Good day, ladies and gentlemen, and welcome to the Hydro Quarter Reports conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rikard Lindqvist. Please go ahead, sir.
Thank you. Welcome to Hydro's third quarter results presentation. Before we start the presentation, I would like to draw your attention to the cautionary note in relation to forward-looking statements, which is provided in the presentation material. With that, I leave the word to President and CEO Svein Richard Brandtzæg.
Thank you, Rikard, and let me first start with the underlying result for the quarter, NOK 659 million, which is up by around 40 million from the second quarter and around half a billion NOK compared to the third quarter last year. The result was impacted by lower realized aluminum and alumina prices. However, the negative effect was offset by lower costs. The Bauxite and Alumina business was impacted by lower production levels at Alunorte alumina refinery following the power outages that we have communicated earlier this year. In energy, the result was up mainly driven by higher production and, for the season, high prices.
I'm also happy that we now can have established the Sapa joint venture, the global leader in extruded products, which is also the largest extrusion company in the world. Let us turn over to the aluminum price slide, and we have experienced prices between $1,800 and $1,900 per ton in this quarter. The realized price went down from $1,926 in the second quarter to $1,822 per ton. For the fourth quarter, we have sold forward 50% of the primary metals production at $1,800 per ton. If you then take a look at the supply-demand balance outside China, we can see a better balance in this quarter.
The total demand is a bit higher this quarter than the previous quarter, also somewhat lower production. In total, the demand now is back on the pre-crisis level of about 26.5 million tons outside China. The supply continued to decrease on more curtailments and delays of new capacity, more than offsetting the ramp-up of new capacity. We said earlier that we expected a demand of 2%-4% outside China this year. We now estimate the growth of 2% outside China. This is mainly driven by lower than expected realized growth in emerging markets. Our expectation for the fourth quarter is unchanged compared to the quarter ago. We see the primary market outside China has largely balanced this year.
On the inventory side, we see a fairly balanced market so far, and an expectation of a balanced market for the full year. It results in stable inventories. Inventory levels outside China is somewhat down in the quarter. Reported inventories outside China is sort of 7 million tons, whereof a bit more than 5 million tons is on LME inventories. If you take a look at the inventory days, it is about 90 days for the moment. If you then take a look at standard ingot premiums, during last months, we have received large movements in Europe and U.S. After LME proposed the new warehousing rules in July, we saw a period of falling standard ingot prices.
It seems like the prices have stabilized in last weeks in anticipation of the decision from LME expected to come later this month. If you look at the recent quotes of ingot premiums, these are down 15%-20% compared to the highest record, the levels. Japanese premiums are holding up around $250 per ton. This could be affected by a fairly tight ingot market in Asia, but also the fact that there's no LME warehouses in Asia affected by the potential changes. There are two warehouses which would be affected by the proposed changes, one in Europe and one in U.S., where canceled warrants currently is creating a queue of approximately 300 days. The alumina price was fairly stable in the quarter, around $320 per ton.
Index price of alumina is currently also trading around $320 per ton. The average price decreased $9 per ton, corresponding to 3% in the quarter. LME prices dropped 2%, with the effect that the alumina price has decreased marginally compared to LME from 17.5% of LME to 17.3% of the aluminum price during the quarter. With regard to the export-import balance in China, we see another all-time high import of bauxite into China. We believe that this is in preparation for the export ban on bauxite from Indonesia starting January 2014. We saw similar stockpiling in the first half of 2012 prior to the temporary restrictions introduced in Indonesia in May 2012.
Bauxite stocks is now estimated to be around 48 million tons, which correspond to more than one year supply, in addition to what they also produce of bauxite in China. Alumina imports increased in September, but for the quarter imports continue at low levels. As we have said before, on the primary side, there is not much new to report. China continue to manage their supply and demand, making a net import-export close to zero. We expect this situation to continue throughout this year. Looking at the semis export, we saw a small decrease from the second quarter, which is seasonally expected. For 2013, we don't expect large changes compared to 2011 and 2012.
If you then move over to Brazil and Alunorte, you already know that we experienced two unrelated externally induced power outages that caused a disruption to our alumina production at Alunorte. As Alunorte is the sole offtaker of bauxite from our bauxite mine in Paragominas, the lower production levels in Alunorte also affected the production levels in Paragominas. We mobilized resources to identify improvements and prioritize the efforts in order to stabilize and increase the production. We see that this is now gradually going in the right direction. I'm pleased to see that the effort's starting to show results, and we expect gradually increasing production in the fourth quarter. However, production in the fourth quarter will be unsatisfactory and not at the same level as we had before the power outages.
It will slowly go in the right direction, as said. Although the production challenges impact the 2013 target of the improvement program from B&A, we maintain our ambition to deliver NOK 1 billion in improvements by the end of 2015. We move over to Qatalum, and the smelter is again showing strong performance. Qatalum is continuously producing above nameplate capacity. Third quarter production of liquid metal was approximately 607,000 tons on annual basis. Cash costs continue in a good trend. Qatalum is also benefiting from higher premiums of the metal products, which is mainly extrusion ingots and primary foundry alloys on top of LME.
We are happy that the first dividend of $35 million, or approximately NOK 200 million, was received earlier this week. Qatalum continues to generate solid cash despite low aluminum prices. The $300 program for the fully owned smelters is set to be concluded by the end of this year, and this program is developing according to plan. The improvement efforts in our joint venture portfolio is also contributing to the positive or an improved cash cost we see for the Primary Metal business. In addition, we have lately seen a positive impact of the cost position from exchange rate development, especially in Brazil.
Looking at the cash cost, it is trending downwards, and so far the apparent cash cost is $1,550 per ton, with an EBITDA margin so far this year of $375 per ton. The EBITDA margin in the third quarter was on the same level as the first half, although LME prices dropped by more than $100 per ton. As you may have seen, in early October, we announced that our joint venture, Slovalco, signed a power contract for the power supply beyond 2013. If you then take a look at the downstream business, Rolled Products, on quarter-on-quarter, we see a seasonal effect.
Total sales in Rolled Products were down 5% since the second quarter this year. Compared to last quarter, sales in the automotive segment increased by 10%, while sales in most other segments experienced seasonal downturn and also some customer destocking. If we compare total sales year-to-date for Rolled Products, we see an increase of 5% compared to year-to-date 2012. Beverage can and general engineering is contributing strongly, while also litho is marginally down. Other segments are fairly stable compared to year-to-year 2012. On Energy, we started the third quarter with the reservoir levels above the 10-year average. Low precipitation, however, in the quarter resulted in reservoirs below normal at the end of the quarter. For the Nordic region, reservoirs were 17 TWh below normal.
Water reservoirs in the southwestern Norway, where we have two-thirds of our capacity, are close to normal levels. The low precipitation in the quarter supported prices, giving an average of 267 NOK per MWh in the southwestern region of Norway, which is fairly high for the quarter. As I said, I'm happy that we have now established a global leader in extruded products, the 50/50 Sapa joint venture. After two months, the focus in the company is to integrate the two organizations and, of course, also to realize the synergies and drive forward the restructuring that is now ongoing in Europe. With that, I leave the word to the CFO, Eivind Kallevik.
Thank you, Svein Richard, and good afternoon, everyone, and thank you for joining this afternoon's phone conference. To start with, I would like to draw your attention to a specific reporting topic this quarter. As Svein Richard had mentioned, we did close the Sapa transaction on the first of September this year. The operating results for Hydro's extruded products will therefore for July and August still be presented net of financial items and tax as income or loss from discontinued operations, and as such excluded from reported and underlying EBIT for Hydro. Depreciation of property, plant, and equipment is also excluded for these periods. Now, following the completion of the transaction, and going forward, Hydro's share of the operating results from Sapa is in September included in share of profit and loss in equity accounted investments under the line other and eliminations.
With that out of the way, let's get into some more of the details. The underlying result before financial items and tax increased for Primary Metal, Energy, and for Rolled, giving us a group result of NOK 659 million for third quarter, up NOK 140 million from the second. Lower LME prices measured in U.S. dollars were partly offset by the strengthening of the dollar against Norwegian krone and Brazilian reais. Increased sourcing costs for alumina in the B&A segment was partly offset by lower fixed and variable costs in other parts of the business. In addition, and very importantly, we had good and high energy production giving a good lift in results for this period. Some further comments on the line other and eliminations.
As you will see, we have an underlying EBIT of negative NOK 87 million versus negative NOK 17 million in the previous quarter, a change of 17. As I mentioned before, our share of the underlying net income from the Sapa joint venture is included in this line. For this quarter, there's a positive NOK 10 million effect, reflected in this line. The other quarter-on-quarter changes mainly reflect changes in eliminations of internal gains and losses in inventories. For this period, the effect was negative NOK 7 million versus positive NOK 40 million for the previous quarter. Adjusting for these internal eliminations and the Sapa effect, the result is NOK 90 million in charges for common services and other businesses, a seasonal improvement compared to the second quarter.
If we turn to the high-level quarterly result development, as I've said, we started or we left last quarter with NOK half a billion in underlying EBIT. In this quarter, we saw an increase or an improvement in the energy volume and price of NOK 0.2 billion. Roughly NOK 250 million is driven from higher production between the periods, and that is partly offset by somewhat lower prices, taking the results back down to approximately NOK 200 million. Primary Metal costs has an improvement of NOK 200 million. Roughly NOK 60 million of that comes from improvement in variable costs, where lower Alumina cost is a big explanatory factor for that change.
The biggest change though comes from lower fixed cost of NOK 120 million, of which half of it is seasonal effects, where we have somewhat less maintenance activities in the smelters during the summer period. Aluminum volume and price is net NOK 0.1 billion down between the quarters. We see that the LME measured in U.S. dollars has a negative effect of about NOK 240 million. That is partly offset by the dollar change, which gives us a positive effect of roughly NOK 130 million, bringing us to the NOK 100 million net change.
The Bauxite & Alumina volume, price, and cost, -0.1, primarily driven by somewhat lower LME-linked alumina prices within that business area, in addition to higher sourced external volumes for alumina to satisfy our supply contracts, which has a higher price than what we saw last year, or last quarter, sorry. On the key financial side, revenues are pretty much flat between the quarters. The increased volumes that we see in B&A and Energy is partly offset by the lower prices and volumes in the other business areas. The underlying EBIT is, as I've said, up from roughly half a billion to NOK 659 million for this quarter. We have excluded negative NOK 62 million from the underlying EBIT, thus giving us a reported EBIT of NOK 597 million for this period.
Financial items for the quarter was a negative NOK 246 million, which includes currency losses of NOK 152 million, a significant improvement from the negative NOK 1,367 million for the second quarter. This gives us an income before tax of NOK 355.51 million, which results in a calculated tax expense of NOK 162 million. Due to a large share of the taxable income coming from Energy, the tax expense is influenced by the power surtax that we have in this area, resulting a tax percentage of 46%, somewhat up from the 28% calculated in the previous quarter. This gives us a net income of NOK 321 million, up from a negative NOK 665 million in the previous quarter. Turning to the financial income slide. As I said, the net financials were a negative NOK 246 million for the quarter.
As you will remember, in the last quarter, we did experience relatively large currency losses due to the weakening of the NOK versus the euro and the dollar. That was in the previous period, close to NOK 1.3 billion, and in this period it is NOK 152 million, and the 152 is primarily driven by the weakening of the NOK versus the euro. All other effects between the quarters remain relatively stable. On the slide items excluded from underlying EBIT, there are relatively smaller changes this quarter. We have excluded negative effects of about NOK 62 million from the underlying results versus NOK 144 million in the previous quarter. We walk the way down the table.
We see a relatively small effect this quarter on unrealized effects on power and raw material contracts of NOK 7 million negative. This in this quarter is related to an embedded derivative in one of the power contracts in our portfolio. Second line, we did have a positive effect on unrealized derivative effects on LME related contracts. That is driven from the fact that we have a long position out in time due to customer pricing and then in the rising LME environment, we get the profit on that. Third line, metal effects again and development which should be anticipated typically in a falling LME market, this line should give us a negative effect, which we see.
There is a small rationalization charge or actually reversal of a charge this quarter of NOK 9 million, which is reversing previous charges in our business areas. On gains on divestments, we have NOK 53 million, which is basically reflecting the acquisition of the Vigeland metal refinery, which closed in third quarter this year. That gave us a revaluation gain of NOK 53 million on the shares that we held prior to the acquisition of the other fifty percent from Rio Tinto. Finally, items excluded in equity accounted investments, Sapa, NOK 45 million. This is primarily related to derivative effects in that joint venture. Now turning to the business areas, Bauxite & Alumina. We saw an underlying EBIT of a negative NOK 370 million, down NOK 126 million compared to second quarter.
This is primarily driven by the lower realized alumina prices as well as increased cost of the sourced alumina. Due to the low production at Alunorte, Paragominas, bauxite production is also low, as Alunorte is the only customer of Paragominas. In addition, we've had a two-week maintenance period for the pipeline this quarter, where we did a tie-in of the pump station number two in the middle of the pipeline. Also draw your attention to the fact that due to the increased sourced alumina for this period, the net index exposure was fairly limited in the quarter. If we look forward, we do expect some gradual increase in alumina production during the fourth quarter. Following that, we should also see a pickup of the bauxite production at the Paragominas mine.
In addition, with the higher production, we also expect less externally sourced volumes in the fourth quarter. Thus in isolation, it should have a positive effect on the current cash cost for the area. In Primary Metal, we saw an increase in the underlying EBIT from NOK 237 million in second quarter to NOK 337 million this quarter. On the LME side, we saw a decrease of roughly $100 in realized prices, resulting in a negative effect from the smelter portfolio, including Qatalum. This was, as I've said before, partly offset by the strengthening of the dollar against the NOK of approximately 3%. In addition, we saw a lift in realized premiums on our products of 8% when measured in NOK. All together, these three effects decreased the results by approximately NOK 80 million.
Offsetting this is lower variable cost, which contributed positively with approximately NOK 60 million, driven in part by reductions in the price of alumina for the metal plants. Largest positive contributor was fixed cost. About half of these were impacted by seasonal effects such as lower maintenance, as I mentioned. In total, this contribution is roughly NOK 120 million. Looking at the fourth quarter, roughly 50% of the production has been priced at around $1,800 per ton, and that excludes the Qatalum sales. We expect slightly lower sales volumes for fourth quarter, and we also expect somewhat higher fixed costs as we will have more maintenance in fourth quarter compared to the third quarter. On Qatalum, we continue to see stable and high production volumes, well above nameplate capacity and stable cost of sales at the plant.
The underlying net income was 31 million NOK, which is down roughly 13 million from the second quarter, reflecting lower sales price and somewhat offset by lower fixed costs. As Svein Richard mentioned, we are very happy with the continuous improvements in the ongoing cash cost and of course, as the CFO, also very, very satisfied that we are now seeing the first dividend payment coming out of Qatalum to the owners. On metal markets, we delivered an underlying EBIT of 111 million versus 147 million for the second quarter. This result decline of 36 million is primarily driven by somewhat lower remelt volumes driven by seasonality and slightly lower margins. Looking at the fourth quarter, we expect the volumes to remain stable compared to third quarter.
We also expect slightly higher margins in the period. At the same time, let me please remind you that the results from the trading activities, due to the hedging and currency effects by nature can be volatile, in any quarter. For Rolled Products, we had a good financial performance in a seasonally lower quarter. 4% seasonal decline in shipments driven by all segments, with the exception of automotive and heat exchanger businesses. This was offset by a higher margin contribution, as well as a continued lower operational cost per ton, compared to second quarter.
Let me remind you that fourth quarter is typically the weakest quarter when it comes to volumes in Rolled Products due to seasonality, and it's also the high season for maintenance activities, so there should be some increased cost also due to that fact. On the energy side, we had an improvement in underlying EBIT of NOK 217 million compared to second quarter, leaving us with a result of NOK 485 million for the quarter. This result is primarily up on higher production, which is somewhat offset by lower prices. The production increased by some 748 gigawatt hours, but the net spot sales increased by 844, thus indicating some lower concessional offtake volumes in this period.
The spot prices were held up relatively well in the period, helped by higher power prices in Germany, continued outages of nuclear production in Sweden, and a declining hydrological balance due to lower than normal precipitation, in the quarter. Looking into fourth quarter, we do expect somewhat lower production, due to the declining hydrological balance. Let me also remind you that in addition, net spot sales are usually lower in fourth quarter as we typically expect and have higher concessional offtake in the fourth quarter. On Extruded Products, and the Sapa joint venture, for July and August, as I said, we did report Extruded Products as discontinued operation, whereas for September, we include our share of net income in the other and elimination section under the heading of Sapa.
If we start with Extruded Products, we saw an underlying income from discontinued operations of a positive NOK 57 million for July and August. The reported income was NOK 132 million for the same period, including items excluded of positive NOK 75 million, which includes the positive transaction effects from the deal. If we move to the September figures on a 50% basis, as I mentioned before, we have a reported net income of negative NOK 35 million. When we exclude items excluded, which for this period is mostly derivative effects, we are left with an underlying net income of NOK 10 million. Our share of underlying EBIT for the joint venture is NOK 29 million. If we look at the market developments, we see a slowdown in the decline of the general extrusion market in Europe. The U.S.
continues with slow positive growth, also helped by the automotive sector. If we'll take a quick look at the pro forma sales figures for the Sapa joint venture, sales volumes were up 1% between Q3 2012 and Q3 2013. If we turn quickly to the net cash debt development, we started this quarter with a net debt position of NOK 1.3 billion. We generated a net cash flow from operations of NOK 1.1 billion, NOK 1.8 billion coming from EBITDA, which is partly offset by NOK half a billion in increased working capital. This working capital is driven primarily from the fact that we have higher external sales in this period.
We have invested NOK 700 million, which is very much in line with what we communicated in the past of keeping a tight capital ship, and is very much in line with the annual guidance of NOK 3 billion for investments. This all leaves us with a net debt position at the end of the quarter of NOK half a billion, an improvement of NOK 800 million during third quarter. Finally, let's have a look at the hedging of the U.S. dollar BRL exposure. This, as we've said last quarter, was to secure the cost position, which in a low LME environment creates stability and ensures focus on improving operational performance, which is particularly important for Alunorte following the issues mentioned earlier.
In total, the hedged amount was approximately $800 million at the end of second quarter, and it has now increased to approximately $1.2 billion. Of this, approximately $350 million was hedged for the second half of 2013, and approximately $870 million is hedged for 2013-14. The average rate for 2013 is roughly 2.30 to the dollar, and the rate for 2014 is roughly 2.41. Also please remember that hedge accounting is applied for these hedges. With that, I do conclude my presentation of the Hydro financials.
Just to finalize our presentation today is just to mention the priorities for the company. Number one is of course to increase the production in Alunorte. We see improved results of.
The efforts we have implemented week by week, but this is the biggest alumina refinery in the world, and it will take some time before we're up to the capacity that we expect. The first target is to take it up to the same level as we had before the power outages, which is 5.8 million tons. We are approaching, but it goes slowly in the right direction. After that, to lift the volumes up to nameplate capacity or Alunorte, which is 6.3 million tons. We will continue to improve the smelter competitiveness. We are going to finalize the $300 program, as I said, in the end of this year.
We are also realizing the improvement programs in the other parts of the value chain, including the joint venture smelters, the Bauxite & Alumina, B&A program. We have improvement program in Rolled Products and Energy. I will revert to these priorities and much more on the Capital Markets Day, the fifth of December this year.
Thank you, Svein Richard, and thank you, Eivind. Operator, then we open up for questions.
Certainly. Ladies and gentlemen, if you would like to ask a question over the phone, please press star one on your telephone keypad at this time. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Once again, that is star one to ask a question. We will now pause for just a moment to assemble the queue. We will now take our first question from Neil Sampat of Nomura. Please go ahead.
Hi, good afternoon. I had two questions. Firstly, on Primary Metal, on the cost reductions that have taken placed there. In terms of the fixed cost reduction, I think you've basically said 120 million NOK down quarter-on-quarter. Could you give us an indication as to how much of that is due to seasonality, and how much of that was the $300 a ton program that you've implemented? And then the second question was on the Qatalum dividend. Could you give us some sort of sense as to whether the $35 million dividend is that an annual dividend? Where can we expect that to go, and how frequently do we expect that to come in?
Thanks for the questions, Neil. First question first. The NOK 120 million in reduced fixed costs, we've said that about half of that is due to seasonal effects. I think, you know, a large part of the other part is part of the $300 programs, without going into details on that. The big part of that is reflected in the $300 program.
Okay. Thank you.
Thank you. We will now take our next question from.
Yeah. Let me. Sorry, there was one more question from Neil, which was related to the Qatalum dividend.
Apologies.
I think first and foremost, I have to say that we're very happy to see that we have now received the first dividend from Qatalum. That is an important milestone from a very important plant within the Hydro portfolio, so that's a good starting point. Then I think we will use somewhat more time before we come back on guidance on what the annual dividend capacity is going to be when we potentially get to Capital Markets Day. So let's first and foremost enjoy the $35 million, and then reflecting the strong performance of the plant, and then we will come back to talk more about how this is going to be going forward.
Great. Thanks a lot.
Thank you. Our next question comes from Daniel Lian of Bank of America Merrill Lynch. Please go ahead.
Yeah. Hi. Afternoon, guys. Firstly, I just wanted to ask you a couple of questions on the premiums you realized in your Primary Metal business. I mean, if we just kind of ignore what's going on with the LME warehousing rules for a second, I mean, how sustainable do you feel your premiums in Q3 are just based on market fundamentals? I mean, they're quite high relative to the level of premiums we've seen in the last few years. Then secondly, you know, we've seen some of your peers come out and make public statements against the proposed LME warehouse rule changes.
I was just wondering if we can expect you to take a similar stance on these. Second, I just wanted to clarify a point on the accounting treatment of the extruded products business. I just wanted to confirm that the depreciation for this business went to zero while it was classified as a discontinued operation. Going forward, when you'll be equity accounting the Sapa joint venture, the net income there will include depreciation again. Thank you.
Okay. Thank you for good questions. I can start with the first one, Daniel, premiums, and how will that spell out going forward. As you know, we have production of extrusion ingots, sheathing ingots, and primary foundry alloys, as a main output from our cast houses. In Alvås, for example, we have also standard ingots. With regard to the premiums for the metal products, first of all, they are priced in a different way. Let us start with the sheathing ingots, which is based on LME, plus standard ingot premium, plus sheathing ingot premium on top of that.
That means that for sheet ingot that goes to the rolling mills, the pricing of sheet ingots has an impact immediately when the standard ingot price goes down.
That is one change that is happening for the pricing of sheet ingots. The other extrusion ingots and foundry alloys, they are priced on LME plus the premium for the product. We have some experience from the past that it takes some time before we see the response in the market for foundry alloys and extrusion ingots when there are changes on standard ingot. We should expect that there will be a change, and the delay will probably take some months. I would not propose that there is a one-to-one relationship between changes in standard ingot and changes in extrusion ingot and foundry alloys.
We are expecting some decline in the metal products prices when we see a decline in the standard ingot price as well as all-in premium, as we have seen now during the last few months. Eivind, you may answer the last one.
Yes. On the question of depreciation on discontinued operations, it is so that when you do classify this as discontinued operations, you have to stop depreciating assets. For that period, when it was classified as discontinued, there were no depreciation impacted in the results. That, of course, changed again from September first. For the period after September 1st, there will be depreciation impacting the results of Extruded and the Sapa joint venture.
Okay, thank you. Just on the question about whether you'll be, there's any chance that you'll be taking a similar stance to some of your peers against the proposed LME rule changes?
We have just stated that transparency is very important there, and we are supporting improved transparency. That's it, what we have communicated in connection with the changing warehousing rules.
Okay, thank you.
Thank you. Our next question comes from Ben Duffy of JP Morgan. Please go ahead.
Yes, good afternoon, everyone. Most of my questions have actually already been answered, but maybe one question on the strong performance in your Energy business. You know, that was partly driven by a substantial increase year-on-year in Norwegian power prices. You mentioned outages in Swedish power plants as one of the reasons for that. Is this something that has been solved, and hence, should we expect more stability in pricing in the fourth quarter? Is that something ongoing? Thank you.
The prices of energy in the Nordic market is depending on several factors, of course. When some capacity is taken out, then it has impact on prices. But also the precipitation is important in addition to the temperature. Now we are approaching a colder climate with late autumn, early winter, and we have seen that before has an impact on prices going forward. We have seen the nuclear power plants in Sweden is being taken in and out depending on maintenance programs. Of course, they, when they have a maintenance program, capacity is going out and that impacts the prices. It depends on several factors.
I wouldn't speculate how this will spell out in the coming quarter. In general, fourth quarter is a quarter with a colder climate, and, in the end, it is the precipitation that nobody knows about that also influences and also some external factors like Swedish nuclear power stations.
Okay, thanks.
Thank you. Our next question comes from Jatinder Goel of Citi. Please go ahead.
Hi, gents. Just a couple of questions. Firstly on your fixed cost improvement in the Primary Metal business. You say about half of NOK 120 is due to seasonal maintenance. Is that carried out in all three remaining quarters, and you don't spend that money only in third quarter, or how should we look at it? Secondly, on variable cost of NOK 60 million, there was a comment made in the morning that part of it was due to one-off items on energy pricing. Could you please elaborate a bit on that? Thank you.
If we do the variable cost first, then primarily driven by lower LME or Alumina prices for Primary Metal in this period, due to lower sourcing costs for them, as LME has been going down. The second part, on the Energy side, there are some one-off impacts on the sourcing costs, or grid costs rather in Brazil, in this period, which we don't expect to come back. That is not the significant part of the NOK 60 million. It is a part of it, but it's not a significant part. Your question on maintenance.
Again, it's seasonality and typically during the summer where you know all the experienced and long-time workers go on vacation and all the engineers go on vacation, we spend less time and effort and money on maintenance in that period. You may say that lower amount is, you know, spread out through the other three quarters, but it's just the way it fluctuates during a normal year. Third quarter is typically lower on maintenance.
Okay.
I would say that that's. Yeah.
Yeah. Sorry.
Oh, sorry.
Yeah. If I could just ask a follow-up. Could you give us the current run rate on your 300 program? You're saying you'll achieve it by the end of this year. How far have you been till the end of 3Q?
Svein Richard Brandtzæg, like I had said, for the last, I think 15 quarters, is that we are following the targeted pace of the improvements. We were at $235 at the end of 2012, which is the last one we communicated specifically. Obviously we're getting closer towards the end of the year, so we should get very close to the $300 as we speak. We haven't given a specific number as of today.
Okay. Half of the NOK 120 fixed cost is definitely not coming back. That's sustainable now. Is that a fair assumption?
More or less in broad strokes.
Okay, great. Thank you.
Thank you. We will now take our next question from James Gurry of Credit Suisse. Please go ahead.
Hi, guys. Congratulations on the result and particularly the progress on the cost cutting. The market seems to be taking it quite well. I just got two quick questions. Just on the premium, you know, you've realized in this quarter a record level of the premium. If the LME go ahead with their rule changes, do you think the premium will go back, or your realized premium would go back towards the historical range, which seems to be between 13%-15%? Or is there a risk that it might go lower than that? Just a second set of questions just related to your partner Vale in the Bauxite & Alumina division.
Have you spoken to them about the MRN bauxite mine and you do seem to be the natural owner of it, but you know there is some peculiarities with your offtake agreement. Have you got any views if and when Vale might sell that and if that would impact your business given that you've got the offtake agreement there?
Yeah. Thank you, James. With regard to the first question, premiums going down from record high level, it is also impacting of course the premiums for the metal products, which has also improved very well during the last months. With regard to the volatility and what can happen going forward, I understand you are questioning if it can go back to the low levels as we have seen before. I would say that with regard to standard ingots, the reason for the standard ingots is the availability and different geographies that is setting more or less the premium for the standard ingot. It's on top of that, the effect of the warehouses that you can say also has some influence.
How that will develop now when warehousing rules and how that will influence on the premiums for the metal products will be more indirectly where lower cost for standard ingots means that remelting of standard ingots becomes cheaper than what it is now. Now it's extremely expensive because of the high cost for the standard ingot. That has driven up also the premiums for the metal products. When the standard ingot price or premium is going down, then there will be more tough competition from remelters that are competing with the primary cost also. Again, it's difficult to say how this will end up, but it will have some influence definitely also on the metal products in the end.
With regard to the discussion about MRN and Vale and their position, of course, we never comment on merger and acquisitions. We have an evergreen agreement, offtake agreement, from MRN. We have a steady supply for the coming years from MRN on bauxite to Alunorte and also bauxite that we can sell externally. We are not commenting on any changes on ownerships or also with regard to the shares Vale has in MRN. You have to ask Vale about that. Thank you.
All right. Thanks a lot, guys.
Thank you. We will now take our next question from Amit Pansari of Société Générale. Please go ahead.
Hi. I have a question on Sapa JV. When I look at slide 45 where you put in the pro forma numbers, quarter three underlying EBIT was NOK 24 million. For September only, you're saying that underlying EBIT is NOK 29 million. Just want to understand what has changed in between three months that your full quarter number is lower than just one month number. Thank you.
Just one second. Yeah. I mean, this has a lot to do with, again, seasonality in this period. Typically there are variations during the quarter and during the months. Remember that the NOK 29 million is really only one month, as you say. There is a lot of vacation periods in Europe and other places where we operate during July and August. That is really the reason why there is very limited result, effect, if any, from July and August.
Okay, thanks.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one. We have no further questions at this time.
Okay, thank you. That concludes the call. Have a nice evening.
That will conclude today's conference call. Thank you for