Good day everyone, and welcome to today's Norsk Hydro ASA Q3 presentation. Today's conference is being recorded. At this time, I'd like to turn the conference over to Stian Hasseldal. Please go ahead.
Thank you, operator. Good afternoon, and welcome to Hydro's third quarter 2016 conference call. We will 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 result presentation, it is available on hydro.com. With that, I leave the word to you, Svein Richard.
Thank you, Stian, and good afternoon. Let me start with a brief overview of the key developments in the third quarter. Underlying EBIT for the third quarter of this year was NOK 1.5 billion, down from NOK 1.6 billion in the previous quarter. Around 30% down from the third quarter last year. We experienced higher realized aluminum prices in quarter, while realized alumina price remained stable. However, the price effect from higher LME price was offset by negative currency developments, mainly in or due to stronger Brazilian real impacting our Brazilian assets. Highlight of the third quarter is a strong operational performance in bauxite & alumina in Brazil. Alunorte reached a record run rate alumina production of 6.5 million tons, which is well above nameplate capacity of 6.3 million tons.
Cost is in the refinery also improved during due to a better raw material efficiency. All in all, an impressive performance from Alunorte. Bauxite production at Paragominas also continued to run above nameplate capacity and increased to 11 million tons following the plan maintenance. As usual, we saw a seasonally weaker demand in the third quarter, and as a result, metal sales were lower in Primary Metal and Metal Markets, as well as in our downstream divisions Rolled Products and the joint venture Sapa. I'm pleased to say that we are making good progress on our main growth projects. We started the first trial production in our new Automotive Line Three in Germany on schedule in October, while the Karmøy technology pilot was 40% completed by the end of the third quarter.
Our NOK 2.9 billion BetteR ambition is on track for the 2019 target of NOK 2.9 billion. So far this year, the BetteR ambitions in Primary Metal and Bauxite & Alumina are progressing as planned, while Rolled Products are not expected to reach their 2016 target. Finally, we are maintaining our expectations of 4%-5% global demand growth for primary aluminum in 2016 based on stronger demand than expected in China seen in the third quarter. We believe that we will come out of the year in the higher end of our current estimate of 4%-5%. We still expect a largely balanced global market this year, however, with a somewhat tighter market balance than what we saw last quarter.
I would like to end my introduction today by summarizing our key priorities going forward. As always, our improvement ambitions towards 2019 remain high on the agenda. Our better program is about taking control of what we can influence ourselves by reducing cost and improving efficiency in our operations. Equally about maintaining our technology lead and high grading our product portfolio towards attractive high margin and high growth markets. Developments in Alunorte that we saw in the third quarter are clear illustration of the benefits we are getting from our relentless improvement culture. Another priority of ours is to deliver on our 2 growth projects, the Karmøy technology pilot in Norway and the Automotive Line 3 in Germany on schedule and on budget.
Testing the world's most climate and energy efficient production technology, it's crucial not only to improve cost for the entire portfolio, but also to stay ahead of the game in the long run. The new automotive line, which we'll now be ramping up, will allow us to establish a strong presence within the high growth automotive segment by becoming the second largest body-in-white supplier in Europe. We will deliver on all of this, while at the same time ensuring that we maintain the financial strength to be able to weather volatility in our cyclical industry. Our financial strength is key to provide a reliable payout to our shareholders in the short term, as well as maintain flexibility necessary for creating the most value for our shareholders in long term. Thank you, Svein Richard Brandtzæg. Operator, we're now ready for questions.
Thank you. Ladies and gentlemen, if you do have a question, please press star one on your telephone keypad. If you're joining us using the speaker phone today, please ensure that your mute function is turned off to allow your signal to reach our equipment. Once again, ladies and gentlemen, star one at this time for any question. We'll go to Rainer Goertz with Morgan Stanley.
Hi, good afternoon. Thank you for taking my question. I have two questions from my side. First of all, despite the strong performance in B&A and record alumina production, there were some management changes in this business. What was the rationale behind this? Is it strategic? Secondly, you mentioned this morning that the risk on CapEx is on the downside. What is driving this? And is it higher capital efficiency? Is it a matter of timing? And will we see a reversal of this in the coming years, or is it there to stay? Thank you.
Thank you, Rainer for the question. First of all, with regard to Brazil, I can say that this is based on a mutual agreement. This was the time to make a change, and we will continue of course to develop further the strong position we have achieved during the last years with the improved operations. There are still potentials with regard to operations. We will maintain a stable and high production at Alunorte. I'm not promising 6.5 million for the coming quarters, but we are targeting to stabilize the production of our nameplate capacity, which is 6.3. Also we will target again to continue the efforts done on cost reductions further.
That is the comment on the Brazil case. Eivind, maybe you can comment on the CapEx.
Yes. On the CapEx side, I mean, I guided on the risk on the downside, and I think at the end of the day we'll see the size of that, if any. As we've done in previous years, you know, we always try to do what we call the CapEx optimization, so if we can push certain maintenance projects, for instance, into next year, we would always do so. You should probably look at this more from a timing perspective than anything else.
Okay. Thank you very much.
Once again, ladies and gentlemen, star one to ask a question. We'll go to Daniel Lurch with Exane.
Hi, good afternoon. This is Daniel Lerch speaking from Exane. Thanks for taking my question. Just quickly, on aluminum prices, you mentioned that you see the market balance a bit tighter towards the end of the year and also in 2017, I think you mentioned in your presentation this morning. Do you think that prices right now can maintain their relatively positive momentum, or do you think that there's a lot of incentives for restarts and maybe connected to this, if prices go up and if the market balance is a bit tighter, do you expect that there might be a bit of momentum in premiums as well? My second question is quickly on the downstream on automotive.
There has been a bit of a worry on a slowdown in car production, particularly in North America but also in other regions. Do you see any impact here on your business? Thank you very much.
Yes. Thank you, Daniel. With regard to the aluminum price development, of course it's difficult to be specific on this, and we don't speculate on prices. We are quite confident that as we look at the situation today, the market balance is tighter than what we saw previously. I also mentioned earlier today that we have seen somewhat of a delay on restarts in China, and we will see the effect of these restarts in the fourth quarter and also into the next year. Then it's just a matter of how this will spell out, because you all know how sensitive prices are with regard to the supply-demand balance.
We know also that the cost curve is changing currently while we speak due to the fact that there's been substantial increases in coal prices in China. We know that the transport prices has gone up, and also the alumina price has come up quite significantly. The alumina price in China today is even higher than the PAX, the index price, including freight to China. There are some changes that are happening these days that will change the cost curve. If the speed of restarts of curtail capacity will continue, it's difficult to say. Definitely the price development will very much depend on what happens in China, and especially the supply-demand balance going forward.
There is a deficit of 1-1.5 million tons outside China, and in the quarter we saw a surplus in China. All in all, we see that we are moving into a situation with a fairly balanced market, a largely balanced market, but with a tendency to be in a short deficit situation for the end of the year. With regard to downstream and concern about automotive or car production in North America and also Europe, of course, that is something we follow carefully.
We are of course now in a situation where we are not able to produce enough products for the automotive customers, and that's why we're also very much looking forward to the ramp-up and full production in our automotive line three in Germany that we talked about. We see that order book is better than what we expected, but we are not going to produce faster than what we can control technically and process-wise. It will still take some months before we have positive cash flow from our production in Germary.
Going forward, we see that the substitution of steel with aluminum continues and will be more and more cars that will be produced with aluminum due to the development we see and also the requirements in both the U.S. market and the European market. This is still a growth situation which is of course dependent on the number of cars that are produced, but also the speed of replacing steel with aluminum which will continue for quite a while going forward.
Okay. Great. Thank you.
Once again, ladies and gentlemen, star one to ask a question. We'll go to Helmer Aalberg with Kepler Cheuvreux.
Thanks. A question on the remaining investment in Karmøy of NOK 2.6 billion. Will this come quite evenly split in the next three quarters ahead of the startup in second half 2017?
Hi, Helmer. That is the anticipation that we do have. Relatively evenly split for the rest of this year and then through 2017 at this time.
Okay. You mentioned that the cash cost curve in China could be pushed upwards a bit, considering the latest increase in alumina prices and coal and transportation. Do you think it still would be at the ninetieth percentile, or would it be higher than that, so to say, if you consider the latest increase in alumina and other cash costs increases?
I don't think that when we typically refer to the CRU curve, that has not necessarily been updated with neither the latest alumina figures nor the latest coal price increases that we've seen over the last few months, if you like, particularly on the coal side. That should potentially push the cost curve somewhat upwards. Of course, in that consideration, we have to also go a little bit deeper to understand how big of a proportion of the Chinese smelters actually directly exposed to coal, how many are integrated themselves, and how many buy power or how much do they buy power off the grid.
I think a rough calculation tells us that about 1/3 actually buys coal off the market and will be most exposed to this price increase, the most directly exposed.
Okay, thanks. Just a question on your balance sheet. It's quite strong, and you probably have less CapEx next year and going forward. Where do you see the best use of cash now? Is it dividends, buybacks, or maybe acquisitions in new markets or new verticals?
That's a good question. As you know, we never comment on mergers and acquisitions. In general, of course, we will, depending on what happens going forward, we will of course discuss also in the board of directors what will be the final decision on this. Whether it's share buyback or external dividend, that is something the board will recommend in the fourth quarter report, and then the general meeting will decide on this in May next year.
Okay, thanks.
Cheers.
Once again, ladies and gentlemen, star one at this time to ask a question. It appears we have no further questions at this time.
Okay. As there seems to be no further question, we can end this quarter's call from all of us here. I would like to 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, again, that does conclude today's conference. Thank you all for joining.