Here, all here in London, and all of you following us on webcast, welcome to the Capital Markets Day 2017. 2017 has been an exciting year for all of us, for Hydro, and also for the global aluminum industry. We are very much looking forward to share with you our experiences since the previous Capital Markets Day, and also to discuss the road ahead of us. The most significant event in 2017 was the acquisition of Orkla's 50% shares in Sapa, and that makes Hydro a fully integrated company. We are quite unique, as we are now the only global integrated aluminum company. This is a new opportunity for us for va lue creation to the benefit for our shareholders, for our customers, for the employees, and for other share stakeholders.
Before I move into details, let me first give some highlights to our responsibility and sustainability agenda. Safety is always first priority for us, and we are moving in the right direction with the number of TRIs per million work hours. We are now at 2.7, which is close to the industry benchmark. This is overshadowed by one fatal accident that we had a few weeks ago in Phoenix, Arizona, that came just half year after another fatal accident that we had at Karmøy. We still need to be even better on focusing on the risks, and we will continue to work hard to improve our safety performance going forward.
Hydro has previously talked about the climate ambition to become climate neutral from a life cycle perspective in 2020, and we are in effect on the way to achieve that target. We have to improve further to deliver more aluminum into industries where there are benefits of aluminum, and also increase our recycling activities. Sustainability is very important for us, and we have several activities. Social responsibility is important, and here we have special projects in Brazil, where this is especially important, where we are supporting local communities to the benefit for also the local people and our employees, and supporting the local communities in a way where we can really make a change.
If you then take a look at the main developments in 2017, we are very happy to see the good progress in Brazil with the record production in bauxite and alumina. We have introduced the new press filter state-of-the-art technology to handle the bauxite residue. In Primary Metal, we are now ready, soon ready to start the technology pilot at Karmøy that has moved according to plan and budget. We are today launching two new products that I will come back to. In Rolled Products, we inaugurated the automotive line 3 earlier this year, and we are also now ramping up the UBC line after some modification that we had to make, and Kjetil will come back to that later.
In Energy, we have now signed a new contract based on wind power for the period 2021 to 2039 to another step to secure power to our smelters long term. We also continue our work to secure industrial ownership of Valdres Hydro Power Station after reversion in the end of 2022. We are very happy to have Extruded Solutions on board, and as you saw the third quarter result this year was the best quarter ever in Extruded Solutions, and we are quite optimistic with what we can achieve from this business area going forward, and Egil will come back to that in his presentation later today. With regard to integration of the Extruded Solution business area, which is the fifth business area in Hydro, we have now put the organization in place.
Egil Hogna, the previous CEO of Sapa, is now the EVP for the Extruded Solutions business area. The EVP HR in Sapa is now the AVP HR in Hydro Corporate. On the corporate center of Sapa, about two-thirds of the people of the corporate center of Sapa is now working for the head office of Extruded Solutions, and one-third of the people has moved over to the Hydro Corporate Center. With regard to synergies, we can confirm there are NOK 200 million in synergies related to re-melting, recycling business. We are also now looking at other areas for synergies, and we will come back to that later. We see clearly synergies within research and development and technology.
Also, we see that the integration costs, we have mentioned that previously, will be also what we said, NOK 400 million. With regard to systems, the reporting systems are in place. The emergency systems were in place already from day one, we are now also following the plan with regard to mapping of the IT, IS systems in Sapa and integrating that together with the Hydro systems. All in all, we are well on track with regard to integration of our new business area in Hydro. Let us then take a look at the backdrop and the market. Of course, aluminum is dependent very much, demand is depending very much on the development of the GDP, and there are several uncertainties around us.
The, the major risk going forward is, of course, the rebalancing between the U.S. and the China economies. This is ongoing as we speak. We see there are risk in North Korea, in Middle East, Russia. We have the Brexit with the possible downside both for Great Britain and for European Union. We have the situation in Brazil, where we are very much exposed with our raw material business, where the economy is down, and there will be election next year. In spite of all the uncertainties, we still see that global GDP is quite healthy. The expectation next year is a growth of the global GDP of 3.2%. Good growth still in China, and also in Europe and U.S.
There are synchronized positive development in the main markets as we see it. In China, there has also been some additional issues that we have followed carefully during the last year. First of all, the time for double-digit growth in aluminium consumption in China has probably ended. We are now seeing more moderate growth going forward. We expect 4%-6% growth in China for the next year. We also see the appetite for building capacity is coming down, also probably influenced by restrictions on financing. There is also a raw material issue in China that is becoming more and more concerning for the Chinese players due to the fact that they are running out of local bauxite of decent qualities, and also the resources are limited.
The Chinese bauxite has low alumina content and also high reactive silica content, so it's a high-cost bauxite to refine to aluminum. We see increased raw material prices in our business due to what is happening in China. We are also seeing the effect of the so-called Supply-Side Structural Reform in China, where about 3 million tons capacity has been taken out, capacity that has been built without the necessary concessions. On top of that, China has introduced the so-called Blue Sky Initiative, where 30% of smelting capacity, 30% of alumina capacity, and 50% of anode capacity, anode production capacity for the aluminum smelting, should be taken out from 15th September, 15th of November to 15th of March.
It remains still to be seen what the real effect of this is. We have not seen a dramatic change after 15th of November. Katrine will come back to some more details regarding this in her presentation. If you take a look at the global inventories that was built up after the finance crisis, we have seen quite the steady reduction during last years, but also especially in regard to the inventory days coming down due to the increased market. Inventory in volumes has not come down necessarily so much, but inventory days has come down significantly. When we are now approaching the same level of inventory days globally as we had before the finance crisis. This is also indicating a tighter market situation.
If you then also look at the supply-demand balance going forward, we see that we will expect next year about 2 million tons deficit of aluminum outside China, and almost similar surplus in China. All in all, next year we expect a largely balanced market tending towards a small deficit. If you think and take a look at the long-term situation for aluminum demand, with CAGR we expect 3% increased demand yearly during next 10 years. Aluminum will remain the fastest growing base metal going forward. We expect a bit higher growth in recycling as that becomes more available with post-consumer scrap, and then a bit lower, 2%-3% growth in primary metal demand for the next 10 years.
This is a notch lower than what we had talked about previously. This is a result of higher growth in the last couple of years than what we anticipated previously. Let us take a look at the strategic direction of the company, starting with the value chain. As I said, we are now the only fully integrated global aluminium company. We are operating in global markets, and we are operating from with the assets from bauxite mining in Brazil to Extruded Solutions to customers. We have a long value chain with a lot of opportunities for further development and growth, but we also have another dimension to this due to the fact that we are serving into several different market segments from different parts of the value chain.
If you look at, for example, automotive, we are serving automotive with hydrate, we are serving automotive with metal products, Rolled Products, Extruded Solutions, and also recycling. We have access to different market segments from different parts of the company, which gives us a unique market position, but also a unique source of information. This feedback loop from bauxite to customer and the way back to the mine is very valuable for us. We will definitely utilize that information to do the best for value creation, also to do the best for the customers. Here you see Hydro compared to other aluminum companies. As I said, we are very unique in the world outside China.
Hydro is the only main company pursuing the integrated model and making us unique from and different from all other competitors. If you look at the market position of Hydro today, and I start with North America, we are number 1 in Extruded Solutions. We are number 3 in Extrusion ingots. Moving to ACR, we are number 3 also there in metal products like extrusion ingots and primary foundry alloys. Europe is the gravity of our market, where we are number 1 in Extruded Solutions. We are number 1 in metal products. We have our hydropower production here. We are number 2 in the Rolled Products, and also number 2 in Building Systems. We also have global positions, like Precision Tubing, we are number 1 in the world.
We are number 1 in the world in thin gauge foil for flexible packaging and also for Lithography. We are number 3, 3rd largest player in the 3rd-party market for bauxite and alumina sourcing. We have very strong and wide market positions around the world. Our aspiration, Better Bigger Greener, we have talked about before. It started better because we have always aspiration to become better, and the performance culture in Hydro means that there are thousands of people in Hydro that are working hard to make Hydro better today than what we were yesterday. We have now raised our aspirations and also modified the content of Better Bigger Greener. We all know in Better not only focusing on improving our operations, but also improving the way we are working with our customers.
With the Extruded Solutions on board, there are a lot of opportunities for us to do even better work towards the markets and our customers. With Bigger, we are have an ambition to expand the use of aluminum and also to strengthen our platform for further growth along the value chain. With regard to Greener, this is our wide compliance sustainability agenda, where we will be a leader in our industry towards sustainable solutions, producing products for a low carbon circular economy. Let us then see how we are continuing to improve value creation along all our value chain and start with technology, because technology has been a very important part of our strategic direction.
We see that the position we have on the cost curve, for example, is very much thanks to the performance, but also thanks to the competence and also the technology we are using and have developed over the years. Now we are soon ready to start the first electrolyzer cells at the technology pilot at Karmøy, where we will produce aluminum with the lowest energy consumption the world have ever seen. We are very much looking forward to this. This is a big event for us, and we are now testing the last part of the pilot and soon ready to warm up the first cells. The automotive line 3 in Germany is a big step forward. This is based on many years of research and development.
It is the most advanced production line for body in white sheet for the automotive industry, and it's now ramping up, and Kjetil will come back to that later today. It's now moving closer to what we planned after some problems during the first ramp-up period. Also in Extruded Solutions, very good progress on solutions, on innovation. The coach, the sofa from IKEA is a very good example, and Egil will talk about later. We have digitalization Industry 4.0, where there are several good initiatives in all parts of the value chain of the company. For example, in the Karmøy technology pilot, at Karmøy, we are going to introduce robot cranes. We have artificial intelligence.
We're going to introduce sensors that will give us a lot of new data, that we will use, as a part of the data analytics that we have introduced in Hydro lately. On top of that, we have also introduced digital twins, which means that, we have digital processes going in parallel with the physical processes. The digital processes are based on very advanced simulation programs that we have developed over the years, where we can exchange data between the two and optimize our production even better. Why aluminum? If you ask me that question, I can spend quite a long part of the day answering that. Just a few important, inherent properties of aluminum that I would like to highlight. You all know about the density.
It's about one-third of the density compared to steel and copper. It is protecting itself by a nano-thick layer of aluminum oxide that is transparent and impermeable towards oxygen molecules, so it has a good corrosion resistance. It also has a good electrical and thermal connectivity, competing very much with copper. We have a wide range of mechanical properties. Strength in aluminum is typically around 250 megapascal, while we also have ultra-high strength aluminum alloys that have more than 1,000, even up to 1,200 and higher megapascal in strength, which is then entering into the steel area. We are competing also with ultra-high strength steel qualities that you have heard about.
These qualities are not stiff enough to be used for the body sheets. We also see that they are breaking like glass in crashes. That is very different from aluminum that is absorbing energy better than any other metals. If we then compare with our alternative and competing materials, we have a very strong position. We were a bit concerned about carbon fiber some years ago, but carbon fiber remains to be five to eight times more expensive than aluminum, and it's also difficult really got to recycling. The same with PVC, by the way. Aluminum is energy intensive, but the energy in aluminum doesn't get lost.
It remains in the aluminium, and we need only 5% energy to recycle this metal, and we can do that unlimited amount of times. Again, aluminium is the metal of today and the metal of the future, and that is one of the reason why we see a very good growth. As I said, aluminium is the fastest growing base metal as we see it now. I'm very happy today to launch two new products. 4.0 is a product with a certified guarantee of a carbon footprint with less than 4.0 kilo CO2 per kilo aluminium. 75R product is based on post-consumer scrap. It's certified that this contains more than 75% post-consumer scrap. Also keeping in mind, when we recycle aluminium, we only need 5% energy, so this is also a low-carbon product. Take a look at this.
It all started here with the power of a single drop harnessed to create one of the world's most versatile, recyclable materials. With the industry's highest sustainability standards from start to finish, we continue to forge greener solutions for ourselves and our customers. As our expertise grows, so do our customers' possibilities. Today, we've condensed our knowledge and expertise into two world-leading products. Our low-emission primary aluminium and our high-percentage post-consumer recycled aluminium designed to help shrink our customers' carbon footprints from this to this. Because when our customers' footprints shrink, their opportunities increase. The future of aluminium is here, sparked by collaboration and shared knowledge, driven by a deeper understanding of our customers' needs, and realized with a pioneering spirit. Let's take the next step together, a step towards sustainable growth. It all starts here. It all starts now.
Let's then move over to our operational and commercial progress. Of course, we are here, we are focusing very much on improvements all the way along the value chain. In upstream part, it is very much about improving our cost position to improve asset productivity, increase effectiveness and efficiency. Downstream, it is more about innovation, improve the customer excellence, come up with new products, delivery times, and a lot of other parameters where we measure our performance downstream. We are organizing our value chain very differently upstream and downstream. Upstream in Hydro is much more centralized, organized, while downstream is more and more decentralized. Of course, Extruded Solutions is a very decentralized organization.
This is the way we ensure further progress and ensure that, the tens of thousands of employees in Hydro are making Hydro better every day. With regard to the improvement programs, in Hydro, we have discussed that, previously, we had the target of 2.9 billion, that we'd talked about last year from 2016 to the end of 2019. Now we have raised the bar to 3 billion NOK, with some different contribution and different adjustments along the value chain. In Boknafjorden Alumina, there has been, Boknafjorden Alumina, there has been very good progress during the last years. Silvio and his people is now running the operations in Brazil above nameplate capacity, both in Paragominas and in our refinery, Alunorte, which is the world's largest alumina refinery.
Good progress further on cost reduction. Boknafjorden Alumina is now ahead of plan, delivering NOK 1.1 billion already in 2017. The target originally was NOK 1 billion within 2019. They are going to deliver now NOK 1.3 billion within 2019. If you move on to Rolled Products, there we have had some issues related to ramp up of two main production lines, the UBC line in Rheinwerk and Automotive Line 3 in Grevenbroich. There are significant improvements done, but we still see that we will be behind plan in 2019. The target is now NOK 700 million in 2019. Kjetil and his people is promising they are going to deliver the last NOK 200 million the year after.
We are coming up in full speed with the production lines. Primary Metal is maintaining the target for 2019, but is behind plan this year. The operations in Primary Metal is better than ever in all smelters, except for one smelter that we have talked about. That is the Brazilian smelter, the Albras smelter, where we have put in additional resources and efforts now to maintain the plant better. There are some maintenance work ongoing. Some key equipment has to be lifted on performance. That is now ongoing, and that is what Hilde is focusing on now.
All in all, we are on track for the 2019 target, but also then on track for the 3 billion NOK in improvement. If you look at our positions on the cost curve, on bauxite, alumina, and the smelting. First of all, looking at the cost curves, they are now coming at higher levels than what we showed last year. There are some cost issues related to bauxite, alumina. The refining is influenced by the higher caustic soda cost. There is some energy also here that is impacting the cost curve. In smelting, it's a higher alumina cost, but also higher cost in anode carbon like coal tar pitch and petroleum coke. Our position, if you look at alumina, we are in the...
well-positioned in the second quartile, when we calculate bauxite at market price. If we had calculated the bauxite at cost price, we would be in the first quartile. If you then take a look at the position in the smelting area, we are also here in the second quartile. Also here, if we transfer the energy at cost price, we would be in the first quartile. We have moved down the cost curve, both in alumina and also in smelting. That doesn't mean that we are finished with our improvements.
There are still a lot of improvements to do, and that is what I like with this industry, that, even if we have done a lot, and so far we have delivered about in excess of NOK 6.5 billion in improvements during last years, there are still a lot to do, and that's why I'm quite optimistic also with regard to keeping our cost position. Although there are a lot of uncertainties with regard to currency and other factor that is also influencing Hydro going forward. This is one of the main measures upstream. If you move to the midstream area and take a look at our position in the marketplace here.
This is what you see here is a customer survey done by an external company that are comparing Hydro with other companies in the market, which is now the example here is extrusion ingots. Here we come out as the company with the highest perceived quality, but also the highest perceived cost. That tells us that we are at least doing something right in the market here. We are doing a lot of support, customer support. We are focusing very much, of course, on quality in all steps of deliveries to our customers. It's also good to see that we get the value out of our efforts here. Further downstream, it's more difficult to get comparison between Hydro and other companies.
If you look at the progress, both in Rolled Products and Extruded Solutions, it's very clear to me that also here the business areas are doing a good job. Good progress on the customer satisfactions from the surveys that has been done. I know also there are still performance improvement potentials related to that going forward. I know the business areas are working hard to perform even better in the marketplace and be even better towards our customers with regard to customer service, delivery precision, and qualities in all steps of the activities. Moving over to energy. Here we, of course, are working hard to secure the needs for power, the sourcing that is needed, especially after the Statkraft contract is expiring in 2020.
The blue color on the bottom here is our own hydropower production. You see the reversion is indicated here in 2022. In the end of 2022, Røldal-Suldal, 3 terawatt hours is for reversion. With the new legislation or the adjusted legislation in Norway, we can now enter that into a consortium with more than 6 terawatt hours, and that means that we can own the power for eternity. We are securing industrial ownership of power long term. The green area is already contracted, and it's contracts from different suppliers. The last contract that was signed is the orange one, 1.65 terawatt hours from 2021 to 2039, the Markbygden wind power contract. There are still the black line on top is the needs.
There is still a small gap, we are quite well covered going forward. Let us move over to the financial framework and how we are going to prioritize, because I'm sure that when you see the development in Hydro and the cash generation forward, you are probably also asking what are we going to do with the money? For me, it is very important to make sure that we have a strong balance sheet. We are in a cyclical industry, and for us it's important to have a balance sheet where we can focus on improvements, focusing on our customers, and avoid the action of last resort. That is a high priority, but it's also very important to make sure that we have credit, have investment grade credit rating.
That, we saw the benefits of that with regard to the bond issues that was done a few weeks ago. We are in a capital-intensive industry, so sustaining CapEx is quite important to maintain our assets at the right level, both regard to integrity but also on safety. Sustaining CapEx will be prioritized. We should also remember that when we do sustaining CapEx investments, it's not only to maintain the assets in the same level, but we also very often use and introduce new technologies, use new improvements, so we can raise the productivity, raise the performance of our assets as we go along with the sustaining CapEx activities. There are also some selective growth opportunities for us going forward, that can be related to some sweet spots with regard to debottleneckings.
That could be in our aluminum business or especially now we are seeing a lot of opportunities in the primary metal, and Hilde is working with that to lift the asset productivity by increasing current density in our assets. This is also very profitable growth project for us. For me, it's important to deliver a competitive return, total return to shareholders. The dividend we want to as far as we can to be predictable even in volatile terms. In absence of say profitable or selective growth opportunities and other alternatives, we of course seeing that there could be some M&A activities, could be some organic growths, or there could be also more distribution to shareholders.
If you take a look at the main targets with regard to our financial strategy is to keep ourself within two main targets on equity and debt. The adjusted net debt on equity should be less than 55%. The other target is funds from operation divided by the adjusted net debt. That should be above 40%. Even with Sapa now, we are quite well positioned, and we are well within our targets. Again, if you take a look at the right-hand side of this graph, there you see the cash flow from Hydro with Sapa. Again, with even a bit more debt, we are quite good situation also with regard to the cash flow as we're seeing it today.
Sustaining CapEx, as I mentioned, very important for us, and we are now in a period with a quite high level of sustaining CapEx. Last year, we guided on NOK 4 billion for sustaining CapEx for Hydro, and we indicated that Sapa represented about NOK 1.5 billion on top of that. Now we find it prudent to guide on sustaining CapEx for the company between NOK 5.5 billion-NOK 6 billion. Here Sapa is contributing with, or Extruded Solutions contributing with NOK 1.3 billion-NOK 1.5 billion. The main reason for lifting this guidance is very much all the activities that are now ongoing in Brazil with regard to the residue, bauxite residue, with regard to the mining area, with regard to the pipeline maintenance.
On top of that, there are also important activities in primary metal. All in all, we guide now NOK 5.5 billion-6 billion as the sustaining CapEx for the company going forward. It is, of course, aim for us to run our assets in an efficient way and contributing to the reduction of capital employed in our business. At the same time, as we are working very hard to increase the productivity of our assets. We should also remember that the sustaining CapEx is still below the depreciation of the company, and Eivind will come back and comment on that later. If you look at the capital allocation and selective growth, I mentioned there are also opportunities both in bauxite aluminum and also in primary metal.
We're also looking at the whole value chain, we have different targets on return requirements in the different parts of the value chain, higher return targets upstream than downstream. All in all, we are allocating capital towards which gets best value creation for our shareholders, whether it is upstream or downstream. Incremental projects for 28 and up to 2020 includes smaller creep and productivity improvements in different parts of the value chain, but I would say mainly in primary metal. With regard to the dividend policy, as I said, my priority is to make sure that we are running Hydro in a strong and sustainable way, for long-term value creation and are able to deliver competitive returns to the shareholders.
The dividend policy is 40% of the net income over the cycle, we have established a floor of NOK 1.25 per share. Again, we are committed to deliver predictive dividend level going forward also. The board is deciding what to do with the dividend next year, whether it will be in the future, extraordinary dividend or share buyback. That is up to the board to decide. Normally, we are communicating that in the connection with the fourth quarter presentation in February, and it's up to the general meeting in May to make the final decision on the dividend. That is something we will come back to later.
Finally, the priorities for Hydro going forward is again to maintain the financial strength and flexibility, make sure that we have attractive returns over the cycle, is to continue with our improvements and especially lift the ramp-ups that and resolving the operational issues that we have discussed previously, especially in Rolled Products. Also again, taking advantage of the fact that we are quite unique in the value chain, developing further our integrated model and now also making sure that we have a successful integration of Extruded Solutions. Thank you very much for your attention. The next speaker will be Eivind, please.
Thank you, Svein. In my presentation today, I will give you an update on the financial development since the last capital markets day. I will walk you through some of the key elements of our financial framework and discuss how we think about capital allocation in the company and across the value chain. We will also look at the Hydro sensitivities as well as earnings and returns in several pricing scenarios. Finally, I will then talk about the financial aspirations for the company. Hydro's prudent financial framework is really the stronghold that we have to manage commodity cyclicality and maximize our long-term value creation potential for our owners. It really also lays the foundation for capital allocation decisions within the company.
We do strive to lift our potential for generating cash flow from operations by continuously optimizing costs, improving efficiency and productivity, leveraging the synergies that we have between our business areas, and at the same time high-grading our portfolio to strengthen margins and reduce costs. In addition, we have a high focus on optimizing our working capital in order to reduce and the cash which is tied up within the business. We are adamant about maintaining an investment-grade credit rating with a strong balance sheet as well as a strong liquidity position, as we do believe that these are the best tools we have in order to manage the volatility within our industry. We're striving for a disciplined and return-driven capital allocation at all times. This of course involves maintaining and improving our asset base to ensure operational excellence as well as safety.
We also grow selectively in response to our customers' needs in attractive market segments to increase the high-value add share of our business. It also gives room for M&A optionality, as we have seen with the Sapa acquisition, or to pursue other strategic attractive growth prospects. The philosophy is quite clear when it comes to dividends. It is to offer competitive, reliable, and stable dividends to our investors, which we strive to maintain throughout the economic cycles, as long as we can stay investment-grade rated. We would much rather supplement the dividend payouts through share buybacks or special dividends rather than to cut dividends in tough times. Finally, when it comes to the cyclical nature of our business, we do believe in being exposed to commodity prices and commodity volatility.
That allows us to benefit in full from the upside while we protect the downside through our strong financial position as well as competitive position of our assets and our flexible and diversified business model. Let's that then get into each of the elements of the framework in some more detail. If we start with the efforts to lift the cash flow potential, improvement culture has really become a Hydro trademark. It is a key element in order for us to strengthen our relative industry position and to lift earnings potential by influencing the factors that we control ourselves, operational and commercial excellence. We do this in order to manage the factors that we don't control ourselves, commodity pricing, inflations, or currencies.
We start with the earnings of $6.2 billion back in 2011, this already includes roughly $1 billion in improvement efforts from the Primary Metal program, called the $300 program, already delivered by then. Since then, we have experienced significant currency development in our favor as our revenue currency U.S. dollar has strengthened significantly against our main cost currencies, the NOK and the BRL. This is a net currency effect, as the dollar-denominated cost has also increased, partly offsetting the positive effect on the revenue side. The impact on changes in raw material prices are close to zero for this period. At the same time, prices for aluminum and alumina measured in dollars have declined, partly offsetting the positive currency effects in the period. We also seen some negative inflationary pressures in this period, primarily coming out of Brazil.
You see, if we had not run the improvement efforts between 2011 and 2017, we would have an EBIT of roughly NOK 4 billion in 2017. Therefore, almost two-thirds of the NOK 10.2 billion in 2017 is a result of NOK 6.2 billion in improvement program. This figure also includes about NOK 300 million in the Better program included or delivered so far in 2017. As Svein Richard said, we're quite confident that we will also deliver the last NOK 1.3 billion up until 2019. Let me also underline that our improvement efforts is not simple or primitive cost-cutting exercises. It is really about the way we work on a day-to-day basis within our operations. It is really about stability and controlling the way we operate and the way we produce.
The pie chart you see on the right-hand side gives you an approximate split of where we find the different improvements. If we then take a closer look at the cash flow potential from the business areas, and then starting with Extruded Solutions, as it's now called, we see that Hydro through this acquisition adds significant cash generation already from day one. Cash flow from operations increased from some NOK 12.2 billion ex Sapa to approximately NOK 15 billion, including Sapa, if you look at the last 12 months ending Q3 2017. As you're all aware, the improvements in Sapa during the last few years have been very impressive.
Now in the EBITDA improvements per ton, for the first full from the period until from the joint venture was established until the last twelve months of Q3 2017, this shows that we have an increase of starting with 1,370 NOK per ton up to 2,874 NOK per ton as of Q3 2017. This corresponds to an very impressive 20% increase, per period, during these four years. The first part of this phase was, of course, the restructuring and synergy program that we did establish, which was completed in 2015. Post this, it has really been about a clear strategy and value over volume, adding more, demanding customers into the portfolio and getting a increased share of higher value-add products.
Although probably not at the same pace as we've seen in this period, we still believe there is good room for further improvements within Extruded Solutions. Through increased simplification, collaboration, combined with the selective investments in capabilities and capacities, we do expect to increase also the value add share in Sapa or Extruded Solutions going forward. Let me also then just reiterate that we do confirm the NOK 200 million in synergy savings from this transaction, and this should be delivered then over the next couple of years. We then move to the second part of our downstream operations, Rolled Products. 2017 has been a slightly more challenging year, as already mentioned by Svein Richard.
This is quite clear if we look at the underlying EBIT per ton, which is down from 1,014 last year to 376 NOK per ton in the third quarter of this year, excluding the Neuss smelter. If we include the Neuss smelter, the reduction is slightly less, and that, of course, is because the Neuss smelter has benefited from the higher all-in aluminum prices for the year. Kjetil will go through this in some more detail later on, so let me just comment this on a very high-level perspective. At Alunorte and Hamburg, the production performance has now stabilized, and we do expect to be back to normal production levels in the fourth quarter of 2017.
Due to the issues that we have faced in 2017, we see that the underlying EBIT is down roughly $100 million compared to the same period last year. Similarly, results is down around $150 million due to the technical issues and ramp-up issues related to the UBC line as well as the Automotive Line 3. We now expect the UBC line to be up to 40,000 tons by the end of 2018, and the technical issues in the Automotive Line 3 have been identified, and they are being resolved as we speak. The Neuss smelter has also been struggling with two very unfavorable energy contracts for several years.
We now soon enter into 2018, we will have new energy contracts in place, lifting EBIT of roughly NOK 350 million-NOK 400 million per year for the Rolled Products segment. At the same time, let me underline that one of these contracts was an internal contract. This will have a negative effect on the earnings in energy of roughly NOK 250 million per year. Going forward, we will continue to high-grade the portfolio, work on the product mix, so that we can re-return to more stable and healthy margins compared to what we've seen so far in 2017. We then move upstream, focusing on cost and margins. We start with bauxite and alumina.
The margins in 2017, both measured in dollars and NOK, have increased versus 2016 and are at the highest levels that we've seen for the last five years. This, of course, is driven partly by prices for the product that we produce, but also very much about operational improvements both at Alunorte as well as in Paragominas, in addition to some currency tailwinds. After several years of reduction in cash costs, we are now seeing a raw material cost push up. This will hit all industry players. We see it coming through components like caustic, fuel oil, as well as coal. If we move to primary aluminum, we see a similar development. The margins have increased in 2017 compared to 2016, both measured in dollar and in NOK.
Now if we compare to previous years, we see that the last 12 months 2017 shows a somewhat lower margin in U.S. dollar versus 2013, 2014, and 2015. The weaker NOK versus the dollar increases the NOK margin very close to the high levels that we saw back in 2015. As for B&A, we see that market forces are contributing to lifting the cost for all primary producers in our industry through increased costs for petcoke, pitch, and not at least also alumina. Another way to improve cash flow generation is, of course, by managing operating capital tightly.
In this overview, we have included Extruded Solutions coming in with an average working capital of around NOK 5 billion, increasing total working capital for Hydro to a level of around NOK 21 billion when we look at the last 12 months as of Q3 2017. If you look at the four quarters rolling net operating capital in days of sales, then since the peak of Q4 2015, we see a reduction of about five days. This is really a result of optimization of stocks and working hard on trade terms across the complete value chain. Let me just add quickly that you should expect Q4 that net operating capital will be released as is normal from a seasonal perspective. Let's now move to the balance sheet and start with the left-hand side of this slide.
Prior to the Sapa acquisition, we had almost NOK 8 billion in net cash. Adjusting for pension, debt, and equity accounted investments, as well as operating leases, we had a net adjusted debt position of NOK 9.9 billion. This strong balance sheet really allowed us to purchase Orkla's 50% share in Sapa, and we will still remain in a very comfortable financial position post this transaction. If we simulate how the balance sheet would look at the end of Q3, by taking in the Sapa acquisition, the net cash position of NOK 7.7 billion has grown into a debt of NOK 6.9 billion. The difference of NOK 14 billion plus NOK 6.6 billion is explained by close to NOK 12 billion in the enterprise value of the acquisition price, plus the NOK 3 billion of debt that was carried within Sapa.
Operating leases and other increases by roughly NOK half a billion, driven by the operating leases within the company. Debt and equity accounted investments goes down to NOK one and a half billion, as we no longer account for Extruded Solutions as an equity accounted investment. Meaning that Qatalum is the only sizable equity accounted investment left within the company. We also add in roughly NOK 1 billion of pension obligations from Sapa. In total, this gives us a debt of NOK 24.6 billion post the transaction, still at a comfortable level given Hydro's size. Maintaining a solid balance sheet has and always will be important for Hydro. As Svein mentioned when talking about balance sheet strength, we also talk about the importance of maintaining our investment-grade credit rating.
This is important because it allows us to access bond markets when needed, as we recently exemplified earlier in November. It also enables us to realize business benefits or business opportunities that otherwise would not have been possible if we had not been meeting the requirements of being a credible, reliable, and credit-worthy counterparty. Since the start of 2011, we have had a BB B rating, and this is where we're comfortable being, as it gives us 1 notch headroom downwards. We typically follow two financial ratios over the cycle to ensure that we meet the criteria that the rating agencies set forth. One is net adjusted debt to equity of 55%. Second one, funds from operations to net adjusted debt should be above 40%.
As you can see on the right-hand side of this slide, we're comfortably within these targets, both pre and post the Sapa acquisitions. As most of you know, we did enter the Norwegian and Swedish bond markets early this month, raising NOK 3 billion in the Norwegian market and SEK 3 billion in the Swedish market. I have to admit, it was extremely encouraging to see the reception we got in the market with the bonds several times oversubscribed at the end of the day. We were also able to achieve what we believe are very competitive terms, and again, proving the importance of being investment-grade credit rating, rated, and having a strong balance sheet. We now turn to CapEx and the CapEx outlook.
The sustaining capital that we use, is of course to maintain the assets in the shape that they are today. It does also include other types of investments which will lead to better performance, better efficiencies, or higher safety, in our current asset base. Some of those projects are relatively minor, as we see in energy, and some of those are relatively large, as we see in Boknæs and Alunorte, but they also tend to live longer in B and A, often for about 10-15 years. As Svein mentioned, we are updating our long-term sustaining CapEx to NOK 5.5 billion-NOK 6 billion. This also includes the sustaining capital in Sapa or Extruded Solutions of roughly NOK 1.3 billion-NOK 1.5 billion.
The increase of a few hundred million in is then otherwise related to sustaining projects and investments in Brazil. More specifically, it's related to replacing parts of the pipeline in Paragominas, from Paragominas to Alunorte, where we have an updated CapEx profile. It's also partly driven by higher CapEx, maintenance CapEx in Paragominas, as we have produced very high and very good amounts from that mine over the last couple of years. As you can also see, the sustaining CapEx levels for the next three years are somewhat higher than our previous long-term guiding. This is partly driven by the sustaining projects that I've just mentioned for Brazil. It's also important to remember that when we give these figures, it is based on real 2017 figures.
Next year, you should expect that it will be slightly higher given the inflationary pressures that we have in our industry. Please also note that this is still well below the long or the depreciation level that we have in the company, which is roughly NOK 7.5 billion per year. We now complete the CapEx picture looking at growth projects. In the current environment, even though it's strong, we still don't see any room for large organic upstream growth projects. We do, however, see profitable and value-creating opportunities for selective growth within recycling, developing technology in order to reduce cost or to take higher market shares within higher value-add business. The growth estimates will generate additional cash flows, obviously satisfying Hydro's return requirements.
The large part of the investments that we included now is really related to the strong pre projects that we see within our primary metal business area. Also in 2017, we are finalizing the Karmøy technology pilot. This will produce its first metal towards the end of this year. Importantly is that this will take productivity really to the next level, which we couldn't achieve with lean operations in and by itself, and it will also create very important spin-off effects to the rest of the portfolio that we have. The net investment amount is $2.7 billion unchanged, and then we have also received $1.6 billion from the environmental agency Enova. It is important to underline that this slide does not include investment in specific growth projects which might be initiated going forward.
These will be announced separately after having passed internal decision gates and CapEx estimates have been matured sufficiently. Following the estimates on capital, it is also quite natural to talk about how we should consider capital allocation and how we think about this in Hydro. As the only large-scale, fully integrated aluminum player, we do allocate capital where we believe it creates the most value, whether it's upstream or downstream. Given the cyclical nature of our business, as well as the different capital intensities, we do also differentiate on the cost of capital between the different parts of our business. If we start with Hydro as a group, we have an estimated cost of capital of 7.5% real after tax, and it's based on a adjusted net debt to equity level below 55%.
If we then start with the upstream business, we do apply a cost of capital of 8%-9% real after tax. This reflects the high capital intensity, but also the historically and future expected volatility on the earnings side, which you can clearly see on the EBITDA volatility on the left-hand side of the graph. Going forward, capital allocation upstream will focus mainly on pre projects, further debottlenecking, in addition to continuous focus on cost efficiencies. If you look at our downstream business, here including rolled Extruded Solutions as well as metal markets. We apply a cost of capital of some 5%- 6%, again, reflecting lower capital intensity and also lower and more stable earnings compared to upstream.
Going forward, we would really focus on high-grading portfolio through increasing the exposure in higher margin segments within all three business areas. The market for extrusion, it's fair to say, also offers very interesting opportunities at very low capital intensity. The energy business, recognized with very stable cash flows, has a cost of capital of some 4%-5%. For energy, the most important part now is really to focus on protecting the RSK values and volumes, but you can also expect to see some smaller hydropower projects going forward. It is also important for me to underline on this slide, that these are cost of capital rates. It's not hurdle rates for specific projects.
Specific projects could also be evaluating specific project risks. We will allocate capital where we see the biggest gap between cost of capital and expected returns for the different projects. After the Sapa acquisition, Hydro's capital employed in more stable downstream earnings do become larger, increasing from just about 20% to around 35%. The total capital employed for the group is expected to increase from some NOK 80 million to roughly NOK 96 million, including then the new 50% from Sapa. We estimate that Extruded Solutions will have a capital employed of roughly NOK 23 billion-NOK 24 billion, reflecting the enterprise value that we paid for the 50% of the company, plus the written off values of the 50% that we held prior to the transaction. As capital employed increases, so does the depreciation.
Old Hydro, if you like, had a depreciation level of just below NOK 6 billion. Sapa adds another NOK 1.3 billion, and on top of this comes excess value depreciation, which should at least be expected to be NOK 0.4 billion per year. In total, this adds up to depreciation level of around NOK 7.5 billion. Please note that this is for the last four quarters. We've had some significant investments coming into production in 2017, which should mean somewhat higher depreciation in 2018. The same picture is also quite clear when we look at last 12 months EBITDA as of the third quarter this year. The contribution from our downstream segments will increase from roughly 14% to some 27%. Again, also underlying the total cash flow generation already from day one.
Let's then turn to some of the sensitivities to commodity prices and currencies and discuss earnings and returns in some and several pricing scenarios. As I mentioned before, effective risk management comes as a red thread through all the decisions we make and is paramount for success for our company. This slide gives you an overview of the Hydro Group exposure to currency fluctuations as well as raw material prices. It shows that our results is mostly influenced by LME prices as well as NOK dollar rate. It is also highly sensitive to BRL, PAX prices, coal prices, and caustic soda and so on. This slide, together with more details on primary metal and B&A, will be included or is included in your presentation material. If we then turn and look at the sensitivities in practice.
Let me first elaborate a little bit more on the cross-sensitivities between LME and the dollar NOK exchange rate. When calculating the sensitivities for one element, we do assume that all other elements remain constant. If however, LME and dollar NOK are moving at the same time, the sensitivities will of course, be affected as well. Since our sensitivities are quoted in NOK, while LME is quoted in dollars, the NOK effect of a 10% change in LME will be higher at the stronger dollar. At the same time, the underlying exposure for the dollar NOK sensitivity will also be higher at the higher LME. Let me illustrate this with the sensitivity matrix. The starting point is the sensitivities that I've just been through.
With EBIT moving roughly NOK 3.5 billion at the 10% change in NOK dollar or NOK 3.5 billion with a 10% change in LME. If we look at the corners of the matrix, then we see that the combined effect of the simultaneous movements in changes in LME and dollar NOK is different than the simple sum of the sensitivities. This cross sensitivity is really not a problem when there are small movements, but it can distort the picture when there are large simultaneous movements.
Another point I would like to make with this matrix is that due to the negative correlations between LME and dollar NOK, as indicated by history, over time, we are more likely to see EBIT changes along the backslash diagonal with opposite movements in LME and dollar NOK rather than a slash diagonal with simultaneous changes, either appreciation or depreciation in both variables. This again points to the natural hedge we have in our earnings. However, do remember that this picture is incomplete, since there are many other moving parts to a heater exposure, and besides LME and dollar NOK doesn't necessarily move at the exactly the same time.
Let me also use this opportunity to apply the sensitivities in a simple run rate model, demonstrating the effect of the spot prices that we see compared to the EBIT that we delivered in Q3. This indicates an upside to our earnings, of around NOK 5.1 billion or NOK 2.1 per share impact on online earnings per share. Again, let me underline that these sensitivities show the isolated effect just from the increased spot prices. Let me now summarize my financial update with our financial scenarios here shown as EBITDA. Please keep in mind that these are not our estimates for the coming years, but rather indicative ranges using earnings for the last four quarters as a basis and then applying our sensitivities. Extruded Solutions have been included for the last four quarters with their underlying EBITDA.
Now, this is an illustration of the relative changes in our earnings with and without the remaining NOK 1.3 billion in improvement efforts under the different LME scenarios. Please remember also that these scenarios are very simplified. There are several positive and negative additional factors that influence our earnings and are not taking into account. Currency, inflation, premiums, percentage of packed sales, downstream margins are just a few examples. We will look at 3 examples. The middle scenario will be LME of 2,100, NOK to the dollar of 8, BRL to NOK of 2.5, and alumina prices of $350 per ton.
We also assume the realized premium for a metal of $260 per ton, which is very much in line with what we've delivered in the last four quarters, and very much in line with what we've guided for the fourth quarter. By keeping all these variables constant, we then create a low price scenario with LME 1,800 and a high price scenario with LME 2,400. Again, not price forecast, but only reference points indicating an upside or a downside. With these disclosures, let's then look at the two different EBITDA ranges. First, assets, with $1.7 billion achieved under the current better program since 2015. With a low price scenario, we get to an EBITDA level of around $18 billion. The middle price scenario indicates roughly $23 billion.
Finally, with an LME price of 2,400, we would get to around NOK 29 billion in EBITDA. The remaining announced improvements until 2019 will create an earnings upside, lifting the EBITDA by NOK 1.3 billion in all scenarios. In your CMD booklets, you will also find the same type of scenarios both for free cash flows as well as for raw check calculations. We move on to the last chapter, let me comment quickly on some of our targets and aspirations. Let me reiterate our thoughts on how we manage and allocate cash to create the most value for our shareholders, which Eivind Kallevik has already touched upon. I cannot emphasize enough that in our volatile industry, having financial muscle and flexibility is crucial for being able to navigate through the cycles.
As such, our top priority, especially in a down cycle, is to invest in our own balance sheet. A strong balance sheet really protects us against actions of last resort, such as fire sales, dividend cuts, and allows us to concentrate on performance and pursuing attractive opportunities which may appear as other companies may be struggling in the same period. As we operate in a capital-intensive business, CapEx is necessary in order to maintain or improve our position in our fast-paced and very competitive environment. This includes maintaining existing asset as a prerequisite for lean and safe operations, as well as selective investments in projects allowing us to keep our market share, strengthen our margins, or to improve our cost position. Our next priority is to deliver a predictable dividend to shareholders, regardless of where we are in the cycle, as long as we can maintain our balance sheet requirements.
As the commodity cycle improves, so does our funds from operations. More options for capital allocation becomes viable. Over longer term, we do aim to create shareholder value through reinvesting excess cash flows in either organic growth projects or pursuing attractive M&A opportunities. In the absence of those, we do aim to return excess cash to our shareholders. To conclude, my task as the CFO for Hydro is really to remain financially agile and find a fine balance between capital distribution and financial flexibility. To maximize long-term value creation potential in today's environment, we are focusing on strengthening our relative industry position and investing in our own balance sheet, enabling us to maintain a safe and predictable cash return to our shareholders.
We do strive to optimize further our working capital and for discipline and return-driven capital allocation regardless of where we are in the cycle. Effective risk management allows us to sail through the choppy and stormy waters that we sometimes find in our business and enables us to act on attractive opportunities when and if they arise. Thank you.
Could I ask Svein Richard to rejoin us on stage? It's time for our first Q&A of the day. There are two microphones going around the audience, so please wait for the microphone and state your name and the company you work for when asking a question.
It's Jason Fairclough, Bank of America Merrill Lynch. You mentioned the deficit in the market outside China, and I think you have some idle capacity. How do you think about potential for restarts?
Well, that's absolutely something we are thinking about. We are looking into the possibility to restart Husnes. There's not been taken any decision yet, but if we do that, we will add about 95,000 tons to the market. That is the Husnes smelter on the west coast of Norway that is now operating at 50% capacity.
Hi. It's Johannes Grunselius, Handelsbanken. A question on, or if you could give some more color on your new sustaining CapEx, please. I understand you have changed the mining planning, I suppose, and maybe there's also some more ambitious plans for sustaining CapEx. Could you say anything about, like, do you have a lot of experience of inflation now on the CapEx side? Things become more expensive now than a year ago. Thanks.
There are a couple of cases. One is the, we've done an updated review of the pipeline between Paragominas and Alunorte. In that update, we find that we need to replace parts of that pipeline sooner than what we had anticipated, a couple of years back. That increases the CapEx now for the coming years. We also see a larger need for higher maintenance capital in Paragominas, as we've been running well above nameplate capacity for several years now. That's part of it. You have to remember, as I said, when we give CapEx guidance at any capital markets day, it's a real figure for that year when we give the guidance.
Of course, in higher inflationary areas like Brazil, that of course will lift on the capital and will come one year later on. Parts of this is also inflationary pressures.
Hi. It's Daniel Major from UBS. Two questions. Firstly, just returning to the CapEx guidance. I see your guidance for 2018's come down from about 8.9 to 8.1. You've historically, last few years, come in below guidance fairly consistently on CapEx. Is the reduction for 2018 a reflection of a change in the way that you're formulating the guidance, or is it a genuine reduction in what you sort of plan to spend? That's the first question. The second one, slightly more simple, on Slide 25. Of the $1.3 billion of remaining cost savings, you identify what comes in bauxite and alumina. Can you give us the split between Rolled Products and primary in terms of what's left to be delivered? Thanks.
Okay. On the, on the CapEx side, well, we have reduced it, as you say, by roughly NOK 800 million. It's driven by a critical review of the projects we had at hand. It's not a change in guiding principles or anything. It's really that we had another thorough review which has brought us down.
Just to follow up.
Hmm?
Does that mean there's still some chance you come in below guidance?
I think we have to take account of that, when we come to Q3 next year. Again, we will, as we have in previous years, if there are CapEx that we can push out without harming the integrity, and the quality of assets, we would of course do that. Your second question was related to the improvement programs?
Yeah, the breakdown between the three business units.
Yeah.
It's first of all, with regard to bauxite and alumina, they are now ahead of plan and will still deliver NOK 200 million improvements on top of what they already have done. That is the target up to 2019. In Primary Metal, we are somewhat behind the 2017 plan. Not very much, but behind due to the Albras.
Mm-hmm.
-smelter that I mentioned, but maintain the target of NOK 1 billion total improvement up to 2019. Rolled Products have also now done several improvements, but will be also behind the 2019 target, delivering NOK 700 million in total, but also now planning to deliver the last NOK 200 million. That was their original plan, because they originally planned NOK 0.9 billion. The last NOK 200 million will be delivered in 2020. It's a one-year delay on the last part.
Good morning. Reynolds. Quick question on the Aluminum 4.0. First of all, is this something that customers ask for? Secondly, I assume you wanna get a premium for this product. Could you give any indication of how much premium per ton you can catch for a product like this? Thank you.
These are products, both the 4.0 product and the 75R products, are products that we see there is a need for in the market. We are still in the early stage of this market development, but the customers of us are not only looking for aluminum as a light metal that can reduce fuel consumption in automotive and reduce CO2 emissions. Their customers are now asking, Well, what is the carbon footprint of the car, for example. The first market segment that was asking for carbon footprint was in pack-packaging. Now we see that further in packaging, we see that in building and construction, and we now see that definitely also in automotive. These are products that are dedicated to customers that are really focusing on climate-friendly solutions.
Hydro has already lowest carbon footprint in the world of aluminum. W hen we are comparing Hydro's emissions with all others, we have the lowest carbon footprint in the world, and we still see that there is a need for us to come out with certified products. These products are externally certified, and they're also traceable back to the smelter or to the recycling facility. Our customers will have full guarantee that these products are special products within the limits that we have communicated. These are products that we expect, of course, also will be good business. Here, business and climate goes hand in hand, and we are quite optimistic what we can get out of this going forward.
Good morning. Jatinder from Citigroup. Question on your 2 million ton surplus in China for 2018. How much of this includes any winter capacity impact in 2018? Have you assumed any illegal capacity resumption within that 2 million surplus as well? Thank you.
These are the best assumptions that we can give to the equation. I think we can give Katrine some time to go through that later today because she will address that more in detail. You will see how this is broken down. It is no doubt that the Supply-Side Structural Reform in China have had a substantial impact so far. The Blue Sky Initiative has not been as big impact as many have expected. Katrine will address that later.
Hans Jacobsson, Nordea. China has reduced the production of carbon products quite significantly. You are a big importer of those products from China, as far as I understand. Are you afraid that you can get in a squeeze during 2019? Not only you, but the rest of the industry importing from China as well?
No, we are not concerned about that. We use some anodes from China, just to have again an additional source. We are not concerned long term that this can be a big issue for Hydro. We are covering with our own capacities here.
I think it's more a question of, also the price push that we will see. As we already seen, there's been a good price push on pitch and coal and coke. That is not only for Hydro, it's really a general industry issue, and then it just lifts the cost curve, and then should support the higher LME or the high LME that we currently are seeing.
Hi, good morning. Daniel Lurch from Exane BNP Paribas. Just a quick question on your thinking on AMN in Brazil. What is your expectation? Would you consider restarting the discussion here with Vale? Potentially, at what point do you need to invest CapEx into that mine to keep the production profile stable?
Mm-hmm. First of all, you probably know that we did not agree during last round on the pricing. We still, of course, have the evergreen agreement with Vale, so we get the bauxite as is according to our contract. We still have heard from Vale that this is non-core asset, and it may be that we come back to the negotiating table and find a solution in the end. For us, it's more about operational performance in MRN that we are concerned about, but that is also very important, of course, for continue to de-develop the mine. Of course, at the point of time, there will be need to move into the western plateau. That will be additional investments, but that is something that comes in the future. Maybe you can add to that, Eivind.
No, I think it's important. I mean, you're right. There is a need to move into a new mining area. The management of MRN, together with the shareholders, working to develop the best possible mining plan. CapEx in this respect is still, you know, some years further down the road. As we pass 2023, 2024, there will be a need to move or have moved into a new area.
Morning. Cedar Ekblom from Bank of America Merrill Lynch. Just in terms of your approach to returning shareholders cash. You've alluded potentially to an increased shareholder return maybe coming in the beginning of next year. Can you talk about how you weigh up the lifting of the floor dividend versus a one-off special dividend or buyback and which you seem to prefer ultimately?
As I mentioned, this is something the board will decide. There is no new dividend policy as such in the company. As it is today, it is a minimum NOK 1.25, and there's a 40% payout cycle. What the board will decide will, I think will be based on discussion for the coming weeks, and we will come back to that in the fourth quarter presentation in February next year.
Hi, it's Dan from UBS again. Actually two follow-ups on those questions. You've been well below your stated leverage targets for a number of years. Obviously, you knew the expiry agreement on Sapa was coming. Could you provide any color on whether there's a increased probability that you return the balance sheet towards those targets now there's a less obvious M&A target and how obviously that relates to an additional cash return in the fourth quarter? The second question follows on spare capacity. Can you remind us on how much spare capacity there is at the Neuss smelter and whether the change in the energy contract in 2018 would increase the probability of you restarting any capacity there?
I think when it comes to the financial ratios, as we've shown, we are still comfortably within the targets, both on the FFO and the net adjusted debt to equity. That being said, the FFO is not that greatly above the target. It's still, you know, 20 percentage points or so. For us it really comes back to the discussions we will have in the board as we go into Q4, when we look into the earnings potential going forward. That will really base the evaluation of whether we will deal or put further leverage on the balance sheet to return more cash to the shareholders.
The Neus-
The Neuss smelter, that is.
It's, the capacity of Neuss smelter is 230,000 tons. It's now running around 165, or something below that. There is a potential, of course, and there is a new power contract that is coming on board next year.
Yeah, 18.
That will take the cost level down for this smelter going forward.
Do you have ability to access power to lift capacity once it-?
Well, the power contracts, it covers what is needed today. We don't have any specific plans to lift the production. This is a plant that is integrated with Rolled Products, so it's based on the balance for Rolled Products here.
Okay. As there seems to be no further questions, I think we will now break for the first break of today. Please be back here at 9:50. Thank you.
Ladies and gentlemen, it's time to start the second session of today. To kick it off, I would like to introduce Kathrine Fog, Senior Vice President and Head of Corporate Strategy and Analysis to the stage.
Thank you, Stian, for the introduction. Good morning, everyone. Now I will take you through the market, covering macro and downstream, the primary aluminum market, bauxite and alumina, and then close with our long-term outlook. Macro and downstream. We're seeing an improved macro environment, which is also evident in aluminum demand. Macro development has improved further throughout 2017. The near-term outlook is also looking quite positive. You see this here represented by the manufacturing PMIs on the left-hand side of the graph. This is driven by continued strong growth in China. Even though at the recent party congress, we could interpret policy to be accepting of lower growth going forward, we still expect growth to be relatively high at levels at or above 5%.
We also see healthy growth in other emerging markets to continue, driven by India but also other Asia. We see a marked improvement, and we've seen a marked improvement over the last year, both in the U.S. and in the Eurozone, both in the consumption areas as well as in the manufacturing sector. As we know, macro development is a driver for aluminium, and we see this represented here in the right-hand side of the graph with the growth in semis demand improving across key regions at level with or above GDP. Svein Richard also already mentioned our outlook for GDP for next year, around 3.2% in global terms. The substitution trend in automotive is progressing.
Over the last couple of years, I've emphasized this in my introduction, aluminum is well-placed to benefit across, as the economy moves across different phases. In building and construction, infrastructure phase, as well as in the consumption phase in packaging, transport, and electrical. This means that aluminum enjoys a broad application across the sector and is more protected across the cycle than what we see for other metals and materials. Substitution is particularly important for aluminum in the transportation sector, which is driving aluminum growth, both with increased car sales, as you see here on the left-hand side, and you see this following a quite positive trend, both in the U.S. and in the Euro zone. Aluminum is also growing with more aluminum used in each car produced, and you see this here on the right-hand side, also showing a quite encouraging development.
Automotive demand for aluminum is supporting several Sandvik products. Aluminum continues to benefit from light weighting of requirements as car makers are increasingly turning to aluminum to meet the stronger requirements for lower emissions. This is important for the traditional combustion engine cars. You need aluminum to reduce emissions. It's also important for electric vehicles. Electric vehicles also need a lightweight body and lightweight structure to balance the weight of the battery. Therefore, we see electric vehicles representing an interesting new segment for aluminum going forward. This is interesting, when I was in China a couple of weeks ago, and we discussed this, and we heard this also from the Chinese producers, mentioning again and again the attractiveness of the fast-growing domestic market in China for electric vehicles as extremely important for aluminum.
As you can see from the illustration on the left-hand side here, the dotted car, we see aluminum products are being used throughout the car, in most areas of the car. This is supporting growth of castings part, the blue area in the graph on the right-hand side, and above-trend growth of some 7% CAGR for extrusions, the green area, and not least, the purple area, rolled. We also see above even higher growth rates for body in white and car body sheet in the rolled segment. There are other new segments and applications that are supporting aluminum demand. This is already mentioned by Svein Richard, and with an insight that vastly surprises mine, but we all like to brag about our metal.
We see that in addition to healthy demand in the automotive sector, aluminum is finding new markets and new applications across the economy. New applications are driven by all the advantages of aluminum. Dimension lightweight, but also conductivity, aluminum being non-corrosive, its versatility, and ease of alloying. All this facilitates expansion into new application areas. You see some of the examples here behind me. The fast-growing renewable energy applications, such as solar panels, long-distance power transmission, the offshore sector. I talked about electric vehicles, but also in other transportation uses, such as truck and trailers and high-speed trains, which is a very important segment in China and moving into all of Asia, the marine sector, as well as wider applications in building and construction, both in the building structure, but also in interior applications.
You see the Sapa couch that I'm sure Egil Hogna will talk more about in a moment. Rolled products demand is driven by transport segment, or at least the growth is. Demand in the rolled segment continues to be overwhelmingly driven by automotive, as well as other transport uses. Transportation is growing its share of the rolled segment, about 14% back in 2012, and an estimated 17% for 2017. Other segments with healthy growth is packaging, which is by far the largest segment, about 50%, as you see in the pie chart here in the middle. Here, growth is especially in the end consumer packaging and led by emerging markets, with the strongest, the main driver being urbanization.
Rolled segment demand tends to vary with general consumption patterns and is therefore less cyclical than what we might see for extrusions. Following increased demand in 2017, especially in the U.S., our expectations for 2018 is stable growth in the area of 3%-4%, both for the U.S. and for Europe. The extrusion market is supported by continued momentum in building and construction. The extrusion segment caters primarily into the building and construction segment, about more than 60%, as you see in the pie chart here on the left-hand side, as well as the transport and machinery of 14% and 12% respectively. This is largely linked to general GDP growth. If you look at the middle graph and the right-hand side graph, we see that the positive trend in main extrusion segments continues across U.S. and Europe.
In the U.S., the housing sector continues its strong growth trend, and we see that housing in Europe has been picking up quite strongly over the last year or last years. On the very right-hand side, you see the U.S. truck and trailer market returning to positive, or to growth mode. This segment is important. Approximately 50% of demand for extrusions in automotive in the U.S. goes into this segment due to the intensity of use per vehicle. We see solid extrusion demand growth in several key regions. Extrusion demand in other markets is also driven by construction and infrastructure and closely linked to general GDP growth.
We expect solid growth for extrusion demand, in particular in main Hydro markets. Important improvements, as I said, from low levels in Europe, especially in construction, as well as continued strong growth in the U.S. in the building and construction segment, as well as transportation. On the other hand, growth in China, especially building and construction segment, is easing, however gradually. This, we expect, will impact on Chinese domestic offtake of aluminium into this sector. Also important, to note, it seems that South America is returning to positive growth. We see largely stable semis exports last year. Chinese semis exports continue to influence primary demand outside China. As we can see from the graph on the left-hand side, Chinese semis exports now seem to be largely stable. Year to date, semis exports is around 2.9 million tons.
This compares with 2.8 million tons for the full year 2016. If you look at it in percentage terms, this semis exports is about 9%. This is a lower number in percentage than what we saw last year. We expect a continued exports of rolled products into essentially what are deficit markets outside China. Exports of foil are increasing gradually. The largest increase we've seen here is in sheet and strip. I'll come back to that shortly. We also know that both of these sectors are being met with new trade restrictions almost as we speak.
In extrusions, there is limited exports to Europe and North America from China, partly because markets are protected by tariffs, but also because of the structure in this segment, with characterized by smaller units and supply, shorter supply chains that are less suited to rely on imports. The chart on the right-hand side shows extrusion exports differentiated by receiving regions. We do see that most exports are directed at other Asian destinations, and that's the green part of the chart or the green bars. The chart also includes what we call so-called disguised exports, very simple extrusions that are partly circumventing the Chinese primary export tax. These extrusions have previously been exported towards the U.S., and we see here the light blue bars in 2011 and 2012, but they've struggled to find a market.
Now these extrusions are tariff protected or tariff exposed into the U.S. As a consequence, the metal is now going, primarily going towards Asian destinations, as you see the increased growth in the green bars behind me. Let's look a little bit more closely at trade. Trade flows continue to be impacted by trade measures. Last year, we were preoccupied by the then newly elected Trump administration and possible trade measures that they might take and the effects that it might have on global aluminum. A year later, we have seen increased political focus on trade flows and market protection, in particular, the effects of Chinese exports to markets in the U.S., in the E.U., as well as emerging markets such as India.
China does not export primary aluminium due to an export tax of 15%, but China is a large exporter of semis. Faced with the continued threat of large semis overcapacity, a potential increase in exports, trade action is being evaluated for several markets. Over the last year, we've seen the U.S. administration raising two cases on primary aluminium, the WTO case and the Section 232 case for safeguard measures on aluminium as well as steel. Neither of these cases have been concluded. There are also several targeted cases against alleged dumping of Chinese products and semis. Into the U.S. on foil with preliminary duties ranging from 96% to some 160%, and just this week, we saw a similar case being announced for common alloyed sheet.
We also see that the EU, other regions, are evaluating measures against Chinese imports. On semis, the U.S. and EU markets are largely pro-protected by import duties. Despite improved global balances on aluminum, we do expect continued high attention on trade development and on the possible application of trade instruments if national or regional markets are threatened. Let me turn then to the primary metal market. First, I'd like to recap what we said at Capital Markets Day last year. We expected the global primary market to be largely balanced into 2017. Looking back, we can actually say that even though we thought we were pretty positive, we were actually not bullish enough for 2017. For 2017, we see a market that has is coming in with a small deficit.
Last year, we forecasted growth in the area 3%-5% for 2017. The updated expectation is 6%. Supply growth, which we forecasted at 4%-6%, is somewhat surpassing this at 7%. Overall, 2017 will see a small metal deficit globally, primarily as a result of strong production growth in China. This is also recently subdued by Chinese reforms and capacity curtailments. I'll come back to that in more detail. It's also due to a stronger than expected demand across most regions. At the same time, in 2017, we did see supply suffering from unforeseen shortages outside China in Zhuhai, in Albras, as well as the Portland smelter in Australia. If we look towards 2018, we expect the global primary market to be pretty balanced.
We expect both production and consumption to grow by some 4%-5%. The main drivers on the supply side, now we'll get back to some of these, are Chinese projects, primarily driven by the state-owned enterprises, the SOEs, U.S. smelter restarts, and Indian project ramp-ups. On the demand side, the main influencing factors are the pace of continued slowdown in China, especially in the building and construction segment, continued strength in demand from the transportation sector globally, as well as the strength of U.S. and European overall growth. Let's look then in more detail into China and what has been happening there over the last half year. Svein Richard has touched upon this already. Supply-Side Structural Reform and environmental shutdowns are moderating Chinese primary supply growth.
There are two sets of industrial reforms that have been at play or are being at play in China throughout 2017. It's really the effectiveness of these reforms, Supply Side Reform, environmental shutdowns, that will drive the supply-demand balance of primary aluminum going forward. I'll share very briefly some characteristics of these reforms. Supply Side Reform. This has been implemented across several industries in an attempt to reduce oversupply capacity in China and strengthen central control. Industrial plants that do not have all the required permits on operational issues or environmental issues have been ordered to close. For the aluminum industry, this affects smelters brought on stream in the 2013 to 2017 period, and primarily, or I can say exclusively, has affected private companies. There is an additional effect that is somewhat less highlighted.
In the Supply-Side Structural Reform, we've also seen that a large chunk of capacity that was on the planning board or in construction but not yet started up has been halted. This means that this capacity will not reach the market over the next foreseeable future, and therefore the capacity pipeline is shortened. Through the environmental reform, the other reform or the Blue Sky Initiative that Svein Richard talked about, the authorities are trying to curb pollution in some major populated areas. Industrial plants in and other activities as well, in an area around Beijing, the 26 + 2, have been ordered to reduce activity during the winter heating season, November 15th through March 15th. Aluminum smelters in this area will have to reduce 30% of pots. Alumina refineries, 30% of lines.
Carbon is also affected, with carbon plants with up-to-date technology having to close or curtail for 50%. Older technologies or older plants is closed altogether. We estimate the effect of Supply-Side Structural Reform to be in excess of 3 million tons of aluminum production. The winter closures are believed to reduce aluminum production by another half a million ton over the winter heating season. Now it's also fair to admit that the full aggregated effect remains somewhat unclear, and we're seeing over the last weeks that there is a certain overlap between Supply-Side Structural Reform and winter closures, and we're seeing this especially for Weiqiao in Shandong, which is now closing down less than we expected some months ago.
Again, interestingly, when we met with Chinese producers in China and also the Nonferrous Metal Association some weeks ago, we noted from them an considerable uncertainty whether this capacity will actually start up again after the winter heating season, and especially with regard to smelters in Henan that are older and less efficient. Now key drivers for Chinese aluminum expansion seem to be losing momentum. The Chinese reforms are curbing supply growth. This mirrors expectations for a somewhat slowing demand growth. The takeaway is a general weakening of main drivers. On the one hand, demand growth is moderating from previous years' high rates and double-digit growth rates. It is still expected to stay at attractive levels, especially seen from mature markets.
Now equally important, key supply growth drivers are easing, negatively impacting access to cost-competitive raw materials, to energy, as well as finance. We also expect stricter enforcement of environmental standards across the industry. For example, the financial impact of environmental taxes set to be implemented from 2018. A side step to the energy markets in China. Chinese energy market reforms are impacting on smelter costs. Access to competitive power remains the key for smelter cost competitiveness. Chinese power markets are influenced by two somewhat conflicting trends. First, structural reform of the coal sector. One effect of this is a targeted coal price ban, as you see here behind me, with the goal to maintain coal prices at a level both ensuring profitability for larger coal producers, at the same time as preventing coal from driving power prices too high throughout the economy.
For smelters with captive power production, but buying coal, they are exposed to this movement. We do see that... Or the second reform is power sector reform, adding to a more market-oriented system, and you see this summarized here on the left-hand side of the graph. The reform will remove cross subsidies and reduce transportation and distribution costs in the power sector. It will connect captive power generation to the main grid, and thereby force all power producers to pay environmental taxes. It will allow direct negotiations between power producers and large power consumers. For smelters, this will contribute to higher power costs for smelters with captive generation, and it will contribute to lower power costs for smelters that are buying power from the grid. Overall, these reforms contribute to evening out somewhat the cost curve for Chinese aluminum producers.
Generally and globally, we see a higher and steeper cost curve in 2017 compared with 2016. Smelter costs have been affected by essentially two main factors throughout 2017. Higher overall input costs, especially in the second half of this year, with energy, alumina, as well as carbon increasing by some 50%-100%. You see this here in the index graph on the left-hand side. These cost effects are largely similar across the global industry. On the right-hand side, this shows the resulting cost pressure and the hike in the cost curve from 2016 to 2017. As I mentioned, we expect that the primary aluminum market will be largely balanced in 2018. This is due to moderating supply growth in China combined with solid global demand growth.
Let's look at this in some more detail. On the upper left-hand side, world ex China, we forecast both production and consumption to increase by some 3%-4%. Due to the lower supply base, this means that the aluminum deficit world ex China will continue to grow. Demand is surpassing some 30 million tons, while production is 28-28.5 million tons. On the lower left-hand side, in China, we expect another year where supply will exceed demand. Both production and consumption are forecasted to grow in the area of 4%-6%, even though we do expect policy reforms to affect the demand or the capacities also next year. We do also expect the state-owned enterprises to add capacity next year.
In volume terms, supply continues to surpass demand by some 1.5 to 2 million tons. The resulting global outlook on the right-hand side is a balanced market or a very small deficit if you're looking very, very closely. Let's move to stocks. Inventories outside China continue to decrease, while Chinese stocks have moved higher. The metal deficit world ex China has contributed to a further draw down of inventories in 2017, primarily in LME stocks, as you see in the lower part area of the graph here behind me, but also lowering non-reported inventory levels. On the right-hand side, we can see that also the Chinese, that we can see that total inventories ex China have decreased, and by some 1.8 million tons in this year alone.
This reflects that Chinese exports have been insufficient to fill the metal deficit outside of China. Our view is that metal exiting inventories is being consumed to a large extent. Overall, LME stocks are down by some 1.1 million tons in 2017. If you compare that with the market deficit outside of China, or some 1.9 million tons, our conclusion is that unreported stocks have also been consumed in order to satisfy demand and meeting this deficit. On the left-hand side, we see that Chinese primary stocks have been building throughout the year as supply exceeds demand. Part of this buildup could also be representing the expected or the winter shutdowns building up inventories ahead of that.
Our estimate of total stocks are some 12 million tons as we speak, about a little more than 5 million tons reported, some 5.2 reported, and less than 7 million tons unreported in total. Inventory days approaching historically tight levels in world outside China in 2018 hypothesis. There's one more observation I'd like to share with you. If we add our market outlook assumptions for 2018 and translate the implications into inventory days, we get this quite interesting possible result. Inventory days are coming down rapidly. We expect inventory days to be around 90 at year-end this year. This is still above historic levels of some 60 days, give or take. Given the current supply-demand outlook, inventory days could approach historic levels into 2019. At year-end 2018, we forecast inventory days at some 65 to 70 days.
Chinese stocks are foreseen to continue to increase some, adding inventory days. Again, Chinese inventories are relatively low in inventory days compared to what we've seen outside of China. Let's move to prices. The all-in price level has been supported by higher LME and premiums throughout 2017. Prices in NOK are supported by the continued weak NOK versus the U.S. dollar. Eivind has already spoken somewhat about this. The LME has been moving steadily higher throughout the year, as you see on the left-hand side.
At the start of the year, LME, the green, the green line, was at approximately $1,750 per ton. Prices have continued to increase to levels that we haven't seen for many years, reaching $2,200 in October this year, with a small correction to its current levels just below $2,100. The current weaker NOK is lifting prices in NOK terms, as we see here in the right curve on the same graph. The price recovery is a consequence of improving metal balances, reduction in inventories, but it's also responding to a cost push from main input factors. At the same time, demand has surprised on the upside, as I've already mentioned. The U.S. and European metal deficits continue to support premiums.
On the right-hand side, we see that since the sharp decreases from the 2014 and 2015 peaks in premiums, the standard ingot premium has retreated to somewhat historic levels and is now currently at some $160 per ton to, in Europe duty paid. Product premiums, the blue area, for extruded ingot shows a similar development and is currently around $200 per ton. That takes me to the bauxite and alumina section. Chinese primary production increasingly dependent on import, imported resources. I will use this chart that I've used for the last couple of years just to try to set the scene. If you concentrate here on the middle bar, Chinese domestic refinery production is sufficient to supply approximately 94% of Chinese smelter requirements for alumina.
The remainder needs to be imported. In 2017, in order to feed domestic refineries, China will consume approximately 164 million tons of bauxite. Around 105 million tons of this are supplied in 2017 from domestic sources. 60 million tons about are imported. This alone is an increase of 8 million tons, 15% increase since last year. The right bar here illustrates that exposure to and reliance on imported bauxite for China is increasing rapidly. The four-year historic average import reliance is 30%, but if you look at 2017 in isolation, it has actually increased to 40%. Bauxite production in China declining, triggering more imports. Let's look at it in some more detail. The Chinese bauxite deficit remains the key factor driving global bauxite and alumina markets.
Chinese domestic bauxite supply is deteriorating, reducing volumes available from domestic sources, as we see here in the light and dark green bars on the chart behind me. We've also seen several small mines in China closing over the last month, especially in Shaanxi. This is due to a combination of lack of resources, lower and noneconomic ore quality, as well as mine safety measures. The consequence is that both existing inland refineries, Shaanxi, Henan, and coastal refineries, typically Shandong, are increasingly relying on imported bauxite. An additional factor as domestic bauxite quality is deteriorating, Chinese refineries are faced with increased costs in their processing, especially through caustic. Although this situation differs between regions and it differs between companies, which is also important to remember, the overall message is that import dependency for bauxite is increasing.
You can see that from the expanding blue bars on top of the chart here. Again, this was an important topic when we met in Fuzhou in China for the Antaike conference. Several Chinese panel participants were expressing serious concern over future access to bauxite at good quality. We expect the Chinese bauxite requirement to continue to increase from 164 million tons, as I said, in 2017, to more than 200 million tons by 2025. By 2025, around 150 million tons, 70%-75% of this will need to be imported as bauxite or as alumina. Guinea is emerging as the largest bauxite supplier in China, and their bauxite production is rising.
As a response to the growing bauxite deficit, several Chinese players are pursuing new bauxite sourcing outside China, in addition to the contract sourcing they've had specifically from Australia. Initially, we saw this appearing from Indonesia and Malaysia. Following the imposition of the export ban and the mining ban respectively over the last years, seeing now Guinea really appearing on the scene and taking center stage. On the right-hand side in the graph here, this illustrates the significant export development that we've seen in 2016 and in 2017, an additional 29 and 44 million tons in addition to the volumes that we used to see coming out of Guinea. We expect this to grow even more in the next coming years, reaching some 70 million tons by 2020, as you see here in the graph.
We're also seeing that the substantial bauxite resources available in Guinea are sufficient to support these growth levels. An important feature is also that these resources are now being developed partly captively by Chinese players. In addition to Chinese companies, we see EGA, RUSAL, as well as independent miners pursuing projects in Guinea. Chinese bauxite imports are therefore also increasingly exposed to freight. What does it mean? Let's look first in this bubbly and busy slide on the green blue pies here on the upper right-hand side. The development is quite clear. From 2013 to 2017, the share of bauxite sourcing coming from the Atlantic has increased from around 5% in 2013 to 47% expected in 2017. As I said, this is expected to increase quite substantially also going forward.
Let's look on the bubbly slide or the bubbles on the left-hand side. We see that Australia, represented by the blue bubbles, will remain base load supplier. It will even increase its volume somewhat. However, we can also see that Atlantic bauxite is replacing Indonesian and Malaysian bauxite, and especially Guinea, the red bubbles established as the emerging new large supplier. Among the important consequences are that Atlantic sources means longer freight routes and higher logistics costs. Increased sailing distance adds exposure to freight and oil cost development, and we see this also illustrated here in the Baltic Dry Index on the lower right-hand side. That takes me to alumina, which has been interesting and quite volatile over the last year.
We're seeing a higher and steeper alumina cost curve in 2017 compared with last year, with Chinese re-refineries dominating the high end of the curve. The main cost drivers for alumina are caustic and fuel, as well as bauxite, especially for non-captive Chinese refineries. Again, we have an index graph here on the left-hand side to show this. The recent pickup in caustic prices, as we see in the U.S. Gulf, was caused by hurricanes having affected output and therefore affecting global prices for caustic. Caustic prices in China are influenced by the same Supply-Side and environmental reform factors that we see for the aluminum sector. chlor-alkali producers, main downstream industries are curtailing capacity, and this is affecting the access to and supply of caustic, and therefore affecting prices.
On the right-hand side, we see the upwards shift in alumina costs from 2016 to 2017 caused by these higher input factors. Cost increases for energy and caustic are felt throughout the global industry. The Chinese alumina refineries are the higher cost producers globally. With the Shandong refineries, the red dot in the graph behind me, at the high end of the Chinese cost curve. These refineries are the most reliant upon imported bauxite and make up the marginal producers for alumina. We've also seen other Chinese refineries, the inland refineries, seeing their bauxite costs increase caused by lack of bauxite and closing mines, and you see the increase in cost by the red red line on the left-hand side here. Chinese winter shutdowns are also affecting alumina supply.
I already talked quite extensively about Chinese reforms. We have to remember these are also hitting alumina. Alumina capacity in affected regions is required to close by some 30% of production lines. Transparency in whether refineries have actually closed remains limited, and we see the same for smelters. We expect that loss from winter closures will be between 1.5 million-2 million tons of alumina, with Weiqiao being the wild card, as we see on the upper side of the bar here. This corresponds to some 0.75 million-1 million tons of aluminum. There's a high concentration of alumina refineries within the affected regions here in the middle chart, so the volume effect for alumina might easily exceed the aluminum effect.
In the case of lower than anticipated closures for aluminum smelters, this could add to a relative shortage of alumina through the winter period. Alumina market balancing. We are seeing Chinese additions also outside of China. Over the past years, we have seen that the Atlantic alumina capacity being balanced through refinery closures. We consider restarts of Corpus Christi and Paranavaí as very unlikely. The restart of the Point Comfort Refinery is, however, a possibility. Outside China, we expect limited new refinery capacity within the next 2-3 years. There are new projects in the Middle East as well as India that will add some 3-4 million tons in the period 2019-2020. These projects are delivering into their own smelter requirements. In addition, the RUSAL Friguia Refinery in Guinea, relatively small one, is also expected to restart.
Alumina to feed Chinese requirements have two main supply sources, one being Chinese companies increasing alumina production outside of China. The phase II of the Kendawangan Refinery in Indonesia, a Weiqiao project, may become a reality in 2020. We've also seen the Alpart Refinery, a little less than 2 million tons capacity in Jamaica, having restarted recently, and they are said to have loaded the first cargo, I think, last week. This is also owned by Chinese the company JISCO. The other sourcing possibility is to rely on domestic capacity additions. We do see several possible projects, or at least around some 4 million tons of possible additions.
The way we see it, around half of these possible additions will come on the coast and will rely on imported bauxite with the implications that I've talked about before. Alumina prices rise amid policy implementation uncertainty. To summarize our main points on alumina, let's take a look at the price development. Our alumina prices have been quite volatile over the last year. Starting the year just below $350, dropping to below $310 throughout the second quarter, then price development turned sharply positive and peaked at $484 in October, and are currently around $450 or a little bit below $450. Prices have been driven by three main factors. Market balances. Aluminum smelters that have been ramping up have increased the demand for alumina, and especially again in China.
There have been tight markets in China also following seasonal stocking of alumina ahead of the winter period. Just think back to last year and then the obstacles we saw there on the transportation side. Lower output from Chinese inland refineries, also tight balances outside China. I've talked about cost inflation, the second factor. Thirdly, environmental reforms and lack of transparency, closing of mines in China and environmental charges that we are expecting to see over the next weeks and months. To wrap up the market presentation, let me share our long-term forecast. We see strong growth drivers across segments providing solid demand outlook. 2017 has shown stronger than expected demand growth across most sectors. Long-term demand for aluminum is expected to remain strong based on the fundamental drivers. Aluminum will continue to profit from substitution and taking market shares from other materials.
Substitution-driven growth is expected to be the strongest in the transportation segment and the electrical segment. We also see good growth overall in machine run equipment at an estimated CAGR for the period up to 2027 of some 3%-4%. These growth levels, and Svein Richard mentioned this as well, are down from recent history simply because we do not expect the Chinese growth story to be able to repeat itself anywhere else. The main growth drivers are urbanization, substitution from copper in power transmission, aluminum into automotive and other transportation. On the other, on the flip side, we see the building and construction segment to expect to see somewhat lower growth, especially reflecting the lower expected growth in Chinese building and construction.
Now, across all main segments, we expect growth in line with or surpassing GDP and stronger growth in areas where there is a strong substitution effect. We forecast a long-term demand growth for SEMIs of some 3%, globally for the 2017 to 2027 period. 3% growth both in China and outside of China. This is, somewhat down from historical levels, where we saw a CAGR of 5.5% for 2000 up to today. Growth in global SEMI demand creates opportunities for both primary metal and recycled material. As mentioned by Svein Richard again, we forecast solid growth for both SEMIs, primary as well as recycling. Our global SEMI demand growth outlook is a long-term CAGR of 3% for the 2017 to 2027 period. This allows both for recycling and primary demand growth.
With more post-consumer scrap entering the loop, we expect recycling to grow at some 3-4% on average, while primary growth is expected to reach 2.3-3% over the same period. This brings me to the summary. Solid long-term demand outlook supported by strong growth drivers across segments. Chinese primary supply moderating due to policy reform. Global primary market largely balanced this year and next. Cost curve pressured upwards by rising alumina and coal prices, with regional differences. Recycling growth accelerating with increased generation for post-consumer scrap. Chinese bauxite import dependency continues to increase. Alumina market impacted by cost push and tighter market balances. This concludes my presentation. I'm happy to introduce Egil Hogna, the EVP for our new exciting family member, the Extruded Solutions.
Thank you, Kathrine, good morning, everyone. It's a pleasure for me to be here for the first time as head of Extruded Solutions. The title of my presentation is From Extrusions to Solutions, that is really our strategy in a nutshell. It means moving from standard products to more advanced products, excellent customer service, which represents solutions to our customers. Extruded Solutions, previously known as Sapa, is a very international company. We are present in approximately 40 countries. We have more than 20,000 employees. Last year, 58% of our production was based on remelted aluminum. Most of that being process scrap, a smaller proportion being post-consumer scrap and ingot. There are some key differences between our business area and the other business areas.
You can see here that we have many employees, so it is more people intensive than most of Hydro's other activities. However, it is also a less asset intensive business. Our margins are smaller, but due to the lower assets, the return on capital is still an attractive one. In terms of our position in the industry, we are by far the largest extrusion company in the world. When you compare our size to our competitors, you'll see that most of them are Chinese local companies, while the closest non-Chinese company is Constellium of a much smaller size than what Extruded Solutions has. We pride ourselves on being close to our customers. We source most of our metal locally, if not in the country, at least in the region, and we also sell our products locally.
We are more a multi-local company rather than a multinational, because we don't really have many cross-border flows. Our most important segment is building and construction. However, if you combine transportation and automotive, that is actually the largest one. These numbers are in volume. If we change to value, transportation and automotive is more than 40%. This is, of course, a segment where aluminum has great advantages because of its light weight, reducing energy consumption for everything that moves. Extruded Solutions is divided into four business units. Extrusion Europe and Extrusion North America are both approximately one-third of our business each, while Precision Tubing and Building Systems are one-sixth each. What characterizes all four of them is that they have leading market positions. Extrusion Europe is number one in Europe, Extrusion North America, number one in North America.
Precision Tubing, which is probably the most advanced business we have, creating very small aluminum tubes, mainly going into heat transfer applications like air conditioning systems. They are number one globally with a 35% global market share. Finally, Building Systems, which is one step further downstream compared to the other businesses, are branded products for windows and facade solutions, and Building Systems is the number two player in Europe, slightly behind Schüco. On the left-hand side of this graph, you will see our track record over the last 4 years. The Sapa joint venture was formed first of September, you know, 2013, and since then, there have been constant improvements in the rolling 12-month result.
I show the rolling result here because there are seasonalities between the quarters, so you really need to compare one quarter with the same quarter last year. The first three years during the joint venture period, 2014 and 2015, was really a period of restructuring with big cost reductions, plant closures, and fairly drastic measures being taken. While the following 2 years, 2016 and 2017, have been years focusing on perfecting operations and implementation of a value over volume strategy. You can see how the EBITDA has moved, but the graph also shows how the return on capital employed after tax has increased. We are currently at the level above 12% after tax.
As a consequence of the acquisition by Hydro, the return on capital employed, which you will see in the accounts, is going to drop due to the purchase price allocation, because the purchase price was higher than the book value in Sapa. The asset base is going to increase and the annual depreciation will increase by approximately NOK 400 million, meaning that we will start out with a return on capital employed after tax, so a bit more than 7%. Our objective is, of course, to increase from that level, and even if the improvements so far have been substantial, we have clear objectives to continue to improve based on our value over volume strategy going forward.
On the, on the right-hand side, I've shown you one of our most important key performance indicators, which is a margin measure we call net added value. It is the difference between our revenues and our costs, the raw materials we purchase, and also purchased services. As you can see, we have significantly increased that over the last four years, and our ambition is to continue to increase it through a change in product mix. You will notice that volumes have been completely flat during this period. This is because we have replaced previous standard products with more advanced products according to our value over volume strategy, focusing on what really creates the most value for our customers. Let's have a look at what are the key business principles we work according to in Extruded Solutions.
The first one is making a decent profit decently. If we go back four years, I think it's fair to say that the profit wasn't decent. The return on capital was clearly below cost of capital. While today, I think we can say that we are making a decent profit, giving a return well above the cost of capital. However, even more importantly than making a decent profit is making it decently. That I'm happy to say that we have done all the time, and what that means is ensuring a high level of safety for our workers, a strong quality for our customers, and also being compliant not only to local laws, but also to our code of conduct and operating in a decent fashion. We also try to create a culture of positive dissatisfaction, and that might sound like a self-contradiction, but it's not.
We celebrate our improvements. We are very happy about what we have achieved so far, but we are by far not satisfied. We continue to think every day about how we can improve further. Trust me, there are still plenty of improvement opportunities in our business. We also experiment. We fail, but we try to fail fast and learn from it every time. We're an innovation-intensive business, and all the time we need to push the limits in terms of how we can replace other materials like steel, copper, plastics, wood, and so on, to create even better solutions for our customers based on aluminum. We have a high speed in working with innovations together with our customers, which I will revert to soon. I already talked about our value over volume strategy.
Again, I say something which might sound strange, and that is the power of available capacity. In a typical commodity industry, you'd like to maximize capacity utilization. We don't strive to do that. We strive to have a sensible capacity utilization, which gives us the flexibility to make sure we have excellent customer service. In some cases, we even commit to supplying our customers within 24 hours if they need certain products. In our part of the industry, excellent customer service is extremely important, and having the flexibility to accept special orders is something which creates value over time. Remember that this is not a particularly asset-intensive part of the industry, so having available capacity in our industry is not a major drag on the profitability. We also strive hard to develop unique niches.
I sometimes say that we strive to be short all the time, meaning that we don't have enough capacity in the niches where we are truly unique, and we try to be as unique as possible. What that means is that innovation is very important, and we constantly try to improve our product mix. We have many units. If you look across our total system, we have approximately 100 plants. Some are big, but many are small. In order to manage that system, we do a constant benchmarking. We benchmark the profitability, but we also benchmark energy consumption and a number of operational parameters. We call that the self-playing piano, because that benchmarking in itself is a strong instrument of performance management.
If you are in a poor part of the benchmarking comparison relative to other plants, there's a constant need to explain and work on why you are behind and how you can improve. We also talk a lot about earning your right to grow. That, of course, starts with making a decent profit decently. In order to grow, in order for us to spend more investments to build the business, we require that all units have a high level of safety, quality, and compliance. On top of that, of course, that they have a return on capital employed, which is significantly above the cost of capital. If that is not the case, they need to fix the business first before they can grow. Finally, profitable growth.
We want to grow with our customers. We are not focused on growing the extrusion capacity itself. We focus on growing when we can grow based on innovations, and in some cases, when there are interesting consolidation opportunities where we can build economies of scale by acquiring other companies or assets. Finally, I'd like to highlight that we manage our units primarily based on the bottom line, the EBIT, and the return on capital employed. We don't manage our units based on cost. Because our success depends on being able to have a tailored mass production according to our customer needs. If we then would put up cost as a primary way of managing the business, it would quickly tempt local units to sacrifice differentiation and value creation for the benefit of low cost. That is not in anyone's interest.
One year ago, we made a customer survey globally. We asked our customers, What do you think are the most important competitive advantages? Or what was called Sapa at the time. They listed the following three: unmatched technology competence, value chain width and depth, and global reach and local presence. The good thing about the acquisition by Hydro is that all three of these competitive advantages are actually strengthened as a consequence of the acquisition. Hydro's technology competence is well-known, and one area which we are benefiting a lot from is the alloy competence, which is in Hydro. You've already heard today, and you'll hear more later, about the two new products which are launched today, the Aluminum 4.0 with the lowest carbon footprint in the industry, and the 75-R, which is an alloy based on more than 75% post-consumer scrap.
Value chain width and depth is also improving. What it means is that by being able to have both casting capacity and primary capacity and so on in-house, it means a greater security of not only supply, but also quality for the end customer. It also in total increases the product assortment when we look at, for example, the alloys, which we now can provide, which gives our customers a more attractive product offering. Finally, the global reach and local presence. We pride ourselves on being local. It's extremely important to be close to our customers. In addition to that, with a global system, we have the security of supply, which our customers, for example, automotive companies, are asking for.
If we have a problem one place, we have a whole system of plants which can supply our customers if that is needed. Our strategy is very simple. It's not a very detailed, centralized strategy which we are enforcing on all of our units. It's a fairly broad strategy, but based on some very strong principles that apply to every single unit of Extruded Solutions. The first point is increasing the value added to our customers. It's value over volume, and it requires that each one of our units truly understands what is most important for our customers. Not only what they are asking for initially, but what they truly need. We continue to develop new products in order to better satisfy our customer needs and a better service. The second point is about simplification and collaboration.
Cost is, of course, one element of that, but it's also making sure that we don't have any activities in our system which don't add value for our customers. It means a strong cooperation between the units, even if we have a decentralized system. For example, in terms of variable compensation, our employees are compensated not only based on the local profitability, but on the profitability of the total system, creating a clear spirit of cooperation. Finally, growth in order to lift margins and profitability. I already mentioned that we are not growing to increase the extrusion capacity of the world. There are plenty of presses in the world. Where we see opportunities is where there is more, more processing of the extrusions necessary in order to better satisfy our customers. I'll soon give you some examples of that.
Here are some categories of examples. The first one is very much linked to, for example, the two new products launched today. More and more of our customers are demanding to see verifications of how much of the products are based on recycled scrap, ideally post-consumer scrap, and also the carbon footprint. We also have some examples of what we do here. We have an example of a friction stir welded panel, which can become a helicopter deck or the wall of a train, sorry, yeah, the wall, the box of a train, for example. We have a fabrication and assembly of automotive products in our, in our system. We do several types of different surface treatment, like painting and anodizing in order to reduce maintenance costs and ensure that our products are beautiful throughout a long product life.
We also create some pretty advanced products. On the left-hand side, you see an example of a bumper system. The one in the middle is a solar-powered light pole produced in the Netherlands. It can also be a smart light pole, fitted with internet connections so that it can be a Wi-Fi station and centrally controlled, of course. We also have some agreements in the Benelux with municipalities where we take in old light poles, we re-melt them, and we supply new, better, more environmentally friendly light poles. Finally, service. The level of service we adapt to what the customers need. What we see many places is that they benefit from a strong level of service from our side, because then our products can fit seamlessly into our customer's value chain. Very often we call this tailored mass production.
Our CFO talked to you about sustaining investments, and I'd like to clarify one thing. I think the best way of doing that is showing you an example. This is our new press in Hungary being installed. This is a sustaining investment because it actually replaces two old obsolete presses. The two presses it replaces are weak presses capable of producing commodity profiles, but not much more than that. The new press is a very strong one. It can produce very thin and wide profiles with a high strength. For example, going into automotive parts. It means a fundamentally different capability than the old presses.
If you ask me, this is not only about sustaining an existing capacity, it's about fundamentally changing our capabilities and being able to charge a higher price to our customers based on the fact that the product which we can produce has a higher value. When we do sustaining investments, there is also a lot of value creation associated with that. I would have loved to bring in the body in white of the new electric London taxi here, but unfortunately, the doors were too small, we couldn't bring it in. This is a product which we are very proud of. When it comes to the body, the skeleton of the electric London taxi, we are the, clearly the largest supplier to the London EV Company.
When we won this contract, it was so important to us that we were actually able to reopen a previously closed plant in Bedwas in Wales where we used to produce more standard products. Today, it's reopened as a super modern fabrication facility where we process profiles produced other places into finished automotive parts going into the London electric taxi and the London electric van, which is launched next year, and also some other car models. At peak production, the London Electric Vehicle Company is expecting to produce 36,000 vehicles per year. We believe that this is the start of a new spring for automotive production in the U.K. based on electric zero-emission-capable vehicles.
Yesterday, when I came in from Heathrow to here in London City, I talked with a taxi driver, and clearly there is a lot of attention around the new taxis which have just started to arrive here in London. I don't know if many of you have seen them yet, but starting from the first of January next year, all new taxis in London need to be zero-emission capable, which means that there is quite a push also from the authorities to make sure that there is a change in the type of vehicles used in the center of London. A totally different example is our cooperation with IKEA. We have worked with IKEA for more than 40 years, actually.
IKEA is actually from very close to where the cradle of Sapa was established in the middle of Sweden. But what is new in our cooperation with IKEA is that we are involved at a much earlier stage, also at the design stage, in order to make sure that the products which end up as finished furniture have the best possible capabilities, not only in terms of cost-efficient production, but also in terms of creating an attractive design and recyclability, which is becoming a more and more important characteristic of products. We have been involved in the very early prototyping and design stage with IKEA. Even if I'm sorry not to have the sofa here today, it's launched in the stores in February. Here you see a picture of it.
The name of the furniture series is DELAKTIG, which in English means, participate. We are proud to have been a participant in the development. I think the reason why they chose the name is that as a consumer purchasing this sofa, you are also participating in a product which is designed to be environmentally friendly. The product has two important characteristics which separates it from normal furniture. One is that it is very easy to reuse and to change the use of it. Because this product can be adapted from a sofa to a bed. You can attach a shelf to it, you can attach a lamp, you can attach a baby crib, so that when your life situation changes, you can change the furniture very easily.
The aluminum frame is very easy to separate from the wooden floor of the bed and the textiles. After what is hopefully a very long life based on, you know, a nice surface anodized, so it will stay beautiful throughout, hopefully a century. When that life is finished, you can just throw the frame into one of our remelters, and using only 5% of the energy originally spent to produce the aluminum, you can then remelt it into new products. This is a representative of a trend which we think we will see more and more of, not only in the furniture industries, but also in other furnitures, where the products are very easy to recycle and where this is in the minds of designers already from the beginning of the product design.
Finally, to sum up our priorities as Extruded Solutions going forward. We will strive hard to continue to improve our safety, quality and compliance. Making our profits decently will always remain at the top of our priority list. We are trying to improve the profits as well, and we will do that primarily by increasing value-added solutions to customers through commercial excellence and very importantly, innovation. There's a constant fight between aluminium and other materials, and we want to show that aluminium is the best solution for even more applications than what is the case today. We will also continue to simplify our operations to make sure that we only spend time on what truly creates value for our customers by reducing complexity and reducing cost when that is appropriate.
If we need to spend more to make more profit, then we will spend more. Finally, through selective growth, lift margins, again to create more customer value. Thank you.
Thank you, Egil. It's time for a new Q&A. Kathrine, can you please rejoin us on stage? Two microphones around in the audience, please state your name and the company you work for before asking the question.
Could I start by trying to respond to your question that was kind of left over from the last period? Hopefully I recall it. You asked about the balances in China for next year, the 2 million tons. That's a product of new capacity expected to come on stream. New capacity coming on stream, volume effects from ramping up. This is primarily by state-owned companies, less the effect from Supply-Side Reform, as well as a winter closure. The winter closure from first of January through to fifteenth of March. We have not factored in a restart of capacities closed in the Supply-Side Structural Reform in 2018.
Hi, it's Johannes Granselius, Handelsbanken. A question to you, Egil. My impression is also that profits have increased among your competitors, at least, that what the numbers says for some of the smaller players that I've seen. I've also seen some of them announcing volume increases for the next years. How... What's your view about, you know, new supply meeting the market here?
Sorry, could you repeat the last sentence?
I was just wondering if your competitors are looking into making more investments into the next years, given that market should be more favorable for the whole industry of extrusions?
There.
in the U.S. and in the Europe, please.
Yeah. There are investments in the industry. There are constantly investments. We see that even if there are some investments in new capacity, several of our competitors are also investing into the further processing of the profiles to make sure that the investments are truly creating value for the customers. Yes, there is some growth in capacity, I would say based on what we see mostly in the value-added part, similar to what I described.
You're very clear that profits will increase going forward for Extrusions. I mean, could you perhaps precise that a little bit? What are you looking at for the next years?
I'm very precise in that we are going to work very hard to continue to increase the profitability.
Yeah, that's true.
in Extruded Solutions.
I didn't miss that part.
I'm not presenting any specific targets for that.
Okay.
If, if I could, you know, say a few words on it. As I mentioned, the first few years after the establishment of the JV was really a period of restructuring. Since then, we have been more on the path of continuous improvement, which is about making sure our operations are as good as possible and the change in product mix. We will continue to change the product mix by having an investment level, which with both sustaining investments and with expansion investments in order to continue to change the product mix to the most attractive segments. We are not going to focus only on a few of the segments. For example, we are not only going to target automotive, like some of our competition is doing. We are going after the differentiated niches in all of the different main segments of Extrusions.
We will continue to work hard on that in order to improve the bottom line. I'm not going to give you a target for that today. Sorry.
Hi, it's Daniel Major from UBS. A few more questions on the Extruded Solutions. I guess following from the last question, you said the business, you know, the focus is generating return on capital well above the cost of capital. A 7% return on capital versus the cost of capital of 5%-6% is not a huge excess return. Can you give us any sense of the magnitude of potential uplift? Would you expect to get return on capital from Extruded Solutions similar to the current group average? That's the first question. The second question, you talk about potential M&A. Can you give us a sense of your M&A opportunities? Is that acquisitions as well as disposals? Where does the balance lie between those two?
Our ambition is clearly to have a very good return on capital. you know, from an internal point of view, it's of course a little bit frustrating that, you know, we had more than 12% after tax, and now poof, down to 7%.
Sure.
You know, we've done it before, and I think it's fair to say also that if you look at the original investment cost behind the assets currently in Extruded Solutions, that original investment cost is much higher than the book value still. I believe that there is a potential in order to significantly increase the return on capital. Some of our assets are old, and we need to replace assets, and we need to also upgrade from, you know, let's say, more commodity capability to an advanced capability. Yes, we're going to increase the return on capital. That's my clear ambition. We also need to invest, and that, you know, needs to go a bit like this. On to acquisitions and divestments. There is to a certain extent the possibility of doing both.
You know, our business area is rather focused today, and I would say that we have no non-core areas. If we find areas, units, where there are very few synergies between those units and the rest of our business, and there might be more synergies between those units and some other industry player who might be interested in acquiring them, then we will evaluate such opportunities for divestment. In the same way, we look at potential acquisitions. If we see that there are industry players out there, either in isolation or parts of other companies where we think we would have higher synergies if we would acquire those assets, we will look at those potential acquisitions. You know, how's the balance going to develop? That I think depends on the opportunities. It's very hard to say.
I think on a net basis, of course, we hope to grow going forward. I would be surprised if there are only acquisitions and no divestments.
It's Jason Fairclough, Bank of America Merrill Lynch. Two quick questions, I guess, related. What's your assessment on the degree to which the profit increase or the increase in value add per kilo, is cyclical rather than structural? In other words, if we have some kind of a downturn, you know, how much of this unwinds? I guess along with that, China construction looks like it's slowing down. Your largest competitors are Chinese. Is that a risk? How do you assess that competitive threat?
If we go back four years, the profitability of the extrusion industry was poor. Even worse than that, I think. There was absolutely no incentive for anyone to invest in the industry. Even if there are cycles, there is some cyclicality, getting back to those kind of very poor levels, I would definitely hope that is not part of natural cyclicality of the industry. Personally, I don't believe it's part of a natural cyclicality. I think that after the merger of the old Sapa and Hydro's extrusion activities 4 years ago, I think that there is a more sustainable structure in the industry. There has happened some consolidation since then. Today, I think we are in a situation where, you know, making your cost of capital is definitely reasonable.
Even if there could be changes in demand, it would not be reasonable, I think, to go down to those low historical levels. What was the second part of your question again?
Trying to slow down.
Yes, Chinese competition. Where we see the Chinese competition today is primarily locally in China, and it is in the commodity segments outside of China. We don't see a very strong competition from China in the advanced product segments outside of China. I think an important reason for that is due to the fact that this is, to a great extent, the local business. The products outside of the commodities, they don't travel very well, and one reason for that is that they might be a little bit fragile, depending on what sort of profiles it is. Probably more importantly, it's about having short lead times to the customers, and if there is a problem, if modifications needs to be made, those need to be made very rapidly.
I mean, we can't stop the automotive line on some of the automotive companies if we have a, you know, a 3-week lead time or something. That's totally unacceptable. You need to be close to where the customer is, and that's a fundamental disadvantage for, you know, countries and companies that try to export over long distances.
Hello, Ai Ling Ong from Global Intelligence. Just a few questions. The first one is for Kathrine. We hear a lot of aluminum producers, especially Chinese during the Alumi Week, that they're facing higher costs and margin squeeze. I was wondering whether you can comment on your forecast, and do you see potential rising recycling and recycling volumes in China, also the possibility of like subsidies to support the higher costs? Especially most of the consultants expect the Chinese apparent consumption to rise next year. The second one is for Egil. I'm just curious, how much weight is actually in these electrical vehicles? How much aluminum weight in kilograms?
Also, do you see any potential or have you pursued any other similar opportunities in other markets, especially like, in China? Thank you very much.
I'm not sure if I got your question, correctly. It was about increased consumption in China in transportation specifically, or?
In terms of the costs, most of the Chinese aluminum producers are seeing higher costs and margin squeeze.
Yes.
I was wondering in terms of something must give in terms of the supply side. In terms of either the supply source, do you see like higher recycling volumes coming forward and also potentially, possibly subsidies returning to them, to these local producers? Thank you.
I'll try not to comment on sub-subsidies, but yes, you're correctly saying that costs are increasing globally in the industry and also for the Chinese players into alumina production, as I mentioned, especially caustic fuel, and into the aluminum production as well on the energy side and alumina and carbon. Yes, they're seeing that squeeze. We're also seeing that the Supply-Side Structural Reform seems to be taking out or hitting relatively new efficient smelters, meaning that into 2018, the cost curve, especially for China and at a high end, will be sharper because some of the low-end players have actually been taken out. Recycling in China is a not very transparent sector.
I think we're seeing that the recycling rates are lower than what we're seeing in our markets. If you look at the amount of aluminum that has been put into the Chinese sector over the last years, we will of course expect more aluminum to start coming back into the supply. Yes, playing a relatively higher or larger role in the supply, but again, below what we're seeing outside of China. Subsidies, I don't want, really want to comment on.
Okay. Then on to electric vehicles. The aluminum content varies a great deal. In some car models, and I'm not thinking of electric, you find almost no aluminum extrusions. On average, just globally, I think the average aluminum extrusion content is about 20 kilograms. If we look at the London electric taxi and the van version of that, it has 400 kilograms of extrusions, which is the highest I know of any car. 400 kilograms only in extrusions. We produce more than 150 parts for that car model only. I think it shows the extremes. On average, there's quite a bit more in electric vehicles. If we look at, for example, a Tesla. The Tesla has almost an entirely an aluminum body.
While BYD, the Chinese manufacturer of electric vehicles, they have very little aluminum actually. In China, we supply some of the car manufacturers with parts for their electric cars. Aojie, A-O-J, is one company producing electric trucks in China, and we produce a big part of the body for that car. It varies. The manufacturers have different strategies and we see that there is a certain hurdle for some of them to change from steel to aluminum, because you need different tools, different competence of the workers. Very often, if you have steel, you use magnets to transport the parts. You don't use that with, aluminum because it's not magnetic. You do it in different ways.
This is why we see some companies like Ford, they had the F-150, the world's largest selling car model, made out of steel for many years, and then they did the big switch, and today it's a car model mainly produced with aluminum. They have different strategies, but you know, we are a strong believer in the growth of aluminum for electric vehicles in order to compensate for the heavy battery and to make sure you have a better range. Right now, the range of electric cars is one of the important barriers for adoption of electric cars.
Good. We have time for one more question, over there.
Thank you. Fraser Jamieson from JP Morgan. got a question really on your comment about increasing the breadth of product offering to clients and thinking specifically around sort of automotive. There seems to be opportunities to combine extruded products and rolled products. Just wondering if you could give us a sense, obviously, relatively early in the process, but how are you thinking about the sort of management structures, the logistics structures around improving and offering a more kind of combined offering to some of the clients in automotive? Well, actually to add to it, you know, Thinking of automotive, are there other industries, et cetera, where there's the potential for that kind of cooperation as well?
Both in automotive and in building and construction, for example, there is a strong demand for both extrusions and rolled products. We see that, Rolled Products and Extruded Solutions have many of the same customers. We are looking into some opportunities for innovation in order to combine the two products into one offering. There's nothing automatic about, you know, going together to a car manufacturer and say, You know, now we are selling together instead of separately. Doesn't automatically give you benefits. We are looking into synergies in this area, primarily based on true innovations rather than, you know, just walking and having a common meeting instead of two meetings. That's not a huge benefit.
Good. I think it's time to call for the second break of today. Would appreciate it if you could be back here at 11:40 A.M. Thank you.
Der. Den norske verdensstjernen. Solid. Tidløs. Et ikon. Med fantastiske fremtidsutsikter.
I love it. It's fantastic. It's only 195. I'll think about it.
Aluminium fra Hydro. Lett og miljøvennlig i biler og sykler. En skikkelig verdensstjerne.
Ladies and gentlemen, it's time to start the third and final session of the day, looking closer into what we mean by our Better Bigger Greener strategy through some examples from the business areas. First, I would like to invite Svein Richard back on stage.
Thank you, Stian. As I mentioned earlier today, we have updated our aspiration Better Bigger Greener with the new targets, new goals. Better is today not only about cost reduction and operational performance improvements, but also what we do on the marketplace towards our customers. When we got to bigger, we aim to expand the use of aluminum, especially now with the opportunities in Extruded Solutions. We have also redefined that target. Of course, we will strengthen our platform to grow further. Greener is, as I mentioned earlier, the broad sustainability agenda for Hydro, where we will take a lead towards the low carbon circular e-economy. The slide I will show you here is an update from last year. We have shown that to you previously.
The targets has been clear for a long time, that is long-term targets. There are some green lights, some red lights, some yellow lights, but also some updates here. One is the target on the alumina production at Alunorte that is now lifted to 7 million tons after debottlenecking. That is something we will come back to, but the target is now 7 million tons. We have also lifted the target, let me see now. It's on rehabilitation. We have now set the target at 2020. We are on track to achieve that target. The last one that is to be updated, this is the two. These are the two, yes. We are going to go deeper into that through the presentation from the different business areas. The first business area that is coming on stage will be alumina, Bauxite Alumina with Silvio Porto from Brazil. Please, Silvio.
Thank you. Hello, good afternoon, or good morning, everyone. I have the ambition to present to you the better than ever through operational excellence in bauxite and alumina. Let's go back to the beginning of the fully integrated Hydro alumina, you know, value chain. Here we see Paragominas, which our bauxite mining. And then you can see that we've been achieve year-over-year, especially the last two years, you know, achieving exceeding the nameplate capacity. We are very happy to say that from this very strong 2016, we were able to improve by 3% in 2017.
We are in a rhythm of 1.4, and then that has to do with the implementation of the bauxite's business system, which is help us to improve the equipment condition and also the operator standard and the process control. In our mining, it's very important for us to have a very robust tailing systems. We start this year the new tailing system, which was an investment of BRL 600 million, was done in, on time and on budget. That will help us to improve our safety and reduce the footprint because we'll be able to concentrate more tailings per cubic meter. It's important to us as well as the rehabilitation, as mentioned by Svein Richard. We are on track.
This year, we renew the Biodiversity Research Consortium between Norway and Brazil, that will set the ground for us to really develop a state-of-the-art approach for mining rehabilitation. We are pleased to say that we are on track to close the gap by 2020. When it comes to another source of bauxite, MRN is very important to us, you know, because that secures a strong relative cost for us and a position and with high quality of bauxite. Also when you talk to creeping the bottleneck, the alumina refinery, we also have a long position for us that will be very important to have a second source of bauxite. Of course, MRN needs to have more improvements in terms of developing new mining. That is high on the agenda of the shareholders.
This year also, MRN has reduced their production because they face some problems with their tailing systems. For next year, we are going to continue to work very, very, very strongly with the MRN. There is no impact for us because we have a long position in MRN for Alunorte. For our external customers, we also are working very diligent with them to mitigate any effect. We also strengthen the organization and be in the organization to continue to work closely to MRN organization and the other shareholders. Well, when it comes to Alunorte, we have said that we're going to debottleneck up to 7 million tons per year. The last two years in Alunorte has been very good, stable operation.
We are in a rhythm of 6.3, with a little more above the nameplate capacity of the plant. The same approach you have paid to mining, you are paying for the Alunorte. We implemented the business system, which give us a ground to improve the equipment effectiveness and the process stability. That's very important in a refinery. We recognize to achieve 7.0, you need to debottleneck the plant while we are keeping a very high quality of the alumina, which has been much appreciated by our customers, primary customers. When you operate alumina refinery, it's very important also to have a very robust system to store the red mud. We have implemented the state-of-the-art dry disposal bauxite residue using filtration, press filtration. This is a very well done process.
We still have some debottleneck to do, but it allow us to have much more, you know, condition to store the red mud and reduce the footprint while we are reduce our cost. For refinery, when it comes to energy, is a crucial for our business. You see, because we have a pro-production stability, in 2017, we able to reduce the energy consumption. We have ambition to continue to improve our boilers' efficiency, and that will comes by 2020. We are aiming to achieve 7.6 gigajoule per metric tons, which is a very, very good number and is a reference for the industry. While you, we are looking to increase or improve our energy metrics.
We have our fuel oil. We are aiming to change for gas in the calcination operation. Well, once you have done all the bauxite and the alumina, now it's time to get our strategy, you know? Our strategy is very simple. It's just basically move all the old contracts linked to LME to be linked to PAX. We are improving our margin by doing that. Also we are looking for all the contracts to have a CIF instead of FOB. We are dealing direct with the end customer instead of having a third-party trader, which give a much more powerful situation during the contracts. Of course, everything is applied for alumina and applied for the bauxite. We are also strengthening our position in hydrate.
That's a very good market. hydrate has much less volatility in price, which secures a good margin for us. We are entering the U.S. market with new long-term sale contract established in the United States. We already have a customer in Japan. We are... This 2017 was a record of shipment for United States and Japan, which equates to around 800,000 metric tons alumina equivalent. Two years ago, more or less, we have established our commercial company in China. That has the aim to give us more market intelligence. Today, we are taking advantage of the price arbitrage and understand better the move between inside of China and outside of China, and have established a warehouse which give it a lot of flexibility.
We have this year shipped around 600,000 metric tons of the imported alumina to China, which is a excellent number. We are very happy to see that our developments in terms of a percentage of the contracts in the linked to the facts is growing, and you're growing up to 2020 as high as 85%. Of course, we've done everything very well in the production. We did our homework to reduce cost, get stability, get our market strategy in place. Now we are very pleased to say that we are ahead of the original plan for our improvement process, improvement program.
You can see that the main categories on the operational cost, process improvements, and the alumina hydrate margin has done for us the possibility to every year to meet and exceed the original plan. Such a way, we are very pleased to say that we are lifting our 2019 target from NOK 1 billion up to NOK 1.3 billion. Which is we are sure from bauxite and alumina that we are supporting Hydro ambition to be Better Bigger Greener. Thank you. Now, I will invite to be on the stage, Hilde from Primary Metal. Hilde, please.
Thank you, Silvio. I really appreciate your good quality alumina into the Primary Metal business. Good afternoon to all of you. The strategic priorities of Primary Metal stays the same as last year. It's very much about Better Bigger Greener. Talking about Better, we have a long history of improvement efforts in Primary Metal. In the period from 2010 to 2016, we realized NOK 3 billion in real terms in improvements in the smelters. That has strengthened our relative position, but we have to continue our improvement efforts. Right now, we are half the way into the new improvement program, which is about NOK 1 billion to be realized in 2019 compared to 2015.
We are, as we have communicated, in our quarterly reporting, we are slightly behind the speed in for 2017. The major shortfall is relating to Albras. I feel quite comfortable that we will be able to deliver the next NOK 500 million in 2018 and 2019 to achieve the target of NOK 1 billion in 2019. Talking about Albras. Albras is our Brazilian smelter. It's a joint venture with the Japanese consortium, Nippon Amazon Aluminum Co. Ltd. Already, last year, we experienced some integrity issues on critical equipment, such as the rectifier capacity, the also relating to our pot tending machines, as well as some issues relating to the carbon facility.
That was the reason why we reduced amperage this year to relieve high rectifier load and to stabilize the operation. We are now well into planning for a new rectifier, and we are doing major upgrade on our carbon plant, as well as major overhaul to have pot tending machines in place and reliable. Albras is a good plant. It represent 20% of our electrolysis capacity. I believe there is still a lot of potential in Albras once we fix the integrity issues. Technology development is a very important enabler for our improvements going forward. Now we are very excited with having soon the first metal from the Karmøy technology pilot. We will demonstrate our technology lead when it comes to produce with the lowest energy consumption in the world, with the lowest footprint.
We are also very excited about the pilot in the sense that it comes with a lot of spin-offs to existing smelters. We have a creep program, which is about squeezing 200,000 tons more out of our existing plants. The spin-offs from the technology pilot will be important enabler for doing so. We are well into the program. At the end of this year, we would have realized 34,000 tons more than we had in 2014. Slightly behind schedule also here because of Albras. The creep is very important in the sense of our productivity gains in the existing smelters, as well as getting the unit cost per ton down in the smelters.
We have said that in order to be able to take out more capacity from the plants, we have to do some investments. For the first 100,000 tons, we have indicated that we need roughly $1,000 per ton for this additional capacity. That is quite a competitive cost if you compare it in the global context. We are continuing our path towards the 200,000 tons, but every step we take has to be has to have a positive business case going forward. Better is not only about cost, it's about the way we go to market. We are driving continuously innovations and recapitalizing on our competencies in order to further strengthen our position in the market.
We are working with the most advanced customers in order to continuously high grade our portfolio, getting a higher margin on the products that we deliver above ingot. Also targeting the volume towards high growth segments. Right now, we are very excited about the automotive segment that several of the speakers have talked about. In particular, the electric car is driving more and more aluminum in use in the car, moving from the traditional motor block to more structural components, like I illustrate here, as an example, the steering knuckle in the car, also more and more aluminum in the whole body of the car.
We have traditionally delivered a lot of volume into the Automotive segment relating to the foundry alloys. Now we are also increasing volume in extruded products as well as sheet ingots because we want to capitalize on the growth in this particular segment. We're not only growing and getting bigger in terms of electrolysis volume, we would like to also to grow in the recycling business. We have heard also that being talked about this morning. The more and more aluminum is in use, the more and more scrap is coming back, the more and more aluminum is coming back. That's a good characteristics of aluminum, that it can be recycled without losing its characteristics. We, in primary, want to position ourselves for further growth in this.
We have invested over the last few years in advanced sorting and pile, and combining that with our competencies on the furnace side, we should be able to convert post-consumed scrap into a good profitable business and a good, and a good extruded billet. That is also why we are targeting to increase our post-consumed scrap into the remelters year on year, and we have a target of 150,000 tons by 2020 compared to 2014. With that target, we are also increasing our production from the remelters being used in scrap, which we call recycle-friendly alloys.
At this point in time, we are already at more than 50% producing recycle-friendly alloys from our remelters in Europe. That is also why we're so exciting today that we have launched the 75 R, which is a demonstration that we, with our new technologies, with our facilities, that we are able to go to the market with a product that is based on 75% post-consumed scrap, and to have that as an offer in the market where customers are more and more looking for their footprint and to have solid, sustainable solutions in their products. I'm questioning in the organization, what more can we do? What more can we do in order to continue improve primary metal?
We talk a lot about the Karmøy technology pilot coming with a new novel electrolysis technology. The Karmøy technology for us is also the starting of our journey when it comes to digitalization. We are now going to produce metal from this giant of a cell, and to illustrate that's like balancing an elephant on the finger. It's really a challenging balancing act. With the pilot, we will now introduce a new novel process control system, which we will be the first step towards an autonomous cell. Much more automation with much more soft sensor technology being able to control this giant of a pot.
We are also, as Sandy Card indicating, we have established a digital twin, which will support us in order to be able to operate that cell being in control and capable, with the lowest energy consumption in the world. With these new systems and with this new technology, we also see that the operator's role will change. The operator will act much more on signals from the process itself.
The operator will focus much more now on doing measurements, doing data collection to bring back in the process. The interesting thing also that we will use much more of the data we already have in terms of more advanced analytics in order to understand more about how the pot is trending in order to be able to bring it back where it should be and thus lifting performance in that way. The good thing about this is that once tested in the pilot, we should be able to expand also this way of working to the existing centers. I see that this will be an important enabler for our future improvement programs being able to lift performance in using these new novel technologies. We are also testing other digital initiatives in Primary these days.
Last month, we tested a robot doing our financial closing at one of the plants, with a number of underlying systems feeding into the robot. We are also now testing using machine learning in terms of cathode failure prediction so that we can extend the lifetime of the pot, and also hopefully reduce CapEx. We are at this moment in time also testing out more condition monitoring on the critical equipment so that we can predict our maintenance better and hopefully also reduce maintenance costs. By these examples, we are well on the way to find new improvement areas. I sincerely hope that this will be an important part of our next improvement program beyond the NOK 1 billion that we're working on now. Digitalization will be a key enabler for that going forward.
In summary, new technology, more innovation, and digitalization will strengthen our competitive position further. At the end of the day, all this will support our overall Better Bigger Greener agenda. Thank you. I will invite my good colleague, Kjetil Ebbesberg, Head of Rolled Products, for the next presentation.
Thank you, Hilde. Yeah, likewise, thank you also for the very good quality sheeting that we get from you. Good afternoon, everyone. I would like to give you a short update on the strategic direction of Rolled Products. Starting with our portfolio high grading. This is for us, we are operating in these product segments, in automotive, foil, beverage can, lithography, and special products. Special products represents 30% of the business in Rolled Products and consists really of a lot of different sub-segments. 8 of 10 of those sub-segments are strategic focus areas for us to grow further and to grow stronger because of attractive margin opportunities. Within each of these other product areas, we are high grading. We are turning the product portfolio within Automotive towards the most attractive Automotive products.
Same with the other, within the other products groups. High grading for us is also shifting capacity and volumes from one group to another group. Obviously then there are different growth and attractiveness availabilities in these product segments, which we will utilize in that respect. Ranging from growth level of more than 10% globally on the automotive side in, within Rolled Products, to a negative growth on Lithography because of declining use of printed materials. Focus for us is to be number one or number two in the areas where we want to be strategically. Either we are there already or we are growing as we speak to become number one or number two, either in Europe or in some cases on a global basis.
For automotive, successful ramp-up of our AL3 plant is a focus area. Foil is about, for instance, increasing our business with technical foil, battery foil as one example. It's also for us to strengthen our position on the thin gauge liquid packaging foil, where we are number one globally today. Beverage can, introducing now the UBC, used beverage can recycling. It's an important, high grading, differentiator in this business, offering then tolling opportunities for customers and closed loop, possibilities, and enabling us also to grow here into a number two position in Europe. What is common for all, one thing is to move to products which offers good gross margins, but we also want those, opportunities to lead to a good bottom line and then, operational efficiency, operational excellence is also key.
For most of these products in Germany, we are also dependent on high-performing Alunorf plant, which is feeding all products in basically all finishing lines in Germany with good material. Looking at the result in 2017, as you know, as I also know very well, it's been really a demanding year with more than NOK 400 million decline in profit compared to 2016. It's consisting of mainly four challenging areas for us. Two of them are relating to ongoing operations in Hamburg and Alunorf, and two relating to the new growth projects of UBC and AL3. The gap or the drop of NOK 260 million is really even bigger than it's displayed here.
In our plans, we were planning to add profit from these areas and not Just stay flat. The challenges here are even bigger than what is illustrated in this waterfall. On Alunorte, we are stable now in the operations. We had some problems starting with specific issues in the beginning of the year. The hot mill is now stabilized. It's not any longer a bottleneck. We're working now to bring the cold mills up to full speed to enable the hot mill capacity utilization to the full. Hamburg has been stable, performing on plan level already for several months. When it comes to AL3 and UBC, I will come back to that on separate slides.
In addition, we had negative currency effects this year because of a stronger euro, and also in the standard business, in the standard GE business, there has been a decline in margins negatively impacting us, plus inflation on the cost basis. Looking at the UBC, the project we started ramping up last year. During the ramp-up phase, we saw that it was not possible to bring this plant to full speed according to the design of the plant. In the hot part, we got overheat problems, partly due to a lot of accumulation of dust in the system, which led to a conclusion that we needed to make some major modifications to the line to de-bottleneck and have the full line operating at the designed capacity. That took some time.
We implemented the 1st part of that modification program in April this year. The 2nd phase was implemented in October, just recently. 1st of November, we started up with a new modified plant, with a new heat exchanger, significantly bigger, than the existing one, operating in the series to the existing one, with a new hot conveyor and also modifications on the furnace. September. We are really on a good track to... of a contribution to Hydro Zero CO2... line number 3. On time. We had a very ambitious... Here means then that every component... The old lines, AL1, AL2... than the new lines. However, obviously I'm operating double line, double... Next, this year we are approximately 10% behind in terms of volume on the body in white sales ramp-up. Next year, we will be 5% behind the original plan, and then on track from 2019 onwards.
Optimize the bottom line. This illustration here, these pie charts, illustrates then what we achieve or mean by high-grading. Looking at Automotive represented in 2010, 11% of the output in Rolled Products. By 2021, this will be more than doubled in relative terms. Twenty-four percent of the output will be towards Automotive products, by just to mention two examples. Finally, obviously the difficult 2017 has also led to impact on the better Rolled Products. As you see here, unfortunately 2017 was a big setback, despite the fact that on our other cost improvement efforts, we are ahead of schedule.
On Saturday, Hydro turns 112 years. There are many reasons why we have come so far, still young at heart and stronger than ever.
I believe that the main reasons why we have been so good at taking opportunities to grow and expand is that we always have been thinking long-term, have acted responsible, and have been able to renew ourself when there is a need for that. In Hydro, we work to create viable societies through the products we develop, and we aim for aluminum to be part of the solution going forward within the frame set by the environmental limits and the challenge with the climate. Population growth, consumption growth, urbanization, and pollution will lead to resource depletion and over time, resource scarcity. In addition, we all know about the climate challenge that will affect all of us. We think that technology and technology solutions, new innovations, will be part of the solution to this, and we will aspire to strengthen aluminum as part of the solution.
We as Hydro has special strengths, both through the very good footprint that we have compared to peers when it comes to climate footprint, but also the technology knowledge and also the innovation power in the company. Responsibility has been part of Hydro's DNA for 112 years, from the very start. To the left, you see Rjukan, where it all started, based on the innovation, based on the waterfalls. We built the infrastructure. We built the local welfare society. To the right, you see what we're doing now in Pará. You see some of the same elements, but also new things coming in. There's a red thread from Rjukan to Pará. 112 years of industrial development has taught us that both business and society benefit mutually from responsible conduct and interaction.
If you're in there for the long, as we are, if you're in there for the long, if you believe that CSR, if you believe that human rights, thorough planning, and stakeholder dialogue is something that you call hindrances, obstacles, or a cost, then I think it's very misunderstood. I think Hydro, we view responsible conduct as an investment to save cost, to save risk, to save reputation, and deliver value to the stakeholders. In September 2012, United Nations adopted the 2013 sustainability goals. Seventeen goals set to end poverty, protect the planet, and ensure prosperity for all. For the goals to be reached, the UN also clearly said, this really requires efforts from governments, from business, and from civil society. For us, the 17 goals represent the framework when we discuss sustainability going forward.
Kofi Annan said, What is utopian is the notion that poverty can be overcome without the active engagement of business. It is so true. Even if there are 17 goals, and we will report on all of them, we have selected 8 that where we will be more specific on our strategic goals, and we will report on it as we go forward. Let me put it into three different dimensions: improving our footprint, making a positive difference, and driving innovation. As you have heard through the full day, we are a fully integrated aluminum company. That gives special advantages and special responsibilities. Because we have this role, we want really to try to make this responsibility and sustainability a competitive advantage for us. Improving our footprint is about minimizing the external effects and maximizing the benefits of the products and processes.
Making a positive difference is about creating win-win situations because business thrives from stable and predictable environments. Driving innovation by using our core competencies to create solutions to problems and really, as I said before, show that technology and products can be part of the solution. Let me first walk three through the improving our footprint. Climate, a big challenge. If you look to the graph to the left there, you see the emissions from producing aluminum based on coal or based on gas or hydropower. To the left, you see the footprint when it comes to CO2 per ton aluminum by producing it from coal. At the bottom there, you have probably the green is the emissions from the direct electrolysis. That's roughly 2 tons per ton CO2, and the rest is from then the coal-fired power stations.
To the right, you see when you produce aluminium based on hydropower, it is approximately 2 or less, only the electrolysis. Of course, this is a big difference of the footprint aluminium from the power source. The dilemma and the climate paradox is that we see that over the last 15 years, there's been almost no growth in aluminium produced from hydropower, while there's been a substantial growth based on coal in China and India. The forecast is that this will continue. This is, of course, a dilemma for us in the industry, and it's a dilemma long term if we want to contribute to reduced climate emissions. Of course, based on the Paris Agreement, governments will act. They will gradually move towards tighter regulations and less emissions. Customers will act.
They will ask for products with less footprint, that's also why we respond as we do today with the green products. Hydro and companies need to act, and that's the reason why we, in 2013, established the most ambitious strategy for climate reductions. We said that by 2020, we should be climate neutral from a life cycle perspective, taking into account the emissions from production and the benefits from the use phase and from recycling. Even though we have had a quite substantial expansion of our business over the last years, we see that we have more or less the same net emissions as we had in 2012, and this will also include Sapa. We see that we will still have the ambitions to reach the climate neutral situation by 2020. It's many measures we will take to get there.
Another important thing when it comes to footprint is really to strengthen the rehabilitation in Paragominas. To the right here, you see the mining cycle, removing the earth and going through the mining, and then forest rehabilitation. As Svein Richard said, we have now an updated target, which is a one-to-one rehabilitation within two years after mining. The updated definition takes into account the nature of the mining cycle and the timeline is necessary to ensure quality rehabilitation to restore biodiversity. It is better to spend 1 extra year to ensure proper rehabilitation than to replant quickly but with inadequate results. This is about the forest. Making a positive difference. Why is this so important? I here want to quote the World Business Council for Sustainable Development.
Business cannot succeed in societies that fail. In one sentence, that captures it all. Education, work, growth, and strong institutional institutions are fundamental drivers for long-term development. We really need to work on this to reduce risk and create basis for long-term sustainable operations, because this will vary from country to country. What I will show you now is some example from Brazil, how we address this there. Make some comments regarding education and strong institutions. To improve education, we will strengthen our efforts to promote, for instance, teacher training, infrastructure, and other means to secure quality. We will target the whole spectrum from basic education to technical training and university-level degrees. We work with partners to have more impact.
An example is the relationship and the partnership with Biodiversity Research Consortium, where we together with the University of Oslo and three universities in Pará, we have engaged more than 100 now master students, PhD candidates, and experts to work on reforestation and biodiversity in the Amazon. Strong communities ultimately results in a good foundation for doing business long term. We promote capacity building on good governance, for instance, civil society organizations. To driving innovation, I will split that in three. First is about energy, the second is about the use phase, the last is about recycling. Energy represent approximately 50% of the cash costs for producing aluminum from the bauxite mine to the metal. Energy is the main source for CO2 emissions.
That means that it is so important for us to position ourselves right, going forward, to reduce cost and reduce the CO2 footprint. We will continue to work on greener competitive sourcing, power sourcing, as well as greener industrial processes and electrification. We want to be a front runner here, seeking new options. We all know that the power system is really in really a big change in Europe, but also other places. Solar and wind have had a dramatic reduction in cost based on technology, construction cost, but also lower financial cost. With these sources also comes more volatility and risk in the whole power system. We know that storage will be more important, both in the power system, in transport, and industrial processes.
We are now looking into different aspects of the new power system, the new, how it can affect us, looking both for improvements in our sourcing, industrial processes, and electrification. As you know, we have entered into some PPAs based on wind in the Nordic system. We are also working on digitalization and Energy 4.0 to see how we can capture value from that. We also recently invested in a marine battery company called Corvus, based in Canada, but which is serving mainly the Norwegian market for ferries and ships. We think that this will give us an important learning, but it's also something where we see a business potential in itself going forward.
When it comes to use phase, I think we have already heard several good examples today. I just want to remind you about the car, electric vehicle that Egil talked about, also the buildings that Extruded Solutions is contributing to, is very good when it comes to the effects on the energy consumption, and they will save CO2 emissions in the end. Recycling is becoming more and more important. As you know, being integrated and having the ambitions we have when it comes to being climate neutral, we want to grow in this area. We have set an ambition to grow from currently 150,000 tons to 250,000 ton post-consumer scrap by 2020, given that it is profitable.
It gives climate benefits, but it also gives margin, positive effects. I think we also, longer term, and it was raised a question also regarding China, of course, post-consumption scrap will be very important to get in the right way going forward from both a climate perspective, but also from a business perspective. We are part of the Aluminium Stewardship Initiative, which is a multi-stakeholder initiative, producers, users, and NGOs. The aim is to establish standards to improve sustainability. You here see some of the companies that are involved, and last year, EGA in Middle East and also two Chinese companies joined, and Apple. The third-party certification will start 2018 after five years of consultation.
In certain areas, Hydro wants to set even higher benchmark. I now want to leave the floor to Erik Fossum, Head of Commercial in Primary Metal, to talk about the green billet. Please, Erik.
Thank you, Arvid. It's very nice for me to be here today and finish this day on a high note, talking a little bit about our two new products, Hydro REDUXA 4.0 and Hydro CIRCAL 75R, which we see on the screen behind me here. We are today launching these products to our customers and would like to share some details with you. As you know, we as a company have the world's lowest carbon footprint on our primary production, and we're also the only fully integrated aluminum company with an extensive recycling operation. The first brand, Hydro 4.0, is based on metal from our primary smelters in Norway with a maximum carbon emission content on 4 kg per kg aluminum.
The other brand, 75R, it will contain more than 75% post-consumer scrap, which will give it a very low carbon footprint. In terms of timing, we have followed the market of low-carbon footprint aluminum for some time. Given how the market has been maturing, we think now is the right time to launch our products. We believe that we are very early in the cycle for low-carbon footprint, and we think launching now gives us an excellent opportunity to shape the market going forward. What is unique about our products? Starting first with Hydro 4.0. With Hydro 4.0, we will certify by a renowned external certifier, being DNV GL, the carbon content of the product all the way from the bauxite mine to the finished cast house products.
We'll certify this according to the ISO 14064 standard, which specify greenhouse gas emissions. We will be the only company in the world having this certification. We will by this create a lighthouse brand that we think will define the industry benchmark and the standards that customers will ask for in the future. This will even more be the case for Hydro 75R. We will have a high standard product based on post-consumer recycled scrap more than any other product industry, where also the content of post-consumer scrap will be certified by DNV GL. A little bit to maybe what a lot of you here today are interested in, how will these products gain traction in the market, and what will be the financial effects for Hydro?
Again, we have been waiting to launch these products, both because we have seen the market as so far as a little bit immature, and also because we have spent some time truly certifying this through the value chain. We still see the total demand for this product as being in early starting phase, but it will develop over time, and we think our contribution greatly will support this development. In terms of financial effects, we will charge a premium on both the products. The premium will be higher for 75R than it will be for 4.0. The reason for this is that 75R is more scarce in terms of production capacity and also have somewhat higher production costs.
At the launch, 75R will be delivered from Marklevåg Recycling Plant, but this is scalable to other plants if demand should require so. In terms of market segments, we see this will target building construction, automotive, and the packaging industry, where we see demand is coming from. Again, we strongly believe in our new low carbon footprints, and I also urge you to pick up one of these leaflets or two of these leaflets, one for each product on the way out. They're on the desk outside there. They're very short to read and give you a good insight into products we are launching. Thank you very much.
Thank you, Erik. Then to end this, why responsible? It's simply because it's the right thing to do, and it's based and founded in our values. I will start or I will end where I started. It is in our DNA to be a good citizen, to run sustainable businesses, to work in an engaged way with all stakeholders, to create win-win for company, investors, customers, partners, and society. That's Hydro. Thank you.
Thank you, Arvid. It's time for the last Q&A of the day. I would like to invite then Erik, Hilde, Silvio, and Kjetil to come back on stage. Again, microphones are coming around. Please state your name and the company.
[Brant Hos]-- Oh.
Hmm?
[Brant Hos], Morgan Stanley. Question on bauxite and alumina. You're running the equipment above nameplate currently, and we've seen the maintenance CapEx creep up a bit. Can the equipment actually sustain current production volumes, or is there a risk that you're overstretching the equipment?
Could you repeat? I did not really...
Is there a risk that you're overstretching the equipment?
Ah.
Given that you're currently running above nameplate capacity?
I think the reason we are running above the nameplate capacity is because we have a very integrated manufacturing system that takes advantage of a very good reliability system which is ensure that equipment has a very good, you know, performance. So that you eliminate the possibility to overstretch the equipment. Then are using a lot of operational excellence together with the technical people, all three working together. The sum of the three give us much more than three, which is above the nameplate capacity result.
Hi, Fraser Jamieson from JP Morgan. A question I suspect you might be reluctant to answer, but I'll ask it anyway. Can you give us some sense of the kind of premiums that you are charging and hopeful of getting on 4.0 and 75R, please?
Yeah. As you stated, that's a discussion that we're very careful taking in this forum. Again, we will charge a premium on them. You know, if I start to discuss premiums here, I will almost starting this discussing with the customers on stage, and that's not the best forum to do that in. There will be premium. The premium for us, it will be, you know, I would say in relation to the extrusion ingot premium, which is the market we'll first enter into, will be for 75R, fairly significant. It will not create a significant difference on Hydro bottom line, but it will be a significant upcharge. For Hydro 4.0, more adapted to the total competitive situation, it will be lower. That is also something that we will negotiate over time with our customers.
Jason Fairclough with Bank of America Merrill Lynch. Could you talk a little bit about the any risks that you see in the ramp-up of Karmøy? You know, how should we think about that? Then again, beyond that, what are the the risks on sort of extrapolating that technology to your existing production?
Well, when it comes to the technology that is now going to be installed in, at the pilot, that has been tested in 5, 6 cells in our Årdal test center for 6- 7 years. The risk involved is now that we should demonstrate that in full industrial scale with 60 cells, not 5- 6 cells. We have the best trained operators in the whole system, which has been trained in Årdal as well as some of the other plants. The risk is manageable in the sense that we know how to operate these cells.
When it comes to the scale to implement this in the other smelters, I think we said last capital markets day that this is not one technology. The pilot is composed of 24 different technology elements. It's about the cathode, it's about the anode, it's about the control system. There are different technologies elements that could be introduced on the existing. The size of the pot cannot be put into the existing as measured simply because the buildings are not designed for that. The size of the pot is so large. We will definitely use a number of the technology elements to be tailor-made to each of the smelters, and that's the roadmap that we're working on right now.
Hi, it's Johannes, Handelsbanken. I appreciate you're giving us a lot of details on the company's specific improvements for 2018 and 2019. Could you though speak a little bit about underlying cost inflation on the input materials? It would be in particular interesting to hear from you, Silvio and Hilde, what you see in terms of underlying cost inflation and if you can give us some sort of indications of unit cost year-over-year. Thanks.
Could you start, Silvio?
Yeah. Just make sure I understood your question about the cost input for the raw material and things like that.
Yeah. Cost inflation.
Yeah.
From production.
Exactly. We, as you know, we are in the bauxite and alumina, especially on the alumina side. We have enjoying, you know, a much higher cost on the soda, caustic soda has increase as a result of supply-demand, very tight supply-demand. That was one of the elements you can see. The other one is the fuel oil as the petroleum price has appreciated, and that's the two elements that comes with implication on cost for the alumina. Also the bauxite. Sometimes the bauxite costs can be a little higher as you, we take bauxite, you know, at market price, not at a cost from the plant. That's so are the three elements that we can see in influence our cash cost for the alumina.
What does it mean really in? I understand it's sort of very difficult to answer, but if you can give us any kind of sense for the cash cost per produced alumina in Brazil, if you would look into next year versus 2017 levels?
Yeah. We can say that that has an implication or about 10% of our normal cash cost increase. As you are not really have the final number, I cannot anticipate to you at this stage which number you're going to be because it is internal information.
Okay. Thank you.
If I could just make a comment, Johannes. If you look in the third quarter report that we gave out, a month or two ago, you will find a very detailed justification for the cost development for all the volunteers, for the environment as well.
Yeah.
is that the answer?
Read it yourself.
My comment would be that we are, in terms of alumina, in terms of the carbon cost, I mean, we are in paying market prices. That's the same cost push that the others are experiencing. What we can influence is really to fight inflation with the improvements in the improvement program in order to sustain our margins.
Yeah.
You can read the details.
Yeah.
-report.
Sorry for the alumina cost.
Hi. Hi, Fraser again from JP Morgan. A question for Kjetil around the project. AL3 and UBC, both to varying degrees have gone wrong. We've had explanations about what has gone wrong and what you're doing to fix that. Can you maybe talk a bit about, you know, looking, reviewing it internally, you know, what went wrong from a kind of management oversight perspective to allow these mistakes in terms of design, et cetera, to get through? And what has been done to make sure that doesn't happen again? Thanks.
Yeah. It hasn't gone entirely wrong. As I said, when it comes to the AL3, it was delivered within the investment costs, good safety and good start. The qualification process has been more demanding than what we planned for. We could have planned for a more longer term. We didn't do that. Instead, we made sure that we had a capacity available in the old lines to be able to deliver on the commitments in case we needed more time to qualify. From that perspective, I think that things are managed quite okay. It's been more demanding because of partly new technology. This is the newest technology put into a line. We have a setup which is unique.
We have a completely independent preparation line where you're preparing the coil for the final, you know, performance of a press shop, which is unique, and no one else has that as a separate line. Which enables us to deliver in the future more advanced design solutions to customers, to OEMs. Given that this new technology also, we don't have experience with it before you start operating it. In hindsight, we should have given us more time to understand, to operate the technology before we started the actual qualification process. That is at least one learning. There has not been significantly sort of wrong decisions in terms of the equipment installed.
On the UBC side, that's a little bit different story because that is also for Hydro a brand new technology and a process that we never operated before. There we made mistakes in terms of the equipment installed. As I said, the line couldn't operate at more than maybe a little bit more than half capacity on the end part of the line, which is the hot part, because of problems of overheating. In Hydro, safety always comes first, so we cannot risk anything by running a line too hot. We realized that we needed to make equipment modifications.
And obviously there has been a lot of discussion with the suppliers who we drew up the specification and the performance criteria, and thought that we got what we ordered in terms of performance. Okay, that's another story. There's a lot of learning here in terms of making sure that you get the right equipment in a complicated new line like that, from day one. If you start, if you need to make a modification like that, it easily takes one year. You need to design it again, you need to order it, and you need to prepare and make the components, and then you need to install it. I would say also we could have been even better prepared in terms of the competence of the staffing.
Of course, we cannot train people without having the equipment and the line in place. We could have maybe been better in finding people in the market with more at least close up to that type of tech, process, experience. We did that, but we could have done it even better.
Okay. Thank you.
Morten Normann, Carnegie. You have a new ambitious alumina production target now for 2021, 7 million tons. How about a target you set at last Capital Markets Day, 6.6 for 2018? Will you be able to reach that?
We decided to upgrade that to 7.0, which is what much sound pathway, because 6.6 is around the intermediate path. It was better, we decided to debottleneck up to 7.0.
How about the possibility to reach 6.6 in 2018?
No, that will be, it'll be close to 6.6, but it will not be there. On the average, it'll be much closer, but you're not really fully achieve the 6.6.
Okay. Any further questions? If there seems to be no further questions, we will end this-
I was actually surprised that no one asked about margins in Automotive. They were tired of hearing that you're not commenting upon it, but I was actually willing to say something about that.
Okay.
I can tell you that. We are not obviously commenting on margins. That would not be good for our bottom line. I can tell you that the margins we are expecting and also being demonstrated on automotive products in Rolled Products would be in the area of 20%- 30% better than the average of the other products. Given that we are operating, you know, efficient production. One thing is achieving good gross margin, but then you need to deliver also effective, cost on producing those products. That is sort of the scope that we're heading for. Thank you.
We end this session. Thank you. It's time to move over to the last agenda point of this day. I would now like to invite Svein Richard back on stage yet again for some final words.
Thank you very much, Stian. Now we are coming to the end of the day. I hope you have got a good impression of how we are lifting performance and driving value creation in our company. I'm happy that Erik didn't negotiate the premiums of our new products today. When Hilde is talking about pots in the electrolyzers, that is the electrolyzer cells she is talking about. I think there are a lot of educational issues also that we will bring forward. With regard to priorities going forward, we will, as I said earlier, maintain a strong balance sheet. We are in a cyclical industry, and we will make sure that we can navigate also through more difficult times.
Although we see now that there are quite decent prices on our products and the demand is good. We will continue to improve, and there are several initiatives along the whole value chain to lift our performance, to reduce cost upstream and create even more value downstream, and also to fix the issues that we have discussed. I hope you see that we are quite transparent also with regard to the challenges we have along the value chain in the company. Lastly, we will continue to make sure that the integration of our new business area, Extruded Solutions, will continue as a successful part of the company, and also that we will take full benefit of being a fully integrated aluminum company.
That is again, the main priorities for us for the coming year and for the future. Thank you very much for spending the whole day with us so far. Now we are inviting you for lunch. Thank you very much for your attention. Thank you.