Good day, welcome to the Norsk Hydro third quarter presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stian Hasle. Please go ahead, sir.
Thank you. Good afternoon, welcome to the update on the Norsk Hydro third quarter results. We will start with a short introduction by President and CEO, Svein Richard Brandtzæg, followed by a Q&A session. With that, I'll leave the word to you, Svein Richard.
Thank you very much. Let me say a few words on the key developments in the third quarter of this year. The underlying EBIT for the third quarter was NOK 2.7 billion up from NOK 2.4 billion in the third quarter last year and stable versus second quarter of 2018. This quarter continued to be negatively affected by Alunorte, Paragominas, and Albras producing at 50%, resulting in reduced volumes as well as cost inefficiencies. The main factors lifting the results in Q3 versus last year, were higher realized all-in aluminum and alumina prices at respectively 17% and more than 50%. This was more than offset by significantly increased raw material costs, largest one being alumina, as well as somewhat increased fixed cost.
Energy delivered a record result, mainly due to significantly higher prices, and results from our downstream divisions were fairly flat compared to the same quarter last year. We are maintaining a strong focus on the better improvements across the business areas, but we see now that due to the situation in Brazil, we will not be able to deliver on the NOK 500 million target for 2018. Finally, when it comes to the market side, we see the global aluminum market in a deficit in 2018, but with the continuing uncertainty on U.S. trade tariffs and Rusal sanctions together with the situation in Brazil.
We reduced the expectation for global primary demand from 4%-5% to 3%-4%, but have at the same time, reduced the expectation for global primary production from 2%-3% to around 1%. Resolving the Alunorte situation remains our key priority. On the positive side, we signed two important agreements with the Brazilian authorities in September, which we believe is a step in the right direction. Although they do not provide any indication as to when the embargoes will be lifted, it is important for us now to make sure that we are in alignment with all the stakeholders to increase the likelihood of a positive outcome when we take this case to the judge.
At this time, I'm still not able to give you a clear timing on when we will test our documentation and agreements towards court system. We continue the dialogue with the government of Pará, including State Environmental Agency, SEMAS, and Ministério Público, in order to establish a common platform to resume production.
Operator, we're now ready for questions.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question at this time, please press star followed by one on your telephone keypad. Please ensure that your mute function on your telephone is switched off to allow your signal to reach our equipment. A voice prompt on your phone will indicate when your line is open to ask a question. Please state your name before posing your question. As a reminder, please press star one on your telephone to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for a question. We'll now take our first question. Please go ahead. Your line is open.
Morning. It's afternoon, sorry. It's Liam Fitzpatrick from Deutsche Bank. Two questions. Firstly, just on Primary Metal, or Primary aAluminum, we're beginning to see production cuts in Europe from some of your peers. Are there parts of your portfolio where you would consider reducing production if the global primary margin outlook doesn't improve in the coming months? Secondly, on Alunorte, you know, I understand you're not gonna make any firm comments around timing, but since the announcement we saw from you a few weeks ago to shut down production, have you seen an improvement in the negotiations and greater urgency from the various parties to reach a resolution? Thank you.
Thank you very much for the questions. With regard to production cuts in Europe, we don't have any plans to cut down production. According to CRU, we were well-placed on the global cost curve in the second quarter. We haven't seen the updated figures, but we are placed on the 26th percentile on the global cost curve. We know that there has been some shutdowns planned for shutdowns in Spain, but these are probably very high cost smelters. With regard to the Alunorte and the situation, of course, it was a big surprise that Alunorte management decided to close down the production after the report came from the agency that is expert on the geomechanical area.
We got a clear advice from them, and the conclusion was taken. After that, we saw that the activity level increased, and we were able to lift our list. We got approval from IBAMA first and then SEMAS to lift, that lifted the embargo on the press filter, which was extraordinary situation and which resulted in a continuation of the operation that we could bring back the production to 50% very quickly. That was done very fast. After that, we have, of course, continued the discussions with authorities. We have a constructive dialogue about with government of Pará, with IBAMA, with SEMAS, and the Ministério Público.
First, it is important for us to say that we have the sustainable combination of press filter and the new bauxite residue area, DRS2, that we have talked a lot about. This is ready to be used, but temporarily, we are now using the press filter towards the old deposit area, DRS1, which we can continue to use for another 12 to 18 months. Of course, the dialogue now is about opening the opportunity to utilize the new bauxite residue area, DRS2. Of course, also the discussions is about how we can lift finally the embargo on the 50%.
Would you be disappointed if we're still having the same conversation in three months?
Absolutely. We are eager and very obviously we are ready to start using the DRS2, and also of course ready to continue full production in Alunorte any day. We are impatient bringing back production to full speed.
Okay. Thank you.
As a reminder, ladies and gentlemen, if you would like to queue for a question, please press star one on your telephone keypad. We'll now take our next question. Please go ahead. Your line is open.
Yeah, good afternoon, team. Sorry, I've got a couple this time, bear with me. Let's take them one by one. First, Stanko, the aluminum price obviously dropped further since we last spoke at the second quarter. Norsk Hydro keeps talking about very good supply demand and things being quite constructive in the market. There must be something there that is not going as planned. Clearly, destocking may be a driver. How long do you think this factor of destocking will still drive the share price, the commodity price?
Okay, we can take one question after the other. I can answer accordingly. With regard to the drop in aluminum price, of course, when we look at the supply demand balance and also the cost of production, I'm looking at just the fact that we are talking about alumina, the price levels that are very high and just in percentage of LME, we are above 20%. This should of course the cost level here should indicate that there are several smelters now around the world that is below water.
We had a look at that just a few weeks ago, and we saw that about 40% of the smelters in the world are below water, and the situation hasn't improved very much since then. Of course, we see that China has, I would say, more balanced the situation with regard to supply and demand, while there is a substantial deficit outside China. We see China is exporting aluminum to the local countries in Asia, but also to the especially to Eurozone. We see that China is exporting. This is having an influence. In parallel, we see that the global inventories are gradually going down.
How long this can continue is of course difficult to say, but there will be a tighter market as we see it now if the demand continues as it is now, and also the fact that there is a very low appetite for increasing production. In China, we are taking down the expectation from 2%-3% growth in supply to 0%-1%. This can be ascribed to, of course, the cost situation, the profitability situation of Chinese smelters or Chinese aluminum companies, but also there are some capacity buildup constraints in China. Outside China, there's been some disruptions. Albras is one of them. Only in total, we expect only 1%-2% increased supply outside China.
We, as we see it now, the situation will become even tighter as we move forward.
Okay. In your historic experience, what level of inventory, both visible and invisible, do you need before the market really tightens?
I think we are.
How many weeks?
We are now approaching inventory days level, which was similar to the situation before the financial crisis. That also tells us that the market is becoming quite tight .
It, yeah, the inventory is coming down and the market tightness is moving forward.
Okay. Okay. second one. On, on restart or potential restart, let's call it like that. what is Norsk Hydro's view and what do you think the government's view is, with respect to the rainy season? Obviously, it's a bit of a unnerving period after what happened last year. is that, is it of particular significance? You wait for that, you don't wait for that? what's your view on it?
We are ready to start .
We have already made Alunorte even more robust .
Since the previous rain season. On top of that, we are building a reservoir system that will increase the water reservoir with 350%. That will be ready now in the end of the year. That will give us quite a substantial buffer to handle heavy rain. On top of that, we're also investing in a in a water cleaning system that will be added that will increase the water cleaning system with 50% extra capacity, and that will be ready in the second, third quarter next year. What we have done already, what is already happening now will make Alunorte much more robust going forward.
It has already been concluded by the authorities, like we have said also before, that there has been no pollution even after the extreme rainfall we had in Alunorte in February. We don't gamble on this, and with the climate changes, we expect that the rainfall could become even worse going forward, so we are preparing for that. Alunorte is definitely much more robust today than it has ever been, and we will make it even more in the future. I think we will say that we are ready to start now, and we are that is also what we are discussing now with the authorities.
Okay. Then one more long-term and then one short-term. On rolling, it's been a never-ending disappointment in the last, well, let's say seven, eight quarters, at least I think for the sell side and for investors. How do you look at this? I mean, this seems to be not getting any better, and it's better for one or two quarters, and there's something else going on. Does this need more structural addressing? Do you need to change something? Do you need to sell it? Do you need to shut things down? What, what can you do to make this the business that it looks like it was two years ago?
I am also very disappointed about the development in Rolled Products. We see that there is a need for restructuring and some of that we can now already do ourselves, and we have started with the especially within, in the foil area.
Right.
-foil area. The fact that Alunorte is also now, having production issues is affecting the whole Grevenbroich , system.
That is something else we need to strengthen. The used beverage can recycling line, we have talked about a lot, and we still have issues there. With regard to the Automotive Line 3 , however, that is now moving in the right direction. I think one of the key learning points here is that Rolled Products have been very busy the last years with several projects at the same time, and that is not something-
Yeah.
We will repeat in the future. That is one thing here. With regard to structure, that is something we will come back to later.
Okay. I'm sorry, two very small ones, a bit boring. On the working cap, understandably, you build up quite a bit of working capital in the quarter. Normally, you release some of it in the fourth. This time around, can we expect that some of that buildup will stay into next year because it is alumina and some extra metal that you're sitting on?
Hi, Mano. It's Eivind.
Hi. Hi.
I think when you look into Q4, we do expect a release of working capital as we normally see in the fourth quarter. It's still, let's say, from an overall level, it's probably gonna stay somewhat higher compared to what you normally would see. Yes, it will be released, but overall, you know, the absolute level is somewhat higher than what we normally would have in a Q4.
Great. On Albras, last one, I promise. Albras, you sold the energy NOK 400 million benefit year-on-year to the EBIT. You will still sell some energy, I presume, in the fourth quarter, although at much lower prices. Is there still going to be some benefit year-on-year from selling electricity, or will it be zero?
Well, let's have a look at how the market prices develop. As you know, the Brazilian power market is basically, or the hydropower there is basically run of the river for the most part.
Yeah.
There's dam capacity. In the rainy season, they almost produce that the water comes down, right? That typically means.
Yeah.
that the prices go through the floor.
Yeah.
There will be significantly less contribution in Q4. I think that covers it.
Understood. Thank you.
We'll now take our next question. Please go ahead. Your line is open.
Hi. Good afternoon. Jatinder Goel from Exane BNP Paribas. Two questions. Firstly, on your 2019 alumina sourcing, what are you currently planning above your usual 2.5 million tons procurement to cover the contingency of any delay in Alunorte restart or lifting of 50% embargo? Second one, how long do you need for the press filters to be fully ramped up? Because your comment says, the full ramp-up will determine how long you can take to fully ramp Alunorte back to 100% capacity. Just trying to understand, how long will it take for the press filters to be fully up and running to your comfort level, where you can press the button to 100% capacity of Alunorte if embargo is lifted. Thank you.
Thank you, Jatinder. We, I can take the first, the last question first, and then Eivind can answer on the alumina sourcing side. With regard to the press filter situation, as I said also in the presentation earlier today, we have lost about eight months of commissioning time, where this press filter should be optimized and fine-tuned to the full, to cover the full production. This time has been lost because of the embargo. Now we are back in the business with the press filter. Of course, as I also said earlier today, we have eight press filters today.
When we started last year, the press filter system, we saw that there were at least indications that the capacity may not be covering the full production. That's why we will have installed another press filter, the ninth filter. That will be in operation in the second, third quarter 2019. In the meantime, of course, we are ramping up and speeding up what we already have, the eight filters. Of course, it remains to be seen what will be the bottlenecks here. Normally, when we get such big units in place, big equipment, it will take some time before it is up to full speed.
That the original plan was, of course, that we should gradually ramp down the drum filter, and DRS1 together with ramping up gradually the press filter and DRS2. Now we have only the press filter. That is the reason why we have indicated that if the embargo was lifted tomorrow, we will probably not have full capacity. Of course, we will rather lift the embargo and have a bottleneck on the press filter anyway. This is just to say that it may take some time before we are in full production with as we can only now use the press filter technology.
Sure. Just to push a little bit more, you've lost eight months from this ramp-up period. Can you now do it in four months, or is it still gonna take eight months from the exception approval you have received to go to full capacity of eight press filters, ignoring the ninth new one?
We are putting all resources in place now to make sure that we can ramp up the press filter as soon as possible. This is too early to conclude on, but I can say the press filters are working, but we need to fine-tune and optimize, and we have put our best resources in place to do that.
When it comes to the alumina sourcing, Jatinder, we are as we've said, we are covered for fourth quarter. We're also working to source alumina for the first quarter. We're doing that in a way also to make sure that even if Alunorte stays up, I would rather have one cargo too much than one too little. We will play this on the cautious side.
It will be rolling five months, planning ahead in time. Typically starting from today, if we say first quarter covering during the first quarter of 2023.
We are sourcing for the first quarter to cover any potential shortfall that we would have. As we said before, for this year, we are sourcing roughly 1 million- 1.5 million tons over and above the 2 million - 2.5 million we normally source.
Yeah.
That's in a way this practice will continue on.
Sure. Thank you.
We'll now take our next question. Please go ahead. Your line is open.
Hi, it's Dan from UBS. Apologies if there's been repeat questions. I joined the call slightly late. The first one, just to be clear on the negotiation process, am I correct that the best way forward here for you on is to come to an agreement with the government of Pará and Ministério Público before you present the details of the framework agreement to the court to get the embargo lifted? If that is the case, I mean, I-I don't really understand how you're particularly further in the process because I thought that was what you were doing to get the framework agreement signed to start with, was agreeing with those parties.
Can you just explain a little bit more about sort of how this process goes forward in terms of the negotiation?
Thank you, Dan. With regard to the negotiations that we have had for quite some time now, first of all, we have established a platform which was the TAC, the technical agreement and the social agreement, the TAC agreement that was signed in September. The discussions and negotiation we have had further now is about lifting the embargo. First of all, as I said, for us it's now important to lift the embargo on DRS2 first, and then lift the embargo for getting back to full production. It is right that we would like to have agreement or a common platform with government of Pará, SEMAS and Ministério Público before we go to the court.
I think that will make the court decision safer, to say it that way, so we can have the embargo lifted in an efficient way. We know that Ministério Público have a big impact on the decisions. They are highly regarded in Brazil, and I think it's important that we also have agreement with Ministério Público as we also did with the TAC and the TC agreement. This is the process going forward. We again have a good dialogue with authorities. That is clear. Still it is impossible to say how long time it will take.
Just following that, I don't quite understand what you haven't agreed on. I mean, I thought the agreement, the TAC and the TC, you know, that was the agreement you need to reach. What is outstanding? I mean, obviously, I know you're agreeing on lifting the embargo, but I don't quite understand what wasn't covered in the original agreement.
I think the TAC and TC was the fundament for bringing Alunorte back to full speed and lift the embargoes that we have been exposed to. The discussions now is of course to go through all the details on the operations of Alunorte to make sure that we can operate Alunorte safely also into the next rain season. The fact that we have already done quite a lot, we have strengthened the temp system, the pipe system. We have now done the excavations. We are going to finalize the water reservoir project before
New year and very early and, meaning very early in next rain season that starts in December. I think we are on the right approach now. Again, we have no timing for this, but there are close contacts between the parties here.
Okay, thanks. Just two more slightly smaller ones. Just to clarify the cost bridge for the primary aluminum business. If we assume that the NOK 400 million for energy resale doesn't happen this quarter, then you've got NOK 200 million of higher alumina costs. Am I right in saying that those, from a cost perspective, the two main moving parts we should be thinking about on the cost line in the fourth quarter versus the third quarter? Is that the right way we should be thinking about it?
That is, the right way to think about it, Dan.
Okay, great. Just last one very quickly. You obviously reiterated the CAPEX guidance, which assumes a very large, you know, big step up in spend in the fourth quarter. I know you've obviously got the additional projects in Brazil. You have fallen short of spending your CAPEX guidance in the past. What degree of confidence have you got around that, is the risk to the downside that you fall short of the guidance again this year?
I think normally when you look back in this in history, we spent around 40% of the CAPEX in the first three quarters of what we've spent. This year, we spent slightly north of four of the total budget or indication of eight. I think we're pretty much on track. That as you will appreciate, as the, as the year-end closes, you know, there's always something that is pushed in or comes forward, so there may be smaller variations to that number. As we see it today, we stick by the guidance of just north of NOK 8 billion for the year.
Okay, great. Thanks.
Ladies and gentlemen, just as a reminder, if you wish to queue for a question today, please press star one on your telephone keypad. There are no further questions over the telephone at this time. I'd like to turn the call back over to our host for any additional remarks.
Thank you, and thank you for joining us today. If you have any follow-up questions, please don't hesitate to contact us. Thank you, have a nice evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.