Good day, and welcome to the Norsk Hydro Quarter Two Results Conference Call. At this time, I would like to turn the conference over to Mr. Rikard Lindqvist. Please go ahead, sir.
Thank you. Welcome to Hydro's second quarter 2013 results conference call. With me here to present is President and CEO, Svein Brandtzæg, and CFO, Eivind Kallevik. After the presentation, you will have an opportunity to ask questions. Before we start, I would like to draw your attention to the cautionary note in relation to forward-looking statement provided in the material. I'll hand over to you, Svein.
Thank you, Rikard. Let us go directly to the highlights from the quarter, where we delivered underlying EBIT of NOK 518 million, which is NOK 500 million below the first quarter this year. The result was impacted by lower realized alumina and aluminum prices. Results for energy was down, mainly driven by lower production compared to the first quarter with high production levels. We experienced sequential power outages in our alumina refinery in Alunorte in Brazil, induced by two unrelated external events. These outages impacted production both in Paragominas and Alunorte, and it is a top priority to stabilize and improve the productivity of Alunorte now.
The results for all products improved on the back of 4% higher volumes compared to first quarter, seasonal days driven by can beverage, can and supported by automotive. If you move on to the next page, I assume you are very familiar with the macroeconomic situation and the macroeconomic development, but let me give some comments to the applications for aluminum industry. Overall, we continue to see solid demand growth for aluminum, despite some macroeconomic challenges, and that started in Europe. The weak markets continue in Europe, although different product segments experience different development. In general, we'll see a better market development compared to extruded products, where building and construction in Europe is still challenged. For 2013, we expect a stable development and same demand in Europe.
In U.S., we see a strong demand for aluminum in 2012, and our transport segment contributed to the growth. Transport continued to contribute this year positively to demand. For this year, we also see signs that building and construction sector is also contributing to the growth. Housing market in U.S. seems to be gaining momentum. In China, the demand growth for last year was 8%, and it seems that China is in for soft landing and expectation for aluminum is expected to be between 8%-10% this year. The demand for the first half in this year was about 9.3%.
If you then take a look at the supply-demand balance, we have shown the supply on the top of the curve and the demand as a green area. We see first of all that the second quarter every year is standing out as the best quarter. That is a so-called seasonal effect we see every year. The total volumes in demand is back on pre-crisis level and even better than that. This year, we expect demand outside China 2%-4%, and with the new and potential curtailments that are announced, we expect the market to be balanced in total for the rest of the year.
If you now take a look at the price development, we experienced a reduction from $2,042 average from the first quarter to $1,873 per ton in the second quarter average, when we realized the price of $1,926 per ton from $2,043 in the first quarter. About 8% decrease quarter-over-quarter in average U.S. dollar prices. At this level, there are a significant amount of the aluminum smelters that are losing money. According to the CRU curve, about 20% of the smelters are below water. However, LME price is at lower levels, but this is partly compensated by historically high premiums currently between $250 and $300 per ton for U.S., Japan and Europe.
During the quarter, we saw fairly stable premium for the ingots for all regions. The higher premiums is helping high cost capacity to keep producing compared to what we otherwise would expect to be closed at the current LME levels. If you then take a look at inventories on the next page, we have, as I mentioned, seen a balanced market so far on supply demand. That means that inventory level will also be stable as it is, as it has been also in the quarter and that we expect it to be for the rest of the year. There are some movements in volumes from unreported inventories to reported primary aluminum inventories. That is the effect that you see on this page. The aluminum, alumina price has also been impacted by the market situation.
The Platts alumina index decreased in the second quarter along with a general downturn in commodity prices. The average price decreased by $14 per ton, corresponding to 4%. As I mentioned previously, the LME dropped by 8% with the effect that alumina price is holding up relative to LME and increased about 18% over the aluminum price in the end of this quarter. If you then move on to China and take a look at export-import balance, the situation for the semi and fabricated products are similar as we have seen in previous second quarters. The import of scrap continues at the similar levels as we have seen before. We also see a reduction in alumina import. China alumina is continuing in the second quarter.
What is important to observe is that there's a record high all-time high bauxite import to China. This, we believe, is in light of and preparation for the export restrictions from Indonesia starting January 2014. We saw similar stockpiling in the first half of 2012 prior to the temporary restrictions induced by Indonesia in May 2012. If you take a look at raw material prices that are important for us, we see that these have been trending downwards over the year. However, it is still the aluminum price which is the worst performer when we index the price development back to for the first quarter of 2010, where we see a 15% reduction. We move over to Brazil and Alunorte.
As most of you know, 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 Paragominas, the lower production levels in Alunorte also affected the production levels in Paragominas. One effect of a power outage is that, unless the power returns fairly quickly, you have the risk of experiencing solidification in the tanks. In the precipitation area, we have in total 116 tanks, and these are huge tanks. A single power outage can often be handled. However, we experienced two power outages within two weeks, where we did not have fully recovered from the first outage before the second outage occurred.
We have established a task force that are working intensively to improve and prioritize the efforts in order to stabilize and increase the production. Part of the solution relates to improving the existing and installing new power backup systems. While we are experiencing lower production, we also take the opportunity to increase the general maintenance efforts that we expect will improve the production stability when the production have recovered. Although the production challenges impact the current speed of the improvement program for B to A, we have maintained our ambition to deliver NOK 1 billion improvement in Norwegian krone improvements by the end of 2015, in line with our previously communicated plans. We will deliver somewhat below our targets of NOK 500 million Norwegian krone this year.
Let us move from Brazil to Qatar, where we have our strategically important aluminum smelter, Qatalum, which is again showing strong performance. Qatalum is continuously producing above nameplate capacity, and second quarter production of liquid metal was approximately 600,000 tons on annual basis. I'm pleased to see that the cash cost position is trending downwards, and it's not only because alumina cost is coming down as a result of lower LME. We also see good development on fixed cost in Qatalum, and we are implementing further improvements. Qatalum is also benefiting from higher premiums on top of LME. From a market point of view, I am also pleased to say that we basically only produce value-added products such as extrusion ingots and foundry alloys, and we sell to U.S., Asia, Turkey, and the Gulf region.
The good performance in Qatalum is contributing positively to our position on the cost curve. If you take a look at the cash cost for our smelters in the system, we are now at $1,600 per ton, showing on the next page, where we also are showing that we have now $375 per ton EBITDA margin at which is a higher EBITDA margin at a lower realized price than what we had in 2012. The $300 program for the fully-owned smelters is set to be concluded by the end of this year, which with an additional saving for this year of $65 per ton in addition to what has already been delivered. The program is developing according to plan.
The improvement efforts in our joint ventures portfolio is also contributing to the improved cash cost we see for primary metal. Looking at the cash cost, it's trending downwards. It's in first half, as I mentioned, cash cost was $1,600 per ton. Of course, the improved cost plus margins are also contributing positively to this, to this picture. We should also mention here that we have signed a letter of intent for the Slovalco aluminum smelter to replace the attractive power contract that expires in the end of this year. We have secured power beyond or on the way to secure power beyond end of 2013. If you then move over to rolled products, the demand for rolled products increased in the second quarter, impacted by seasonality.
However, the demand we see in this quarter is also higher compared to the levels that we see in the same quarter last year. For Hydro we saw a 4% increase in our second quarter sales compared to the first quarter. The increase was mainly driven by beverage can segment, which was helped by seasonal effects. Sales to the automotive sector increased both compared with the previous quarter and second quarter of last year, and demand in automotive is helped by substitution in an increasing aluminum content in new cars. Sales of lithographic plates decreased somewhat from the first quarter, although we are at the same level as last year. General engineering volumes were flat compared to first quarter this year, while up 11% compared to the same quarter a year ago.
In total, day to day, we have sold 6% more raw products compared to last year, partly as a result of increased demand in the market, but also impacted by some internal factors which influenced the production negatively last year. I'm pleased to see that operating cost per ton is going down, driven by improvements including increased productivity. On energy, you can see that the Nordic spot prices increased in the beginning of the year and also in the beginning of the second quarter. Prices reached a high of about NOK 400 per MWh before higher than normal precipitation improved the hydrological balance and put pressure on the prices.
You can see from the chart on the right side that we started the quarter with lower water reservoir levels compared to the 10-year average, while we ended the quarter above normal. For Norway, the water reservoir levels were 4% lower than normal at the start of the quarter, while 1% above normal at the end. The reservoir level in Norway is now at a filling rate of about 68%. Prices was furthermore impacted by lower power prices in Germany and seasonally warmer weather resulting in decreased consumption. Prices currently are around 20% lower than the average in the second quarter.
The 9th of July this year, we closed a deal with the Rio Alcan, where we acquired 50% of the Vigeland Metal Refinery and 100% of Vigelands Brug, the hydropower station connected to this operation. It is an attractive deal for Hydro, where we take full control of the metal plant, where we previously owned at 50% and accompanying power production. The metal plant is producing high purity metal with a capacity of 8,500 tons, and the products typically goes to semiconductors, electronic applications such as LCD screens, computers, cell phones and tablets. The power plant has a normal power production of about 180 GWh. With that, I leave the word to the CFO, Eivind Kallevik.
Thank you, Svein Richard, and good afternoon to everybody on the call. I suggest we just dive straight into the figures. The underlying results before financial items and tax declined for all business areas this quarter, with the exception of metal markets and seasonally higher results in raw products. Giving us a group result of NOK 580 million for the quarter, down NOK 559 million from first quarter. From an overall perspective, this quarter's been impacted by lower LME, as well as lower aluminum prices, partly offset by the strengthening dollars versus Norwegian kroner and Brazilian reais. In addition, we saw seasonally lower energy volumes impacting the results negatively. I will get back to some more details on each business area later on in the presentation.
Let me give you some further comments on other eliminations. This quarter, we have an underlying EBIT of - NOK 70 million, versus - NOK 38 million in the previous quarter. The quarter-on-quarter change primarily relates to changes in eliminations of internal gains and losses on inventories. Adjusting for these internal eliminations, the result is about NOK 110 million in charges for common services and other businesses, which is slightly below or slightly improved compared to the results in first quarter of this year. Turning to the high level quarter result development, together explaining the NOK 500 million decline from the first quarter, NOK 300 million is coming from the energy business area, primarily driven by lower production and lower net spot sales.
Net spot sales were down 689 GWh between the periods, giving a negative effect of about NOK 220 million. The balance is made up of negative price and margin effects, due among others to average spot prices declining in the NO2 price area of approximately NOK 50 per MWh. The aluminum price impacts are down together roughly NOK 200 million. If we look on the primary metal side, measured in Norwegian kroner, that is down roughly NOK 100 million. If we look to Bauxite & Alumina, the combined price and currency effect is a negative NOK 195 million. These two factors are partly offset by positive effects from increasing product premiums and margins in the period.
The last block of 0.1 billion, roughly 100 million is driven by lower volumes on the alumina side and metal side, partly offset by seasonally higher volumes on the raw side. On key financials, revenues are basically flat between the quarters. The lower prices on alumina and aluminum is basically offset by the increased production and sales in the raw product business area. This quarter, we have excluded negative 44 million from our underlying EBIT, resulting in a reported EBIT of NOK 375 million. I will revert to the items excluded more in details on the later slide. Our financial items for the quarter was a -NOK 1.367 billion for the quarter.
This includes net currency losses of close to NOK 1.3 billion, which is a significant increase from the - NOK 171 million first quarter. I will explain this a little bit more detail later, but it's basically driven from the strengthening of the dollar versus the Norwegian kroner and the reais. Income before tax for second quarter is a - NOK 992 million, which gives us a calculated tax income of NOK 279 million for the period. This tax income largely reflects tax benefits from currency losses, but there are some power surtax being offset by tax rate differentials in our non-Norwegian entities.
This gives us a net income of - NOK 665 million, down from + NOK 263 in the last quarter, while underlying net income is a + NOK 426 million. If we look at the financial income and expense, the net financials, as I said, was close to - NOK 1.4 billion for the quarter. For second quarter, approximately NOK 500 million of the net currency loss of NOK 1.3 billion is related to external U.S. Dollar debt. The remainder is reflecting intercompany balances denominated in U.S . Dollars and euro. The U.S. Dollar debt normally acts as a natural hedge between operations and financials, as you probably know. All other effects on financial income and expense is relatively stable between the quarters.
As mentioned in previous quarters, we do exclude certain elements when we discuss underlying performance to give you a better understanding of how we see the underlying business of Hydro. In this quarter, we excluded negative items of NOK 144 million from our underlying result versus roughly NOK 372 million negative the previous quarter. We work our way down the table and start with unrealized effects on power and raw material contracts. This quarter, the effect is primarily driven by developments on LME and coal, which has fallen in this period, and that has given us a positive effect on the embedded derivatives in the Statkraft power contract. Second line, unrealized derivative effects on LME-related contracts.
We have a negative effect from primary metal and metal markets and rolled products, as we do have a long position on LME reflecting customer pricing. In the falling LME environment, those long positions gives us an unrealized loss. The third line is the metal effect of a negative NOK 100 million for the quarter, which is due to lower LME prices on sales reflected in revenues compared to what was reflected in cost through inventories in the quarter. The fourth item on this list of any size is rationalization and charges and closure costs. This is primarily related to an improvement program in our rolled products business area, but there's also some effects from the integration and handover transaction costs related to the Sapa joint venture.
If we look at first quarter 2013, the rationalization charges was related to the corporate center improvement program. If we look at the second quarter of 2012, there were some significant charges both on rationalization as well as impairment charges. Those are basically all related to the mothballing of the Kurri Kurri smelter in Australia. We now turn briefly to the business areas and start with Bauxite & Alumina. The underlying EBIT was - NOK 244 million this quarter, which is down NOK 181 million from first quarter. This is basically consisting of lower realized alumina prices, partly offset by some improvement of lower alumina cash costs.
The disruption at Alunorte, which was caused as I explained by the unrelated externally induced power outages, did not only affect Alunorte, but it in turn also affect the Paragominas production with about 500 million tons of production in this period, since Alunorte is the sole offtaker of that production. The realized prices for alumina went down about 8% this quarter, driven by the fall of LME, but this was partly offset by the strengthening dollars against the BRL. The negative impact from realized alumina price was partly offset by reduced apparent alumina cash costs, which was down $5 between periods, primarily driven by lower energy costs at Alunorte and to some extent currency impacts on local operational costs. Due to reduced alumina sales, this also limited our exposure in this period on the Platts index.
If we look into third quarter, we do expect stable production volumes, although at very unsatisfactory levels. We also expect some higher cost of sourced alumina for the next period, as we do need to buy some more material in the market to cover supply agreements and supply commitments. That in turn will also limit our exposure to the index for the next quarter. Realized prices will mainly follow LME with a one-month lag, meaning that the current pricing environment as we see it do represent the downside to third quarter's realized prices for this business area. In Primary Metal, we saw a decrease in the underlying EBIT from NOK 364 million in first quarter to NOK 237 million in the second quarter.
We saw a decrease of approximately $120 in realized prices from $2043 in first quarter to $1926 in this quarter, resulting in a negative effect, which was enhanced further through lower sales volumes. This was partly offset by higher premiums as well as strengthening of the dollar against the NOK, and together this gave us an effect of roughly NOK 80 million. Measured in Norwegian kroner, we did see an increase in raw material costs, which was driven in parts, or in most part by the strengthening dollars, and these effects again was partly offset by lower fixed costs.
Interestingly, if we also compare this to second quarter 2012, we see that the underlying EBIT is relatively stable between those two quarters, while if you look at the LME, that is down about $240 between the period. Meaning that the shortfall in price has partly been covered by improved premiums, but mostly it has been covered by effects from the improvement program, known as the $300 program, for our smelters. At the end of second quarter, we have sold about 50% of production for third quarter at the price of about $1,850 per ton, excluding Qatalum. From a production and sales perspective, we expect stable volumes in the third quarter.
In Qatalum, we continue to see stable and high production volumes, well above nameplate capacity of five for this plant. But somewhat reduced cost of sales for this period, due to the fact that we did sell some metal out of inventory in first quarter. Underlying net income was down NOK 20 million for first quarter, reflecting lower sales price, but offset by somewhat higher premiums. As Svein mentioned, we are very happy to see the improvements in the underlying cash costs, the strong performance on production, as well as the very high percentage of value-added product sales. We do expect the strong performance of Qatalum to continue in the next quarter. Metal markets is very stable compared to first quarter. We delivered an underlying EBIT of NOK 147 million versus NOK 146 million in the previous quarter.
Excluding currency and inventory valuation effects, the result was NOK 109 million this quarter, flat from the 110 million in the first quarter. The result was impacted by stable remelt volumes, somewhat higher margins in this business, but then offset by some reduced contribution from our sourcing and trading activities. Looking into third quarter, we do expect seasonally lower volumes on the remelt side, which is, as normal in this business. At the same time, let me just remind you again that the results from our trading activities due to hedging and currency effects by nature may be volatile between periods. In rolled products, we saw good improvement in underlying EBIT. We had about a 20% increase from first quarter, delivering an EBIT of NOK 181 million for the period.
We saw a 4% rise in shipments, mainly driven by canned beverage and foil applications. The average margins were somewhat lower between the periods, with the main negative impact coming from the standard segments within general engineering. In second quarter, we also saw lower operational costs per ton as we continued to see increasing productivity per man hour in this quarter. Let me also here remind you that the first two quarters is normally the best quarters in rolled products from seasonal perspective. As such, we do expect somewhat lower volumes in Q3. On the energy side, the EBIT decreased by NOK 250 million compared to first quarter, giving an EBIT of NOK 268 million for the period. Results are primarily down due to seasonally lower production and marginally lower power prices.
We entered this quarter with high prices due to somewhat constrained situation, but through the quarter, we did experience 60% higher precipitation than normal, and such spot prices almost halved from the start of the quarter to the end. Looking into third quarter, due to the high precipitation in second quarter, and then improved hydrological balance in consequence, we expect somewhat increased production in the third quarter. However, as normal in this business, volume and price uncertainty is high. Let me also inform you here that we have started the third quarter with approximately 20% lower prices than what we realized on average in second quarter. Extruded products is still classified as discontinued operations, as we continue to expect closing in the third quarter of this year. The underlying income from extruded products was NOK 112 million.
Let me just remind you then that this does not include depreciation, reflecting the IFRS rules. If we do adjust for depreciation, financial items, and tax, we do get to pro forma underlying EBIT of + NOK 50 million for this quarter, which is about a NOK 70 million improvement compared to Q1. We did see higher sales, higher sales volumes in all areas driven by the seasonality. Comparing to sales volumes in second quarter 2012, this quarter is weaker, reflecting the challenging extrusion situation, particularly in Europe. Looking into third quarter, we expect continued weak European extrusion markets, while North and South American markets are expected to continue growth year-over-year. On the net cash debt development for second quarter, we did start this quarter with a positive net cash of NOK 400 million, or NOK 0.4 billion.
We realized a net cash flow from operations of approximately NOK 1 billion in this quarter, driven from EBITDA of NOK 1.6 billion. We released NOK 500 million in operating capital due in part to lower prices and tight capital management. We had other adjustments of NOK 1 billion, which in part, half of it roughly is cash payments on tax, in particular the surplus of the power tax, and then NOK 500 million is backing out non-cash items from the underlying EBITDA. We invested NOK 500 million this quarter, which is very much in line with the guidance that we have for the year of NOK 3 billion, and very much reflects the tight capital discipline that we are running in the company. Even after investments, we had a positive cash flow of NOK 500 million for this quarter.
On dividends, there is an effect of NOK 1.7 billion. NOK 1.5 billion of that is driven from dividends to the shareholders of Norsk Hydro ASA, and the remaining NOK 0.2 billion is dividends to the minorities on the equity-accounted entities. There's a NOK 500 million of other which primarily relates to unrealized currency effects, translation effects, leaving us at the end of the quarter with a net debt position of NOK 1.3 billion. Lastly, let me inform you about a new item that will impact future results in the next quarters.
The joint ventures in Brazil, both the Alunorte alumina refinery and the Albras aluminum smelter, have entered into U.S. dollar forward sales for the second half of 2013 and for the year 2014, hedging parts of the currency exposures. This will mitigate the risk of a stronger BRL against the US dollar in the entities. It secures the position, the cost position, which in a low LME environment creates stability and ensures focus on improving operational performance, which is especially important for Alunorte following the issues mentioned earlier.
The total hedged amount is approximately $800 million with approximately $200 million hedged for the second half of this year at the rate of BRL 2.25 to the dollar and approximately $600 million for the year 2014 at approximately BRL 2.37 to the dollar. We do apply hedge accounting on these hedges, and as such, it will hit underlying EBIT as they are realized. With that, I will leave the podium for uncretain .
Thank you, Eivind and Svein Richard. Operator, we open up for questions.
Thank you. If you would like to ask a question at this time, please press the star button followed by the number one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause for a moment to allow everyone the opportunity to signal. We can take our first question, which comes from Neil Sampat of Nomura. Please go ahead.
Hi, good afternoon. I have a couple of questions. Firstly, at Alunorte, where you are putting in place these mitigating measures, for example, installing new power backup systems, could you indicate whether you expect this to structurally increase your cash costs there? Second question is, there's a slide in the presentation pack which talks about the $75 a ton improvement in your EBITDA margin between 2012 and H1 2013. By my calculations, isn't almost $60 a ton of this accounted for by the higher realized premium between those two periods? I just want to understand that I'm kind of interpreting this chart correctly.
Thirdly, speaking about the metal premium, I guess so far this year, you've increased your realized premium by $45 a ton, while the market premium has been broadly flat. I understand that's a proactive measure that you've done to improve the product mix. Could you indicate whether there's any further upside potential here to the realized metal premium?
Okay, maybe I can start with regard to Alunorte and the situation there. We are now on the way to empty about 10% of the 116 tanks, where we had the solidification as a result of the especially the second pole failure that happened that was externally induced. That is not rocket science. We know what to do, but it takes time. We are emptying by chemical reaction or by mechanical tools. That's why I also indicated in my presentation that this will have a weight on the third quarter result.
On top of the fact that we are emptying the tanks, we also are taking the time to create a more better robustness against similar situations in the future. As I mentioned, we are now strengthening the emergency power supply system and also take the time with lower production to also do some additional maintenance efforts. I cannot give you a number on to which degree that will have an influence on the cash cost, but it will have a weight on the result in the third quarter. We expect to operate at a similar volume level as we had in the second quarter for the third quarter.
Then we'll see at later stage, and we'll communicate that later when we have lifted the production to higher levels. Of course, it's our target to lift that as high as possible as soon as possible. Eivind, maybe you can comment on the margin side, on the premiums.
On the cash flows, yes. You are correct, Neil, that the premiums have lifted approximately $60 between those periods. To the same extent, you have to remember that LME fell by approximately $200 in that period.
More than offsetting that premium improvement. The underlying improvement is actually quite strong, driven in parts by performance improvements in Qatalum, but very much also reflecting the improvements taken from the $300 program in the fully-owned primary smelters. We believe that we are quite robust and that this situation actually reflects the underlying performance improvement.
Great. Thanks. In terms of the metal premium, is there any further upside potential here in the coming quarters, or has that kinda catch up in terms of the improved product mix largely taking place already?
It remains to be seen what can be done further on the premiums. You know, we are mainly selling volumes from casthouses that are producing metal products like extrusion ingot, foundry alloys and sheet ingots. Some standard ingot, for example, as we do in Brazil. It's difficult to say the development in the market there. We feel that we have now lifted the premiums for the metal products during last quarter. Of course, it's in our interest to lift that further, but it's too early to say how much this will change for the next quarter.
Okay. Thank you.
Our next question comes from James Gurry of Credit Suisse. Please go ahead.
Good afternoon, guys. It's a good result in a tough market, I think. Just wanted to ask some bigger picture questions. Just in relation to the net debt. You've gone from net cash to net debt, and then the adjusted net debt also is increased. If you were to pay the same dividend again next year, you'd double that net debt position. Can you just give us an idea of how comfortable you are with the net debt, how far you would let it increase given the vagaries of the aluminum market? Just the second question.
I wanted to know, I think last time you had results, you told us that you haven't had much engagement with Vale, who put up their shareholding as an asset for sale. Is that still the case, or have you been able to engage them in discussions?
Net debt, the net debt development. I think if you look at the cash flow for this period, I think even in a, as I said, even in a low price environment that we've seen in the second quarter, we're still generating a positive cash flow after investments. That is the picture if the current pricing environment persists, you know, we should still generate relatively good earnings also relatively going forward. We would be comfortable, I think with what we see today also to maintain a good and what we see as a competitive shareholder return, also in the periods to come. With regard to the question on Vale, I think that has to be asked Vale and not the Hydro.
They have to decide on what they want to do with their position in our company. We don't deal with these questions in our company.
Okay. Thanks, guys.
Our next question comes from Rob Clifford of Deutsche Bank. Please go ahead.
Hi, Svein Richard. Just a question on the cost reduction program, which is clearly going quite well, $1,600 with $65 a ton more to go. That's an average cost. Clearly you have smelters in your fleet that are above that. Now that you're coming close to the end of this program, are there still smelters that you would look at curtailing now, or are you comfortable with your fleet as it sits? A second related question.
When the conditions for the carry trade unwind, either the contango comes back or the interest rates go up, there's a lot of metal sitting in the LME that will likely come out and put further pressure on the LME price and on the regional premiums, I would've thought. Do you think that the $1,600 or the $1,600 - $65 is then low enough to weather that however long it is, a year or two as that unwinds?
Thank you, Rob. With regard to curtailments, you probably know that we took out 26% of our capacity during the financial crisis, 2008, 2009. We took out another 180,000 tons by curtailing Kurri Kurri last year. At the moment, we are now spending most of the time focusing on improving our competitiveness and taking down the cash costs through the $300 program, through the programs for the joint ventures, and even in Qatalum we continue to take down costs and also then working with our customers to improve the product premiums. With regard to the carry trade, Even, you can give some comment to that.
I'll try. As you know, Rob, this is a very difficult question to be very precise on. Typically, at least the popular theory on this is that when interest rates goes up, that may be an incentive to break some of the carry trades. Then economic theory should tell us when interest rate comes up now and QE maybe eases, you know, that is driven from the fact that the demand and economic growth is back in this world. As growth, the metal that comes into the market will be eaten up by increased consumption. It is very hard to have any sort of very specific viewpoints if that is what's gonna happen, if there's going to be other reactions to that.
So far the market has held this metal relatively stable. We see inventory stable relatively stable between the quarters, probably some increase in LME warehousing. We do believe that there's been some reduction in the unreported metal warehouses. We will just have to follow this quarter-over-quarter, I believe.
Okay. Thanks for that. Just a clarification on the first point. Are all of your smelters profitable, economically profitable today, or cash profitable and/or cash profitable?
We never comment on individual smelters. As we have shown you, we are very comfortable with the fact that we have moved down the cost curve on average, and that the programs, improvement programs, is involving all the smelters. From that, you probably see that we are in a much better and much more comfortable and more competitive situation today than what we were before we started these improvement programs.
Okay, great. Thanks, gentlemen.
Our next question comes from Amit Pansari of Société Générale. Please go ahead.
Hi. I have just two questions. The first one is on the Alumina B to A program. Earlier, we were expecting some NOK 500 million improvement for this year. Now, as you have said, the speed has to be slowed down. Could you guide what number you're looking at now for this year? Also, on the unit cost for second quarter, there has been some cost improvements despite lower production volumes. Could you please shed some light as to what is causing that? Thank you.
Thank you, Amit. With regard to the alumina B to A program, we maintain the target of NOK 1 billion improvements up to 2015. We are working on the improvements every day, but due to the power failures we had, it will have some impact on this year's target. You are right, we had the ambition to deliver half a billion, half of the program in 2013. But it's too early to give you a number on how this will spell out for the rest of the year. We still keep the high ambition level. It will probably be below NOK 500 million this year, but we will come back to the detailed numbers at a later stage.
When it comes to the unit cost at Alunorte, there's primarily two drivers behind that. One is an improved energy mix at the plant, utilizing more of the coal boilers than what we have been able to do in the first quarter. That explains parts of it. The second part is basically explained by currency. As the dollar strengthened against the BRL, that gives us a more competitive situation on the local cost side when converted to dollars.
Okay. Thank you.
As a reminder, to ask a question, please press star one on your telephone keypad. Our next question comes from Luc Péz of Exane BNP Paribas. Please go ahead.
Hi, gentlemen. One question, if I may, with regards to the call option you have with Paragominas. Could you comment on the timeframe for exercising these options, as I understood that half of it was due to be exercised this year?
The options to take over the remaining 40% of the Paragominas shares, half of that is coming in 2014, and the second half is coming in 2016.
Thank you.
Our next question comes from Thorsten Zimmermann of HSBC. Please go ahead.
Yeah, good afternoon, gentlemen. I have just two simple question. The first one is on Alunorte. Could you just explain me why we don't see any restructuring costs for that entity, given that it's one of your major programs that you run at the moment? The other one is on your Brazil real hedging. What is your thinking behind this? Because general expectations, I'd say consensus is more for U.S. dollar strengthening further. So why are you non-consensus, and why do you fix it now, right now?
On the Alunorte restructuring side, I mean, it's partly manning, as you know, but that is mostly contractors that are being taken out, and as such, there is very little or no restructuring charges taken on the manning side. On the BRL hedge, you know, it is almost impossible to speculate about how the BRL will develop going forward, as it has been in the past. I mean, it's not that long ago, in 2011, it was BRL 1.67 on average for the year. Now we have a spot price around BRL 2.20 or so. This is not about taking really a position on the development of the BRL.
It's more to securing the cost position at the plant as such, creating stability, and calm about the situation, so they can focus on the operational improvements for the plant as such.
A weaker real would obviously be desirable. Is this just, you know, the kind of first limit that you can live with, and you just chose to hedge it? Or, you know, hedge it, how much will it improve the cost position really, for you?
We are comfortable with this level, Rob. As you say, that will lock in a very competitive situation for the Alunorte refinery in Brazil at this cost level, in particular, when you look at the weak LME environment that we do have today.
Maybe a final question on bauxite exports. Is there any? You have very vaguely talked in the past about maybe exploring to export bauxite directly from Paragominas. Is there any project moving forward, or is that just a concept, or is it not even that?
Thorsten, what we do is that we do export some bauxite out of Brazil, and in part it goes to China, in fact. We've seen bauxite shipments from Brazil to China both in the second quarter, and we will see some shipments also for the remainder of this year. That is not necessarily bauxite coming from Paragominas. It is bauxite coming from our other mine in Brazil called MRN, where we have a drier bauxite position.
Okay, thank you.
As a reminder, to ask a question, please press star one. Our next question is a follow-up from Amit Pansari of Société Générale. Please go ahead.
Thanks for taking my question. My question is on Slovalco power agreement. As I understand, the power prices are very attractive and the agreement was signed some 20 years back. What kind of power increase are you seeing in the new contract? Thank you.
Well, we don't guide exactly on how this price is going to be. But to give you some historical reference, the last time we renegotiated the power contract in Slovalco was back in 2002, 2003. And although it's not, you know, in the German market as such, Slovakian prices are a little bit different. But what we see is that the German power market has developed 50%-60% adversely between 2002 and today. That is, you know, an indication, not precise indication, but that's an indication where you should expect the increase for Slovalco power cost to go as well.
Okay, thank you.
I can just add that, of course, in Slovakia we have a considerably lower level of labor cost than in the rest of the system. If you then take also into account the size of Slovalco, it represents 77% of the consolidated capacity, and 5% of the capacity on equity basis, just for your information.
Yeah. Thank you.
As a reminder, to ask a question, please press star one on your telephone keypad. Gentlemen, we have no further signals for questions at the moment.
Okay. Thank you for joining our conference call. Have a nice day.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.