Welcome everyone to the presentation of Hydro's third quarter results. Welcome also to all of you following us on webcast today. The results will be presented as usual by our CEO, Svein Richard Brandtzæg, and CFO, Eivind Kallevik. We will have time, as usual, for questions from you after the presentations. Please, Svein Richard.
Thank you, Inger. There are two main factors that are lifting the results in this quarter. First of all, the lower cost in Primary Metal, and the other one is higher production in energy. On the other hand, there are weak results in Bauxite & Alumina due to low production in Alunorte. I'm happy to confirm for you again that we are on track with the $300 program, and I think this is the fifteenth time I'm confirming during the quarterly presentations that we are on track with the $300 program that we are now finishing in the end of this year, which is for the fully-owned smelters.
We will continue with our improvements also after finishing that program, and continuous improvements will continue in the company along the whole value chain with contributions from each employee, and that is what will make Hydro an industry leader going forward. Let's move over to the highlights from the quarter. The result of NOK 659 million is about NOK 140 million, NOK 150 million above the second quarter, about half a billion better than the third quarter last year. Lower aluminum price, lower alumina price, but also lower cost in Primary Metal. The Bauxite & Alumina result impacted by the low production Alunorte, as I mentioned, which is due to the power outages that we communicated earlier this year. This is also, of course, impacting the bauxite production in Paragominas.
Higher production in energy is supporting the result and also the fact that we have fairly high prices for a third quarter level. I'm also happy that we have now the Sapa joint venture on track. The deal was closed first of September. The company was established and is now on track to deliver on the synergies and also on the integration that is ongoing. With regard to the aluminum prices, we saw levels between $1,800 and $1,900 per ton. During the quarter, the realized price went down from $1,926 to $1,822 per ton. The market price went down from about $1,870 to $1,827. We have now priced about 50% of the volume for the fourth quarter at levels close to $1,800 per ton.
If you then take a look at supply and demand balance outside China, we see that the market is now in a better situation. We see that the demand has picked up somewhat in the quarter compared to the previous quarter, and we are now back to pre-crisis level on demand on aluminum. If you look at the total growth that we have talked about also earlier this year, we talked about 2%-4% after the second quarter. Now we see that the market will grow closer to 2%. There are announced curtailments, but also ramp-ups. Some of the ramp-ups of new capacity is delayed. But all in all, we expect that market will be largely balanced for the rest of the year.
If we then take a look at the inventories, the fact that we have a balanced market also means that we have quite stable inventory level, about 7 million tons inventories in the part that is registered, and also some unregistered inventories. All in all, about 12 million tons altogether. There is some movements between the registered and unregistered inventories. All in all, due to the fact that the market is in balance, we see a fairly stable situation with regard to inventories. If you look at the inventory days outside China, we are talking about 90 days consumption altogether. We have seen quite a steep reduction in standard ingot premium in the U.S. and European market, more stable in Japan. This can be ascribed to a fairly tight metal situation in Japan.
We also know that there has been announced possible changes in warehousing rules. The LME warehousing rules may be changed on a decision that we are expecting to be taken within this month. In July, when this was announced, the market reacted and we saw a decline in premiums for standard ingot in the U.S. and European market. During the last days, we have seen this has been stabilized. The warehousing rules that they are going to be changed will impact warehouse in U.S. and also in Europe, where there are queues of canceled warrants of more than 300 days. If you then take a look at the alumina price, also there is somewhat a weakening situation.
We had prices down to $317 on average from $326 from the previous quarter, trading now at around $320. In percentage of LME, alumina was priced from, and the price of alumina went down from 17.5% in the quarter to 17.3% during the quarter. If you then take a look at the export-import balance in China, we have again a new record of bauxite import. As you know, there are expected to be restrictions of export of bauxite from Indonesia to China, which has been a very important source of raw material for the aluminum industry in China. China is preparing for this situation and building up inventory. All in all, we see 48 million tons of bauxite inventory in China.
Together with their own consumption, they will now have bauxite for a full year, and even a bit more than that. If you take a look at the alumina import, small increase, but at low levels compared to the bauxite. Obviously China have a intention to convert the bauxite to alumina domestically. The primary metal is in balance, no major export or import in balance, zero. We see scrap import continues as before. When we look at the export of semi-fabricated products, a bit lower in the third quarter than the second quarter, which can be ascribed to normal seasonal variation. Alunorte is on the way to improve, but this is the largest alumina refinery in the world, and it takes some time.
We see improving data every week on volumes, but the power outages created a setback, and we lost volumes. We are now in the quarter operating, we had an average of about 5.25-5.3 billion ton level. We will still need some time before we are up to the level before the power outages, which was around 5.8 billion tons. That will also have a weigh on the volumes we will see in the fourth quarter. However, the improvement program will also continue, and we have the ambition to deliver on the improvement program, the B2A program, which will reduce the cost with NOK 1 billion within the end of 2015. These ambitions has not been reduced.
In Qatalum, the production is going as previous above nameplate capacity, very good operational results on current efficiency, energy consumption, anode consumption, all the important operating key parameters in Qatalum, very good. We also see lower cost in Qatalum with stable operation, we have a better cost position, cost development is good. I'm also very happy that we have now received first dividend from Qatar. The first dividend was NOK 35 million. We are also producing casting products, which is mainly extrusion ingots and primary foundry alloys in Qatar, which gives also additional contribution to the bottom line of Qatalum, as we also have seen improved premiums for the metal products during the quarter.
When we look at the Primary Metal, the cash cost for the total portfolio is going down. In the second quarter, we said $1,600 per ton. Now we are at $1,550, and with a margin of $375 per ton on the low prices as we have today. We have created even more robust situation with contribution, of course, from the $300 program, but also the fact that we also have an improvement program for the joint ventures. The weakening currency in Brazil is supporting this also. Good results in Qatar, and also the fact that the cash cost margins has also been lifted during this quarter. All in all, $1,550 as an average cash cost for our Primary smelters.
We announced earlier this month that we have signed a contract for Slovalco, which means that we now have a power contract beyond 2013 for our smelter in Slovakia. If you look at the downstream and Rolled Products, we had 5% lower volume in Rolled Products in the quarter, which is expected from seasonal variation, mainly weaker in canned and general engineering. In automotive, however, it was 10% increased volumes of sales into automotive, from automotive sheet, which is a positive development. If you look at the quarter this year compared to the quarter last year, we have 5% improvement in sales, very much supported by good sales in can and general engineering.
In energy, we started the quarter above the ten-year average reservoir level, ending up close to or a bit below the ten-year average on reservoir level in the southwestern Norwegian region. Prices quite stable and, as I mentioned, on a quite good level for third quarter due to the low precipitation. Finally, Sapa established, it is now on track, integration is ongoing. We also now working to realize the synergies and of course there are also some restructuring in Europe that is ongoing in this company. With that, I leave the word to Eivind Kallevik.
Thank you, Svein Richard Brandtzæg. Good morning, everyone, and thank you all for joining us on this third quarter result presentation. To start with, I would like to draw your attention to one specific item from a reporting perspective this quarter. As Svein Richard Brandtzæg already mentioned, we did close the Sapa transaction on September 1st. This means that the operating results for Hydro's old Extruded Products were therefore for July and August still be presented as a result net of financial items and tax as income from discontinued operations, and excluded from reported underlying EBIT from a Hydro perspective. Depreciation of property, plant, and equipment is also excluded for these periods.
Following the completion, for the month of September, Hydro's share of operating results from the Sapa joint venture is included in share of profit/loss and equity accounted investees, and then included in the line called other eliminations, and reported as such in the quarterly results. With those details, let's dive straight into this quarter's figures. The underlying results, as Svein Richard Brandtzæg mentioned, for this quarter, improved by NOK 150 million to NOK 659 million. We saw an increase in the business areas Primary Metal, Energy, and a slight increase within the Rolled Products segment. From an overall perspective, this quarter has been impacted by a lower LME measured in U.S. dollars, which has been partly offset by the strengthening of the dollars, both versus NOK as well as the BRL.
We see some increase in sourcing costs for alumina impacting the Bauxite & Alumina results. This, on the other hand, we see partly offset by lower variable costs, in particular in the business area of Primary Metal. Also as Svein Richard Brandtzæg mentioned, we have very strong energy production for this period lifting results significantly. Some more comments to other eliminations. This quarter, we have an underlying EBIT of NOK -87 million versus NOK -70 million in the previous quarter, a difference of NOK -17 million. As I mentioned before, our share of the underlying net income from the Sapa joint venture for the month of September is included in this line, and that is NOK 10 million for this month in isolation.
The other quarter-on-quarter changes on this line primarily relates to the gains and losses, eliminations of gains and losses on inventories. That is a NOK -7 million for this quarter, while it was a NOK +40 million for the previous quarter. Excluding this elimination and excluding the Sapa effect, we see that the charges for corporate costs and other businesses is roughly NOK 90 million for this period, which is a seasonal improvement compared to second quarter of roughly NOK 20 million. If you look in on the high-level quarterly result development, as I said, we started with roughly NOK 0.5 billion within second quarter.
We have roughly NOK 200 million or NOK 0.2 billion improvement in Energy, about NOK 250 million improvement on the production side, somewhat lower prices of about NOK 40 million, taking the net improvement down to NOK 200 million. On Primary Metal, we see a cost improvement of roughly NOK 200 million. NOK 120 million of that is related to fixed costs. Roughly half of that is related to more seasonal effects, while the other half reflects continued strong and good performance on fixed cost improvements. Roughly NOK 60 million comes from variable cost improvements in Primary Metal. We see lower prices in Bauxite & Alumina, which is a negative for them. The opposite side is, of course, that the sourcing cost for Primary Metal is improved, and alumina has a positive impact on this quarter's variable cost.
On the aluminum volume and price, we have a negative effect of NOK 100 million. That, of course, is net of the negative effect of LME measured in dollars of roughly $250 million. The positive effect that we get on currencies offsets that with close to $110 million. The net effect measured in Norwegian kroner is NOK -100 million. Bauxite & Alumina very much related to lower prices, as we indicated, driven by the LME link. But then also, and even more so, there is a negative cost effect from the fact that we had to source additional volumes in the third party market to satisfy the supply commitments as we had from a commercial perspective. This is pretty much in line with what we guided for in the second quarter results.
All in all, that leaves us with third quarter results of NOK 0.7 billion or roughly NOK 700 million. If we take a quick look through the key financials, we see that revenues are pretty much flat compared to second quarter this year. The increased volumes that we have in Bauxite & Alumina, as well as in energy, are offset by the lower prices and volumes in all other business areas. We have excluded 62 million from the reported EBIT this quarter. I will get back to that in more detail. That gives us a reported EBIT of NOK 597 million for this quarter in isolation. Financial items NOK - 246 million. This includes currency losses of NOK 152 million.
This, of course, is a significant improvement compared to what we delivered in second quarter, which had a negative financial items of NOK 1,367 million. I will refer to that on the next slide. Income before tax for this period is NOK 351 million. This results in a tax expense of roughly NOK 162 million. Again, this is driven from the fact that the high proportion of our income before tax comes from the energy segment, and thus we get a higher proportion of the power surtax impacting the results. This gives us a net income of NOK 321 million for the period, up from a loss of NOK 665 million in the last quarter.
If we look on the financial income or expense, and then really point to the net foreign exchange loss, that was roughly NOK 1.3 billion in Q2. That was, of course, primarily driven by the weakening NOK versus US dollar and Euro. Quite large changes in that quarter. In the third quarter, or between second, end of second and the third, much smaller variations and primarily related to the Euro development, gives us an effect of NOK 152 million. This, of course, is on this perspective, an accounting effect mostly. All other effects on the financial issues are relatively stable between the quarters. As we always mention, I'll mention it in all quarters, we do exclude certain elements from our reported EBIT to give you a better understanding of our underlying performance.
In this quarter, we have excluded NOK 62 million altogether from our underlying results, versus roughly NOK 44 million in the previous quarter. In this quarter, there is a very limited effect on the unrealized effects on power and raw material contracts. It's NOK 7 million, relates to an embedded derivative in one of the power contracts that we have. Second line, unrealized derivative effects on LME- related contracts. This quarter we have a long position on LME due to customer pricing out in time, and then with the pricing development on LME that we've seen between the end of the quarter, this gives us a positive effect on this line. Metal effect on Rolled, as we normally see, it's a negative number.
Declining LME environment typically also gives us a negative effect on this line. Limited rationalization charges and closure cost, it's basically reversal of NOK 9 million of some period, previous periods, charges. Two more significant items and new items in many ways. Gains, losses on divestments, NOK 53 million. That all relates to the fact that we closed the Vigeland transaction in third quarter. We held 50% of those shares already before the transaction, and this is then a reevaluation gain of the shares we had at that point. We back out that gain to give you a better understanding of the underlying result. Items excluded in equity accounted investments, which is all Sapa, that for all practical purposes relates to unrealized derivative effects within their portfolio of metal hedges.
Turning to Bauxite & Alumina, we had an underlying result, underlying EBIT for this quarter of NOK 370 million, which is a worsening of result of NOK 126 million compared to second quarter. This is driven by lower realized alumina prices, Alunorte, and it's driven by increasing cost of the sourced alumina, as I mentioned. Also important to note that, of course, due to the low production at Alunorte, this has an impact on Paragominas, and we see lower production at Paragominas this quarter than we did in the last quarter. In this period, we also have the effect that we have installed a new pump station in the middle of the pipeline, so we have to take down the pipeline for two weeks for this work. That was planned and anticipated.
That is now up and running according to plan. If we look a little bit more closely on the components of the underlying EBIT, the realized price for alumina is down some 3%, this quarter, driven by the fall and decline in LME, but is partly offset by the strengthening of the dollar against the BRL. In addition, probably more importantly in this quarter, is the increase in apparent alumina cash cost. This is driven by significantly higher sourced volumes in the third-party market in order to satisfy the supply commitments that we have as a company. Due to this increased sourced alumina, the net index exposure in this quarter is very limited. Looking forward, Svein Richard Brandtzæg already mentioned that we are expecting gradually increasing in alumina production.
We do see the improvement efforts starting to take effect, but it will be a gradual improvement. Bauxite production will ramp up according to alumina production in Alunorte, as we have seen in the past. Primary Metal delivers a strong result given the current pricing environment. An increase in its underlying EBIT of NOK 100 million from NOK 237 million to NOK 337 million. The LME decrease of roughly $100 per ton this quarter results in a negative effect from the smelter portfolio, of course, including Qatalum. This is partly offset by the strengthening of the dollar, which increased about 3% versus the NOK. In addition, premiums lifted roughly 8% between those periods, measured again in Norwegian kroner.
Together, these effects gives us a negative impact of roughly NOK 80 million combined. Helping the performance is the lower variable cost, which contributes with roughly NOK 60 million between the quarters, driven by two things. It's really the reduction in the alumina input costs and also some reduction in power costs, in this period. The reduction in power cost is partly a one-time effect, which you should be aware of. The largest contributor is really fixed costs, down NOK 120 million compared to the previous period. As I said, partly due to seasonality, but also very much helped by the strong efforts in the $300 program. Looking into next quarter, we have sold about 50% of our production, priced at roughly $1,800 per ton.
We expect slightly lower sales volumes in the quarter, and also seasonally higher fixed costs, through increasing maintenance activities in that period. Turning to Qatalum. I think Svein Richard already mentioned the fact that we have and continue to have very strong and stable performance, well above nameplate capacity from a production perspective. The net income is NOK 31 million for this period, down NOK 13 million from the second quarter, reflecting the anticipated lower sales price, but also helped by lower fixed costs, and improvement in operational performance. It's very good performance from a cash cost perspective.
As Svein Richard Brandtzæg mentioned, we're also extremely happy to see that the first dividend payment is coming from Qatalum, but I would like to highlight it's $35 million on Hydro's behalf, which is quite a significant and good cash contribution. On Metal Markets, we see relatively or as anticipated, we see some seasonally lower remelt volumes. We delivered an underlying EBIT of NOK 111 million for this period, down NOK 37 million or NOK 36 million compared to second quarter. The currency and ingot valuation effects stable between the quarter. Also excluding this, we see the same negative change in results of roughly NOK 36 million between the quarters. As I said, this is primarily driven by somewhat lower seasonal sales, and then slightly lower margins compared to second quarter.
Looking into fourth quarter, we expect volumes to remain at the level as we saw in third, and then we expect to see a slight increase in margins. At the same time, as we always do, please remember that these results may be impacted by the trading results and the currency hedges that we do have in place, so they are volatile and will have impacts, which is hard to predict before the quarter is over. On Rolled, a flat EBIT between second and third quarter, which is a relatively good performance considering that we have a 4% seasonal decline in sales. This is, the lower sales is partly then offset by lower operating costs and improved contribution margin within the business that we operate.
Looking forward into fourth quarter, please remember that the fourth quarter within Rolled Products is the weakest quarter from a production and sales perspective in a year. Also that Q4 is the highest maintenance season for Rolled Products, which will have an impact on results. Energy strong production. We have an added EBIT increase of NOK 217 million compared to second quarter, which gives us an underlying EBIT of NOK 485 million. The results are primarily up on increased production, and partly offset by somewhat weaker market prices. Production increased 748 GWh. As net spot sales, we see an increase of 844 GWh. This then basically reflects somewhat lower concessional offtake of power in that period. Slight decrease in prices, although seasonally strong.
Prices were down from NOK 296 in the second quarter to NOK 267 per megawatt hour in the NO2 pricing area, where we still have about two-thirds of our production. These spot prices, which we said remain strong, was basically supported by higher power prices in Germany, outages of nuclear production in Sweden, and a decline in hydrological balance throughout the quarter due to lower than normal precipitation during the summer and the end of the summer. If we look into fourth quarter, given the lower precipitation and resulting worsening hydrological balance, we expect somewhat lower production in Q4.
In addition, please also remember that net spot sales are usually affected by higher concessional offtake in the fourth quarter, at least if you look at history. However, also in this area, please remember that prices and sales and production is highly uncertain and very much depends on precipitation and price expectations going forward. Now let's spend one more minute on Sapa and Extruded Products. It is a special quarter when it comes to reporting for this area. As I said, for July and August, we reported Extruded Products as discontinued operations. Whereas for September, we include our share of the net income of the joint venture under the heading of Sapa in the other and eliminations line in the report.
If we start with Extruded Products, we saw an underlying income from discontinued operations of a positive NOK 57 million for July and August. If you look at the reported income for that period, that is NOK 132 million. This period excludes excluded items of NOK 75 million, which is basically the positive transaction effects on that deal. If we then move on to the September figures, this is on a 50% basis, as I mentioned before, we have reported a net income of a NOK -35 million. When we exclude excluded items, we get to an underlying net income of NOK 10 million for that period, which we report in our books. If you look at this from an underlying EBIT perspective, the result would be roughly NOK 29 million.
If we look at the market developments, we see that the decline in the European general extrusion market is slowing down. Whether this is the bottom or getting close to the bottom is, it's hard to say, but it is at least slowing down. The growth in the U.S. is still positive, also supported from the automotive sector. If you look at the pro forma sales figures for the whole Sapa joint venture, we see a 1% increase in sales when we compare Q3 2013 to Q3 2012. On the net cash and debt development, we started this quarter with a net debt of NOK 1.3 billion.
During this quarter, we have a cash flow from operations of an aggregate of NOK 1.1 billion, NOK 1.8 billion coming from EBITDA, and then NOK 0.5 billion in buildup of working capital. This is primarily driven by increased sales within the Bauxite & Alumina business area, and depends very much on the timing of when the ship leaves. Normally, that should come back in fourth quarter. We have invested NOK 0.7 billion, NOK 700 million in this period, very much in line with our earlier guidance on keeping a tight ship on capital, and a guidance of NOK 3 billion for the year.
Positive effect on other NOK 0.3 billion very much currency translation effects due to the currency development in the period, but leaving us at the end of the quarter with NOK 0.5 billion in net debt or an improvement of NOK 800 million during the quarter. Finally, I would like to give you an update on the BRL hedge that we did or have done. This, of course, is to secure the cost position in Brazil, which in a low LME environment at least creates some stability and ensures that we keep the operational focus on improving performance. Particularly important for Alunorte, given all the challenges that we have talked about also this quarter. The total hedged amount last quarter was roughly $800 million, and now it's increased to roughly $1.2 billion.
Approximately $350 million of that is relating to the second half of this year, and the remaining $870 million is related to 2014. The average hedge rates is 2.3 for this year and 2.4, or to be precise, 2.41 for next year. Hedge accounting is applied for this, so you will see no mark-to-market effect. It comes straight into earnings. With that, Svein Richard, I will conclude the financial part of the presentation.
Thank you, Eivind. With regard to the main priorities for the coming quarter is, of course, first of all, to lift the performance in Alunorte. Our improvement efforts have got traction, and we see improvements moving in the right direction and lifting the production gradually. As I mentioned, this is a huge refinery, and it will take some time. Of course, first of all, we will lift it up to the level we had before the power outages, and after that, continue to lift it up to nameplate capacity, which is 6.3 million tons. We will then continue our efforts to strengthen the competitiveness of our smelters, and of course, also to deliver on the improvement programs that we have established along the whole value chain in a balanced market situation.
I will come back to all these details in the Capital Markets Day that we have the 5th of December, where you all are welcome. Thank you very much.
Okay, we are opening for questions. We have a microphone for you, Hans Erik. Please also, here, Andre. Hans Erik Jacobsen. Please introduce yourselves also.
Hans Erik Jacobsen, Swedbank. The cost reductions within Primary Metal has been impressive. In your view, where are you located on the global cost curve now, after these cuts?
This is a difficult question because the cost curve is quite dynamic. The positions are moving continuously. We are quite confident that we are at least below the 50% level on the cost curve. Exactly where we are on that quartile is difficult to say. We have moved gradually down the cost curve and of course the portfolio now is much more robust even on these levels. We have $375 per ton in margin. Of course we still are continuing our efforts to make it even more robust. How this will end up in the cost curve is difficult to say, but we are below the 50% level now.
If I may add, and I think, because the cost curve at least is the public concern, you know, there are some uncertainties about it. If you do this, if you look at different players and you take an implicit cash cost perspective on EBITDA margin, for instance, you see that our relative position and relative performance is quite good compared to the market in general.
Thanks.
Okay. We have a question online, actually.
We have one question from the web. It's Amit Pansari of Société Générale and Luc Pez from Exane BNP Paribas asking the same question. Could you please elaborate on your exposure on the standard ingot premium? When should we see the effect from the drop in standard ingot premium on your realized premium and P&L?
We are producing standard ingots in Brazil. We have some joint ventures. Tomago is producing standard ingots. We have also capacity for standard ingot in Qatalum. The main strategy for our smelters is to produce metal products. Of course, we see there is some relationship between the development in premiums on standard ingots and the premiums for the metal products. First of all, it has a direct impact on the premium for sheet ingot, which is priced on top of the standard ingot premium. The sheet ingot prices will have a direct impact on the level of the premium for the standard ingot. With regard to extrusion ingots and primary foundry alloys, we expect that there will be some months delay.
How many months is difficult to say, but there will be several months before we see, or expecting to see, a decline in the premiums of extrusion ingots and foundry alloys, which is the main products from our fully owned smelters.
Good. We have Anne with a question from third row there. Anne?
Anne Gjøen from Handelsbanken Capital Markets. Some are very much against changed LME regulations when it comes to reduction of these queues. Different reasons behind that, but at least some says that the risk is that a lot of metal is coming out from the registered inventories and into the unregistered inventories. Do you believe it's possible to add regulations that would also hinder that?
I think that is difficult. What will happen to the unregistered inventory is of course an unknown factor for us. We know that the LME is working on the warehousing rules. We're expecting in a few days' time that they will decide on this. Again, the market is adjusting to new situation gradually. Whether this will lead to a flow of metal out of the warehouses is difficult to say. The constraints that we have seen in the warehouses so far will probably be changed. How this will spell out, I will not speculate on it.
Okay. Any more questions for us this morning? No? I would like to say thank you very much for coming and see you in December.