Good day, welcome to the Norsk Hydro ASA Q3 presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Stian Hasle. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Hydro's Q3 2017 conference call. We will, as normal, start with a short introduction by President and CEO Svein Richard Brandtzæg, followed by a Q&A session, also joined by CFO Eivind Kallevik. For those of you that did not see this morning's webcast of the results presentation, it's available on hydro.com. With that, I'll leave the word to you, Svein Richard.
Thank you, Stian, good afternoon. Let me start with a brief overview of the key developments in the third quarter. Underlying EBIT for the third quarter was NOK 2.4 billion, down from NOK 2.9 billion in the second quarter. The main explanation for the lower result is higher raw material cost and negative currency effects in the quarter. The acquisition of Sapa was officially completed the 2nd of October, I'm very happy to see that the integration is progressing well and that Sapa again is delivering improved quarterly result compared to the same quarter last year. On the BETTER program, we are on track for the 2019 target of NOK 2.9 billion.
However, due to slower progress in both rolled products and primary metal, we do not expect to reach the 2017 target of NOK 500 million. The Karmøy Technology Pilot is running according to plan and is now 95% completed and is on schedule, on budget, and ready for the first metal in the fourth quarter of this year as planned. Finally, when it comes to the market side, there is a positive sentiment currently, and there have been announcement of Chinese closure during this third quarter. We reiterate our estimate of largely balanced global market for 2017 in line with what we said in the previous quarter. With that, ready for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is star one if you would like to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first question from Hjalmar Ahlberg with Kepler Cheuvreux. Please go ahead.
Hi, thank you. Maybe I'll first a question on Bauxite & Alumina. You said that costs are now a bit higher since you're running the tailing systems in parallel. Could you say how much the impact was in Q2, and what could be the benefit when you only run in one system, in the future?
Hi, Hjalmar. It's Eivind. The additional cost in Q3 over Q2 is roughly BRL 60 million or, say, around NOK 30 million additional kroner.
Okay, perfect. The raw material cost push, how much more do you think we will see in Q4 at current raw material prices in Bauxite & Alumina as well?
I think on the, on the caustic side, you should expect to see that coming up some 10%, compared to Q3. You should also expect some uptick in bauxite costs taken from MRN, based on the LME price formula that I indicated today. The way you have to go back and track what LME was in first quarter, second quarter of this year and fourth quarter last year and compare that to what was impacted on this quarter. You will see that it will be about it. Yeah. It's the best way to do it.
Thank you. Coming to the price levels, I mean, we are now, as you said on the conference call earlier, we're significant above cash costs. Do you see restarts outside China to compensate for this? What do you see in the short term happening in the alumina markets?
Well, in the alumina market, Hjalmar, I would say that there are still room for restart in China as they take note capacity. According to our information, this capacity will be available for restart, the same with a lot of the smelt costs that has been closed down beyond the supply side reform and also the Blue Sky initiative, that is developing further. This capacity that is going to be taken out, that has been taken out, can be restarted. Beside that, of course, there are probably also a capacity outside China that it will be evaluated for restart, but that depends on the position on the global cost.
I think, Hjalmar, if I can add, I mean, if you look outside China, there is, of course, the Alpart refinery in Jamaica, which was bought by a Chinese company just about a year ago. I think that's in the process of starting, and we should probably start to see the first shipments from that refinery, in the second half of this year, at least that's what they indicate.
Okay.
Other than that, there's really no capacity that can restart on a short-term notice. I think Rusal is talking about the Fria refinery in Guinea, and then obviously the Point Comfort refinery of Alcoa in the U.S., which may come at some point, but it will take a little bit of time, I think.
Yeah. How are, I mean, alumina buyers reacting to this? Are they delaying purchases, hoping for lower prices, or are they still volumes at this current alumina prices?
Well, I would be careful to speculate.
Yeah. Okay. Maybe on rolled products, you still have some operational issues. Looking a bit further like into 20 to 2019, you said that you will reach a higher capacity and full speed in automotive, but not full capacity. Will you reach a good profitability despite not being at full capacity? Do you need to be at full capacity before we can see the real profitability in this line, beyond 2019?
Hello?
We will take our next question from Felix Schlueter with Goldman Sachs. Please go ahead.
Hi. Thank you for taking my question. I had a question on the PAX prices regarding alumina. One of the best indices that we can follow from our side is the Metal Bulletin posted one. I was just wondering if there's a price differential on the price that you take from that, the last reading was $480, or if that's more or less a 1 for 1 move on the pricing that you get. Thank you. Hello?
Please stand by. We will attempt to reconnect our speakers. Mr. Havel, your line is live.
Hello? Can you hear us now?
I can. I don't know if it's up with my questions. Felix here from Goldman.
I t's Elvind. What I tried to say is that the PAX index at the moment is just around $479. If you have $480 on the flats or on the Metal Bulletin, that you're looking at, it is very close, at least at the moment.
Okay, thank you. Just 1 follow-up. I mean, we've been talking a lot about the price escalations this year, pet coke, anode prices, and caustic soda. My question is, if China, or some of the Chinese producers actually move and shut down capacity, would we, or is it fair to assume that some of these prices would actually reverse into next year, given that, you know, there should be a fall off in demand as well? Is a lot of the supply of those raw materials actually coming from China as well and affected by those closures? Thank you.
I think parts of the-- Is your question if they come back into the market or if they stay out? It's a little hard to hear. Sorry.
If, yeah. If primary production leaves the market, I mean, in my understanding, should allay some of the cost pressures as well. Is that correct?
Yeah, it all depends on how they shut down. If the shutdown is parallel, if you like, also the calciners, bringing the coke into the market, because that's part of what we've seen being done. It's not only about smelter capacity or alumina capacity. I mean, they're also taking up bauxite capacity. They're also taking up calcining capacity. They are restricting production in several other industries. Of course, if they leave that static and they take out more metal capacity, then that should be helpful to the market, if that happens.
Perfect. Great. Thank you very much.
As a reminder, it is star one, if you would like to ask a question. We will take our next question from Menno Sanderse with Morgan Stanley. Please go ahead.
Yes, thank you. One follow-up on the cost inflation, specifically on caustic soda. What caused the price to increase so much all of a sudden? Was it more supply that has been coming out of the market or better demand for caustic soda? I mean, why did none of the suppliers actually see this coming? The same actually for the anodes, did none of the suppliers see this coming, and is there any expansion in capacity near term? Thank you.
I think on the, on the caustic side, if I start with that, it's been clear, quite clear for some time that the demand for these products been relatively good, for quite some time, both from the alumina side, but also from, for instance, the pulp and paper side. What we've seen, quite a bit of during 2017 is capacity closures, very much driven by the mercury usage of mercury in some of the European production. This they have to shut down for environmental reasons at the latest in 2018. Some people are probably taking out capacity sooner rather than later. We see very little new build of capacity.
I think at least some of the suppliers I've talked to have been singing this song for quite some time, that this market will become very tight and there will be cost pressures. On the anode side, we've seen also some calciners in China have been taken out. In that sense, it's not that surprising at the moment that these prices go up. I think importantly is to remember that this is not a unique Hydro cost pressure. It's really pressuring the whole industry, lifting the cost curve everybody and then making it more sustainable the price level that we see today.
Just to follow up on that, is everyone exposed to these at the same level, or is there any way that you can avoid these cost pressures or be less exposed or just along the cost curve?
Well, we dig up to this question. It's depending very much on the contracts you have, of course, and there are also some consumption factors here. There are some companies that have, for example, on anode side, have quite high net anode consumption and other companies that have lower anode consumption. That differentiating factor is not substantial enough to lift in a way the cost curve dramatically. There are some differences between the companies. Again, it depends very much on what kind of contracts, if it's a long-term fixed contract, fixed price contract, whatever it is, that could influence on the cost levels for some of the companies on a temporary basis.
Okay, thank you very much.
As a reminder, it is star one if you would like to ask a question. We will take our next question from Lee McMillan with Clarksons Platou. Please go ahead.
Hi, everyone. Just one question from me. I was just curious how you're thinking about the end of the Indonesian bauxite ban and how long you think it'll take that tonnage to start coming back into the market and making a difference? Thanks.
Thanks, Lee, for the question about bauxite there, because that is something we of course are following carefully. It is, however, very difficult to say how this is going to spell out now because the ban has been lifted, and there are very limited amounts of bauxite coming out of Indonesia for the moment. The reason why they introduced the ban was that. I had a meeting also with the mining minister about that, by the way. They saw that there were very little value left in the country, and they wanted to have more investments related to their raw material and their resources. Very little infrastructure was built, and also the mining companies were doing the mining in a way which was not optimal seen from a country point of view.
They were targeting the lowest cost areas and not in a way doing the mining in a holistic way, which take care of the resources on the more sustainable basis. There was a good reason for them to stop export. Now they have introduced stronger environmental regulation, and it could be that this is also a limiting factor for the export going forward. It is difficult to say what is going to happen if there are companies that are willing to invest in Indonesia, whether it's alumina investments or in capacity for aluminum oxide production or aluminum metal production.
Remains to be seen. That is something the authorities really would like to see before they give in a way more power to the export of bauxite. I think it's difficult to predict, but I think there will be some bauxite exported, but maybe on more limited basis than what we have seen before.
Okay. Thank you.
As a reminder, it is star one if you would like to ask a question. We have no additional phone questions at this time.
Okay. As there seems to be no further questions, we can end this quarter's call. Thank you for joining us today. If you have any follow-up questions, please do not hesitate to contact us. Thank you, and have a nice evening.
Ladies and gentlemen, once again, this concludes today's call, and we thank you for your participation. You may now disconnect.