect on both sides of the fjord, so to say. You could also see this on both sides of any market system for power. How will a battery system interplay with production and consumption? That is where we see the learning over time that we can really benefit from.
There is one other thing, and we talk a lot about the value of the integrated value chain in Hydro. Batteries is really an area where you can see that very easily. Both Kjetil and Egil has talked about their contribution now to deliver material to the batteries themselves. To that we can contribute with the modules with cooling systems. We are participating in Corvus. We see from energy side how we now can make a battery system into play, either inside the fence of one of our businesses or as part of a bigger system. We can really work on the application side. We also now are in discussion with battery producers. How are we going to do the recycling of batteries? Because as Kjetil points out, there will be a lot of aluminum in batteries.
How are we then going to take this back into the loop? This is a very fascinating business with a very strong growth. When we sit down with battery cell manufacturers or the kind of ship builders, whoever, we have a lot to contribute within those discussions. Here we really can see we can utilize the full range of Hydro's competence and let's see how we can build more business from this value chain. Let me finish off with a few words on financials. To the left here you see the EBIT from Hydro's energy and the gross level. The blue color that is the actual reported figures that we have had over the last years and the red at the top here is the, let's say annual loss from this legacy contract that we have informed you about. This contract will expire in 2020.
From 2021 on we will have a lift in the results of Energy all other things equal of NOK 400 million-NOK 500 million. That will not have any negative effect of the rest of Hydro. This will be a net improvement also for Hydro all other things equal. One additional thing to inform about is that we have entered into a new internal contract with Primary Metal for the 8 terawatt hours for power sales to Primary Metal in Norway from 2021 to 2030. That means that as I said with the external contracts and with these 8 terawatt hours, Primary Metal is for all practical purposes 100% secured until 2030. This contract internal contract is mirroring the external contract. It will again from 2021 lift the result of Energy all other things equal with roughly NOK 300 million.
If you then look at it from a from the other side of the table from Primary Metal, the combined external and internal contracts that we have after 2021, the price level delivered to Primary Metal will be equal to the current level. There is no big change or there is no change from the contract portfolio 2020 and going forward it's the same level. On that note, I just want to summarize. We have a strong focus on safety, no injuries so far this year and working on the items you see here and that have been true. I hope that by next year we can see development both on when it comes to new businesses and further development on the sources side. Thank you very much.
Okay then we have the final Q&A of the day. If Egil, Kjetil and Hilde can join us.
As I said earlier, please w ait until you ask the question.
Question.
Market Magazine, I've got two questions for you, please. One concerns the extent to which you might be looking at 3D printing or A dditive Layer Manufacturing as a future processing method. For aluminum. The other is really a question for Hilde concerning the digitalization side of things. I understand your digital twin is based on a sort of fundamental understanding of the physics of your process. A lot of industries now are also looking at artificial intelligence, where they're actually throwing a lot of data at a supercomputer and looking for patterns and then working out there's some kind of correlation w ith
it is a little bit hard to hear you.
Sorry, can you hear me better now?
Yes.
Yeah.
Okay.
I was just starting about artificial intelligence to the extent of which you're using that in your digitalization program. Looking at patterns rather than fundamental physics.
We start with the first question. I think we have looked at the 3D printing technology we have evaluated and we don't have extensive program relating to that, at least not in my part of the business. Centrally we have it on the technology center and Hydro has a portfolio, but this has been part of it, but we don't have any concrete plans.
Maybe I can give a quick comment as well. We have looked at it and we are still looking into it because the technology is improving. For additive manufacturing, the problem so far has been that even if you can actually print metal today and you can print aluminum, you don't get the same product properties. For example, if you extrude something, you actually get a very strong profile. You get a product which is sturdy and can handle quite a bit of energy, while when you print you don't get the same product characteristics. Today we see additive printing as a competitor for some types of casting where the strength of the material is less important, while for typical extruded applications today the strength is very important. The 3D printed products are not able to compete with today's standard of technology.
It is developing, so we are following it.
In the role portfolio, the productivity limitations will, at the current level at least, all enhancement is preventing this to be competitive
in terms of the digitalization. We, as I said, we have started with really working on our fundamental models using all the data. We also now testing machine learning. We are on the journey, so I cannot elaborate more on that at this point. This artificial intelligence is part of the development.
Question for Arvid. Have you looked into hydrogen as a way of storing energy compared to batteries?
Yes, we have looked at that and I think it's fair to say that as of now it's hard to see that it is cost competitive. We see that if you look them 10, 20, 30 years down the... road
You decarbonize the power sector in Europe completely, then you need something that can tackle these periods of days or week or two without wind and without sun. Hydrogen can be a solution to that. The answer is yes, we looked at it. We will continue to look at it more from a desktop point of view but also maybe look at some research, let's say initiatives in that area.
Thank you.
Daniel over there.
Hi, Dan Major from UBS. A couple of questions. Very useful to provide some financial guidance on the Extruded Solutions business. Thanks for that. Could we walk me through the sort of bridge on the synergies versus the integration costs? You say you've realized $100 million of synergies. Can you remind us what the integration costs you've incurred this year and how long they will continue for?
Eivind, do you have a precise number there? I do not recall it.
We have guided to $400 million. It's also on the integration cost functionality. That doesn't hit the resolution and we spent a little bit more than 50% of that remain common over the next.
Maybe I should repeat that as I have a microphone, that what Eivind Kallevik said was that the total budget for integration cost is $400 million and as of now we spent approximately half of that. The total of that has not been charged to Extruded Solutions.
Okay, just to clarify on that, assuming you deliver 10% growth in underlying EBIT from the business in 2020, you'll have a $200 million delta as you're no longer incurring the integration costs, is that correct? If you spent NOK 400 million over 2 years, 2018, 2019, in 2020 you'll no longer incur the integration cost. There'll be a NOK 200 million delta in 2020, is that correct?
A lot of this is going to come on the corporate level. A big part of this has to do with rebranding, for instance, which comes in parts in 2019.
Okay, thanks. Then the second question, just to c larify, I'm sorry if it's already obvious, but in the energy segment, when I take those two components of the contract changes, that's NOK 700 million-NOK 800 million increase in EBIT on a like for like basis group impact in 2021.
That is true.
Great, thanks a lot.
Thank you. Evan, Analyst, DNB Markets, two questions, one for Egil. First, 10% EBIT growth per year. Is it possible to split that up between organic and inorganic growth targets? Can you elaborate on the typical size of the companies you're looking for?
Geographies, etcetera. Also, I think for Hilde, the lower sourcing cost on Remelt. Are you at this stage prepared to u pdate the guidance on metal markets which have been performing quite above the previous guidance for quite some time?
Thank you.
If I answer the first question relating to the EBIT growth and whether it's inorganic or organic growth, most of this is going to be organic. If you look at the acquisitions we've done this year, the one in Brazil was in the range of US$10 million. When you get assets at such a low price, it means that typically we acquire something which is loss making. It's a turnaround operation. That means that when we are having a target of 10% annual EBIT growth with very slow acquisitions going forward, it means that we have put very little into the inorganic improvement, meaning that the very large majority of it is organic growth.
Well, as to the result of the business unit recycling which is part of the commercial or metal market, as we report, I showed the development on the return and the results we have an improvement program that sort of continuously work to improve the profitability of the recycling business. Not more guidance than that I can give.
Okay, there seems to be no further questions.
That concludes Hydro's Capital Markets Day 2018. Before we leave for lunch, Svein Richard please. You guys can come down and Svein Richard can come up and for a few last comments of the day.
Thank you very much and thanks to all of you here in London participating and asking good questions. Thank you very much for your attention. Thanks to you following us online. I hope you have got a good impression of how we are navigating challenging times and maintaining long term focus and that you also have got a good update and overview of our businesses and opportunities going forward. Now we are going to prepare ourselves for good meetings tomorrow. I will have 14 meetings tomorrow during the day, so I look forward to that. In the meantime, we have lunch ready for you outside. Thank you very much.