Good morning, and welcome to Norsk Hydro's Capital Markets Day 2014. We are pleased to see so many familiar faces today from Oslo, but I see we also have people from London, from Paris, Stockholm and Hong Kong, and I would like to welcome you all to our day today. I'm sorry for those of you traveling that we could not provide you with some pre-Christmas snow to get you in the spirit, but hopefully we can settle for some strategic aspirations and market updates instead. I know that a few of you are following us on webcasts also, and a warm welcome to all of you, too. Hydro is a diverse company with attractive positions all across the value chain and all across the world.
Whether we are mining high-quality bauxite in Brazil, creating alumina at the world's largest alumina refinery, producing renewable energy from everlasting Norwegian waterfalls, casting extrusion ingots and selling at record high premiums in the markets, or rolling automotive body sheet for the world's most quality-focused customers, we have one thing in common, and that is safety first. In case of an emergency, we have two exits at the back. An alarm will sound. Please take a left and then use the exits either on the left or the right side. The gathering point will be at the parking place opposite the main entrance. Also before we start, I would like to direct your attention to the cautionary note in relation to forward-looking statements. This is shown on screen and can also be found in your presentation on your chairs.
If we run quickly through the agenda, we will first have a presentation from CEO and CFO, followed by a short Q&A and a break. After the first break, there will be a market update as well as a presentation from the business area Rolled Products. Another Q&A will follow and another break. Then we have the final sets of presentations. These will be from the business areas Primary Metal and Bauxite & Alumina, where we also will have a final Q&A before our CEO summarizes the day and we break for lunch. Lunch will be from 1:00 to 2:00 o'clock, and we hope that as many of you as possible can join us there. One last comment.
For those of you following us on webcast, if you would like to ask questions during the Q&A sessions, you can send a mail to pal.kildemo@hydro.com, and I will try and ask them in the Q&A sessions if the time allows. With that, I would like to hand the word to our President and CEO, Svein Richard Brandtzæg. First, a look at this.
Aluminum. It's an amazing material. Strong, light and durable. It has a multitude of uses, from trains to toasters, sports equipment to spaceships. No wonder our modern world depends on it so much. It takes a lot of energy to meet that demand. In a world of limited resources and the threat of climate change, that matters. At Hydro, we're looking at the bigger picture. We're finding new ways to reduce the amount of energy it takes. We're experts in renewable energy. We're also helping our customers develop new products like lighter, safer cars and more intelligent, energy-efficient buildings. Importantly, we're encouraging the reuse of aluminum because it can be recycled again and again and again, every time in perfect condition. With the energy it takes to make aluminum for one new can, we can make enough for 20 recycled ones.
The more times it gets reused, the more energy efficient it becomes. By producing and using aluminum intelligently, you can actually reduce emissions, which, after all, makes sense for everyone. There you have it, the aluminum case.
Welcome, everybody. It's great to see you all here in Oslo. We hope we have made an exciting and interesting program for you today, and there should be ample time for comments and questions, and please take the opportunity along the day. Overall, our overall agenda today is showing how Hydro is driving performance to create value through our aspiration Better, Bigger, Greener. Let me start with safety. You may ask, why is safety so important in Hydro? The clear answer, first of all, is safety is an important part of our values. We want to take good care of our employees and our contractors, and we also know that safety is good business. We have years of experience and enough statistical data to show that good safety performance is also correlated with good operational performance. In the smelters
Rolling mills, where we have good operational performance, they're also showing good statistics on safety. Health, environmental safety, and operational performance goes hand in hand, and therefore, I'm very pleased to see that we have a long-term track record to keep the total recordable injury rate as low level, and the level we are today is very close to industry benchmark. That doesn't mean that we are not improving. We are working every day to improve our safety performance, which also means that we are also linking that to operational performance, which again, is depending on the competence, leadership, development in the different parts of Hydro.
We have followed since the financial crisis in 2008, 2009, we have had a response during the years at adapting to that situation, where we first took out capacity and since 2009, started our improvement programs along the whole value chain that had the impact on each and one of the business areas and also the corporate center. In parallel with that, we also constructed and started Qatalum. We acquired the bauxite alumina assets in Brazil, and last year, we closed the deal with Alcoa to create a global leader in extrusion, the Sapa joint venture. All in all, we have created a more competitive and stronger Hydro. The most interesting developments this year shows that we are following our agenda.
We started early this year to decide on expansion or a new automotive line in Grevenbroich, expanding our body in white production from 50,000 tons to 200,000 tons. That was a 130,000 tons investment, a EUR 130 million investment decision. Later, we decided on the UBC recycling facility in Germany, where we're going to take used beverage cans back into the value chain with a capacity of 100,000 tons per year, EUR 45 million capital expenditure decision. We decided on a permanent closure of the Australian smelter in Kurri Kurri. Over the years, we have developed the technological leadership in aluminum, and we have started our plans to build a technology pilot at the west coast of Norway at Karmøy.
Enova has granted NOK 1.5 billion support to that pilot, still pending approval in Brussels by ESA. Very important achievement is also a 2.7 TWh energy contract for our Norwegian smelters from 2021 to 2030. We announced in July that we should take over the whole ownership of the Søral smelter, which is now Hydro Husnes, and that deal was closed just a few weeks ago. We decided to optimize the production at Sunndalsøra and replace expensive ingot remelting with liquid metal, 50,000 tons. That is ongoing. I'm very happy that we, for the 15th time, are now also included in the Dow Jones Sustainability Indices.
As we talked about last year, our ambition was to produce 6 million tons alumina at Alunorte, and we are on track. All in all, we have a clear agenda. We are firmly committed to deliver improved results now under the heading Better, Bigger, Greener. Even if we are able to show that we have utilized the low cycle period well in the relative terms, we are of course not satisfied with the performance in absolute terms. As for the entire industry, the total shareholder return since the finance crisis has absolutely not been satisfactory. The profitability in this industry has not been able to deliver adequate returns to the shareholders. In the relative terms, Hydro is performing fairly well. If you look at the last year's total shareholder return in 2012 and 2013 has been fairly flat.
If you look at the situation so far, it has changed. Now it's above 50%, before dividend, which is a result and a combination of several factors. Its own performance improvements, its high grading of products and product portfolio, also a better balance between supply and demand, and also of course, the fact that we have reasonably higher all-in metal price levels today. We will of course during the day place our operation firmly in the spotlight. The developments in the global aluminum industry are also closely linked to the global economy. Our markets and commercial opportunities are highly influenced also by global trends and developments. Therefore, I want to share with you some key perspectives on markets and macro before moving into what we do and how we respond to these developments.
Again, with performance and value creation as guiding star. First, our latest data shows that and reconfirm that the demand in aluminum is relatively strong, both in absolute terms and also relative to competing metals and other materials. We are experiencing a growth of 3%-4% in 2014. We expect the growth in 2015 will also be 3%-4%. If you look 10 years into the future, the best estimates is still 3%-4% growth going forward. This indicates that aluminum will create interesting opportunities for the right players going forward. We certainly aim to be among those players and are actively positioning ourselves to grab these opportunities.
If you take a look at the global growth, because these are growth figures outside China, if you include China, look at the whole world, we expect that the growth in total globally next year will be 5%-6% in 2015, and for the next 10 years, around 4%-5%. Another highly positive development is a shift from a long period of overproduction to a situation where we're now into a deficit in the world outside China. The deficit has developed to a level of about 1 million tons as we look upon it today. External estimates that we made in fall 2012 show that we would end up in a deficit in 2018. The updates that we did this fall shows that we are already in a deficit.
The gap will decrease a bit in 2016 due to some capacity coming up in Russia, Canada, India. Some of these project has been delayed, but we expect that to come. The deficit will decrease a bit, but after that increase again. In the coming years, we expect the deficit situation that we have today to continue. As the appetite in the industry has more or less diminished to build new capacity, as it looks now, at least no new big plants around in the global aluminum industry outside China, we expect that the deficit will at least continue for a while. This is of course translating into lower inventory levels as we see it today.
There are a lot of discussion ongoing with regard to inventories, very much related to the change in warehousing rules for the LME inventories. If you take a look at the two biggest warehouses that keep metal for LME, Vlissingen and Detroit, we see that both warehouses has acted as if the new warehousing rules were already introduced from May this year. The warehouses, the level of inventory in these warehouses are going down every day, every week, every month. When we look at the queue of canceled warrants, that has also gone down but increased a bit lately due to the fact that the number of canceled warrants has increased. In Detroit, nearly all the warrants has been canceled. That result in the queue that we see of canceled warrants.
I would say it's a positive development. With regard to warehousing rules, we don't believe that changing rules will have a major impact on the all-in prices. In a longer perspective, it may be that the very high standard ingot premiums we have today will be reduced and that the LME would increase as the LME will become closer to the physical market. There is a considerable tightness in the physical market, and this is the market where our customers operate. They want metal delivered at a geographic location at a certain time, and they are paying a higher and higher premium to get that metal in place. We have record high standard ingot premiums, as you have observed.
This translates also into a record, or not a record high, but at least we have improved all-in metal price in the different main markets. The regional standard ingot premiums now is close to the $500 mark from Europe to U.S. Midwest. Again, all-in metal prices are approaching sustainable levels. We have a big share of metal products, added value products as extrusion ingots, sheet ingots, primary foundry alloys. Also in these areas, we see record high premiums. We of course also have a time delay of two to four months before this is shown into the bottom line of Hydro, but we already see the impact gradually developing.
We had shared with you previously some empirical data to show you the correlation between LME, the 90 percentile on the cost curve, and the supply-demand balance. It's obvious when there's oversupply, the LME goes down, and when there is a deficit, the LME should go up. If you take a look at the last movements on LME and the deficit we have today and the historical data, we should expect that LME should go up further than what we have seen so far. We expect that the high inventories are acting as a counterweight to the deficit. That is also at least an indication to what can happen when the inventories goes down. Yet the world around us is far from fixed and static, and above else, it is a highly multispeed, multipolar economy.
Of course, starting with the global GDP, that is a key driver for aluminum demand. We continue to see a different development in different markets. U.S. showing solid momentum, more mixed in Europe, although the outlook has improved somewhat in aluminum over the last years in Europe. Among emerging economies, Southeast Asia is a large growth region, with India also now starting to deliver on its growth potential. Material substitution is an important factor for us. Substitution of steel with aluminum in automotive is well known. Substitution of copper in heat exchanger business is also well known, and this is now moving faster. This is due to, of course, the inherent qualities of aluminum as a lighter material.
Our customers can develop smarter, more recyclable solutions and playing on aluminum qualities as lightweight, strong corrosion-resistant and an infinitely recyclable material, and the automotive industry is a strong tool in that respect. Climate change is another megatrend that will increasingly impact our way of life, including stronger regulations and demand for sustainable solutions. In aluminum, economy and climate go hand in hand as energy efficient solutions and low footprint are also competitive advantages. Once the world moves to place a cost on CO2, these advantages will grow in importance. China, of course, continues to be a key issue for the aluminum industry. They are now consuming about half of the world production. They're also producing about half of the world production. And there are two, at least two primary ways they are affecting us.
First of all, it is the fact that China doesn't have enough raw materials for their consumption and production, so they need to import bauxite and alumina. That is also then driving the development of the prices on the raw material side. They are also then exporting products, semi-fabricated and fabricated products, that also have an indirect effect on the demand of aluminum in the world outside China. We continue to see China as balanced in primary aluminum as continued demand growth in China paves the way for new smelter capacity in regions such as Xinjiang. Turning over to the industry landscape of aluminum, there are also here certain megatrends, sometimes to amplify each other and sometimes to counterbalance each other.
We start with a traditional shareholder return approach to aluminum, which is what drives this industry in the Western Hemisphere, where we are following forces of supply, demand, return on capital, shareholder focus on our guiding strategy. With the rise of aluminum as an important material and building block in modern society, other approaches in other parts of the world has developed that not necessarily follow the same pattern. In some economies, aluminum has been looked upon as a strategic diversifier for energy-based economies. For example, in Middle East, we have a large aluminum base in Middle East based on low-cost energy. Also players that are willing to price bauxite on its own fundamentals and develop their own aluminum industry based on the fact that they have raw materials in their nations.
Finally, China, that had the policy, as I mentioned, to stay balanced, and we have seen over the years that balance in Primary Metal has followed the demand in China. That means there has not been major oversupply or deficit in China. They have been able to produce as much as they have consumed in China. But it means that with the growing development in China and the speed of the demand growth in that country, they need more and more bauxite and alumina. With the Indonesian ban holding firm so far, this has a global ripple effect on pricing of raw materials going forward. This brings us to our aspiration.
Our strategic response to strengthen our position and ensure value creation in this fast-developing, multi-speed global environment is summed up in our long-term aspiration, consisting of three pillars, Better, Bigger, Greener. This is building on our platform of a solid asset base, strong financial position, leading technology, commercial capabilities, and a highly competent workforce. Our aspiration aims to realize the full potential of the company, building a better, bigger, and greener Hydro for the future. Let me start with better, and that then we are on familiar Hydro ground, because that is about improvements that we have long-term experience with. We aim to continue our improvement drive in the company and further strengthen our commercial drive and commercial edge to capitalize fully on our opportunities going forward that arise through the value chain.
We also aim to extend our lead in technology and innovation to ensure that this becomes an even stronger competitive advantage for us in the future. With bigger, and that may be looked upon as the most interesting part now, we aim to strengthen our relative position within the industry than to grow it, and only embark on new projects when or if and when the time is right. Time will come, when it's ready for the best, most profitable projects in the industry to be realized, and we have a highly competitive portfolio of good projects. We will continue to high grade our portfolio and enhance our market position as parts of our commercial strategy. We come to greener, which is much broader than our already communicated climate strategy.
We have communicated that we aim to become carbon neutral in 2020, but it's also about strengthening our ability to meet future customer demands related to a broader sustainability agenda. Let me start with better. It is a part of the philosophy we live with regardless of where we are in a bauxite mine in Paragominas, a rolling mill in Germany, or a smelter in the west coast of Norway. We even export it with much success to the joint venture program in Primary Metal to Qatar, Brazil, Slovakia and Canada, again, the Primary joint venture improvement program. As my leaders would hasten to say, it is equally about the way we work as it is about the results. We aim for more true sustainable improvements than one-off cost cuts.
That requires a lot more in terms of competence, technology, standardization of work procedures and lean operations. Our human capital is key to our ability to drive improvements, lift performance and add value in Hydro. We have established dedicated production systems in each of the business areas in Hydro. Our business leaders, Alberto Fabrini in Bauxite & Alumina, Hilde Merete Aasheim in Primary Metal, Oliver Bell in Rolled Products, will give you detailed insight into each of the business areas, and they will highlight also the importance of the human capital in that respect, the production systems as key success factors. Our approach and strategy for value creation in aluminum is competence, technology, innovation and organizational development. If we annualize year-to-date third quarter 2014 and add our already delivered improvements in the period from 2011- 2013, we get the following.
The B to A program is moving according to plan and has now delivered NOK 0.7 billion. In Primary Metal, the $300 program and the joint venture program has now delivered NOK 2.3 billion. The Climb program has delivered NOK 0.6 billion, and even the head office has delivered NOK 0.1 billion. These are all real improvement measured against the respective baseline year of the programs. In addition, Sapa synergies of a total of NOK 1 billion by end of 2016 are on track and come on top of this.
Finally, energy is an area that is also working hard on dedicated improvement programs, but in a dual mission, strengthening own operation and act as a global energy provider for the company is also important, and I'm happy that we have been able to sign contracts from 2021 to 2030, 2.7 TWh at competitive price levels for the Norwegian smelters. Our new normal in energy is 10 TWh. We have gradually moved from, as you remember, some years ago, 9.4, 9.5, and now 10 is the new normal. Operationally, we are very close to being the benchmark in the Nordic energy market on hydropower production. We have high-quality assets due to good maintained assets and also upgrades that we have done during last years.
We are running the 20 power stations in our system in an optimized way together with our commercial organization. Given the maturity of the Nordic power market, the commercial complexity here is higher than anywhere else in the world. That also means there are big opportunities to be captured for those that have the best at utilizing the combination between operational and commercial competence. Hydro is at the very lead on this. Being in the market every day, every hour, every minute, and we can turn up and down hydropower stations within a few minutes. Our operations are in constant dialogue with our commercial division that are utilizing the financial instruments every day.
This is a unique competence in Hydro, that we have this commercial competence in addition to the operational competence, and that competence we are using also when we are in Brazil, establishing energy contracts and securing energy supply to operations there, and also in Germany. Our Bauxite & Alumina business is strategically of highly importance and hold the long-term potential. In the near term for us, our focus is very much operational. It is to lift production and reduce costs. That includes lifting production in Alunorte and Paragominas to nameplate capacity, realize our From B to A improvement program according to plan, and as Alberto Fabrini will show you later, we are well on track.
We aim to be the leader in expanding index pricing within alumina in order to move this key material to be priced on its own fundamentals and not linked to LME. Bauxite sales should also adhere to the laws of supply and demand, and also here we aim to be a commercial leader. A very important part of being better in Brazil is to secure competitive framework conditions and predictable framework conditions on our current and future operations. Both Eivind and Alberto will come back to these efforts today, especially in relation to the ICMS tax. Our primary business area has been the best in the entire industry to realize sustainable improvements.
As you know, we realized the $300 programs last year, and Hilde Merete Aasheim is now fully engaged in the joint venture program and has even started a beyond $300 program for the fully owned smelters. We have an improvement culture in the company. It is a never-ending focus for our people to do the work today even better than what we did yesterday. We have thousands of employees that are contributing every day to make Hydro better and more competitive, reduce our cost position of our smelter portfolio step by step, day by day. We will also increase our efforts in the commercial to utilize the commercial opportunities offered by changing markets and pricing mechanisms as we see now, and capitalize on the technological edge and our commercial competence.
Our metal markets area has over several years scored particularly high in the European market on customer satisfaction. I'm also very happy to see that now that we are number one in Primary Foundry Alloys in Asia outside China, and we are also going to strengthen our market platform in North America and South America going forward. The Rolled Products business model is all about meeting and exceeding customer expectations, with technology and innovation being key to the value proposal, as Oliver Bell will tell you later. We have for some time been very focused on high-grading our portfolio to target market segments where we can make a difference and create additional value.
Is also the background why we decided on the investment decision earlier this year to increase the production of body in white from 50,000 tons to 200,000 tons in Germany, and be one of the main players in the European body in white market for the automotive industry, and also the UBC line that we decided in Germany, which will help lowering the metal cost by returning more metal back to the loop. The creation of Sapa as a global champion was strategically very important for us, and we are very focused on ensuring that Sapa restructuring program and synergy program yields according to plan, NOK 1 billion by end 2020. Sapa is on track. It has a competitive platform to meet customer demands in every region where it operates.
Being number one in U.S., number one in Europe, sustainable size in Asia, and also large in South America. It has a unique research and development expertise, process capacity, and working very closely with the customer base, also with innovations. Sapa is aiming to capitalize on the continued strong outlook in the U.S. market while it respond to the more challenging situation in Europe and also in South America. Under the heading Better, several Hydro focus areas. There are key products to the priority list, and one is operational competence. That is common for all business areas because competence is a key to lift improvements. Whether we are at Sunndalsøra or Paragominas, we are lifting competence among our employees to make sure that we can do things better every day.
We also continuously develop our technological leadership, and that has led to the plans of building a technology pilot at Karmøy. That is the core, in fact, the strongest illustration of our technology lead, because that is a pilot where we'll test the newest aluminum technology that will produce aluminum at the lowest energy consumption that the world has ever seen, and also with lowest emissions. We're also working very closely with our customers. The research and development expertise we have up in the value chain is also utilized further down. We have experts in material science in addition to metallurgy that are working closely with the customers and together with customers, develop the next generation products.
We sit together with our customers to develop tomorrow solutions in automotive, in electrical applications, in offshore, packaging, electronics, and there are several examples. Our philosophy is that if our customers become winners in the market, we will also be winners, creating long-term partnerships of mutual benefits. All in all, we feel we have a very strong story to tell under the heading better, and that story is much driven by our strongly improved performance. In the period 2011 to 2014, we have yielded improvements of NOK 3.7 billion excluding the Sapa Improvement Program. As already mentioned, improvements is an ongoing process in Hydro. Our ambition is to gain another NOK 1.5 billion in improvements in the years 2015, 2016 in real 2014 terms.
That doesn't mean that we are finished with the improvements. Even though markets have improved and the earning outlooks are positive, we will continue our drive to build competence, lower cost, and increase efficiency in our company. Then moving to bigger. We don't aim to grow for the sake of growing. We aim to act in periods where there is a sustained pull from the market and on clear indication of a total supply demand perspective that it will provide added value. An overriding issue for Hydro has for several years been to strengthen our relative position, and that remains on top of our agenda also today, and will be also going forward. The reason why we place bigger within our aspiration is that aluminum's position as a key building block of modern society continues to accelerate.
The many qualities of aluminum as a lightweight material, the density is one-third compared to steel and copper. Aluminum has 60% of the electrical conductivity compared to copper, 60% of the thermal conductivity compared to copper. It protects itself with a nanothick layer, so it's corrosion resistant. If you go down to the atomic structure, the metallic structure of aluminum is built as a cubic face-centered structure, similar to gold and silver, by the way, in good company. That structure gives superior formability of the metal. That is why all our Rolled Products can serve Tetra Pak with six micrometer thin foil, which is produced in about 2 m wide coils, and in one piece, it is 300 km long and even longer than that.
For example, in extrusion, Sapa can utilize our alloys to produce very thin-walled multi-port extrusion for heat exchanger applications, and also very complex profiles for energy-efficient buildings. Aluminum's inherent properties are extremely competitive when you are comparing aluminum with all other materials. There are certain market segments that are expected to grow higher than others. You can take a look at the growth, expected growth in transport, which is 6% for the next 10 years. Within transport, we could say body in white has much higher growth rate than that. Another big segment in aluminum is building and construction, 4% expected growth for next 10 years. Electrical, the third one, 5% for next 10 years. These are the three biggest market segments in aluminum.
Aiming to become a future winner in aluminum also carries with it a future ambition to become bigger when time and opportunity is right. For those that has followed Hydro closely during the last few years, this ambition should not come as a big surprise. Indeed, Hydro has a much stronger, better position and bigger value chain today than we were before the financial crisis. In energy, we have upgraded our assets and added capacity. In Bauxite & Alumina, the Vale transaction changed our position from being short to long. In primary, we have added Qatalum, majority ownership in Albras, and also lately the Husnes smelter. In downstream, we have created the world champion Sapa joint venture. In recycling, we have considerable capacity for remelt, of course, post-consumer scrap, and we aim to further increase that capacity.
In total, we have utilized the low cycle well, growing our company, strengthening our position throughout the value chain. We aim to follow that path also in the years to come with clear ambitions for each business area. In Bauxite & Alumina, the near term ambition is of course to lift production up to nameplate capacity, but we aim to go beyond nameplate capacity. By debottlenecking, we will come back to you with more information about what we can do in Alunorte, but there are potentials. We have the CAP alumina project in Brazil, and also the plans to expand Alumar when the time is right.
In energy, we have already captured opportunities, helping us to push the production up to 10 TWh in a normal year, and we expect there may be further opportunities as there are still green certificates available in the Nordic energy market. In primary, over the 10 years, and Hilde also will come back to that, he has plans to realize creep of 100,000 tons increased capacity in the coming years. We will extend our technological lead with the Karmøy technology pilot, and we will mature options for Qatalum 2 and the Alouette expansion. We are not going to build Alouette or Qatalum 2 now, we will wait until the time is right.
In Rolled, we will continue to high-grade our portfolio, and we have already talked about what we are doing in body in white automotive line in Grevenbroich that will be online in end 2016. We will increase recycling also to reduce the metal cost in our value chain, and we will continue to build our market position and lift margin through technology and innovation also in our products. Greener. Greener is the final part of our aspiration to become better, bigger and greener. It's an integral part of our goal to establish our strategic direction and create a solid platform for value creation. By Greener, we do not only refer to our climate ambition, but to build our full sustainability agenda. It incorporates our efforts in climate change and resource scarcity, viable communities, corporate social responsibilities, integrity and environmental impact and reforestation.
Investments in these areas we see as a competitive advantage. We see, in fact, an increasing trend among our customers that they seek suppliers that they can trust and they can rely on also in these areas. We expect this trend only to continue in the years to come. Products made by poor environmental performance and with environmental impact at unsustainable levels will be increasingly hard to sell. We are safeguarding and strengthening our competitiveness by focusing so strongly also on these areas. We expect this advantage will continue to grow and its ability to generate value going forward. Our climate strategy is now well established. Hydro wants to be in the forefront of developing a sustainable aluminum value chain. We are aiming to be the first company in our industry to become carbon neutral from a life cycle perspective within 2020.
We have made good progress. In the years that has passed since the launch, we are on track to meet this highly ambitious target, and we are working along three axes. First, we are aiming to reduce our own footprint, reducing energy consumption in our production, and reduce emission from our productions. The second is to help our customers to reduce their emission in the use phase and gain most out of aluminum inherent qualities, such as lightweighting, of course, by replacing steel. In the recycling phase, we bring as much metal back to the loop and bring more metal back to the loop, and we have ambition to reach 250,000 tons recycling capacity of post-consumer scrap in 2020. There are reasons behind our climate neutral strategy, at least two main reasons.
We are aiming to be a part of the solution because this is the right thing to do, and we're aiming to be the best on climate because that will increasingly be a competitive advantage. Even in the absence of a global CO2 agreement, there is a multitude of smaller, more regional factors that still point in that direction, even the progress is low. End users are increasingly looking at life cycle perspectives of their products to buy, they buy, putting pressure on our customers that are again, putting pressure on us. We welcome that pressure because we believe we can deliver above and beyond our competitors when it comes to climate. If you look at the footprint of Hydro in comparison with our peers, we are the best in the industry.
Regional lawmakers in U.S. and Europe is tightening the screw, setting increasingly strong limitations of emissions and energy efficiency in key sectors such as building and automotive. Life cycle results shows that in automotive application, each kilogram of aluminum replacing steel saves between 13 and 20 kilos of greenhouse gas emissions. The case for metro subway cars has shown savings of approximately 26 kilos in Europe, 51 kilos in U.S. of greenhouse gas emissions reductions. International Energy Agency's Maria van der Hoeven has said that energy efficiency is a hidden fuel, yet hiding in plain sight, as energy saved is like energy produced. Automotive is a very good example where climate and aluminum go hand in hand. Hydro strategic direction for lifting performance and creating value is building on our competitive strengths, capabilities, and established track record.
We are building a better, bigger, and greener Hydro, which will create an even firmer foundation for our future ability to add value and create and ensure competitive shareholder returns. In order to serve our shareholder well, we need to ensure that our profitability reaches sustainable levels. Clearly, the low cycle period since 2008 has been disappointing in this respect, but this is now beginning to change. If you take the last four quarters adjusted to today's market prices, we see a ROACE of about 5% even without our delivered improvement efforts. If you then add to what we have delivered of improvement efforts in 2011 to 2014, NOK 3.7 billion, we are just above 8% in the ROACE.
If you then also add the effects of improvement efforts we have now announced for 2015 and 2016 in real 2014 terms, we arrive at around 10%. This is a fixed picture, of course, in a world that is forever on the move, and lately it has moved in the favor of aluminum. Depending on whether you expect this trend to continue, you could see market effects as a positive upside in this scenario. This scenario, of course, excludes many elements which could have an impact on earnings going forward, including shifting alumina index, our alumina volumes to index pricing, energy pricing, ICMS, premiums, and inflation, and so on. Take that into account. In conclusion, our value proposal for increasing shareholder returns rests on three pillars. We will continue our operational and commercial improvement drive.
We have already shown that we have a good track record, a strong momentum, and strong organizational capabilities and competencies to make it happen. We will continue to strengthen our relative industry position through portfolio high-grading and selective profitable growth. Lastly, we will build on our climate-friendly position into a future advantage for Hydro when climate becomes an increasingly important part of our overall competitiveness. These pillars are equal to a short version which will lift Hydro to the next level, both in terms of performance and value creation, which is better, bigger, and greener. Thank you very much for your attention. I have the pleasure to welcome on stage our CFO, Eivind Ka llevik.
Please. Thank you, Svein Richard, and thanks to all of you who have decided to join us here today, and also to all of you listening in on the webcast.
In my financial update today, I would like to start with an overview of the key financial developments since the last capital market day in December last year. I will then move on to discuss earnings drivers for the Hydro group, as well as to present some scenarios based on EBITDA, and to illustrate the real effects from the improvement programs that we have in the company. We will then move on to look at Hydro's financial policy, in addition to Hydro's capital allocation priorities going forward. Here, I will spend some more time on the sensitivities, but then on the return of capital perspective. Finally, I will end my presentation by commenting on some important items for reporting going forward, as well as to give you an updated guidance following the Q3 reporting. Let's start with the financial developments.
Now, the last four quarters have to a large extent reflected the improvement in the fundamental market situation that we have experienced, in addition to the efforts from our own improvement programs, both operationally as well as commercially. We have delivered some 3.3 billion NOK in underlying EBIT since the third quarter last year, which is an improvement of some 35% compared to the preceding four quarters. Of this 3.3 billion, roughly 45% of that was delivered in the third quarter this year on the back of the improving realized all-in prices for Hydro. Now, if you look at the all-in realized price for Hydro, it has, for the last four quarters, averaged some 13,815 NOK per metric ton, which is a 5% improvement compared to the period.
This price has, of course, been helped by the development in the NOK dollar exchange rates. If you look at this in U.S. dollar terms, it has been relatively flat between the periods. The implied primary cost has, for the period, seen a 14% reduction, bringing it down just below $1,360 per metric ton. This, of course, is a result of the focused internal efforts on the improvement programs, in addition to help from the rising premiums. Now, if we exclude the rising premiums, we will still see a good and healthy cost reduction of 6%. All these developments have so far resulted in a 47% increase in total shareholder returns or an additional 30 NOK per share compared to the preceding four quarters.
If we take a cash perspective, we see that we are more or less cash neutral if we exclude the operating capital and currency translation, but including the full-year dividend payments at the realized price of $2,300 per metric ton. If we do a quick walk-through of the cash flow in the period, we ended Q3 2013 with a net debt position of NOK 0.5 billion. We have generated NOK 7.8 billion in EBITDA in this period, up from NOK 6.7 billion in previous period. We have other adjustments of NOK -2.8 billion. This, for all practical purposes, relates to the payment of taxes.
We've invested NOK 3.1 billion, which is slightly below the earlier guiding, and it relates pretty much to CapEx optimization within the Bauxite & Alumina, as well as the Primary Metal business area. Add the dividend payment of NOK 1.9 billion, this includes dividend payments to minority shareholders, bring us back to a small net debt position of NOK 0.5 billion. If we then look at the two last items, which can be argued to be non-recurring, we have an increase in net operating capital in an absolute amount of roughly NOK 1 billion. This, of course, is driven by the increase in all-in metal prices towards the end of this period.
In addition, there is $0.6 billion negative related to currency translation effects on the U.S. dollar net debt position that we do have, leaving us with a net debt position of $2.1 billion at the end of the quarter. Cash and freeing up cash has been and will continue to be a key focus area for Hydro. Through that, we also have a very strong focus on net operating capital performance. Over the last couple of years, we've seen a good development in the right direction when looking at operating capital days. We reduced the number from some 80 days back in 2011, down to 64 days in 2014. In terms of absolute amounts, we see an increase now in 2014, but that, of course, again, can be explained by the higher all-in metal prices. It's not an increase in the underlying volumetric figures.
If you look at the average net operating capital for the most recent period and take the 16-day improvements that we have done since 2011, this would represent roughly NOK 3 billion in additional freed up cash. It's quite important. Just to be clear, in this slide, we've also excluded extruded products for the whole period just to make the numbers comparable, year by year. If we then turn to the financial position, we will see that despite some increase in net debt, this remains, from our viewpoint, a very solid financial position. I know that a lot of you also comment on this solidity from time to time.
As I just mentioned, we had roughly NOK 2.1 billion in net debt at the end of third quarter this year, an increase from NOK 0.5 a billion in the same period last year. We've gone through the explanation and the drivers for this for the previous slides. The adjusted net debt position of a -NOK 14.1 billion consists of, in addition to the net debt, a net pension liability of NOK 6.6 billion and other adjustments amounting to NOK 5.4 billion. Now, the other adjustments comprise mainly of operating lease commitments, asset retirement obligations, in addition to the payment for the outstanding Paragominas shares, that we have an option to buy in Brazil. The increase in adjusted net debt from NOK 10.7 billion last year to NOK 14.1 billion this year is primarily driven by higher net pension liability.
This is due to the lower discount rates on pension liabilities in Germany and Norway, giving us a higher net discounted liability, in addition to the implementation of the new K2013 mortality table in Norway. Let's move on to sensitivities, and here we will talk about the EBITDA scenarios, which I do know that quite a few of you do appreciate. Now, when trying to understand Hydro's earnings drivers, and we go through the sensitivities, it is important in this section to remember that the starting point for the assumption is quite important. Example, of course, is that if you're starting with a higher LME price as a basis, that would give you a larger NOK dollar sensitivity. Starting with a higher NOK dollar would give you a higher LME sensitivity.
The models that we use are simplified, and there are no accurate answers to all price or currency movements. Typically, over time, there was also a certain degree of negative correlation between LME and NOK dollar. As in the past, we will see that the largest impact for Hydro in terms of sensitivity relates to the LME price as well as the NOK dollar. The total company sensitivity on LME is NOK 2.8 billion on a 10% change in LME or $190 per ton in our calculation. Of this, NOK 1.95 billion comes from the Primary Metal business area, NOK 0.65 billion comes from Bauxite & Alumina, and the remaining resides or comes from the Rheinwerk smelter, which is reported within the Rolled Products business area.
The largest currency sensitivity is related to the U.S. dollar, as the prices that we sell for our products, either the LME or the PAX index, is quoted in dollars, while most of our costs are related to local currencies. We can see that EBIT will improve by NOK 2.8 billion if there's a 10% movement in the dollar NOK rate. As all of you know, we have seen a significant change between NOK and dollar from the third quarter and into the fourth quarter. If you take today's currency rates of 6.8 against the realized rate in third quarter of 6.25, that would indicate a full year EBIT increase of some NOK 2.5 billion in increased earnings for Hydro.
Let me also give you some comments on financial items, on the sensitivities. These sensitivities are either related to debt, intercompany positions or embedded derivatives, in power contracts. Important to note that the movements here are unrealized effects until either the debt is repaid, the intercompany positions are settled, or the power contracts are matured and expired, assuming that the currency level stays at the same level. On a long-term basis, we see a significant BRL sensitivity on EBIT due to the local cost in BRL, in Brazil. However, you should remember that 2014 we did have a hedge in place, of 2.41, between the BRL and the dollar, and there is no hedge in place for 2015.
If you take today's currency rates of roughly 255 to the dollar, there is an upside compared to the hedged amount for that we had for 2014. If you take the hedged amount, roughly $850 million, take the delta between 255 and 241, you will get to an earnings uplift of Hydro's results of roughly NOK 300 million on an annual basis. There is limited euro EBIT sensitivity, but more in financial items due to the intercompany balances in euro and embedded derivatives within the power contracts. Just finally to inform you will find detailed sensitivities on the Bauxite & Alumina area, on the Primary area, as well as the Energy business area within the slide pack that you have received today. If we then turn to the annualized underlying EBITDA scenarios.
Now, keep in mind that these are not our estimates for the coming years, but they are indicative ranges using the sensitivities that we have just given you. We're using the last four quarters' performance as the baseline. This is an illustration of the larger picture and not necessarily for any single year. Now, if we take Q4 2013- Q3 2014 as a starting point, an all-in metal price of $2,250, we've tried to give you three scenarios. One with an all-in price of $2,100, one with an all-in price at $2,500, and one high case at $2,900 per metric ton. This year, we've used the all-in price for the scenarios, as the premium assumption is becoming increasingly important.
When we've done the sensitivities, we've only stressed the LME part of the all-in price as the realized premium for Hydro for the last four quarters is approximately $450 per ton. We kept the exchange rate assumptions flat for all three scenarios, NOK dollar exchange rate of 6.8 and the BRL to the dollar of 2.6. We are only assuming differences in the all-in price, and of course, there are many other moving parts which are not taken into account but would influence these scenarios. On this slide, importantly, we would also like to illustrate the effect of the Hydro improvement programs as we show the EBITDA scenarios with the realized improvements, with the full improvement potential in addition to EBITDA scenarios without any improvements delivered.
If we look at the red scenarios first, we see what kind of EBITDA range we could potentially achieve if we had not implemented any improvement programs at all. You see that this would give us roughly NOK 4 billion in the lower price range, NOK 10 billion in the mid-range, and finally around NOK 16 billion in the upper range. If we take the asset scenarios, these scenarios include the already realized effects from the improvement programs. We would get in the low price scenario of $2,100 an EBITDA of roughly NOK 8 billion. In the $2,500 case, we would get to roughly NOK 14 billion, and with an all-in price of $2,900, we would generate roughly NOK 20 billion of EBITDA a year. As Svein Richard Brandtzæg indicate, there is more improvements to come.
With fully realized remaining improvement programs in real 2014 terms, we would see an even improved EBITDA, roughly NOK 10 billion in the low price range, NOK 15 billion in the mid-range, and up to NOK 21 billion in EBITDA in the higher price range. If you look at the delta between the red and the green case, we believe that this clearly proves the importance of the improvement culture that we have in the company. Again, to be orderly, just like to stress the positive and negative additional factors that may influence earnings going forward in addition to these scenarios. Currency, currency inflation, ICMS, and obviously also the shift of alumina volumes from the old LME contracts into new PAX-oriented contracts would have an impact on earnings. Let me then spend some slides on financial policy.
I will also in this part work a little bit with the scenarios which we've just introduced, so don't forget them just yet. When we work with capital allocation priorities in Norsk Hydro, it's really three main factors. First of all, it is very important for us to deliver competitive shareholder returns. As you all know, we have not delivered sufficient shareholder returns in the last five years. This has largely been driven by the limited profitability within our industry due to the overcapacity and resulting depressed prices. However, as we see it now, the last year's market developments as well as the internal improvement efforts that we've done, starting to take effect and is helping the returns as we see them.
As Svein Richard mentioned, our share price has appreciated more than 50% year-to-date, and we are working through the better, bigger, and greener aspiration to do what we can to ensure the potential for competitive shareholder returns also going forward. Secondly, it is important for us to maintain a solid balance sheet, and this is in particular due to the cyclical nature of our industry. The last five years is a good example of this, where we in the challenging market have had the possibility of making long-term strategic important moves, like the Vale transaction. The strength of our balance sheet is also a reflection of our desire to remain investment-grade rated. In order to do so, we need to view our debt situation both against equity but also against earnings.
Remember, it's only in the last third quarter that we started to see an earnings uptick for our industry and for Hydro. Thirdly, we have a broad portfolio consisting of highly competitive growth projects. As we mentioned before, we have and we will continue to employ a very disciplined capital spend strategy. Given today's market situation, we will continue to focus on the company from the inside, keeping a tight capital discipline and investing in projects where we can high-grade our portfolio. Now, improving returns to shareholders is currently and has been for a long time on top of the priorities. One way of doing this, of course, is to improve the relative cost and earnings position. That we have improved through the improvement programs. If we then transfer this into a returns context, we can see the following picture in a minute.
Here we illustrate profitability scenarios as measured by ROACE, that correspond to the EBITDA scenarios as I've shown you a few slides back. As with the EBITDA scenarios, let me just again remind you that these are indicative ranges of ROACE levels given the sensitivities that we have provided you with. The analysis is simplified and given for different levels in price of the all-in price. Again, if we look at the red scenarios first, those without any improvement programs, we see that for the lowest price scenario of $2,100 all-in LME, that would give us a water level of around 0%. In the mid case of $2,500, we get to 4%-6%, and in the high case of $2,900 per metric ton, we would get to 9%-11%.
If we include the effects that we have already realized on the improvement programs, we get to a 2%-4% range in the low case, 8%-9% in the mid case, and roughly 13%-14% in the high all-in price case. Finally, if you then include a total of potential from the improvement programs as we talked about and look at the green scenarios, we again see improved profitability ranges up to 4.5%, 4%-5% in the low case, 9%-10% in the mid range, and 14%-15% in the high case. Again, same as with the EBITDA scenarios.
Please remember that there are additional factors, again, currency, inflation, ICMS, and the shifting of the alumina contracts to index to be named some of the most important ones that will impact earnings going forward. Another important part of shareholder return for us is to provide cash returns to the investors. It has been and still is important for us to maintain a stable and competitive dividend yield to our shareholders over time. If you compare us to those companies that are exposed to the same markets as ourselves, then our dedication to providing shareholder returns, cash returns is more visible than if you just look at Hydro on a standalone basis. Our ability to do that, of course, also reflects the flexibility we have when we have a strong financial position.
As a Hydro shareholder, you should expect competitive returns over time. One of my top priorities as a Hydro CFO is certainly to contribute to make sure that we run Hydro as a company that contributes to strong and sustainable long-term value creation. We do remain committed to the dividend target of paying out 30% over the cycle of net income over the cycle. Obviously, in a low earnings environment that we've been through in the last five years, the payout ratio becomes quite large, and it has averaged some 86%. We will use share buybacks and extraordinary dividends as a supplement in periods with strong financials. These will be evaluated internally alongside other measures that we believe may create the most long-term shareholder value.
Let me also just remind you that, according to normal procedures, Hydro's board of directors do review the dividend, and they will do in connection with the fourth quarter results. The board's proposal will then be presented and announced together with the fourth quarter results presentation in February 2015. Finally, before moving on to CapEx overview and guidance, let me just give some comments in terms of our balance sheet and how we see and how we determine its strength. For Hydro, maintaining investment-grade rating is a high priority. It allows us to secure access and competitive terms in the bond markets when and if needed, and it helps us to realize business opportunities and deal with counterparties' issues.
We're happy to see that since the start of 2011, we have been able to retain a BBB credit rating, despite the downward trend in aluminum prices for this period. As communicated before, Hydro has two financial ratio ambitions over the business cycle, which is important for us in order to retain the investment-grade rating. Now, if we start with number two on this slide, the net adjusted debt to equity, our aim is to be below 0.55. Now if you look at the period since 2009, that has really not been an issue, and we've been well within the target. The other ratio is funds from operations to net adjusted debt. Here we aim to be above 40%.
This of course has been challenged over the last years with the exception of 2010, and this reflects the weak earnings environment that we've been in. This has really been the main contributor in determining what we believe is an optimal balance sheet structure for Hydro over the last couple of years in order to keep the investment-grade rating. Now obviously, if you look forward with today's prices and today's currency rates using the sensitivities and the scenarios that we've given you before, this ratio will also improve, giving us some more flexibility in how to remain investment grade in the future. Let me just give you a comment on also the strong focus on liquidity that we have, which is an additional source of financial flexibility for Hydro.
As communicated in the third quarter, we have roughly NOK 6 billion in cash and cash equivalents sitting on the balance sheet, but in addition to that, we also have NOK 1.7 billion credit facility which is undrawn and matures in 2019. Let me now go to capital expenditure updates for 2014 and give you some guidance for 2015. On these slides in the beginning, we will just talk about sustaining CapEx, and I will revert to the growth CapEx in just a few minutes. As you may remember, as a previous capital markets day, we guided for a somewhat higher sustaining CapEx in 2014 of roughly NOK 3.9 billion.
Due to a combination of bigger sustaining projects, in particular in Bauxite and Alumina, I will come back to those, but also somewhat higher and above cycle realigning projects within the Primary Metal business area. Optimizing CapEx and investing, also sustaining CapEx when the time is right is important for Hydro. When we know getting closer to the end of 2014, we see that the sustaining CapEx for 2014 is going to be closer to NOK 3.3 billion rather than the NOK 3.9 billion that we indicated at last Capital Markets Day. The result of this is what we discuss internally as CapEx optimization. We're moving. If we can move, if that's the right decision, we will move CapEx to later years. That's what we've done between 2014 and 2015.
It also means that if you start looking at the 2015 number, that is significantly higher than what we've seen in the past. Several factors behind that. First, it is the CapEx that we moved from this year to next year. Secondly, there are two significant projects that we have talked about in Bauxite & Alumina. One is building a new red mud disposal area at Alunorte. The one we're operating today was built when the plant was new. It's getting full. We need to open up a new area. That area is gonna live for another 15-20 years. We have a similar project in Paragominas, the bauxite mining area, where we have a tailings dam where we deposit bauxite residues. The one we're using today was opened when the mine was new. It's getting full. Need to open up a new one.
That is going to live for another 10-15 years. It's two significant investments coming basically in the same two-year period. Thirdly, also within the Primary Metal business area, somewhat higher relining than what is a normal cycle for the next year. All these factors combined gives us a sustaining CapEx for the next year of some NOK 5.7 billion. Very much, I think, in line with what we communicated before, that we will see a wave of sustaining CapEx for 2014-2016. It is a temporary buildup, and let me just underline that our long-term estimate still remains at NOK 3.5 billion per year. In addition to sustaining projects, we also aim to high-grade our portfolio in line with our strategy.
Through 2014, we have announced several smaller and medium-sized projects, which will affect the CapEx level also for 2015. We have been working to shift production to more innovative and value-added products which have higher margins. One example of that is the new body in white line in Germany, basically quadrupling our capacity in this high-growth segment. Another example is the adjustable flexible mold project in Årdal, allowing us to produce higher quality sheet ingots targeted for the automotive industry. In addition, we have a debottlenecking project in Alunorte, the world's largest hot rolling mill, and Oliver will talk a little bit more about that later.
We're also investing in new remelt and recycling facilities to meet the long-term recycling targets and an ambition to become carbon neutral by 2020, but also to lower the input cost for metal into our rolling facilities or remelt facilities. We continue to work on securing more captive hydropower, and we have announced also two smaller projects in the second half of this year. If we put everything together and look at the total CapEx guidance for 2015, then we see a significant increase from 2014 to 2015, up to NOK 6.5 billion. Again, this is primarily related to the temporary buildup of sustaining CapEx, which I've just explained. You also here see the impact of the smaller growth projects that we have, primarily related to the Rolled Products business area.
Again, let me just remind you, the long-term guidance for CapEx is NOK 3.5 billion when it comes to sustaining. That brings me on to my last chapter, which is financial reporting going forward. Let me start with the closing of the Søral transaction at the end of October. This will be fully consolidated going forward. The plants from now on will be referred to as Hydro Husnes as of the first of November this year. In addition to Husnes, Hydro previously owned 36% of the Aluchemie anode factory in the Netherlands, while Søral, or Husnes, owned 10%. We now own close to 50%, and we will proportionally consolidate Aluchemie from the first of November as well.
The total combined effect from the Husnes transaction will add approximately NOK 100 million additional in sustaining CapEx, but also about NOK 100 million a year in depreciation. On to a very important topic, which is a top priority internally in Hydro. The aluminum industry, as well as the iron ore and manganese industry, has an exemption of paying ICMS on goods procured in the state of Pará. For Hydro, this is mainly bauxite, fuel oil, and alumina. ICMS is practically like a value-added tax. Since we export most of our products produced in Pará, we would have to pay it if the exemption was not in place. These types of regimes are very common in Brazil for states to attract investments and to generate employment.
It's also common that such regimes are renewed. The current exemption will be revisited in the middle of 2015, and we expect that the state of Pará understands Hydro's ambition to develop robust and viable operations in Pará, as well as our ambition to be an enabler for sustainable growth in this resource-rich region. In order to pursue such ambitions, Hydro needs stable and predictable framework conditions, and that of course also includes tax regimes. When it comes to fuel oil, the state of Pará decided to move the collection point for ICMS from inside the state to outside or from the fuel oil distributor to the refiner. This has resulted in increased charge of some BRL 60 million per quarter. This still remains in place. However, there are ongoing dialogues with the governor following now the conclusion of the elections.
We have no indications yet as to the outcome of this discussion with respect to the likelihood of getting this reversed, but Alberto will come back in some detail on how we work locally in terms of addressing these issues. On the positive side, though, we see that REINTEGRA, which is a special tax regime that allows exporters to account tax credits on exports of certain products, including aluminum, has been reintroduced for our products. This will for 2015 represent an annual reimbursement to Hydro of some BRL 170 million. If you look at the market developments compared to what we said in Q3, not too many things has changed. LME has continued to trade between 1,850 and 2,100 with a contango which has been somewhat volatile with periods of backwardation.
We've seen a continuous increase in premiums. We see standard ingot now trading above $500, and we're booking extrusion ingots close to $900 per ton. Alumina prices are up from the average levels that we saw in Q3 and are now trading at around $350 per ton. Where we've seen the largest movements that will impact earnings in fourth quarter is the NOK dollar exchange rate. The BRL dollar has had some significant movements on the back of the re-election of President Dilma in Brazil. Production at Paragominas and Alunorte, I'm happy to say, has increased as we guided on in Q3, and Alberto will also come back to that in some more detail.
On the energy side, we've seen an NO2 spot price in the third quarter of some 247 NOK/MWh. So far in the fourth quarter, the average has been around 230 on the back of the very mild and wet weather that we have experienced in Norway. Also, let me just remind you that spread between the NO2 and NO3 areas has increased from 26 in the third quarter to some 39-40 NOK/MWh in the fourth quarter year-to-date. Both these effects obviously being negative on the energy results. Finally, on financial priorities going forward, we will continue to work through a better, bigger and greener aspiration to improve and maximize shareholder returns. We will maintain keen focus on cash flow generation.
We have today spent so far a lot of time illustrating the effects and the value of the improvement efforts that we are doing in Hydro. We will deliver the outstanding improvements potentials. Of course, we will also do our utmost to find new levers to pull and new buttons to push to ensure that we remain the improvement benchmark of our industry. Margin management continues to be a key focus going forward. We will high-grade where we can, and we will continue to push and reduce input costs. Finally, we will continue to focus on financial strength and flexibility. We will keep the tight capital discipline to make sure that we are within the communicated financial ratios in order to remain investment grade. Thank you.
Thank you, Eivind. Could Svein Richard please join us on stage also? We will now open up for Q&A. There will be two microphones going around the room. Please state your name and company clearly before asking a question.
Anja Hansson at Arctic Securities. One question to Brandtzæg and one to Kallevik. First to you, Brandtzæg. In the aluminum market and the all-in price has improved, and it looks like it could be even tighter market. What do you think could be restarted of all the closed capacity? To you, Kallevik, when it comes to the sensitivities, it's a rather remarkable change when it comes to the currency sensitivity given compared to what we saw in your third quarter presentation.
Okay. I start with the first question related to capacity, restart of curtailed capacity in metal production. We still see some uncertainty going forward. The price levels, of course, are now all in at all-in metal price of around $2,500, and when you include the metal products premiums even above that.
Looking at LME itself, it's still not at a level where it will become, from that point of view, very attractive. It depends very much on the outlook on the tightness of the market. I cannot answer on behalf of the other actors, players in this market. From Hydro's side, we have only made one decision on restart so far, and that is the Sunndal three line, 50,000 tons. We have not made any other decisions. I will say that we will need more time and better predictability before we are thinking about restarting more capacity because we are running lower capacity in Germany. We have a reduced capacity in Søral at Husnes, running Husnes at 50%.
We co uld also take that up to full speed, but we are not going to do that before time is right, and that is not now.
On the currency sensitivity, yes, the amounts are bigger, but this has also to do technically with the starting point when you do calculate your sensitivity. That's where you would find the big difference from the third quarter. It's the starting point.
Hi, it's Jeff Largey from Macquarie. I have two questions. The first was just on China. I mean, you basically describe it as relatively benign for the global aluminum balance. You know, there's been some talk or discussion that, you know, in terms of their export regime, their tax regime, potential for rebates or even eliminating some taxes that they might, the government might look at taking action there to help, you know, not only the domestic players sort of export away some of the weakness, but also potentially just to take advantage of, you know, the arbitrage we see. I mean, obviously semi-finished materials have picked up considerably in terms of exports.
Just curious on your view if you think that China, in terms of as a player, remains relatively benign to the global market or the Western world market or whether there's concerns. And the second question is more on CapEx. We might go into more detail on this, but just looking at the pickup for 2015, I'm just curious if some of these projects that have been delayed effectively wrap up next year, or do we have spillage over into the following year. You know, I know we won't drop immediately to that long-term sustaining CapEx number, but I'm trying to get a sense of what the profile is, you know, in what could be a very robust cash flow environment.
Sure. Okay, just to answer your first question, we have also heard the rumors about changing incentives for export of primary metal. Today, there is a metal advantage of $200-$300 per ton for the downstream business, competing within the extrusion market and rolled products market, for example. We have not confirmed that. If you take a look at the long-term development in China, over the years, China has been very well-balanced in primary metal. Again, just to remind all about the raw material situation, they are completely dependent on heavy import of bauxite and alumina from the outside. They don't have enough raw materials. The energy situation in China is becoming more difficult related to emissions and pollution.
Again, there is a question if China really will be a net exporter of primary metal. It is more likely to see that they will export more semi-fabricated and fabricated product. There is not dramatic change in that respect, but we are following that development very carefully. On the capital side, and if you look at this from what we call CapEx optimization, we will do the sustaining CapEx when you need. If you can push that one year without jeopardizing operations, of course you would do that. There will be then effects in 2016 as you push some of these projects out one year in time.
Both the red mud area as well as the tailings dam area in Brazil, there will also be CapEx in 2016. We expect to come somewhat down from the 2015 level, but we will not be down to NOK 3.5 billion in 2016.
Morning. Jatinder Goel from Citigroup. Just two questions. You're saying about resuming some of these projects when the time is right. In your mind, what are the triggers or how much visibility have you got? Because you have laid down 10-year growth outlook for both Primary Metal and alumina. Would you wait for the shutdown capacity to come back first and then resume your projects? Or do you think you'll see incentive prices before the others can come back to the market? Secondly, on the capital return to shareholder, what would be your preferred route for choosing between buybacks and special dividends? And what triggers are you waiting for there? Because you seem to be moving in the right direction, and your balance sheet doesn't look stretched. You have got investment-grade rating as well.
Do you need more visibility into the market, or are there any specific metrics you're watching carefully before you start doing something? Or do you need to reach the high water mark of 30% through the cycle before you return excess cash? Thank you.
Okay, I take the first question related to timing for deciding on building a new primary capacity. Of course, it remains to be seen what will happen with the curtail capacity in the world. We know that the major part of it will probably not be started. That is also the case with our own curtail capacity. We took out among the different production lines, old Søderberg lines, high cost Søderberg lines in 2008, 2009. Of course that is already demolished, will never come back again. The same with the Kurri Kurri smelter. We have said that is permanently closed. We see also among our peers, there are capacity that will never come back again. But there is some capacity that can come back.
We think that let us now follow the market development quarter by quarter, year by year, and find out when the time is right. There is definitely a positive growth situation, so that is not the problem. I would say that the experience in the aluminum industry so far and the problem we have had so far is not the demand, it has been the supply. We will be very careful with the building new capacity in the years to come.
On the dividend question, I think we use the word cautiously optimistic still when we look into the future, although it's a lot stronger today than what it was a year ago. That's an important backdrop. Remember that we have one quarter of reasonable earnings, and that's the third quarter. I think we would like to see at least for a little bit of period of time, sustained good earnings, before we get more than cautiously optimistic.
It is, as I said, I mean, when you look at the net debt position of NOK 2.1 billion, and if you apply the credit rating agencies ratios, and if you look at the sensitivities that I've given you know the situation will potentially be better at the end of the year. Then we will have a discussion with the board during the annual close, and then they will propose give their proposal at the Q4 release. When it comes to share buyback special dividends or increasing the steady dividend on a yearly basis, that is something that we will discuss with the board when the time is right.
Hi. Ola Skar, Morgan Stanley. Just to check, the NOK 6.5 billion for next year doesn't include any CapEx for Karmøy, but that's NOK 2.1 billion potentially according to your original press release. You were hoping to get that started by 2017 pending approval. That would imply actually a very heavy investment in presumably 2016. Is that correct?
It does include some CapEx for Karmøy in 2016, but it would be a heavier investment in 2015, but it would be heavier investment in 2016 if the project is approved.
The approval process from your side and Enova side is to go ahead, but you're still waiting the European Commission ruling, is that correct?
I think we're waiting for several things. One, as we've been quite clear, we need the approval from ESA on the project and the grant that we get from Enova. Secondly, of course, also, long-term, competitive price power supply is also very important for the pilot before it can go ahead.
Vanessa Lai, Bernstein Research. With the narrowing metal contango and the release of the warehouse starting now, can you share with us your view on the physical premiums, especially when we see a little bit of softness on the Rotterdam premium versus U.S. Midwest? Then the second question is, on bauxite. With the Indonesian bauxite ban persisting, from your perspective, do you see tightness in bauxite, and does this change your bauxite strategy, especially with your position in Brazil?
Okay. With regard to development on standard ingot premiums, I would say that at least when we look at the premiums in the metal products market, the very tight situation continues. There may be some softening in the standard ingot premium market because now there is a steady outflow of metal from the market, from the inventories, but that goes also into the physical market. Customers are waiting for that metal. I would not speculate what is going to happen in the future between the possible reduced ingot premium and possible increase in LME. There is reason to believe that when LME comes closer to the physical market, then LME will also show some more reaction to the tightness in the physical market.
On the bauxite side, Alberto Fabrini will come back with a lot of information, and he will tell about and I think we'll answer your questions about the bauxite.
Thanks. It's James Gurry from Credit Suisse in London. Two quick questions. Is the tax rebate in Brazil a new thing that was introduced recently? Did you have it during this year at all? And also, what challenges do you think the new report from the U.S. Senate has thrown up for you to consider, and how do you think that may play out within the market going forward?
If I answer the tax side first. It's very limited impact in 2014 of this Reintegra reintroduction. It was in place in 2013 for the most part, and then it's coming back for full effect in 2015. It's quite an important factor for export industries like ourselves. That's a significant, I would argue, earnings impact.
Yeah. Again, it remains to be seen what will be the effect of this. There could be some changes, but it remains to be seen.
Thank you. I think we will stop the questions there for a break. You can continue asking your questions outside, of course, during all the breaks. We are a bit behind the schedule, so I suggest we meet back here at 10:25 A.M., so 10 minutes from now.
10 minutes.
Thank you. Okay. Thank you , ladies and gentlemen. We are now ready for the second part of today's presentations. For this, I would like to invite Executive Vice President and Head of Energy and Business Development, Arvid Moss, to the stage. Arvid, when we are out meeting investors and analysts, there is really one focus areas that we get more questions on than others, and it's related to the market balance and not really the demand side. It is related to supply side. What are we seeing in the supply pipeline going forward, and how much and how will restarted or curtailed capacity be restarted? I hope you can cover these topics in your presentations. Thank you.
I will do that, Pål. Took me by surprise this time. Good morning. Good to see you all again. What I will share with you today is the normal perspectives on macro and the markets going forward in the different parts of the value chain. Erik Fossum will also this year join me to discuss the development of premiums and the metal markets. Let's start with the broad picture first. To put the growth of aluminum demand in a perspective over the last 10 years, you see here that transport and construction each represents 25% on a global basis. It's also important to see that if you look at the different consumption areas here, in this period, all of them have had a very solid growth.
Packaging lowest at 3.3% and up to some 8%. All of them are above the GDP growth globally in this period. Aluminum intensity in the economy is growing. For us in aluminum, it's a very good picture that we have such a broad-based growth. It's not dependent on a single area of application. Secondly, if we look at the distribution per region, Asia now represents some 60% of total consumption of aluminum. It's been a tremendous growth, as you know, over the last 10 years. You see also at the bottom here that the growth in Europe and North America has been low in this period.
That doesn't mean that there is a zero growth in the use of aluminum, but it comes into these economies based on semis, fabricated products, and finished products shipped from China and other places. The GDP or the aluminum intensity in the GDP is still increasing. If you then look at the picture for GDP growth versus aluminum growth, it's the same story that we see that in countries where you have a solid GDP growth like the green growth here in the U.S., some 2%-2.5% over the last years. We see also a solid growth and higher than the GDP growth in aluminum, here up to some 5%-6%. In Europe, it's been much more volatile, as we all know, over the last years.
We had a very weak demand for aluminum in 2012, and we see a modest growth this year. I think I will come back to Europe, but of course, it is a rather vulnerable situation now at the end of 2014 and going into 2015. We believe in a slow growth in the base case for Europe next year. What is then the main driver? Now we're seeing more and more, the growth in automotive. Historically, you know, the regulations on the CAFE in the U.S. and the regulations on miles per gallon or kilometers per liter CO2 emissions in Europe was to reduce the dependency on energy imports to the U.S. or Europe.
More and more, this has now become vehicles to reduce the CO2 emissions. We see here the development of the CAFE rules in the U.S. and the emission regulations in Europe tighter and tighter. We see how the automotive industry respond to this. Better engines, but for sure, also more lightweighting and more aluminum. In the U.S., we see here has come up to now some 170 kilos per car. Next year, this will over to 2020, this will actually increase by another 50 kilo. The same in Europe, starting at a little lower level, but still plus 50 kilos over the next seven years. That's a huge growth. China is lower, and in the base case here, this is a more modest growth.
I think this is, to the extent there is a risk on that one, it's on the upside. Because if the government in China starts to put more focus, even more focus on the environmental situation and the pollution, this is one area where they can turn the screw. They for sure should do that. If you visit Beijing these days, it's really bad. Other cities, it's really bad. This translates into a total demand in the transportation sector of 7% growth up to 2020 for the transport segment. Be aware that transport is more than automotive. Out of this, automotive represents some 75%, but we have trucks and trailers, we have trains, we have containers, and we have aerospace.
Aerospace, we are not in aerospace, but aerospace only represent 2%-3% of this total transport segment. It's mainly about automotive. That's also why it is so important to see this growth rate. This will drive growth, and the highest growth will be within sheets. Oliver Bell will later share with you some of the perspectives of the development of body in white over the next years. Turning to Rolled Products, I want to start down here looking at how is the split of consumption areas in Rolled Products. It's mainly about packaging. Half of the demand for Rolled Products is packaging. That is rather flat over the cycle for various reasons, and also consumer durables is pretty flat.
The more volatile areas in the economy have a lower share in Rolled Products. You see now that there is a very strong demand in automotive, and this leads to growth rate of 15%-20% per year now in Europe and the U.S. This leads to, for Rolled Products, Neuss America to growth rates of above 6% over the next years, while Europe is at some four percent, 3%-4% in total for Rolled Products. It is a more positive outlook for the Rolled Products than we have seen over the last years. If we take a look at the extrusion, it is a totally different composition of demand.
Here, building and construction represent 65%, and we all know that is probably one of the most volatile sectors in the economies around the world. We remember what happened in the southern part of Europe after the financial crisis, and we also see in the U.S. that this is really one of the most volatile sectors. We have seen now a positive mood and positive momentum in the building and construction in the U.S. We see growth rates in the U.S. of 5%-6% over the last years. This you also see in the results of Sapa that has really been good trend in the U.S. Europe coming from a low level before here and had another two bad years, 2012 and 2013. This year, I would say approximately at zero.
Estimated slow growth in the years to come, based on, I would say, also a more uncertain development in Europe on building and construction. Due to the composition of demand, it will not have the same benefit from automotive development. When we then translate this into the primary supply and demand, I will come to answer your question, Pål. I start with the picture I shared with you last year. The line here is the demand over the last 7-8 years, and the green area is the supply side. We had a bubble saying what should be watched on the supply side and what should be watched on the demand side. What has happened, and we said last year that it's possible for a modest inventory decline.
What has happened is that we have ended up with a gap here now of around 1 million tons. That is also what Svein Richard Brandtzæg showed you. What has happened and what has not happened? First of all, potential curtailments came in stronger than expected. All in all, in 2013 and 2014, 2 million tons of capacity have been taken out. That's more than expected. We have seen fewer restarts than you could fear, and we have seen very few new projects coming on the table. When it comes to the demand side, the positive momentum in the U.S. kicked in as we expected or had in the scenario. The moderate growth in Europe unfortunately also came in as in the base case.
We have not seen the improvement in some of the emerging economies that was in the base case. Brazil is one example where we have very, let's say, a weak result behind us on aluminum as well. Of course, also in Eastern Europe, we see lower than expected demand for aluminum for obvious reasons, to put it that way. What is the headline for 2015? The headline is really the headline. There is still an expectation for a modest decline in inventories also for 2015. On the demand side, it is a question about, let's say, to follow these four factors, the transport segments, sustained U.S. momentum, mixed development in Eurozone, we have not put in a lot of growth in there.
There's a semis export from China, which is still the most uncertain factor. We have added some increased export of semis from China, but I will discuss with you later, let's say, what could bring that up and what could bring it down. This is the, let's say, on the demand side, the most important factors driving a demand growth of 3%-4% for 2015. On the supply side, we expect an increase of a little bit less than 1 million tons. Of this, some 400,000 tons we expect to come in production in India. You can ask why now? Because India has been in there many times with expected growth.
This time we see some more, let's say, some more reasons to believe that they will be able to start up some of the capacity that is already standing there. What they're really lacking is raw material from the alumina plant or bauxite mine next door. India is in there with some 0.4. Others, it is Kitimat, the new Kitimat coming on stream, and it's the full year effect of Ma'aden and EMAL coming into production. All the things are smaller things. We here have potential restarts of 0.5 million, up to 0.5 million, and potential curtailments up to 0.5 million.
Just to explain this one, there is a full year effect what has taken place this year represent approximately 300,000 tons of this. Then there may be some new capacity, some other capacity going out for different reasons like expiry of power contracts or other things. We think there are, let's say, both rumors and let's say releases saying that some capacity will be started up in Europe and potentially also in the U.S. But all in all, we think that this will balance out. In total, a growth of a little bit less than 1 million ton. Then I leave the floor to Erik Fossum, who will discuss with you the premium developments.
Thank you, Arvid. Let me first start to talk a little bit about the all-in aluminum price. We here see the development of the last 15 years, with aluminum in blue, the premium element in green, and we see the premium element as a share of the whole aluminum price in purple. As we see, the premium element has reached an all-time high share of 18%, recently. If we then try to define the historic development since 2008, we think we have three distinct phases. First, after financial crisis, where we had accumulation of stocks and very low premiums.
This entered into the warehouses developing a business model, where they started to build up premiums in order to attract metal to their warehouse financing, going into 2011. It was the warehouses building up the premiums, not necessarily the consumers. We entered into the last phase that we currently are in, where premiums really have spiked, where it has been a metal deficit in the market, and we have seen that LME has a very strong effect on premium development. As Svein Richard Brandtzæg said earlier on, we believe that as the fundamental situation improves for aluminum, if we then should see a reduction in premiums going forward, this will very much be mitigated by an increasing LME.
Moving on to the regional premiums, and here we see the premiums in the U.S. and Europe both have surpassed $500 for the standard ingots. We also see the Asian premium, the Japanese premium at $420. We see that the recent premium increase coincides fairly well with developing market deficit in the market. The effect of a market deficit on premiums looks to be really strong. When we were standing here last year, premiums were around $250, and I think then people were concerned about LME regulation changes. I think the general perception was that it was only a question of how much premiums would drop and how fast they would drop.
Instead, we literally saw a doubling of premiums, and this just tells us something how difficult this is to analyze and how strong the marginal effect of additional demand and a deficit is on the premium picture. There was also a question here earlier on what is the effect of backwardation on premiums. Here we put the spread in the cash to three months LME curve in blue on top of the premium development. Anything below the zero line in the blue constitutes the backwardation, and anything above the zero is a normal contango situation. As we see, we have had several backwardation situations since 2008, and none of them seem to have any significant effect on premiums. Rather contrary, premiums have gone up all the time.
We also believe that the current backwardation we are seeing is much too small, and probably will not last very long and will not have a negative effect on premiums going forward. Let us also keep in mind that the theoretical definition of backwardation is that it's a lack of metal. In that context, you should not see significant downside on premium due to backwardation. In looking for other explanation factors for the strong regional premiums, we also looked at the metal deficits in the major importing regions, being North America and Europe. Here in green have inversely displayed the metal deficit per quarter in North America and Europe. We see that there's a fairly good correlation between the increasing metal deficits and the strengthening premium picture.
What we think the market has not appreciated sufficiently is that more metal needs to travel longer distances in order to satisfy the increasing metal deficits that we are seeing in both North America and Europe. North America and Europe needs to compete with other regions in order to attract this metal, and hence we get a shift upwards in the premium picture. Also discussing a little bit on the development on LME stocks, and as Svein Richard Brandtzæg has covered this earlier on, we here see the Frisco and the Detroit stocks in green and blue. LME stocks have since the peak in November 2013, last year, decreased by around 1.2 million tons.
In terms of the implementation then of the new LME regulations that now will be enforced, and then looking at the load in rate versus the load out rate for the major warehouses being Frisco and Detroit. We see that the load out rates trump the load in rate with three times. I think it's fair to say that the warehouses are to more or less full extent complying with the new LME regulations. Looking at the stock days as a measurement of how tight the market is. We see that the stock days, looking here on the right-hand side, have moved in a band between 80, 85, and 110 days, basically since the financial crisis.
We are in the lower end of the band currently, but still far above what we regard as a normal range between 40-60 days. Looking at Arvid's presentation and listening to what Svein Richard Brandtzæg said about the market deficits going forward, there's reason to believe that it will start to move down towards the 60-day without trying to give any timing for when that will happen. On my last slide, I wanted to talk a little bit about the product premiums. Here we see the premium for extrusion ingot billets in Europe in green. We see the standard ingot premium in Europe in purple. We see the spread between the premiums in blue.
We see that the spread recently have reached close to a normal all-time high level of around $300. If we go back a few years, it has been the thesis that it has been the standard ingot premiums pushing up the product premiums. While the last 12 months, we have clearly seen that it has been a strong product market with strong demand from customers dragging up the standard ingot premium with a pull from the product premiums. I think it's fair to say that Hydro's positioning now in the value-added products looks to be a very strong position, and this will be covered more in detail by Hilde Merete Aasheim later on. I hand back to Arvid.
Thank you, Erik. I will turn to the bauxite and alumina markets. Last year, when we met, the topic was very much about whether it would be a ban of export from bauxite from Indonesia or not. The whole bauxite story is a story about import to China. If you see historically, the development of bauxite from Indonesia into China, we had very high levels in 2011 and 2012, and then skyrocketing up to 50 million tons in 2013 in the expectation of the ban. This year into China, we have had some 6 million-7 million tons, but that is really some pipeline effect. The ban was completely effective from January. We have seen that India and Australia has contributed to solve part of the challenge for China.
We also see some coming from other Pacific countries and the Atlantic, mainly Brazil and Guinea. What was 80-20 in favor of Indonesia to China is now 20-80. Next year, probably Indonesia will be more or less 0 because there is no sign that the ban will be lifted. We expected that this Indonesian ban, if it took place, would lead to a squeeze on bauxite supply and increased prices. Let's see what has happened. If we look at the green line first, that is what you find in the books as import prices to China. We've seen a steady growth here also over the last two, three years, from some $45-ish up to some $55-$60.
Since there is a shift, our bauxite is not bauxite. There's a difference in quality based on the reactive silica content, and also how much alumina there is per ton bauxite. To get to a comparable product, you have to adjust the pricing. The blue here is what we call a value in use. Because they have to use more caustic soda, for example, or more energy, the cost for the alumina plant is not $60, it's up to $70-$75. This has contributed now to lift the cost of producing a ton alumina in China. Let's take a picture on the medium-term picture, medium-term situation, short to medium-term situation first.
The inventories in China of bauxite measured against the left axis here, that's the green columns behind here. It peaked at some 40 million tons by end of last year. They had, since China needs almost 40 million tons of bauxite every year in import, they had one year's inventory of bauxite. We said that this will lead to a squeeze, substantial squeeze within short. Due to the fact that they have been able to increase import from other countries, this is the line here compared to this scale. Per month, they have been able to lift the import up to some 2.5 million-3 million tons per month. That means that the delta is only some 1 million tons per month.
They are drawing down the inventory in China, approximately 1 million tons per month. This can last for another two years if you want to go to zero. Of course, they cannot work on zero inventories. It's also a fact that these inventories are unevenly distributed. We are coming towards a more squeeze situation, and these new sources will have to deliver more and more. Of course, that will probably have some effect also on this all-in value in use bauxite price. How does it look if we look a little bit longer term? This is the need for bauxite import to China up to 2019, from some 35 million tons next year, up to 55 million tons in 2019.
The assumption behind this forecast is as follows: No change in alumina imports, but some 10% increase in domestic bauxite production over the first years, and then tapering off to some 5-6% in the last years. This is actually a pretty challenging picture for China. The bauxite resources in China are being depleted. From 2009 to 2012, the resources came down from 4 billion to 3 billion tons. Remaining quality is lower than before, so that the price of processing increases. There is also a trading environment now developing inside China, where independent traders want to, of course, lift the prices to import parity. Let's say, yes, they can grow domestic production for some years, but of course, then at a certain time, this will stop to grow, at least.
Then it's a question, will this materialize as bauxite import or will it materialize as more import of alumina? Because this is, as I said, here alumina is kept flat. We know that to get more bauxite out, and I will show you a map afterwards, is more and more challenging. Has to do with resource nationalism, as Svein talked about, has to do with environmental politics, has to do with infrastructure cost that is increasing all over the world. Of course also, if we start to talk about Atlantic bauxite, you also have some shipping exposure here that becomes pretty heavy. If you look at the global map, just to look at where you have the main resources.
Of course, in the Pacific, you have Indonesia, Vietnam, India, but none of these countries want to export bauxite as bauxite. They want to have alumina refineries or even smelters, some of them. They add on export taxes, for example, from India and with the ban in Indonesia and in Vietnam. I think the tension between Vietnam and China and vice versa is such that there is a limited expectation of trade, to put it that way. Australia, yes, probably, there will be more bauxite coming out of Australia. But remember that you should replace some 30 million tons that originally came from Indonesia. You see Malaysia coming up, Fiji coming up, some from Ghana. Small volumes annually.
From a bauxite perspective, that's going to be filled, that gap is going to be filled, as last year we said that then some more bauxite needs to come from Guinea or Brazil. Guinea is challenging, needless to say, for various reasons. Let's see if it will materialize this time. Of course, the alternative is then to import more alumina into China. When I was in China two weeks ago and spent time with different stakeholders, I think that the openness to, I think many find it easier to buy and import alumina. It's a global commodity. The pricing is very transparent. You could, let's say, you can get access to it immediately.
Getting bauxite from different sources with different quality is more troublesome. Of course, there is curtailed alumina capacity outside China, several million tons. Part of this gap can be filled if now some capacity is restarted. Let's say a main scenario could be that, yes, bauxite, they will strive to find new sources, but we should not be surprised if also this ends up with more alumina import. That's the point in my last slide on bauxite and alumina. Let me explain this one. This is showing in the columns behind there is import or export of alumina into China. When you're below the line, it's import into China. The green line here is alumina price compared to this graph here.
The point here is that when China here started to import alumina, the price went up for alumina, and then they stopped to import alumina and imported bauxite instead. Then they started to import alumina again, and the price of alumina went up, and they stopped to import alumina and went to bauxite. Now again, over the last year, they have increased more and more alumina, and suddenly the alumina price shot up like this. The question is, will it come back again this time? That is what we want to illustrate here, that China has really been able to balance and cap this alumina price, but that has been on the assumption that there is sufficient slack in the bauxite and alumina market outside the world so that they can play this game.
If there is lack of sufficient bauxite or/and the bauxite is imported at clearly higher prices, then this whole balance price level, this power price will be lifted up. That is. I think that it's tilting like this now, and we should just all of us follow what is going to happen over the next quarters. It's an interesting story to follow. Continuing with China, but now moving to the metal market. It's been very, very stable, consumption and demand following each other. We see, however, that production is approximately 1 million tons higher than demand this year. There's been some slack in the real estate market and some lower construction activity. We now see that the government is really trying to increase the application areas for aluminum to move this upwards.
When it comes to supply side, we have had 1.7 million tons of new capacity in Xinjiang, going then from 2.5 to 4.2 million tons. This is the northwestern province with pretty high transport cost in and out, but of course, a lot of coal. This is how it looks now. I don't think we should be, let's say, expect this new construction of smelter capacity to stop in China. There is obviously no support from the government to build more capacity. This is private capital going in, trying to extract value.
In the end, the pockets will be empty also for some of these companies, and there must be a healthier balance in China at some time also on the smelter side. We touched the discussion about the metal advantage in China related towards the Western. Here shows the columns here shows the semis export per month out of China over a long period. The red line here is when the metal price in China is equal to LME plus ingot outside China. We see here that over the last months, the metal advantage for China has increased up to between $200 and $400. That of course has given support to more semis export out of China.
We have seen these periods before also. Is this a permanent situation? Well, it is. Based on history, it's not, and there are reasons to believe why this is happening now. First of all, the tight market in the West, as Erik explained, leading to higher prices, and of course, the overcapacity in China depressing metal prices. This we must assume will sort itself out as time goes by. If we then dig a little bit deeper into the semis export going forward, we must understand, let's say, what is the history and what are the factors driving this export up and down. Historically, if we look at the semis production in China in total, it has grown from 15 to some 35 million tons.
The blue here on top is the net export of semis. The line here is a percentage. All in all, relatively, the export of semis from China has not increased as a share of their total production. That's one thing. The second is that most of this export goes to Asia, and more limited volumes to Europe and the U.S. Of course, it has a domino effect, and that also has a direct effect, of course, on the primary balance, but it has an indirect effect also on margins downstream. What do we expect now, going forward? There are drivers for more export, and there are drivers for less export.
Let me first say that when we visited China, it came out that there is no one saying that there is a policy or there is a wish to export more semis out or more aluminum out of China. No one is saying that. Because they see the challenge of import of raw materials, they see the challenge of energy consumption, and not least, they see the challenge of pollution and emissions. What they let this, let's say, continue, but I think they will tighten the screw on several of these parameters going forward. 'Cause if we look at what could drive more export, I think if you have this continued metal price advantage and the VAT rebates for semis continue, of course, that is driving in one direction.
It's for sure that the quality they produce with is better and better. That Oliver will also feel when in his business and others will feel. They're not at the Western level yet, but they are improving. I think also one other thing to be aware of that we see more integrated business models now from coal to smelter to downstream, but not the refinery. Many of the refineries are at the coastline, you know, they have to buy the alumina, but the coal, the smelter, and the downstream is more in the same value chain. That means that what they are exposed to and what could reduce the attractiveness of semis export is what I've discussed with you, the higher alumina, bauxite and alumina cost. Energy cost is increasing.
Remember, China has signed up several LNG contracts over the last years at quite high prices. This is now being transferred to customers, and this will lead to substantial increases for the manufacturing industry in their cost line. The same is with labor costs. You know, there are areas in China with the same labor cost as in some states in the U.S. The question about VAT rebates, we have touched upon. It's interesting, as I said, government do not want this export, they really want domestic use. They are now working. The ministries and the aluminum associations are working to develop new applications inside China so that they could limit this growth. Let's see how this develops. There are forces in both directions.
All in all, you know this picture from before, and the main message is this, same as when Erik mentioned. Yes, there may be some short-term disturbances, but we believe still that China will keep its line as being balanced in Primary Metal. Let's move to energy. These are the prices for power, system prices for power in Germany and in the Nordic system. Since 2011, early 2011, we have seen a pretty steady decline in prices in Germany, driven by lower CO2 price, relatively low fuel prices, lower power demands, and high growth in renewables. It's interesting to see that you know, Germany has now a surplus of power production. Germany is now exporting power to other countries. It's interesting that we want to export power to Germany because they are an exporter.
Something's wrong there. At least there is a good solution for balancing between Norway and the continent, utilizing the difference in prices on night and day. There will be, let's say that is the idea about the interconnectors, that you have this balancing over day and night. We see in Norway or the Nordic system price have had more variations, and that is due to the hydrological situation. When it's high in flow, we have price collapses. That is the situation. Really, if you look now at the forward price in Germany in the mid-thirties and the Nordic in the low thirties, it's really, well, what you could say, modest price levels.
Of course, to watch is, I think that we have seen now, I think, a permanent shift in the power intensity in GDP. You know, it's very, very modest growth now in power consumption, even if GDP is growing due to the energy efficiency work, et cetera. We still see that there will be incentives for renewables, based on what the commission has proposed as new regulation after 2030. I think what you really need to follow to see what could lift this in Germany is of course the CO2 pricing and the coal and gas prices. Sharing then with you perspective on the Nordic balance, and this line in the middle here should be moved to 2013.
That's when we are more updated than 2009. We see that actually this year it's a pretty good balance. We see from 2015 and forward a surplus in total in the Nordic region. This is driven by the certificate market in Norway and Sweden developing some 26.4 TWh. We also have the new nuclear plant in Finland adding some 15 TWh. All in all, with a modest demand growth, we see that we will get this surplus that many have discussed, whether it's 20 or 30 or 40 TWh, it's quite robust. We have tested this surplus against several different dimensions, and we think it's rather robust over the next 10 years.
Of course, there is some new uncertainty now in Sweden with the new government, whether they will take out some capacity in the early 20s. I think that, to put it mildly, I don't think there's a stable political situation in Sweden that for these days. I think we just have to wait what is the outcome of a nuclear compromise in Sweden before we can, let's say, have a firm view on what is going on. I think that the robustness of the surplus is quite good. To the Brazilian market. Of course, to start with, let's say the most important thing, we are not exposed, let's say with Albras for this short-term high prices in Brazil. We have a long-term contract to 2024.
The green line here is what is called the PLD price. It's a balancing price. Brazil has a central dispatch, so there is no spot market where there's hundreds of thousands of actors are playing. It's central dispatch, and the central authorities set this balancing price based on the balance in the market, the resource situation, demand, et cetera. This price has now over the last year increased to more than BRL 700 . To translate it for those who are not like this hundred is around NOK 0.25. When you are up here, it's a lot more than NOK 0.25, to put it that way. This of course gives. Who pays this? Well, it is producers who have committed to sell power that do not have enough themselves, so they have to buy.
It is consumers who decide to reduce their production. For example, an aluminum smelter who then do not use all the power can then, let's say let this market go back to the PLD market and realize these prices. That is what we also see that Alcoa and others have done this. We also see that due to the maintenance work we do in Albras, we also have some benefit from this. Going forward, we see that the auction prices for new power in here is going down, so this is not expected to last. Two days ago, they decided centrally to cut this PLD price to a maximum of BRL 388. This will not be 800 anymore, it's BRL 388.
That of course will change some of the calculations. Second, now we go into the rainy season, and we do not expect that the authorities will make any major changes to this market now before the end of the inflow period, and that is by April, May. Let's say that is the main hypothesis now that this will continue until then. To the long-term, to finalize this one. I started saying that aluminum consumption is not a play on one application area. It's really all major applications areas have their own drivers for growth, being it urbanization, being it, lightweighting, or being it climate, policy or climate positive effects. We expect that in total, we will see in this period up to the next five years, some 4%-6% annual growth.
Of course, the strongest growth in this period will also be in China, but also a steady growth in demand for Primary Metal outside China. That is what we then expect to happen, of course, that some curtailed capacity will come back. That is good. It's good that we get some smelters firing up in the fourth quarter. It's the right thing to happen, that swing capacity actually swings. In a way, we shouldn't be afraid if we now see some of this capacity coming back. It will contribute to the right thing, and then also the need for new capacity is delayed. Summary of the summary. The main message we have had is that a modest decline in inventories is the base case also for next year.
We see a strong case for the Bauxite & Alumina side due to this uncertainty regarding Indonesia. Erik Fossum went through the metal markets. I think that what is going to happen inside China now with the consequences of potentially higher bauxite and alumina cost is really important to follow. Whether we will get more export of semis or not is very important to follow. I don't think we should exclude any scenario, but the base case is flat or the no change in policy on metal and some increased semis export is the base case for us. With that, I invite Oliver Bell to the floor to share with you his view on the Rolled Products business. Thank you.
Yeah. Thank you, Arvid. Good morning from my side. Take a little break because we are now moving to downstream, Rolled Products. A little bit different business because it's about customer, creating customer value, creating actually the platform for the growth which we have seen here presented by Arvid and Svein Richard. Last year, I shared a little bit with you our strategic direction, where we wanna move, and what opportunities we see, attractive opportunities, what we see in the downstream market. I believe one year later, we made a major step forward, and I would like to share that with you. Before I do that, I would like to introduce you very quickly to our business, give you a market update, and how we are moving along with our strategy within the frame given by Svein Richard with the Better, Bigger, Greener program.
First, let's take a look at our business. Rolled Products in Hydro is the number one producer in Europe. We are mainly focused, or solely focused with our production in Europe, but we have global reach. We are generating a turnover of around NOK 20 billion, and we employ around 4,200 skilled and motivated people. With that, we are enabled to produce 1 million tons, which we are selling, of course, mainly in the market in Europe, but 25% we sell outside of Europe, and we are able to do that because we have a world-class asset base, very much concentrated around Grevenbroich, and it is a unique cluster, still a benchmark in the world, often copied very much in China, but it's still the largest rolling mill, the largest conversion mill, and the largest cast house network.
That's the reason why we also combine now the re-melting, the recycling capabilities, and also primary smelter, which is close around the center, give us a unique advantage. On top of that, we have included the R&D facility, and our approach towards the market is based on technology and R&D and know-how. With that, we are establishing positions in certain markets. The core product where we have global reach is, for example, lithographic sheet, where we are having a world market share around 30%, and I guess it's fair to say that we are considered to be the benchmark in that product range. The same is valid for foil. Here we are the world market leader, but not in total foil. That would be a too huge market. We are focusing on the real top end of these products, which is liquid packaging.
Also here, we are holding the world leader position here with a total market share of 22%. I will come to that later. Svein Richard mentioned that already in his presentation. We are producing very thin foil, six micron. I come back to that because six micron doesn't tell you that much, but I will try to explain a little bit better. Then we have two segments which are attractive for us, where we don't have a world leading position, but a leading position in Europe. Beverage can and very much automotive. This is what we all talk about, and I will elaborate a little bit on that further on. Global Rolled Products, 23 million tons worldwide. Arvid has mentioned that roughly 1/3 of the total demand on primary products is related to the flat rolled product market in the world.
Very much, as you can see, driven by packaging. The market segment, which is really outstanding right now in terms of growth, is the transport market. When you can see here, there's a solid growth also in the other areas. We talk about 5%-6% growth rates over the next years. In transport, which is the bulk of all transportation applications, it's aircraft, it's automotive. In the automotive market, there is the segment of the body in white, which is in the discussion, what we are always talking about, what everybody keeps talking about. This is the penetration of aluminum going into cars. Arvid has shown the chart, the aluminum content, how this is developing, the aluminum content in cars over the years. 50 kg increase.
In the past, it was very much related to castings like wheels, engine blocks, cylinder heads, something like that. The next decade, it is the penetration of aluminum in body in white, which means flat rolled products. There is the demand, there is the drive coming from, and it's replacing steel. There's very good reasons to do that, and I will elaborate on that. Since for us, the main market is Europe, let's take a look at that. Not a fundamentally different picture, but of course, growth rates in Europe are a little bit lower compared to the global growth rates. We expect, on average, 3%+ in the years to come. Maybe next year, a little bit lower, but for reasons Arvid has already explained. Also here, the main driver is the automotive market. The CAGR is here showing with 12%.
It was a little bit higher, but there was this enormous step in the last one to two years that the CAGR has been reduced because we have lifted that already to quite a good level. Twelve percent, I would say, not so bad. That is a market you wanna be in there, and we are looking for that. That was the picture Arvid has shown. What is the situation in Europe? We see a little bit of a downturn right now. Maybe it's just a destocking, so we are a little bit cautious on our prediction, looking a little bit ahead. That is one of the challenges, but we are not concerned. We see maybe a growth, which is below the 3%, between 2%-3%. That is what we are assuming for the next year.
The second element, which is, of course, creating also a challenge, is China. Arvid has mentioned that already. The development of flat rolled product exports out of China is increasing, and it's quite a bit. Yeah. It's not really a steady line. There is some increases, then it falls back, then it increases again. Of course, we are not concerned about export coming out of China. That we can expect if you invest so heavily into an asset base and develop an industry, you can expect it's not just for the local demand, there will be exports. Of course, if it's combined with a metal advantage, that's a little bit of a challenge because we see here peaks of $400, and if a product comes out of China with an advantage of $400, that makes life a little bit more competitive.
It is, of course, mainly hitting Asia and not to that extent, Europe. Of course, it has some effects also because Asia gets competitive and some of the competitors in Asia are looking then for other markets, and we see some effects from that. The question is: Will this be a sustainable solution? It's clearly driven by government policy. It's industrial policy in China promoting this kind of development. We see it happened, it turned back, and we can now discuss how long it will last. We assume this is not a sustainable situation. It will go back to normal for reasons Arvid has also explained. Some good opportunities, some challenges. What is our answer to that? It's along the lines of Better, Bigger, Greener. Let's start with better.
When we talk about better, we have to answer one question of the customer. Why should I buy from you? The answer from that must be because we are better. That is our direction, that is our ambition we are striving for. We want to differentiate ourself in the market. Of course, one key element for that is innovation. You need to innovate constantly, otherwise you are downgraded to a commodity, and then life gets very difficult, it's just about cost. Our business is also about cost, to say it clearly, to stay competitive, and I will come to that later, but it's very much focused on innovation, how we can differentiate. This example I've shown you last year, and it's these pieces, aluminum pieces for the body in white of a car.
I think that's a good start, but we can do better. We can do better by doing something like that, with new alloy, with advanced formability capabilities for formability, and then we can produce something like that. This is creating customer value. It reduces the assembly cost of our customers. It gives the designer the freedom to design more complex shapes, which is even more important. It ensures that aluminum is really penetrating this market, replacing steel. Still, steel has some advantages when it comes to formability. The battle against steel is not won already. We have to work as an industry for that to make that happen. That is the reason why we believe R&D and innovation will be key parts to make that happen. This is one example from last year.
This product is now introduced at all premium OEMs. We are in a qualification process, and I'm quite confident we will bring that into the cars very soon. This was last year. I introduced it last year to you. This year, we are coming to a new product, again, a new alloy with high formability and corrosion resistance, also for these kind of applications. With these steps and with these developments, one step change every year, we wanna establish a strategic supplier position. We are coming here as more or less, I would say, new kid on the block. We entered that market in 2008, I will show you later, with our investments. We are moving here very fast. That is the way we would like to establish really a strategic supplier position and being benchmark on the innovation side.
Talking about automotive is, of course, the main and in most interesting market. I would like to share also with you markets where we already are holding a world leading position and are considered to be a benchmark. This one is, for example, the high-end foil. When Richard talked about six micron, and now I'm talking about five micron, you just might say, "Okay, what's the big deal, yeah? One micron less, yeah? Hey, come on. It's easy, yeah." But when you take a hair, and I'm gonna have to be careful with it because it gets less, little bit less, yeah. You can imagine a hair has a thickness about 50-60 micron. When we talk about six micron, it's one-tenth of a hair. Five micron is 16% less.
It's then, it's not just to get it thinner, you need to keep the same properties. The only reason why a foil is in a Tetra Pak brick is because it protects what's in there. Protects what's good, is the slogan of Tetra Pak, for example. The only reason why the shelf life of this product is so high is just because of the thin foil. When you reduce the foil to five micron, the grain structure gets much more complicated, yeah, and the barrier function is usually much reduced. With our innovation, we keep the same barrier function by reducing the thickness by 16%. Less cost, more resource efficiency, and I think that makes also such a product even greener. That is another example for maintaining a leading position in the world market, and that's what we are striving for.
Innovation, key, but on top comes also something else, creating customer value also on the service side. I have two examples. One, a customer survey from this year for a specialty segment, one on a commercial segment. Commercial is a little bit more towards the commodity side, yeah? We see basically product quality is, of course, always high ranked, whatever segment you're serving. The requirements for each segment are different, and you see that also here. Technical customer service in a specialty segment, very important. Here, not so important. It's good to be better there, nice, but I think it's not the driving force to buy from Hydro. The specialty segment, they appreciate very much the technical customer service. The product quality is anyway a must, and they appreciate the supply chain solutions. I think that is how we try to differentiate.
Closeness to the customer, being a partner there for many, many years, some for decades, and to develop concepts helping the customer to find solutions for problems in their production, being integrated in the planning, in the supply chains with the customers. That's creating a close link, and that is creating customer binding, and that is key. That is also creating value for the customer. That is how we try to differentiate ourselves. Cost, as I mentioned, is also an issue for us. That's the reason why we are pursuing our Climb program. We are well on track with our goal to accomplish NOK 800 million. We are close to NOK 600 million until now. We are a little bit faster than we thought when we launched the program, and that is a positive thing.
We have to do that anyway because we have cost inflation on one side, and you see there is a negative market impact. A big portion of the negative market impact is also related to the positive element on the upstream side because of the premiums. The premiums has increased enormously, and we have a little bit of a difficulty to forward that to our customer in the market. That's a little bit of a challenge right now. Of course, some of the contracts, we have long-term contracts where the premium was calculated on a lower basis. Now we have not fully compensated for the increase. I think the main message is it's important that we work on that, even if it's not our core to be the lowest cost producer.
We need to be competitive on the cost base, but the most innovative producer on flat roll products. Coming to bigger. Of course, we have talked very much about the all-new automotive line in Grevenbroich. What I wanted to say is, yeah, that is a capacity development over the years. In 2008, we decided that could be an interesting market. Let's invest in that small scale, and we have constantly ramped up this. This now, this was a debottlenecking of the existing line in 2014. We are now on a capacity of 50,000 tons. With the new line, we will increase the capacity by end of 2016 to 200,000 tons. Having the capacity is nice, but of course, you need to have a customer base. You need to be qualified.
You need to have a certain reach of demand, and that is shown here. This is the number of brands, of OEM brands we are qualifying, and that is the demand of those brands. We are quite confident that we are filling that line according to our assumptions when we made the investments. I believe all the projections on the market side are on track as well as the project as such. We are in time, we are in budget, and we are in scope. In line with this increase is, of course, the debottlenecking of the North mill, which is a core asset, the hot mill in North. We're increasing that with 60,000 tons, and that is also well on track.
Then, a third element, which I think is considered to be bigger, is, of course, the UBC line, which I think is a core element in our strategic way forward. Recycling is, in particular for the packaging market, a key issue, and we need to close the loop with our UBC line. UBC line means used beverage cans. Once you have drunk, you take your drink here, and it's empty, then it goes back into the loop, and you will have the same product again or another product without quality loss. That we ensure here with a new technology here, with a new sorting technology, enabling us also to sort out more difficult scrap. This will be in place by the end of 2015. Some exciting projects coming to Grevenbroich.
I think when I talked about the UBC line, this is already, of course, closing the loop. What can be more sustainable? What can be more green than closing the loop? That already speaks for itself. We from Hydro believe clearly aluminum is anyway already a green metal because of the recycling capabilities, about the benefits the products create during the use phase. This is enormous because one example was mentioned already, every kilogram of aluminum replacing steel in a car is reducing the CO2 emissions by 20 kg over the lifetime of a car. Then you might say again, 20 kg, what's the big deal? Multiply this with 70 million cars produced every year, then it gets bigger numbers, and then it's impressive. That is the reason why we believe aluminum is part of the solution.
Of course, not resting on our process. It's also part of the efficiency program, and the Climb program is also to improve our processes. Here, lately, three weeks ago, we received two awards, energy awards for smart and very energy efficient solutions in our rolling mill in Neuss. I think that also makes us proud, gives us pride. We are proud of that we have received that because it shows our continuous effort to work on that. Better, Bigger, Greener. What did we say? Differentiator, innovation, quality, service, and lead time. I think the examples I've shown, that is our direction, that is our ambition, striving for lifting the bar. Some examples I have shown you. The Climb program belongs clearly also to that.
The bigger program, I think the automotive line in parallel, the North expansion is one major step, and the other one is the UBC line, makes us bigger, I believe also better. The greener part, I think I have explained already. All three elements will support us in our ambition, and our ambition is number one in Europe, benchmark in the world. Thank you.
Thank you, Oliver. If Arvid Moss and Erik Fossum could join us on stage, we'll open up for a second Q&A.
Hans Jacobsen from Swedbank. I have a question for Arvid. Could you comment on the production cost on the new export capacity within bauxite and perhaps alumina that may be necessary in order to fulfill the demand from China? I was especially thinking about Guinea and Australia and perhaps also Malaysia.
Yeah. First of all, just to put production cost and freight, sea freight in perspective. If you talk about Guinea, the sea freight today is roughly $40.
We see now both from Brazil and Guinea, when you ship bauxite to China, it lands in China with CIF at $80+. I think that the over long-term perspective, let's say opening a small mine in Fiji or Malaysia. Really the bigger bulk, if you have to do something Australia, that is 10 million tons. If you have to do something Guinea or 10 or Brazil 10, I think you need to see levels of 80+ in China CIF. Then if you go back and take away the sea freight, you are probably 40+ on the bauxite, let's say, at port delivered.
I think that we will see a lift upwards to allow these things to happen.
Yeah, hi. Jeff Largey again from Macquarie. I have two questions. The first I think maybe for Erik, it was on the inventory destocking and, you know, seeing what's happening in Detroit and VW Licensing. Sorry. You know, to what extent are those inventories leaving LME inventories and just moving to non-LME inventories? You know, generally those are controlled by traders or warehouse owners. You know, they're likely benefiting from the premium as well to the extent that they're selling to consumers. You know, what would change their behavior in terms, you know, so that they. Well, what would. You know, they've been acting rationally, what would change their behavior, I guess? Then the second question is on rolled products. You know, obviously, there's very impressive demand growth for body in white, you know, in Europe.
You know, OEM customers, though, I guess they always wanna see as many suppliers as possible. Could you maybe comment on the competitive landscape? Are any of your competitors in Europe also, you know, investing in new capacity? I mean, you look like you're generally balanced versus where demand will go, but, you know, is there a risk that the industry overinvest in this automotive side? Thanks.
Okay. On the first question, you know, whether the metal going for consumption is leaving inventories outside LME or inside LME is really irrelevant. It's really the balance being drawn down that's important. I think to discuss exactly where the metal on LME is going is not that interesting. It's more that the total stocks are clearly drawn down. You know, if somebody decides to shift metal from one warehouse to another, it doesn't really matter because it's total metal balance, and that is improving.
Okay. Yeah, there is quite a lot of investments in that going on right now, but we are not concerned, at least not on the level we are seeing right now. When you take a look at now, while the market is developing, in particular here in Europe, I think the investments are in line. Currently, we see an undersupply of the market. It is enormous how the OEMs are pushing us for supply. You saw our capacity. Every day, we are trying to find a new measure how to lift a little bit the capacity. We can't fulfill the demand of the customer right now. That is the current situation. Of course, the question is: How is this continuing?
I believe it is in Europe, it is very much in balance, and even some of the major OEMs have not decided to move into that, into the aluminum market, to replace steel. The smaller, compact car manufacturer. If one of those decided, Volkswagen, for example, they are to go for something like that, and we know of course that they are considering that. They haven't made the final decision. If something like that happens, of course, this will have an enormous impact on the total demand. Then we need even more investments to come. If you ask me right now, I would say with the announced capacities, that seems to be in line with the demand.
If I take a look at the U.S., for example, where even more investments was lately announced, I believe it's still in a good balance. Also there, OEMs are desperate to find supply. I think we as an industry need to provide the platform, otherwise the transition will not happen. Imagine the OEM to decide on a new model to replace the steel by aluminum and say, "Well, I'm not quite sure if I get the aluminum." I think we need to do both, yeah. We need to manage that we get not, let's say, supply and demand in the right balance, but to provide also the confidence to the OEMs to make the transition. But so far, I think we are in good shape.
Hi there. It's Danielle Chigumira from UBS. I'm just following on from that last question. When you predict your semis demand from transport to increase 6.8%, I think, what kind of underlying assumptions are you making in terms of further OEMs continuing to increase the percentage of aluminum in cars?
The-
Are you just focusing on the premium markets or are you assuming?
No, no. I think that is really detailed based on really the announcements and some maybe also additional information we have where we know which parts are replaced. It's not always that. Of course, everybody knows the F-150 truck from Ford. This was a revolution, a decision made from one day to the other to make a complete full aluminum car. The transition in Europe is a little bit more cautious, let's put it this way. Okay, replacing a hood, the doors, the fenders, whatsoever, yeah. Step by step. We base our assumption on the demand side on the information we receive. They're gonna change on this model, this car. We know the build rates. We know when the launch of the car is. We know the ramp curve, how it's developing.
Based on that, we know what's gonna happen in the market, and it's based on really this detailed analysis. It's not just the OEMs, but the small cars, the compact cars. There is not much in there.
In the current demand, yeah?
Some of your assumptions are based on your current relationship with customers, and that information-
Yeah.
...might not necessarily be public.
Yeah.
Okay.
Okay. If there are no further questions, I suggest we break. No, sorry, not lunch. Just a 10-minute break. If we can all meet back here at 11:55. Thank
Okay, we are ready to start again. I said earlier I was sorry I couldn't deliver any snow. Well, in the break it seems like we have got some snow. I hope those of you are traveling are happy. Or not. For the next session, I would like to invite Executive Vice President and Head of Primary Metal, Hilde Merete Aasheim to the stage. Hilde, I will also give you one of the focus areas which we receive when we are out meeting both analysts and investors. Because I think the external market has appreciated and noticed the effects which have taken place on the improvement side within Primary Metal. The questions are now more what is coming next?
Since earnings have improved, given on the basis of improved market fundamentals, a lot of aluminum producers are now back in the black again. What separates Hydro from other peers?
I'll try to comment on that during my presentation. It's good to see you all. I hope that you are ready for the two last presentations of this Capital Markets Day. I will focus on Primary Metal, and there is a lot that has been said about the macro situation. A lot has been said about the market in general. I will concentrate on giving you a status of the sort of the production portfolio within Primary Metal, and then obviously tell you about how we in Primary Metal can support the aspiration of becoming better and bigger and greener. Let's start with the first slide, which some of you have seen in the past. We have today 10 smelters.
Five of them are fully owned, and on the second of November just a few weeks ago, we took over Søral, which is now called Hydro Husnes. That's why we now have five fully owned Norwegian smelters representing 1 million tons of capacity. We also have five joint venture smelters. You know them, Albras, Qatalum, Slovalco, and Alouette and Tomago, which represents another 1.1 million tons of capacity. In the past, we had Kurri Kurri, the Australian smelter in the portfolio. As you know, we curtailed that capacity in 2012, and in May this year we decided to permanently close down Kurri Kurri. We also have remelting and recycling capacity. We have five remelters in Europe.
We have two remelters in the U.S., and we also have remelting capacity in the primary cast houses, totaling 1 million tons of capacity. So all in all, the Primary Metal portfolio consists of more than 3 million tons of primary capacity. Let me move to the better. In Primary Metal, we have been working on improving and becoming better since 2009. With the depressed prices, the overcapacity in the market, we simply had to look at our cost base and to work on what we could influence. That was the start of the improvement program that we have been working on since 2009.
I think you all would recall the $300 program, which was started in 2009, and which was about improving the cost position of the four Norwegian smelters. We finalized that program in 2013, last year, at a total of 1.2 billion NOK in real terms. We initiated a similar program for the joint ventures in 2011. It's not one program. It's an improvement program for each of the joint ventures smelters, which we summarize to a total of $180 per ton on average, which we follow up month by month.
I'm happy to be standing here now and saying that we have at the end of 2014, I forecast that we have achieved 65% of this program, representing NOK 800 million in improvements compared to 2011. When we finalized the $300 program in 2013, we saw that we had a number of initiatives that has also given us effect in 2014, which has been where we could add NOK 300 million more to the improvements. In total, we have then realized NOK 2.3 billion in real terms in these pro-improvement programs. We have been working on what we can influence. This is not about market effects.
This is about hard work with the cost base we can influence. NOK 1 billion of the 2.3 billion is about fixed costs. It's about reducing fixed costs in these plants. The rest is about operational excellence. It's about improving the way we work in the electrolysis. It's about improving understanding of the critical processes in the carbon plant. It's about improving the way we work in the cast houses, as well as that we also have looked on a more broad basis about the plants in the way we procure, in our demand management, and also a substantial improvement in logistics. All in all, NOK 2.3 billion in real effects. When I'm working with improvements, I like to see that the improvements comes to the bottom line.
I put up this analysis by looking at what has happened compared to 2009. In 2009, Primary Metal had a loss of NOK 2.3 billion. In 2014, I took the three quarters in 2014 and analyzed that result to NOK 2.6 billion. That is not the forecast for 2014, just to have that said. It's an annualized EBIT comparison using the three first quarters in 2014. Then I've looked at what has happened in between. We have seen good improvements in LME, and in particular, in the product premiums, and we have also had quite some good favorable development when it comes to the currencies that we are exposed to.
Roughly NOK 2.6 billion comes from these market effects. We have seen increases in raw materials in both in alumina, in pitch and coke and other supplies, representing NOK 1.6 billion. We have inflation, which is working on our cost base, which represents NOK 400 million. We have taken some actions ourselves. We have, during this period of time, have had some big portfolio changes. In 2009, we were ramping up Qatalum. We had only costs in 2009. Now Qatalum is in full speed, generating good earnings. In 2009, we did not have Albras, which came through the Vale transaction, which also has good earnings now in 2014.
In 2009, we had big losses from Rheinwerk, which was in the numbers from 2009. We at that time curtailed 180,000 tons or 230,000 tons on Rheinwerk, and now Rheinwerk is transferred to Rolled Products, so Rheinwerk is not in our portfolio. As I said, we have curtailed and closed down Kurri Kurri. Big portfolio changes which has a bearing on our earnings today. You see the improvement program sticking out NOK 2.3 billion in real terms, which really makes us have a much more robust earnings today than what we had in 2009.
What I also like to point out is that if you look at the market effect, if we had just been sitting still and doing nothing, then we would still have quite grim earnings if we only relied on the market effect. That is quite encouraging when we look at the results of the actions we have taken ourselves, which I also use to mobilize and to motivate the organization to continue to work on improvements because we can influence a lot, but what we do ourselves. I was mentioning Qatalum, and I'm very happy about the development in Qatalum. I think I was standing here last year and confirming that we had a cash cost position of Qatalum in the first decile, and that is still the case.
I'm very happy about the performance in terms of production in Qatalum, and I'm very happy about the quality and how the market perceive the quality of the metal from Qatalum. I'm also happy that after the full ramp-up, the management of Qatalum has focused a lot on getting fixed costs down. In a ramp-up situation, you have quite some additional cost in order to succeed on the ramp-up. We don't know the equipment that well, and we incurred a lot of extra costs. Qatalum has taken down their fixed costs quite substantially during the last two years, and which is also an important part of the joint venture improvement programs that I have referred to.
When it comes to what next now, Qatalum has now been operating for more than five years, and now we are approaching the next generation of cathodes that we when we need to reline the pots. You might know that a pot has a lifetime of between five to six years, and we are now approaching the next generation relining in Qatalum, and we are preparing for that. When we have the new lining in, there should also be potential for productivity increases because we put in a more robust lining now, and we should be able to increase amperage based on that new lining, which we will come back to when we see the effects of when the lining has been put in.
This will take a couple of years to finish the relining of 704 pots. With a good development in the market, Qatalum is generating cash. The last twelve months, we have had an EBITDA on 50% Hydro-based basis of NOK 1.7 billion from Qatalum. With a strong cash flow, Qatalum has also started to pay dividends. We have received the last twelve months NOK 900 million in dividends from Qatalum. With a strong cash position, they are also started to pay down their debt, NOK 450 million on a 50% basis. All in all, very happy with Qatalum, standing out as one of the best smelters in the industry. Coming back to the improvements.
I said that we are encouraged by what we have been able to achieve in the improvement programs that we have had up to now. We are very aggressively now pursuing improvement programs further. To the right here, you see the joint venture program. I mentioned that we forecast now to take out NOK 800 million from this program at the end of 2014, and we have NOK 400 million left for the next two years. We are progressing well. We have 65% achieved at this point in time. I believe that we will be able to stand here in 2016 and tick that off. There is always the question, now what next?
When it comes to the fully owned smelters, one of the most important ambition is to make sure that the improvements that we have made sticks. I believe they will, because this has not been primitive cost-cutting. This has been a way of working, looking at how we can improve the way we operate, understanding the critical processes, being in control and capable, lifting the operation by using our skilled operators to combine with our technologists. To keep the achievements that we have is priority number one, not sliding back. Then obviously to look for new areas where we can fight inflation, increase our productivity on a day-to-day basis.
I also asked our technologists and our people, what more can we do in terms of a step change for the fully owned smelters? It was interesting when we looked back ten years behind us. We have seen that by using our competence, by using our technology, we have been able to take out 100,000 tons of these four Norwegian plants the last ten years. That is 100,000 ton on the capacity basis of 700,000 tons. I asked the technologists and the people in the plant, what more can we take out?
The good thing is that with our technology development, which we are doing in the R&D environment, we have test cells. We see that we do have some quite exciting technology elements that we can also introduce to the existing assets. Now we are raising the bar again by setting ourselves a target of taking out another 100,000 tons in the next 10 years. Because this is not something that we can take out tomorrow, because this is about making an even more robust lining so that we can increase amperage and get more volumes out of the pots. We are, as I said, changing the lining every five to six years. The anode, we are changing every 30 days.
The buildings are almost 100 years in some of these plants, but we are changing the pots, we are changing the anode on a frequent basis. These are the technology elements that we're working on. The reason why we dare to raise that bar is also that we believe that we have the competence. We have the competence from the technologists, but we also have the skilled operators that are able to operate at a higher level year-on-year. The next target for us is to pursue these targets. It will not come tomorrow. You cannot put that into your Excel sheet tomorrow, but it will come through technology development, through the realigning process, which will take place in these 10 years period.
Now, I talked a lot about ambition when it comes to improvements from the production, but we also have a lot to gain from using our competence in the market. We have a strong position in going to the market with value-added cast house products. A value-added cast house product is when you take the liquid metal from the electrolysis into the cast house where we alloy the metal, we bring it into the shape and the specification that the customer has asked for. We are delivering 85% of our whole portfolio in terms of value-added products based on a specific order, based on a specific specification from a customer. We are only 15% in our portfolio of ingot. We have a strong position.
We have more than 50% in the extrusion ingot segment, while we also have a good position in relation to foundry alloys and sheet ingots. The interesting part is when you are in the value-added segment, is that you have a dialogue with the customers. You continuously work with the customers to provide the metal that the customer need. So when the customers are advancing, we are also advancing. Erik was mentioning the spread between the ingot premium and the value-added premiums. This shows the standard ingot premium in Europe, the development over the years. The green line shows the weighted average value-added premium that we have in the European portfolio.
You see that there is a good spread, and even the spread is increasing over the last year, being also a reflection on the strong physical market in this, in these segments that we are in. This curve doesn't show the margin, but I dare to say that we have had significant value creation through pursuing the value-added strategy. I also dare to say that, there obviously there are some costs related to alloying elements to be able to produce these alloying costs. There are some extra costs relating to the cast house equipment as such. But there is a substantial value creation by going to the market with specialty products rather than standard.
I believe that that is one of the most important levers we have in order to be ahead of our competitors, and also ahead of the Chinese should they start to come into our markets. We have to be ahead all the time with advanced products. That is what we enjoy to work with more and more advanced customer, because when we are producing for advanced customers, we are also advancing ourselves. Providing them with a good quality metal that they need in their processes, and we're able to capitalize on our competence and thus increase our margins. We are right now installing, and I think you have mentioned it, Eivind, the adjustable flexible mold technology. We have tested it in Høyanger.
We are now about to implement it both in Høyanger and in Årdal in order to strengthen our capabilities towards the automotive segments when we produce sheet ingot for the automotive segment. As I said, we have a strong R&D basis to work with the customers, providing them with our skills and work in cooperation with them, producing new alloys which the market needs. The basis for working with these advanced customers is to be reliable every time, on time, with the quality that the customer needs. Quality aspect is also about bringing our competence to the customer, providing them with service and technical support.
I'm very happy to see when we had the recent customer surveys for 2014, this is for the extrusion ingot segment and foundry alloys in Europe. I am very happy to see that when it comes to the perceived quality, and quality here is not only product quality, it's service quality and image quality, which is about the sustainability long term, that we are a long-term customer. The y-axis is about the relative perceived price. I'm very proud to see that we are standing out compared to peers when it comes to the perceived quality. I also I'm very happy that also the customers are willing to pay for that good quality.
I'm not that concerned about the fact that we have this high rating on the price. This is a good basis to be even better, to sustain this good position, to sustain these good customers to work with, these advanced customer, and to be even better when it comes to generate margin from the cast houses and from the competence we have in terms of material competence to provide good quality metal for the market. Let me move to Bauxite. Here I have to admit that our focus in Primary Metal has over the last few years been to become better. Because when we had the losses we had in 2009, it was simply we were simply not robust.
We had to work in order to become better, to become more robust. When you are more robust, you are also more capable to take on new opportunities. We have some opportunities. Just this month, we have become bigger because we have taken in Hydro Husnes, which adds 90,000 tons of capacity. Now, as I said, now we have five Norwegian fully owned smelters, which is strengthening the Norwegian production base. In Hydro, we have quite a positive view about Norway. Here we have the competence cluster, we have the technologists, and we have the skilled operators where we can test out new technology, as I just mentioned, with 100,000 tons capacity.
That is also why we are excited about building a pilot in Karmøy, building it on the Norwegian turf, using our competence, not only from the technologists in Årdal, but to test this new technology with skilled operators at Karmøy. Arvid mentioned also the Nordic power situation, which is where we see that the Nordic power market is in surplus, which gives a good basis for us to believe that we can renegotiate power contracts after, especially the Statkraft contract, after 2020 expires. It was very good to see that we could enter into four contracts of, in total 2.7 TWh, this summer at favorable terms, which is a good basis for the Norwegian smelters going forward.
Then also looking at the Norwegian capacity compared to Europe. It's very close to Europe. It has good logistical advantages being so close to a big market, and also noting that Europe as such has an increasing primary aluminum deficit. We believe that the Norwegian smelters are well-positioned also from that perspective. Let me say some few more words about the pilot. Because this, as Svein Richard Brandtzæg mentioned, this is really to show our muscle when it comes to being in the lead, when it comes to cell technology in the world. We would like to demonstrate that we have the technology that we have tested for five years in six cells in order that we can be able to demonstrate that in a full-scale pilot at Karmøy.
Showing that we are able to produce with the lowest energy consumption in the world, at the same time, with the lowest footprint. This will be important as a basis for growing, but we will also be able to take technology elements from the pilot into existing assets. There are some conditions still to be ticked off before we can decide. We have talked about the pending ESA approval, but we also need to feel comfortable that there is a market there so that we don't jeopardize that good situation that we have now. Also we need to have agreed upgrade confirmed in the Karmøy area, as well as securing power for the pilot longer term.
I would also like to pinpoint that we have several opportunities within the Norwegian portfolio. We have the Sunnidal, the 50,000 tonnes. We are ramping up that now. We have the first section probably done by Christmas, and then we will continue up till second quarter next year. Having then installed the last 50,000 tonnes, making Sunnidal a 400,000 tonnes smelter. We have one idle line in Søral in Husnes, which we're sitting there to be restarted when time is right. We have mentioned the 100,000 tonnes, even though we're talking about a ten-year perspective, and then we have the Karmøy pilot, which will represent 70,000 tonnes.
310,000 tonnes sitting there as opportunities. The good thing is that the restarts at Sunndal will come now and which will also add to the profitability of Sunndal. We are preparing for the restart and do it when time is right for Husnes. When you look at also the creep capacity of the 100,000 tonnes, all these three first options here, we talk of a limited investment, so it's cheap capacity to be brought in when time is right. Obviously to build a pilot is not cheap. That's why we need the support from Enova.
We are very happy that Enova has given us the support, and we're waiting for the ESA to come back on us. We have, as I said, attractive options in Norway, and there are also some brownfield possibilities in Norway. We have Qatalum 2, which is sitting there as an option. It's probably the best project in the world when time is right. We also have some exciting options for expanding Alouette together with Rio Tinto when time is right. When it comes to greener, we have in Primary a lot to contribute when it comes to this aspiration for Hydro. We are working every day to reduce our emissions. We are, as Hydro, already in a very good position, well above the world average.
For the Norwegian smelters, we are the best in the world. When you take into account the fact that you have a CO2 free source of power, which adds to the, let's say, the attractiveness of the Norwegian portfolio. I already talked about the way we work with the customers towards the automotive segments, towards the building industry to reduce the customer's footprint. We, as Oliver was mentioned, we are also looking into using more post-consumer scrap. There's a huge post-consumer scrap possibility coming in, and we should take a pile of that scrap pile, bringing post-consumer scrap into our remelters. Thus we will be able to come to the market with so-called recycle-friendly extrusion billets and at the same time improving the margins in our remelters.
Lots of exciting opportunities, both from a greener prospect but also from a profitability aspects. Summing it all up, I already talked about we will aggressively pursue more improvements. We will work to secure competitive power, which is the basis for a smelter, and then continue to also increase our margins from going to the market with advanced products. We will pursue opportunities taking out as much creep capacity as possible from the existing assets. We will hopefully be able to demonstrate our technology in terms of the pilots, and in that sense, we will also stand out in the industry, demonstrating our technology lead. Then we will mature our growth options when time is right.
Then finally, we will grow the recycling business to improve margins and contribute to the environmental footprints. We will reduce energy consumption and emissions in our own process, continue to do that, and develop products together with the customers, which can help the customers reduce their footprint. My aspiration for Primary is to stand out to be the globally leading aluminum producer in the world. Thank you. Then I invite my good colleague, Alberto Fabrini, representing the Bauxite & Alumina area for his presentation.
I think it's good afternoon, everyone. I'm very glad to be here this year and to be able to share with you some of the things that we are doing in the Bauxite & Alumina area. We'll talk a little bit about the cluster operation we have in the state of Pará. We'll also discuss our program to be better From B to A. We will discuss bigger, greener, and we'll talk also about a strategic direction we'll be following in From B to A program. To give an overview in terms of our strategic position, we have the mining operations, our Paragominas mining with 9.9 million capacity, and we have 100% financial exposure to it.
We have MRN, where we have 5% ownership, but 40% offtake from Vale transaction. We have also our largest refinery in the world, Alunorte, with a nameplate capacity of 6.3 million tons and 92% Hydro ownership. Also, we have the CAP project that in the first phase could reach 1.9 million tons and has 81% ownership from us, all located in the state of Pará. We're gonna talk a bit about better, bigger, and greener. What better means to us. First of all, more or less, at the same time this year, I came here to discuss what we were gonna do to revert the situation, bauxite and alumina.
As you can see from here, we face some and still facing some very challenging situations in terms of our results. This was also aggravated by our operational issues in 2013, that affected the performance in Paragominas. As you may recall, we have a sequence of power outages that affected our operation. We also have the Brazilian inflation that impact our costs, continuous low alumina price, regulatory challenges, and on the upside, we had a positive currency development. Not a very pretty scenario. Let's see how we are responding to that challenges and with our improvement efforts. Here is what the market is affecting us. This is the market effect.
If you take the basis of 2011, you can see that price effect took a big chunk of it. We had inflation, raw material price, other, and on the positive side, as we're mentioning, currency. We took the actions from B to A that will give more details. After the stabilization of the plant, we start stabilizing the plant. We see that actions from B to A going to the bottom line results. This expectations here is based on the annualized Q3 underlying EBIT. Let's discuss a little bit the from B to A since we're back on track now in 2015 and 2014 after the setback we mentioned last year. Paragominas is ahead of target. Underlying improvements in Alunorte is catching up.
In 2014, we are catching up in our expected outcome for that. We will be on target for 2015 in our From B to A program. We delivered about NOK 700 million. The total of NOK 1 billion, we anticipated some actions. That's the main reason. As I said, 2015 target is confirmed. We have 20% manning reduction by the end of 2015, mainly in Alunorte. We confirm the NOK 1 billion annual improvement. Let's see now individually in the mining and in the plant how the better is working. Paragominas is ahead of target. It had very positive developments in Paragominas.
In 2013, of course, Paragominas was also affected by the setback in Alunorte since Paragominas only supplies bauxite to Alunorte, so there was a direct impact in 2013. The recovery was very good and ahead of target, and the positive contributions come from production. We increased production, and we are ahead of our target. We'll talk a little bit more in detail about that. We also have productivity improvements driven by the debottlenecking at beneficiation plant and optimization of mining operation. Beneficiation plant is not usual in a mining because in our mining, we produce the slurry. We're grinding and produce the slurry that's then piped and pumped to the refinery. This is a different situation from other mines. That is so important for us.
Normally, in a normal operation, this is done in the refinery. That is so important for us to optimize the beneficiation plant. Also, when we talk about optimization of mining operation, just to give an idea, we have an overburden of about 10-12 m. So to produce 10 million tons of bauxite, we move 100 million tons of earth from topsoil to overburden. So to optimize that is essential for us in terms of our productivity, in terms of our cost, and that's what we're doing. We also had a very positive development in fixed cost reduction in terms of money. This was done through improvement in our processes. Let's see here. Production, annualized. Here is the first quarter in 2013.
Here again, we're just reflecting what happened in Alunorte, and we start gradually ramping up in a very steep curve. Very positive development based on our systems and the application of our BABS. We're gonna talk a little bit about that. Here we have a little bit of a decrease in production, and this was planned because this was due to our so-called pigging campaign, which is basically the maintenance we do in our pipeline. We send through the pipeline the pigging, the performance indicator gauges, for one, clean the pipe, and two, gather the data in terms of the integrity of the pipe. This was done in a very professional, positive way. We planned for 12 days, and we did in 12 days.
What we expected to miss in production, that was what happened. Then after that, we had a quarter, a month of above the nameplate capacity production. If you look at here, 9.5, we also had some months that was pretty close to 10 for the close in the quarter. That was a very positive outcome. Nameplate capacity is 9.9. We're able to obtain 10.1. Whenever we do that, we free bauxite from MRN to be sold. That's how it works. Here is a little bit of a detail, the productivity that we're talking about. This is a removal of the overburden, and we improved this process in 17% productivity.
We reduced the distance traveled for moving equipment by increasing cut angle for transport ramps from 14 degrees to 18 degrees. It's a lot of detail, but just to show the importance. We move around from 1,000 to 1,200 trucks per day. Trips, huh? Not quantity of trucks, trips. 1,000 to 1,200 is everything is big. In everything we can gain is very important for us on efficiency and on the cost perspective. That was a very good development. Now let's talk a little bit what better means to Alunorte. Alunorte, again, the dip here in 2013, and our recovery, also a steep recovery in 2014, not meeting yet the target, but getting close. All the indications are that we will meet the target.
We continue the positive contribution from increasing production. We'll talk about that more in detail in a moment. We are stabilizing performance and increasing raw material efficiency. We're still lagging in energy reduction. We have a plan for this for next year, and this was planned because we focus on stabilizing. Stability for that size of refinery and the complexity that was involved was key for us. Fundamentally, we focused on stability. As this stability is coming, now we have the possibility to improve our productivity and therefore reduce energy. Last year, I said about this bullet as well, increase robustness against power outages. There was a series of actions and projects that we implemented.
We implemented the connections among the turbine generators and the four lines that were able to do it. We have out of seven, four lines that can run independent. They can run as an island. Whenever we have a power outage, they are isolated from the grid. The second was automating our substation. We have more than 47 substations in the refinery. I'm talking just the big ones, and they're distant. Imagine whenever you have a power outage, the poor electrician has to go in all this power station and try to find where is the key for put the system back on. We automated that. From the control room, you can pushing a button, and you have the system back.
The system is the most critical system, which are the precipitators. You need to keep the impellers running to prevent settling of the solids. We trained that every week. Believe me, we trained that every week. It's so serious. In September, we had a real test. We had a power outage that went unnoticed because all of this worked. In six minutes, the electrician was able to put back on the impellers in the precipitation area. That was very good. We didn't ask for it, but since we got it, we test what we had, and that was very positive. Going back from last year to the production in Alunorte.
We came in from a very dramatic situation here in this quarter. We improved in the third quarter, and then in the fourth quarter, we were in that level. That was a very important recovery for us. We were able to keep and to reach 6.1. We have here a slight decrease, and that mainly caused by our hydrate consumption we had. Because of this situation, we had some hydrate on the ground that we decided to burn in the calcination area. Therefore, we had to slow down a little bit our Bayer process, the refinery itself, and back to 6 million annualized pace of production. 6 million is the annualized pace of production.
I'm gonna show this, so maybe some of you recall this for last year. This is exactly the same model I used it last year. This is the model I said that we're gonna follow, and we would observe the result and evaluate whether or not the model was working. Foundation of the model is the implementation of our bauxite and alumina business system, the so-called BABS, mirrored in AMPS, aluminum metal production system. Why we did that? Because we have very talented people here that developed this process over the years, and we thought that we could just adapt it to our system, and we did it very quickly. We implemented this system in seven months. A lot of people could not believe on that. Normally take five to seven years if you're gonna start from scratch.
We use everything we had here, and we were able to implement that in seven months. A lot. It's. This is not. This never ends. You cannot say, "Okay, I implemented. That's it." There is always this continuous improvement, always something to do. The basic tools that once implemented, give the result very fast, as you saw there, was the foundation for us. Then we said, "Okay, and then we're gonna work on the enablers." That at the end, if that model is working, production would come. The enablers basically were still some of that are there. Aligned the organization. The buyer process is a loop, and we modify the organization to respect that loop, work in each separate process, but all integrated.
That was the first thing we did. We work, as I mentioned, in power stability and process control. If you don't have the stability in your power system, there is no way you can get stability. It's impossible. We put a lot of focus on that. We also develop competence further, enhancing and strengthening the competence we have, adding some people experienced, training, the people that are there, so that we could run this complex operation. Of course, we still working in improving maintenance, improving reliability with the most modern technologies we have in that area. We said, "If that works, two things has to happen." Those are the two main indicators for a refinery production.
What we call yield, which is the precipitation efficiency, and the flow is the circulation of the liquor in the pipes and tanks. It correlates more or less to the current efficiency in the platforms. More or less is this correlation. We saw here the improvement. In all aspects, the improvement in OEE, operating equipment efficiency was very high. This is very important because this is not just about breakdown, it's about everything. It's running pace, it's quality, it's process. Anything that can slow the flow from its nominal capacity is here. We achieved 94.5%. The yield, which is the measurement of a process efficiency. We went from 86.5% to 90%.
Each gram per liter for us means around 70,000 tons per year. Each gram per liter. Because we run more than 7,000 kL per hour. It's a big number. We tick the box here because we did. As I showed, the result is here. That's, to me and to my team, was very important. We keep constantly in a process to evaluate the model, to detail, to deploy the indicators, to analyze the critical process, to empower people in the area, because the box process is about empowering people. It's about surfacing the problems where it first starts and empower people to solve the problem at their level. This is very important for us. I repeat that in this complex refinery operation.
This is some more detail on how it worked. The focus on residual life and disciplined root cause failure analysis took us to this level. The OEE achievement. We had a much better temperature control. It's a big detail, but those are very important characteristics for a refinery because this improves our total process. Shifting from line into process orientation, I mentioned that. Daily meetings. Daily meetings is where we empower people. Daily meetings is where we surface the problems and don't allow the problem to get to a level where it can really cause a big issue for this operation. Although I'm focused here in the Alunorte, we applied exactly the same process in the mining, which is not a lot of mining, did that.
That was also very important for us in that respect. Let's see what better for commercial means. Commercial improvements are within the targets. We are achieving it through strategic price ambitions, as it has been mentioned here, going from LME-based price to index price, having the prices on the alumina's own fundamentals, reduced demurrage cost, portfolio optimization, and improved price in terms of existing and new contracts. This is demurrage cost. Why this is important for us, because this is linked to a very good commercial planning as well as an improved stabilization. This is a significant improvement. This is the outcome. What we follow on a daily basis is the waiting time for ships. We are around one day.
We came from more than five days. That's very important because that's cost, huh? When you see commercial bauxite in APM Terminals, this is also. If you take 2011 as a basis, this is the development year-to-date. Also a very positive development. When we talk about alumina pricing, we're here. Increased index potential. There are opportunities to some contract renegotiations, sourcing volumes higher than previously indicated, and stable going forward. We're focusing on developing strategic consumer business. We wanted to get closer to the end users. We see this as our strategy. Our objective is to sail on CIF, because then we can have a better control of the total value chain.
This is the development in terms of internal demand, LME-linked sales, and index exposure. Some of the contract that we inherited from Vale will expire at the end of 2016, and then we'll start having more exposure. This is our strategy, more exposure to the index price alumina on its own fundamental. We have a possibility for more attractive market positions. China and Indonesia represent commercial opportunities. Brazilian bauxite quality attractive in global market. As I said, as we increase production in Paragominas, we free up more capacity MRN, and we are able to sell MRN bauxite. Bauxite pricing on merits value and use pricing gaining traction. I'd like to make a few comments here.
I think there is a better consciousness about the impact of bauxite quality in the alumina refinery. It's important to mention that bauxite travels with 8%-12% water. This we have to be careful. That a quality of the bauxite can dramatically impact an alumina refinery to a point that you can shut down a refinery that's not prepared for a type of bauxite. Things that impact available alumina, oxalate impact tremendously. The monohydrate or trihydrate, the type of bauxite, you cannot run a monohydrate bauxite on a trihydrate designed refinery. There are many factors that can contribute positively or negatively. We have one of the sweetest bauxite in the world based on these elements. Very low impurity, which is very good for the end user customers.
Very low zinc, good for lithographic, and some other characteristics. Our bauxite's very good. As such that, some refineries use this type of bauxite to what we call in the refinery jargon, sweetening their process. They can use this kind of a bauxite to improve energy consumption, to improve output. More and more, the market is getting conscious about this. That's why we believe, coupled to what Arvid said, and some other restrictions that we have in the world, that's what we believe that our bauxite has a very good value and the market start perceiving it. It's more understanding about that. Increasing commercial diversification through Atlantic and Pacific presence, swaps and other things. It's also a strategy for us. Bigger.
As Hilde said, I'm going to repeat more or less the same. Our major focus was in being better. We had to go from a difficult situation to an improved situation, a more stable situation. That was very important. Our focus has been more on the better side. On the bigger, we also have some initiatives like the high quality gibbsite bauxite. I mentioned that. Highly available, good alumina, low impurities, so on and so forth. We need to secure and develop our bauxite resources in Brazil as well. It's very important that we maximize what we have already as a resource and reserve in the state of Pará in all the areas. We have a possibility to expand Paragominas to 15 million using the same pipeline we have.
There is no need for major infrastructure changes. We can use the same pipeline, we have the capability. Then we can secure bauxite supply for our CAP project. It is important that we secure this long-term supply to Alunorte, because this is a long life resource base. Utilize large bauxite reserves in Paragominas, competitive investment cost and cost position. As I said, utilizing the pipeline. We are also conducting a full review, a technological assessment of CAP because we believe that CAP already is one of the best cost positioning new projects, but it can be even better. With the new technologies, with the utilization of this bauxite, we can go to really extreme benchmark yield, for instance, going to 100 grams per liter or something like that.
There are possibilities for that. There are technologies available for that, and we know that. Ready to proceed as soon as new capacity is needed in the market. Yes, we are evaluating price, but we also evaluate in the market balance. Whenever this is, we consider that to be okay, we'll be ready. Then the phase one is around 1.9. Greener. Greener is, as for any other business area, very important for us. We have all the advantages in terms of weight, reducing CO2. A lot of times customers ask, "And how you get your raw material?
How do you extract your bauxite? First of all, living in an area where we live with lots of needs, the relationship with our community is very important. Our focus on health, safety, environment, social and educational program has a big weight for us. It's our license to operate in these areas, in these communities. Very important. It totally align it with Hydro's value. Safety, of course, comes first. I'm very glad to say that, with the stability of the plant, our numbers in safety also, as production and other numbers, came in a very positive trend. I'm very happy with that. Education, we have several education programs for children. Here is children using tablets. We have music training.
We also have an apprentice program that we have in the refinery that we have in the mining. Every year, we have 70-80 apprentice persons that come, and we train them in our operation. We train them in lots of things, and given sometimes the turnover, we can assimilate some of them. It's very important because we prepare them not only for us, but for the industry there. I mentioned education. Social project, we always link this. We have football. For the Germans present, we still have football in Brazil. We still are okay with that despite the setback. It's always linked to education. It's always linked to development.
All the sports we work on is linked with development, their own development of the children and the persons participate. The environment. Reforestation, this is very critical for us. This is our day-to-day business. We mine about 480-490 hectares per year in that area. We had a gap in 2011 of 900 hectares. We have the commitment to close this gap by 2017, and we are well in line with this commitment. We don't have a gap from what we had mined out. We do have a gap to what we're going to mine. We're mining, actually. We are pretty much confident that by 2017, this gap will be closed.
We also have developed different techniques to reforestation. We have a partnership with University of Oslo, Federal University of Pará, Federal Rural University of Amazonia, and Museu Paraense Emílio Goeldi in Pará that also provide experts for that. We have a structured program to work on the biodiversity. I'm very proud to see this program going, that it's not only about reforestation, but it's doing it the best way possible to put back on the original forest and also the wildlife. We follow that. We track that on a daily basis. We also have our Pará Sempre. It's a proactive approach to face the regulatory challenges that we have in Pará.
We have a systematic dialogue with key stakeholders, the politicians in the local, state, and federal level. We also have a dialogue with the industry associations, with NGOs, and we focused on what is our contribution to the sustainable aluminum value chain in Pará state. We also underline need for a competitive and predictable framework. If we are to grow there, we need a predictable framework. On that regard, we are fully aligned with the government of Pará. We have a strategy for SMS, and we also have a task force work on that. In summary, better. Continue operational improvement, a drive to achieve and surpass our nameplate capacities. Price bauxite and alumina on fundamentals. Bigger, we have to secure and develop further our bauxite resources for future decades.
Mature CAP project and Paragominas expansion for when time is right. Greener, improve organizational capabilities and HSE, as we mentioned, and deliver our reforestation ambition, one to one in 2017, which we are well on track. Thank you very much.
Thank you, Alberto. It is now time for the final Q&A. If Hilde Merete Aasheim can please join us on stage.
Hi there. I'm Danielle Chigumira from UBS. A couple of questions for Alberto, if I may. You mentioned the review of the CAP project to try and reduce costs there. Could you clarify when you expect the results of that review so we can get an idea of what kind of alumina price you would need for that to make sense? And also on the manning reduction for Alunorte, just wanted to clarify whether you've managed to start that this year or whether the entirety of the manning reduction is expected next year.
Okay. The review of CAP project, the main goal of the review of the CAP project is to assimilate to introduce all the gains that we now know in relation to the very good bauxite we have. We believe if we review the design, including new technologies available, we can improve very substantially the original design and, of course, this will impact positively cost, and other, and even the design cost of the total project. In terms of time, we are studying that internally and with engineering companies, and we will have this coming up in next year.
Just on the manning reduction, sorry, add a little bit.
On the manning reduction. On the manning reduction, you ask if we already started or you're gonna start next year. We already started. The manning reduction in Paragominas has been accomplished, and the manning reduction in Alunorte, we are concentrated first in optimizing. We're optimizing the contract services. In some cases, we are insourcing, and we're benefiting from improved productivity. We already started.
Thank you.
Hi. Jatinder Goel. Hi. Jatinder Goel from Citigroup. Just a question on CAP Refinery again. You've been talking of it again after a long period in time, but how much of that is Indonesia? And is that based on a view that Indonesia will never come back in bauxite, alumina or refined metal form ever? Or do you think the project can still work if Indonesian volumes come back in either of the forms?
I think there are two things separate. In terms of reviewing project, in terms of evaluating what we have, this is something that is independent of the development of the Indonesia. In terms of the CAP project itself, as we said, mentioned here several times, has to do with the price of alumina and the balance. That is the main driver.
Anja Hansson with Arctic Securities. In Brazil, except for Paragominas, you don't own 100% of the other assets. Is it some of the other owners that not is so strategically interested in keeping their position as before?
We don't own 100% of any other asset? That's is your question?
Yeah.
Well, in terms of the positions, we have the acquisitions from Vale in the case of the bauxite and alumina assets. We work very well in the joint ventures that we have. We have very good partners, and I think we see a lot of positive results from that. Then I think Hilde can also talk a little bit about the primary.
Yeah, your question was the Bauxite & Alumina?
Mm-hmm.
Well, we have a partner in Albras with the Japanese where we work very well, which has been the same partner as it was in the Vale, back in the Vale days.
Mm-hmm.
They still are as interested as previously to keep their position?
So far. No signs of that.
Hi, Sindre Sørbye from Solstad. Obviously done a good job in cutting costs on the primary smelters. If you look at it from a relative perspective, where do you see your leaving Qatalum, which is a world-class smelter outside the other smelters, where do you see them on the cost curve? Also compared to last year, and especially taking into account most recent changes in current foreign currency rates.
We are not precise on where we are on the cost curve because the cost curve is not precise. The CRU curve is not precise. We believe that the portfolio we have now is a little bit less than the average, lower than the average. When we look at the relative comparison, which we do every quarter based on official numbers, we see that we do have a relative improvement, which is at least as good as the best competitors we compare with. We have a good track and a good relative improvement.
Okay, if there are no further questions, we will leave the stage, and we would like to invite up Svein Richard Brandtzæg.
Okay, thank you very much. It's now up to me just to make a very brief summary of what we are doing, because as you have seen from our presentations today, we are still doing our utmost to lift performance and create additional shareholder value. We will continue our improvements. We will continue to high-grade our portfolio and mature some very interesting project for the future. At the same time, also develop our sustainability agenda in the company. All in all, our aim is to create a better, bigger and greener Hydro for the future. Thank you very much for your attention, the lunch is ready, so enjoy your lunch. Thank you very much.