Welcome everyone to Hydro's 2nd quarter results. Welcome also to all of you following us on webcast this morning. The results will, as usual, be presented by our CEO, Svein Richard Brandtzæg, and CFO, Eivind Kallevik. Svein Richard?
Thank you, Inger. The underlying EBIT of the quarter was NOK 2.9 billion, up from 2.3 in the previous quarter. It was supported by higher metal prices, but also influenced by lower alumina prices and higher raw material costs. In addition to that, we are also seeing disappointing results in all products. Following the announcement of Hydro's acquisition of Alcoa's share in Sapa, we are very happy that Sapa is delivering a record result. The improvements continues in Sapa.
With regard to the better program, the improvement efforts, we are on track to deliver the NOK 500 million target this year, and also on track to deliver the NOK 2.9 billion target for 2019. At Karmøy, the technology pilot is being built, constructed, it moves according to plan, both with regard to timing and cost, and we are ready to start operations in the pilot in the 4th quarter of this year. On the market side, we maintain our view that market demand for 2017 will be around 4%-6% and market balance will be it will be largely balanced market with regard to supply and demand.
If you then take a look into the market from first to 2nd quarter, we saw about 10% higher demand in the 2nd quarter compared to the 1st quarter. 15% higher demand in China, and 6% higher demand outside China compared to the 1st quarter. This resulted in a global deficit in the world of about 500,000 tons of aluminum. If you take a comparison between the 2nd quarter this year and the 2nd quarter previous year, the demand increased with almost 6%, almost 8% higher demand in China, and about 3% higher demand outside China. The production capacity in that period from the 2nd quarter last year to the 2nd quarter this year increased with about 9%.
If you then take a look at the 12 months rolling average, which one is on the right side of this slide, we have a largely balanced market situation as it is now. If you take a closer look at the supply-demand balance, we see about 2%-3% growth outside China in demand, in supply. In demand, 2%-4% growth, so a bit higher demand growth than supply growth. In China, it's the opposite, 10%-12% supply growth and about 6%-8% demand growth as we expected this year. When we add everything together, we have a deficit outside China out of about 1.5 million tons, and a similar surplus in China. Again, largely balanced is what we expect out of this year.
If you then look at the metal price development, the market price, if you look at the realized price, increased from $1,757 to $1,902 per ton. Market price increased in the quarter from $1,856 to $1,915. Now we are trading around $1,920. If you then look at the premiums in the different markets, in the European market, premium went down from $147 per ton in the 1st quarter to $144 in the 2nd quarter, now trading around $137. In the U.S. market, the premiums reduced from $213 per ton down to $199 in the 2nd quarter, now trading around $160.
Also some strengthening of Norwegian kroner influenced all-in metal price in Norwegian kroner in total. When we look at the export of semis from China, we saw already in the beginning of the quarter in April, May, higher volumes compared to the 1st quarter. There are also indications that the June figures on export from China on semis will be higher. We saw in the beginning of 2016 that it was a negative arbitrage, also when we correct for VAT semis rebates in China. It was negative arbitrage in the beginning of 2016, but the window opened in the end of the year, and we see this window is still open with regard to arbitrage and higher prices outside China than in China.
It is not a big surprise when China has a surplus that there will be export to a market with deficit, and we expect that also to continue. We also saw in the 2nd quarter that all in all higher figures, higher export numbers than in the 1st quarter. On the alumina price, we saw reduction in the PAX index price from $340 to $296 per ton. It was weakening in the beginning of the quarter, and we hit the bottom in May at $272 per ton. Since then the prices has improved, now trading around $306 per ton. If you look at the bauxite import to China, again, Australia continues at high export levels and Guinea is coming up as a new source, as we also mentioned the previous quarter.
We saw in 2015 that volumes from Guinea represented about 7% of the total import to China. Now, in 2016, it was 35%, and this year it will be around 45%. The speed of export from Guinea to China will be around 30 million tons per year in 2017. If you then take a look at the total export-import balance of aluminum units in China, we see it is quite similar in total as the previous quarter, but higher import of bauxite, lower on alumina, quite stable on primary. It is stable on scrap import, but higher export of semis, as I also talked about previously. On the B&A program, I'm very happy that we are moving according to plan.
We will deliver the NOK 2.9 billion program in 2019, and also we are on track to deliver the NOK 500 million target for 2017. If you look at the different business areas, I would say that Bauxite & Alumina is well ahead of plan and will deliver the NOK 1 billion improvement program that they should contribute with already in 2017 instead of 2019. In Rolled Products, we are behind plan due to operational issues that I will come back to. Primary Metal, it is very much according to plan in most of the smelters. I would say all the smelters except for one is operating at a very good level, and the one smelter we are talking about is Albras.
There we have some additional efforts to lift maintenance level in some areas, especially in the crane area, and that will be done during the coming quarters. The other smelters are delivering better and better results. In all, we expect that primary metal will be behind target in the end of the year. In total, we will deliver what we have promised. If you then look into more details on the business areas and the alumina, as I mentioned, we had lower alumina prices in the quarter. They're going down from $309 to $295 per ton. Margins is going down due to this, but we also saw lower cost.
In fact, we had higher caustic soda consumption in the quarter due to higher reactive silica in the bauxite and also somewhat lower available alumina content in the bauxite that was used in the quarter. We had also lower sourcing cost of bauxite and alumina and also some benefit on the currency side. All in all, cost went down on the alumina side in the quarter. If you look at the smelting side, I think it is no surprise that we had somewhat higher cost due to higher alumina cost in the smelter area. The cost, all in, EBITDA cost, went up to $1,700 per ton from $1,675.
Also the margins went up to $475 per ton in the quarter due to the higher LME. If you then move over to downstream and Rolled Products , the operational issues result in 1% lower sales in the 2nd quarter compared to the 1st quarter. There is also a mix effect here with lower sales of litho, foil, and general engineering and higher sales of can. Can has a lower margin than the other products, so there is also a margin effect there. If you look into the 2nd quarter this year compared to the 2nd last year, also have similar figures. On volume, it was very much the same, but also here the mix effect, lower sales of litho, foil, general engineering.
Litho and foil is a higher margin products than what was compensated with in the can. Can body sheet was increased quite a lot during the quarter. If you compare with the first half year, 2017, with the first half year, 2016, we had 3% higher sales. If you look at yearly development in body in white, automotive body in white, we had 13% higher sales in the 2nd quarter this year compared to the 2nd quarter last year. If you then take a closer look at Rolled Products , it is disappointing results. It can be ascribed to issues in 3 areas.
One is the issues we have had in Hamburg and Alunorf in Germany, where we have had some startup problems after maintenance stop during this winter, which has influenced the results in the 2nd quarter. Most of these issues are now solved, but there are still an issue with the coal mill in Alunorf. We are working together with Novelis to solve these issues, but that will have some impact also in the 3rd quarter. If you look at then the second area, that is the ramp-up of the used beverage can line, there we have identified the problem, but it will take some time before the issues will be solved, and the target is to be on full speed on the UBC line in the end of the year. On the automotive line number 3, we are somewhat behind target.
It is moving in the right direction, but also there we have seen that it takes some more time to qualify the products in among our customers, and also some operational issues that we are now identifying and also solving. It will not be a positive contribution from automotive line 3 during this year. For me and the corporate management board, rolled products has a top priority. We take the situation very seriously, and we need to solve these issues as soon as possible. We have strengthened the organization that are dealing with this. We have put together the best possible teams in Hydro to work with these issues.
The target is, of course, to come out with full speed on the used beverage can line, as I said, in end of year. Also then we can ramp up and come back to the target with regard to automotive line number 3. With regard to Alunorf in Germany, the big hot mill joint venture, they're also. I'm quite optimistic that we got to solving the problem, but it will still take some time. In Hamburg, we have mostly solved the problems. We have also got a new plant manager in Hamburg, and we are quite happy with the development there. If you then move over to Sapa and the acquisition, we already have presented the main details from this transaction. The enterprise value was negotiated to be NOK 27 billion.
It is accretive to earnings, and we will have cash flow from day one. We have synergies in remelt and recycling area of about NOK 200 million. Sapa will become a new business area in Hydro after closing of the deal. We have a strong financial situation, and this acquisition we will be paid by, partly by cash, and also we will move into the bond market in the second half of this year. We expect that the closing of the deal will be in the second half. It will take some time, but we don't expect any problems to close the deal within the second half. If you then take a look at the research development in Sapa, quite impressive. It is a very strong organization with high competence.
It's a global leader in extrusion. If you compare the 2nd quarter this year to the 2nd quarter last year, a 22% improvement in the underlying net income. Our share of the underlying net income in the quarter was NOK 329 million. Now Sapa has been through restructuring, synergies, also several other improvement efforts. We expect that improvements will continue in Sapa, but not at the same speed as we have seen during the last years. If you take a look at extrusion market, we see that the extrusion market also here has quite some seasonal effects in the 2nd quarter. 9% higher sales in Europe in the quarter, and 3% higher sales in North America.
If you take a year-by-year view, it is growth of 3% in North America and 2% in Europe. If you look at the different segments in North America, we see support from automotive, from building and construction. The truck and trailer market has been quite weak, but we see now in the end of the quarter there are some improvements in this market segment. In Europe, it has been growth in automotive. More and more cars will be built with aluminum, more aluminum to become lighter. And also building construction in Europe is moving in the right direction and contributing to the demand growth. On energy, we had quite stable prices in the beginning of the quarter.
The prices came under pressure in the end of the quarter due to delayed snow melting. This improved the hydrological situation, so we are quite close to normal in the southwestern market, where we are mainly operating with our hydropower stations. If you look at the Nordic hydrological balance, we are about 3 terawatt-hours below normal, which was very similar situation as we had in the end of the 1st quarter. We move to Karmøy and the technology pilot, which, as I mentioned, is moving according to plan and budget. We expect to start the electrolysis cells in the end of the year, in the 4th quarter. We have now spent about NOK 3.2 billion so far, NOK 1.1 billion in support from Enova.
In total, NOK 4.3 billion is the budget for this pilot, and we will get NOK 1.6 billion in support in total from Enova. With that, I give the word to Eivind and the CFO members, please.
Thank you. Thank you, Svein Richard. Good morning, everyone, and welcome from me as well. I will then take you through the quarterly financials in some more detail. This quarter, we delivered an underlying EBIT of NOK 2.9 billion, up some NOK 600 million compared to Q1, and up roughly NOK 1.3 billion compared to the same quarter last year. The improvement is primarily driven by higher realized LME prices, up some 8%, as well as premiums being up some 3% compared to the 1st quarter. This is partly offset by higher raw material cost, in particular in primary metal, where we see alumina costs is up some NOK 150 million in this quarter. Altogether NOK 200 million for the company.
We also, from a production perspective, saw higher production in Alunorf and Paragominas, as Svein Richard Brandtzæg mentioned. We also then saw a combination of foreign exchange and other having a negative effect at the end of the day with roughly NOK 200 million. This is primarily driven by the BRL as well as the Norwegian kroner, which on average weakened against the dollar for this combination. I'll give you some more details as we go through the different business areas later on in the presentation. If you look at the key financials for this quarter, revenues increased by roughly NOK 1.5 billion compared to the 1st quarter. Again, it is primarily driven by higher realized LME prices.
This quarter, we excluded from the underlying EBIT of NOK 2.9 billion, roughly NOK 16 million, and what we call items excluded, which I will get back to in more detail on my next slide. Financial items for this quarter amounted to NOK 1 billion in financial expenses. Roughly NOK 900 million of that is unrealized financial expenses, primarily relating to the strengthening of the dollar versus the BRL, having an impact on the debt that we carry in Brazil. Also, the strengthening of the forward curve of euro versus Norwegian kroner having an impact on the embedded derivatives that we carry in the euro-denominated power contracts in Norway. As a result of this, the income before tax was roughly NOK 2 billion, compared to NOK 2.5 billion in the 1st quarter.
The income tax is calculated to be NOK 424 million for this quarter, which is just above 20%. This, of course, is below the 30% as we guide on. This is primarily driven by the good results we have in our equity accounted investments in Qatalum and Sapa, who then brings in their net income, which of course is an after-tax item. Adjusted for this, we'll get back to a 30% tax rate, very much in line with the guidance that we give. This gives us a net income of 1.6 billion positive, down from 1.8 billion in the last quarter.
If we take the underlying view, however, we see that the underlying net income is roughly NOK 2.2 billion, significantly up from the NOK 1.6 billion that we saw last quarter. Consequently, also, if you look at this from an earnings per share perspective, this is now up to NOK 1.04 per share for this quarter. Looking to items excluded, it's a very limited gain that we excluded this quarter of NOK 16 million. First, we've a unrealized loss on embedded derivatives in the LME contracts, and a small gain in the power contracts, in total a combination of NOK 67 million.
Secondly, the metal effect of rolled products in this quarter it is a gain as cost of goods sold reflects a lower LME compared to what we realized on the revenue side. Also, thirdly, in Sapa we have an unrealized loss related to their LME contracts for this quarter. We then turn into the business areas and start with Bauxite & Alumina. The underlying EBIT for B&A declined this quarter from NOK 756 million in Q1 to NOK 662 million in the 2nd quarter. 5% lower realized alumina price, primarily driven by the 10% lower PAX price, was the primary contributor to this. Already mentioned, we came back to good production levels, both in Alunorf and Paragominas, following the maintenance stops we had in Q1.
Annualized production, Alunorf back to the 6.3 level, and Paragominas still well north of nameplate capacity, producing at 11.8 million tons on an annualized speed. We saw somewhat higher raw material cost and consumption this quarter. It's partly related to the lower quality bauxite we consumed this quarter. Higher reactive silica, lower available alumina content, increasing the caustic cost. Also the fact that we are operating both the drum filters as well as the new press filters has led to a higher caustic consumption and higher fixed cost in the period. In addition, we also wrote off some obsolete assets in Alunorf this period, roughly NOK 50 million, for this quarter.
If we look into the 3rd quarter from a production perspective, we do expect very stable production as we move into 3rd quarter and should not anticipate any large changes. We will continue to see higher raw material costs in Q3. Next quarter, we expect the caustic costs to come up some 5%-10%, and that, of course, is reflecting the pressure in the international caustic markets. In addition, we will also start using the new tailing dam in Paragominas, meaning that we will start to depreciate it in 3rd quarter, giving an additional depreciation effect of roughly NOK 50 million. As mentioned before, from a pricing perspective, we will continue to sell roughly 65% of our production on PAX also for the remainder of the year. We turn to primary metal.
We saw a significant improvement in their underlying EBITs, coming from NOK 900 million in Q1 to close to NOK 1.5 billion in the 2nd quarter. This improvement is primarily driven by the 8% improvement that we've seen in LME, as well as the increase in premiums. The price improvements was partly offset by higher alumina costs. Remember that in the primary area, the alumina prices comes in with about 2-3 month time lag, both on the LME as well as on the PAX side. There was also an increase in the Albras energy cost this period. Typically, Albras has a renegotiation or re-evaluation of power costs in the 2nd quarter, based on the inflationary situation in Brazil for the last year.
Looking into the next quarter, at the end of Q2, we've sold 55% of our metal production at roughly $1,900 per ton. Same situation on the premium side, 55% sold at $300 per ton, meaning that we expect the average for the 3rd quarter on the premium side to be in the range of $225-$275 per ton when we close the 3rd quarter. On the raw material cost side in primary for the 3rd quarter, we do expect the cost pressure to alumina to come a little bit back down given the time lag of 2-3 months. We also expect pet coke prices to come up more than 10% compared to what we realized in the 2nd quarter.
We turn to Qatar and Qatalum, and as you all know, on June fifth, Saudi Arabia, the United Arab Emirates, Bahrain, and Egypt imposed some trade restrictions on Qatar. This affected Qatalum to some extent, meaning that we needed to find new solutions both for inbound as well as outbound logistics for raw material and for our metal. We were quite quickly able to find new logistic solutions, shipping out through different ports in the Gulf states. We've seen some delays to customers, some additional freight costs, as we're not able to go through the Saudi border for some of the sales that we've done. The effect for Q2 has been relatively limited.
Going forward, we will have to shift some production from foundry alloys and extrusion ingots over to standard ingots, which will have a limited effect on the financials for the next 2 quarters if the trade restrictions stay in place. With regards to the results in Qatalum, very strong improvements on the back of the higher realized aluminum prices for the period. We turn to metal markets. We saw a significant improvement in underlying EBIT up to NOK 224.4 million, up from the NOK 24 million that we realized in Q1. Now if we exclude the inventory and ingot valuation effects, the result increased from NOK 83 million to NOK 152 million in the 2nd quarter.
This improvement was driven by higher volumes as well as higher margins within the remelt systems that we have both in Europe and in the U.S., but also very strong results within the sourcing and trading operations in Oslo. If we look into next quarter, we do expect sales volumes to come down somewhat due to the fact that the 3rd quarter is typically somewhat weaker than 2nd quarter, demand is somewhat lower. We will also have some summer shutdowns for maintenance in the remelt system. At the same time, again, let me just remind you that the results within this business area by nature is volatile. In rolled products, as Svein Richard has been through, the results in rolled products is clearly not at a satisfactory level.
Q2 EBIT is down from 106 in Q1 to NOK 84 million in the 2nd quarter. Margins in the quarter came down, and it's mostly due to product mix, where we sold significant higher amounts of canned sheet or canned body, which typically has a lower margin level than what we see within the litho markets, the GE market, the special products market, as well as the foil market. In addition, we've also had an accrual in this area, typically or mostly related to previous periods, amounting to some NOK 40 million. We talked about operational issues in the 1st quarter related to Hamburg and the hot mill in Alunorf, amounting to some NOK 70-80 million for that quarter.
Most of that has been resolved, but we will still carry some of those costs with us into 3rd quarter. The Neuss smelter delivered good results this quarter, strong improvement, again based on much improved metal prices. If we look into Q3, as mentioned, we will still carry some of the operational issues with us. We will still work hard in order to fix those quickly. We're still working hard to get the improvement speed and ramp-up speed also in line on the UBC line, as well as on the Automotive Line III. We turn to energy. The results decreased from NOK 423 million in Q1 to NOK 284 million in the 2nd quarter. This is primarily the result of lower production, which were down 15% compared to Q1.
In addition, there was also a smaller price effect as we realized lower prices in the 2nd quarter compared to the first. Production cost also improved somewhat lower in the 2nd quarter. That is primarily driven by the periodization of the property taxes, which is typically at the low level in Q2. Looking to the 3rd quarter, again, as always, production is highly volatile in energy, all depends on precipitation and reservoir levels. On the cost side, please remember that, again, the property taxes in Q3 will come up, again, due to the periodization. We look to the Sapa joint venture. It is very encouraging to see that Sapa continues its strong improvement trend, also in the 2nd quarter. It's, of course, especially encouraging given the large announcement we did on the tenth of July.
The underlying EBIT improved some 17% from Q1. That is partly seasonality, but it is also a reflection of Sapa continuing to improve their production base and continuing to move into more value-added products. This comes out clearer when you compare it to the 2nd quarter of 2016. Again, we see underlying EBIT coming up 14%, again, reflecting the strong move into more value-added and higher-margin products. This both leads us to an improvement in underlying net income of roughly 20%, both when you compare it to Q1 this year, as well as when you compare it to the 2nd quarter last year. Please also note that this quarter, as we did last quarter, we've included more details per business area, both in the investor presentation as well as in the quarterly presentation.
When it comes to the outlook, we do normally expect a seasonally weaker second half, and a 3rd quarter which is slightly below the 2nd quarter results, just driven by normal seasonal swings. At the same time, as Svein Richard talked about, we do expect to see continuous improvements in Sapa year-over-year, but we should not extrapolate the improvement trends that we have seen in the last couple of years. On other eliminations, we've just been through the Sapa results. If we look to the other line, which is common services, corporate costs, and other businesses, this was now NOK 71 million in the 2nd quarter, which is clearly below the guidelines of NOK 150.
Now if you isolate the corporate costs, that is roughly NOK 130 million for this quarter, which is closer in line with the quarterly guidance of NOK 150 million. That indicates that we've had some special effects into our captive insurance company, Industriforsikring, as well as we have realized a gain on the sale of Herøya Nett in the 2nd quarter. Eliminations amounted to NOK -88 million this quarter. That reflects the widening margins we have now on our primary production, which hasn't been sold externally yet, and that will be realized in subsequent quarters. We look at the net cash development. It's in reality been basically flat in this period. We started the quarter with NOK 5.9 billion in net cash. We produced a relatively good EBITDA of NOK 4.3 billion.
We have a build-up in operating capital of roughly NOK 700 million. That is primarily related to currency as well as price increases impacting the valuation of the inventories that we do carry. We have taxes in the order of NOK 200 million. That reflects the dividend that we received from Sapa of NOK 1.5 billion, partly offset then by NOK 500 million in paid taxes, as well as backing out the net income from Sapa and Qatalum, and our share of their net income. That gives us an operating cash flow, a free operating cash flow of NOK 3.9 billion for this period. We've invested NOK 1.1 billion in this period.
We also paid dividends to our shareholders of NOK 2.6 billion, leaving us at the end of the quarter with a continued strong net cash position of NOK 6 billion, despite the fact that we have paid out annual dividends of NOK 2.6 billion. If we look at the adjusted net cash, we saw slight increase in the 2nd quarter. Slight decrease if you just look at adjusted net debt compared without the debt and equity accounted investments. Decrease from NOK 5.4 billion in Q1 to NOK 5.1 billion this quarter. Net cash, as we've just been through, was relatively stable this quarter, and pension liability is also relatively stable between the periods. If you look at net debt in equity accounted investments, that increased by some 900 million.
That, of course, reflects the NOK 1.5 billion that we received from Sapa, and that was partly offset by strong cash earnings within Qatalum. As a result of these developments, we do see that the total adjusted debts, including then the debt of the equity accounted investments at the end of Q2 amounted to NOK 12.8 billion, an increase of NOK 700 million compared to the 1st quarter. With that, Svein Richard, I'll give the word back to you.
Thank you, Eivind, and it seems that the microphone is working now. With regard to priorities, going forward, safety is always on top of the priority list. With regard to the better program, we have especially focused now on the Rolled Products and the efforts that is now ongoing there to make sure that we can solve the issues that we have talked about as soon as possible. With regard to projects, we are moving according to plan on the technology pilot, as I mentioned, and we are now preparing the startup of the cells in the 4th quarter this year. We will have an official opening the 24th of August with the Norwegian Prime Minister attending. On the automotive line, as I talked about, we are somewhat behind schedule.
We are running close to 75% of the original plan, but there's still a lag that we now want to catch up with on the Automotive Line 3. On used beverage can line, as I mentioned, there we have the cooling chamber issues that has to be modified, and that is going to be done in the second half of this year, and we expect full speed at the end of the year out of the used beverage can recycling line in Germany. We are planning the integration of the Sapa organization. As I mentioned, it will be a business area in Hydro, and we look forward to welcome 22,500 new competent, hardworking employees into Hydro. Thank you very much for your attention.
Okay. Thank you, Svein Richard and Eivind. We open for questions from the audience in Oslo and also from webcast. Any questions in Oslo today?
There you go.
There's a question.
Eirik Melle, Danske Markets. A bit on bauxite and alumina costs, if you could please comment a bit on how much this reactive silica and lower alumina content actually affects the quarter. On the rolled product side, if you can elaborate also a bit on how much the margin effect is for the quarter, and also the positive effect on the Neuss smelter. If you can just elaborate a little bit on that. On the third hand, do you see any changes on the policy side in China? Recent news, some cuts have been announced, but then yeah, what we see in the production figures is still increasing production.
Have you any updated information on that development?
Maybe I can take the last one, Eivind, and you take the 2 first.
I'll see if I remember the questions. Yeah.
Yeah. With regard to China, we know that there are 2 initiatives ongoing. One is the pollution issue that they want to at least not solve finally, but to reduce pollution emissions from industries, and aluminum is one part of it. Where you know that has been announced that 30% capacity should be taken out in 28 cities close to Beijing. This will have a major impact of course on the supply-demand balance. I would say it remains to be seen if that happens.
There is another effort, which is this, the supply side effort, where the authorities has now stopped production in private-owned aluminum companies, where they have built capacity without the necessary concessions. That has had a real impact already. It seems that the authorities now are pushing harder than what we have seen previously. If that will then be a signal of what they are going to do during the winter environmental shutdowns that they all talked about, obviously it remains to be seen. We know there's been similar signals before, and we haven't seen the volumes coming out. So far we have only seen the supply side reductions that has been impacted to some extent.
Then we'll see what happens after I think it's the fifteenth of November this year. Then we'll see if capacity will be taken out. It is very difficult to take out 30% capacity of a smelter for the winter months and then restart again in the springtime because it takes some months to ramp up a smelter, and then it takes also some months to stabilize the operation. You are suddenly in the 15th of November 2018, and then you have to take out 30% again. How that will be spelled out remains to be seen. From a practical point of view, it is very difficult to see that it will be as easy as the authorities has been talking about.
With regard to the alumina question, I think Eivind can answer on the number side. We had, in the 2nd quarter, we used the bauxite with some higher reactive silica content than normal, and also with some lower alumina, available alumina content than normal. That resulted in higher costs, and Eivind can come back to the numbers. You can also answer the whole product side.
I'll try. I think importantly to say on the bauxite side, that's a situation that will change as we get into Q3. That's a temporary situation for the 2nd quarter. That probably had an effect in the range of somewhere between 80-100 million Norwegian kroner. Now, if you look forward into the 3rd quarter, you will still see elevated costs, but that is more from the fact that we're running both the press filters as well as the drum filters at the same time. In a way, you duplicate your fixed costs, and you don't get the cost efficiencies that you'd planned for. That totality for 2017 is probably in the range of $20 million-$24 million for B&A.
There will be additional costs going forward, but not due to bauxite quality as such.
When it comes to rolled, I think if you look at the Neuss matter that improved, driven by market prices, probably to the tune of NOK 30 million-NOK 40 million, maybe in the region quarter in the quarter. If you look to the operational cost side, so that's NOK 70 million-NOK 80 million in Q1. Big part of that is taken out or improved, when we move into 3rd quarter. There will still be some left in the 3rd quarter before it's finally fixed. The most significant change in the 2nd quarter is actually the product mix. You saw on the slides, we produced significantly more can sheets, can body this quarter compared to other products.
That takes average margins quite a lot down. It's also not only about products with mix, but it's also about your customer mix, customer mix within that portfolio, which was also not optimal in the 2nd quarter.
Okay, another one here.
Yes, thank you. Eivind Lervik , DNB Markets. 2 questions. One following up on, maybe on China, just seeing that premiums are declining and, in the beginning of this year, they increased on the back of maybe, tightening of the market due to Chinese cuts, and now we're seeing them coming down again. What's driving this? And secondly, on, B&A, you mentioned that the NOK 1 billion will be delivered already in 2017. What can we expect for 2018 and 2019? Are you seeing more potential? Is or is this as good as it gets? Thank you.
Okay. That when we got to the last one, we can share that question also, maybe. We are not seeing the end of improvements in Bauxite & Alumina after 2017. We will raise the bar and have higher ambitions on what we can deliver. We will come back to that, probably in the Capital Markets Day, I guess, Evan, to talk about that. It is not the end of the improvements.
Premiums on China. Yes, probably some softening. I think if you look at this morning's news, there is a little bit of an uptick in the U.S., if you look to the extrusion ingot side, at least.
I think if you look at the LME as such, versus the cost curve, you still find that, you know, we've been relatively stable around $1,900, which still indicates that we're close to the 90th percentile. I think you need to look at these 2 things in combination. Premium situation, of course, would also very much depend on the outcome of the WTO case in the U.S., the Section 232, Section 332, and these things probably.
It all remains to be seen.
Yeah, it's the short answer.
Yes, good morning. Bengt from ABG Sundal Collier. Can you talk a little bit about the priority on internal growth projects? You have some growth projects going on, and debottlenecking and capacity increases in the different business units. Also back to the Sapa. If we look at extrusion Europe, it seems like earnings are down year-over-year. Can you talk a little bit about that? The final question is on the transaction. In the information memorandum, you will probably highlight what will be the amortization cost, the increased depreciation level. Can you give any insight as early as now, or should we wait for the information memorandum?
Okay. Yeah, I could maybe start on the first one with regard to because you are probably referring to the creep capacity that we have talked about previously. We have said that if you look at the Bauxite & Alumina area, we are already now operating above nameplate capacity on bauxite. The bauxite production this quarter had speed of well above 11 million tons. Nameplate capacity is 9.9. We see still potentials there, but I wouldn't say that there will be substantial changes without any investments. Because to lift that significantly higher, we need some investments, and I think we are at the sweet spot today.
With regard to the alumina production, we have already identified possibilities to lift Alunorf up to 7 million tons from 6.3 nameplate today, which is now the operational level, and take it up to 7. The cost of doing this will be around $400 per ton. It's a very attractive debottlenecking efforts we can do in Brazil. That is the plan to do it also. We are going to come back to that. This is on our plan going forward on Bauxite & Alumina. In the smelter area, we have talked about before, we have a capacity of about 1.2 million tons. We see creep capacity with the existing technology of 100,000 tons.
We have the technology pilot that will add 75,000 tons. When we have tested the technology elements that we are looking forward to, we will see another 100,000 tons creep capacity on top of that. There is creep capacity in our system that we will utilize, which will increase the asset productivity. It will reduce the cost position further. That was one of the main purpose of the investment that Karmøy, the technology pilot, is really to take our smelters further down the cost curve after finalizing the NOK 2.9 billion program. We have rolled products. There we are not talking about creep capacity, but to lift the performance up to the level that it should be.
Of course, there we have additional efforts these days in the areas that I already have mentioned.
Yeah, when it comes to the increased depreciation after the closing, we're just in the process of completing the information memorandum within these days, and you should just expect that will be forthcoming very shortly.
We will come back to, in a way, opportunities in Sapa later. In the capital markets today, we'll talk more about that because there are also quite some interesting opportunities in the extrusion business going forward.
Okay. Good. We have some questions from webcast.
Yes. Starting with Menno Sanderse, Morgan Stanley. There have been many operational issues in rolling ongoing now for 3 quarters with financial results getting worse. What confidence can we have that, 1, the company's actually on top of these issues, 2, has taken measures to rectify it, and 3, financial results will show that the company's adjusting these results?
With regard to the measures we have taken already, it's really about the fact that we have identified the issues. As I mentioned, in Hamburg, we have solved the main issues. Also, with the hot mill issues that we talked about in the 1st quarter, it has been solved. We have some issues in one of the cold mills in Alunorf. That also is identified, so we know what to do, but it will take some time. On used beverage can line, we know that the cooling chamber didn't have the capacity as it should, and that is going to be rebuilt and modified during the coming months. I would say that very much identified what should be done.
On the Automotive Line Number 3, also there we have identified some issues that we are working with. We know that these are some of the bottlenecks for ramping further up. The problem is that it will take some time, but we have identified the issues. This is not rocket science, but it's quite complex production lines that we have installed. That will also give us a very good cost position when they are operating at full speed, of course.
Second one from Menno. What portion of the issues in rolling are due to bad market conditions versus self-inflicted operational issues?
Yeah, I would say that a significant part is self-inflicted here because the fact that we have lower volumes in the 2nd quarter compared to 1st quarter is really about operational stability that we didn't have in the 2nd quarter as we should. We cannot complain about the market on these issues. There are also some pressure on margins in some market segments, like general engineering. We see clearly the market price or the margins are going down. There are also some pressure on margins in litho and foil. That also has in a way contributed to the change of product mix in the quarter. Maybe Eivind, you could add some more flavor to this.
Yeah. I think in general, if you look at the demand situation in rolled in Q2 and the speed we see into Q3, there's really nothing wrong with the market. The market is really there, and there's good demand within all product segments. It is, as Rune said, it is predominantly self-inflicted, the weak results in the 2nd quarter.
Last question from Menno. The ramp-up of the UBC and AL3 has taken substantially longer than expected. Should we think about the timing of the first metal from Karmøy? When was the last time Norsk Hydro ramped up a new aluminum smelter? Does Norsk Hydro have enough project experience and people in-house to deliver new build projects?
Thank you, Menno. This is, of course, important questions. I would say that we are confident that we are going to ramp up the technology pilot at Karmøy according to plan. As we have seen it now, we are moving according to plan, and this is, I would say in-house technology. We know that this is something we have done before. We have electrolysis cells in Årdal in our research center running with the same technology. We know that this technology is working, but we need to test it in pilot scale. We're, in a way, scaling up the same technology. With regard to automotive line number 3 in Germany, this is, I would say a state-of-the-art production line. It hasn't ever been built before.
Also there, we are confident that we are going to come up to full production speed when we have then solved the issues that we have identified. Also, with regard to the used beverage can line, of course this is a technical issue with the cooling chamber that didn't have the capacity that we needed. It is about the energy that is created during delacquering of the aluminum cans. It was identified higher energy from the cans than was the design of the production line, so this has to be changed. We know what to do, but it will take some time.
Next question from Daniel Major, UBS. On CapEx, to meet guidance, implies significant step-up in the 2nd half of 2017. What are the key drivers there, and does original guidance stand? What is the value of the Enova support payments in the 1st half of 2017?
I think it's quite correct. If we are going to meet the 2017 target, it needs to be quite a significant step up in the second half. Now, if we try to draw some learnings from previous periods and previous years, you will typically see that as we get closer to year-end, we very often move project out in time, and I think this is also an indication what potentially would happen in 2017. We'll of course comment more on that as we get into Q3 and capital markets day, but taking learnings from previous years, you shouldn't be surprised if CapEx also for this year come in somewhat lower than what we guided on. When it comes to the Enova support, so far this year we received roughly NOK 460 million from Enova.
If you look for the remainder of the pilot project, we have about NOK half a billion left to go on the project support.
On extruded products, again from Daniel Major. A record Sapa earnings and EBITDA per ton now of above $300 per ton. How much more margin expansion can we expect? Is $400 per ton EBITDA sustainable?
Yeah. As we commented on, we still see possibilities of improvements in Sapa. As also Eivind said, you should not extrapolate what has happened during the last years because there we are talking about restructuring and synergies that you can only do once. We see that there are opportunities, not only in the profiles itself, but also the machining and the additional value-added work after the extrusion press that Sapa is working with. Sapa has prioritized margins over volume, which is a good strategy which makes it less sensitive for volumes. We see quite some potential further on also with regard to added value activities in the extrusion business.
A question from Daniel Lurch in Exane BNP Paribas. On automotive line 3, could you provide some details on the nature of the delays with the product qualification?
Yeah, this is mainly some design issues on this production line, but it's also the fact that it takes time to qualify the aluminum products in the OEMs. They have to modify their equipment, and it takes time to qualify among the automotive customers. Again, what we are working on here is really to get stabilized production on a higher level than what we have today. That is the main issue we are focusing on. The customers will take the time that is necessary for their qualification process.
Following on that, how does the ramp up schedule look like for AL3?
Yeah. As I indicated, we are now at around 75% of the original ramp-up schedule. We are somewhat behind, and that is what we are ambitious to catch up with. Again, we have identified issues that we are now modifying and improving, and then we are expecting that the ramp-up will be caught up. Again, it will not be a situation where automotive line 3 will contribute to the bottom line of Hydro this year. We will continue the ramp-up during 2018 and depending on also the processes among our customers there.
A question from James Gurry, Credit Suisse. What is the CapEx profile after Sapa is included at 100%? Does it change significantly?
We expect the Sapa, if you look at this from a sustaining CapEx perspective, to have a CapEx level of roughly NOK 1.5 billion on an annual basis. We've guided on Hydro as it is today of around NOK 4 billion. On aggregate, that makes it roughly NOK 5.5 billion, long-term sustaining CapEx guidance.
The last question from the webcast, from Fraser Jamieson in JP Morgan. In Rolled Products, you point to some operational issues and some more structural headwinds. How should we think about longer term margin potential in the division? Is it really realistic to get back to the 14%, 15%, 16% levels on margins going forward?
Again, the quarter was impacted by operational issues that we had talked about, but also the fact that there is a change in product mix. If you look into the different products, we see weakening margins in general engineering, which is again, I would say more commodity like market segment. But if you look into the litho and foil other areas, automotive body in white, for example, we don't see similar situation. Again, Rolled Products is of course working also not only to solve the operational issues, but also to improve the product mix.
Okay. Any more questions? No? I would like to say thank you very much for joining us this morning and have a wonderful day. Thank you.