To Hydro's earnings presentation and the presentation of the second quarter 2012. My name is Inger Sethov, and I'm the Head of Communication in Hydro. The presentation material that we will use today, the second quarter report, is also available on our website, hydro.com. Today's presentation will, as usual, be given by the President and CEO of Hydro, Svein Richard Brandtzæg, and the Chief Financial Officer, Jørgen Rostrup. As usual, we'll have time for a Q&A after the presentation, and if you're following us on webcast, you may ask questions also over the web. Before we start, I would like you to direct your attention to the cautionary note in relation to forward-looking statements that are provided in the presentation material.
With these words, I'm pleased to hand over to Svein Richard Brandtzæg, who will take you through the first part of the presentation. Sure.
Thank you very much, Inger. First of all, I must apologize, but I have to leave in about 30 minutes. I'm going to CNN for a direct interview. I will finish my presentation. Jørgen will take over, and then Jørgen will also answer the questions afterwards. First of all, our concern is, of course, about macroeconomic situation un certainty. The fact that countries are deleveraging and rebalancing the economies. We expect that the growth will remain low, at least for a while, and also below pre-crisis levels. We see that the recovery in the U.S. is losing some momentum, and the growth in emerging markets is slowing down, also in China. That means that we are prepared for tough markets, which require tough measures.
We are continuing our efforts with innovative strength, and we have now also then presented our program that will yield NOK 2 billion-NOK 3 billion improvements in the next two to three years. The most important program so far has been the $300 program in primary metal, but we are continuing with that program, but then also introducing improvement program in Bauxite & Alumina and also in Extrusion Eurasia and Building Systems, and I will come back to that later. These programs and the improvements are very important for Hydro's future. It is important for us to continue to improve our competitive position and in the best market picture, and it's our ticket to the future. The highlights for the quarter is first of all EBIT at similar level as the first quarter.
It's NOK 1.3 billion below the second quarter last year. Prices upstream was somewhat higher than in the first quarter. Volumes in Bauxite & Alumina and downstream somewhat higher than the previous quarter, but volumes in Primary Metal and Metal Markets lower than in the first quarter. We had a lower operating cost in energy and also lower prices due to high production in Nordic market. We have also then decided in the quarter to take down the remaining two pot lines in Australia in our Kurri Kurri smelter, incurring again a charge of NOK 1.5 billion, which is then also a part of the reported result this this quarter.
If you take a look at the downstream business and the development since the first quarter, we know that the first and second quarter are normally the strongest quarters, second quarter the strongest, but we saw only 1% improvement in the volumes sold in the second quarter compared to the first quarter. Quite stable in Rolled Products. In foil-lead through packaging and building, automotive sheet and general engineering, heat exchanger was down due to lower automotive sales. We have 8% improvement in canned stock due to higher demand in Europe, Middle East, and Asia, also supported by sports events. In extruded products, 3% improvement since first quarter. 6% improvement in the Building Systems is coming from very weak level.
2% improvement in Extrusion Eurasia is seasonal, also much weaker development than in a normal second quarter. Fairly stable in Precision Tubing, in fact, a bit down in Europe and up in the U.S. Extrusion Americas, which means U.S. market in automotive, transport, general engineering, positive development and also strong development and good demand in South America. If you then compare it with the previous year, 5% down since the second quarter last year. In Rolled Products, 6% down, but we have decided to exit some products or in real terms or corrected for that, it's minus 3%. Extruded Products, minus 4% compared to the second quarter last year.
6% down in Extrusion Eurasia , 12% down in Building Systems, reflects a very weak market in Southern Europe. Stable in Precision Tubing and again, Extrusion Americas stands out as the strongest market. This slide shows the supply and demand balance in the world outside China, and the green area shows that we have had a stronger demand in second quarter at the same time as the supply is going down. In total, 1.2 million tons of capacity has been announced curtailed in during this year. We expect that 700,000 tons will be in effect in 2012. On top of that, there has been some disruptions, a strike in Canada, operational problems in South Africa, which adds 400,000 tons.
About 1 million tons less production this year due to this situation. With the outlook we see now, we expect total growth outside China 2% this year. We expect also the market to be balanced in 2012. The curve on the left side is the development of the inventories. In fact, in total inventories has been fairly stable. Inventories days are going somewhat down due to higher demand. This metal is not physically available in the market. That has resulted in record- high ingot premiums for P1020 standard ingots. This again shows that the physical market is tight. This curve shows the import-export balance in China.
Again, strong import of bauxite and alumina the first two months in this quarter because we have only here shown the April and May import and export. In fact, we saw quite dramatic change in June numbers which came yesterday. A steep reduction in import of bauxite and alumina. We are coming back to what that means for industry. In general, a stable import of scrap and also fairly stable export of semi and semi-fabricated products. In total, we see that China has been balanced in primary metal, and we expect that to be also balanced going forward in this year. We expect China's demand to be about increasing about 8%-9% in this year.
We have a situation where the inventory level is stable, inventory days going down. The standard ingot premiums are going. China continues to import, and also we have a fairly balanced aluminum market. I wouldn't be surprised if the aluminum price went up. But in fact, the aluminum price has gone down in the quarter, approximately. The realized price in this quarter was $2,167 per ton, and we have three months forward pricing, as you know. You have to add another few days due to the cost of production. At these levels we have now, it is a challenge for the industry.
It is not enough for the industry to give adequate returns to the shareholders, and also some of the industry is now below water. Looking at the alumina price development, it has been quite stable during last quarters, in dollars per ton, but in percentage of LME, it is going up. This is a market that has been stable. It is still a situation where China is importing and helping the market, which we assume is somewhat oversupplied. There's been announcement of curtailments in this market. When and if that is implemented, the market in alumina will also be in balance. China has imported a lot of alumina and increasing alumina amounts in April, May.
A different picture in June, by the way. So far it has been probably also influenced by the increased uncertainty related to export of raw materials, bauxite from Indonesia, which increased quite a lot during last year. While Indonesia has decided to introduce a tax on bauxite import, that was done in May this year. Also they will impose a ban on export of bauxite from Indonesia to China from 2014. It remains to be seen the total effect, but I think there are some uncertainty in China with regard to import of raw materials in general. We delivered a weak result in our Bauxite & Alumina business area, very much influenced on the development on LME, of course.
Weak LME, but also influenced on the increasing cost of production in alumina. We have shown here indexed price and also indexed cost, cash cost for the different main elements that is a part of the cash cost from Alunorte, the alumina refinery in Brazil. Seen that the cost is going up 8%. In bauxite, we have had a higher price of bauxite from MRN. Bauxite has gone down 3%. This is related to fully owned our own bauxite mine. In Alunorte, we have seen 9% or in fixed cost, 9% cost reduction due to better performance in Alunorte, somewhat supported by currency, by the way.
In raw materials, however, energy and also caustic soda adds up to a 21% higher raw material cost. That is then the main reason for the 8% higher cost of production in alumina in Paragominas. At the same time, the price is going down 15% in this period, so it's clear that this is a margin pressure, and it's a challenging situation and also difficult to deliver decent returns in alumina and Bauxite & Alumina business in this situation. This means that, okay, as long as we are not able to influence on LME, we can still work on the elements which we can influence on.
We have established improvement program in Bauxite & Alumina, which will yield NOK 1 billion over the next two to three years. We are targeting both Mineração Paragominas, Alunorte, and the commercial area. There are several elements. There are several actions that are going to be implemented. First of all, in Alunorte, we are targeting the nameplate capacity of 6.3 million tons, but there are also specific issues related to maintenance, related to the boilers, and other elements that will be a part of that program. In Mineração Paragominas, also there targeting the nameplate capacity of 9.9 million tons, increase productivity, there will be de-manning.
In the commercial area, we're targeting more index pricing, although we are locked in with the old contracts that we took over from Vale until 2015, and then we will be gradually released from that. We will also increase the flexibility, the logistical flexibility for our bauxite or commercial activity in alumina. In primary metal, we continue our improvement program. The $300 dollar program continues. We delivered $200 until the end of last year, and the target for this year is $35 per ton improvement, which is now under pressure due to the situation in cast houses.
If you then take a look at the cash cost, however, the cash cost has gone down from $2,000 per ton to $1,825 per ton in the first half since 2011 to the first half of 2012. $75 is related to lower alumina price. $100 is ascribed to reduction of costs, cost improvements, and also the fact that we are now adding Qatalum to the picture, and also some currency elements into it. I'm happy to see that the cash cost is going down significantly during this period. Again, $1,825 was the cash cost for the first half of this year.
I mentioned that we see that the cash cost margins are under pressure, and we have decided to merge the business area Primary Metal and Metal Markets, and then add the organization together that are running the primary cast houses and remelters together. The remelters are fairly flexible, and the big primary cast houses are linked very much also to the remelter system. We see a good opportunity to optimize the total cast house system, optimize the product mix, and reduce cost further. In addition, we have again closed Kurri Kurri, as I mentioned, and this is also then having some implication on the metal market side for us. In Qatalum, we produce at full speed the annual capacity of 600,000 tons, which is about nameplate capacity.
We are happy to see that we delivered on our performance test, on the technical performance test that was carried out in this quarter, better on all parameters with lower energy consumption, higher current efficiency, and also better anode consumption. That was the guaranteed numbers from Hydro as a part of the technology package to Qatalum. We also finalized the insurance case, and I'm happy to again confirm that the insurance coverage was robust. Jørgen will come back to the numbers there. With regard to the sea water cooling tower that burned down the seventeenth of March, this is now well underway to be reconstructed, and we are going to restart the one steam turbine in the third quarter and the second steam turbine before the year end.
This is moving fast and according to our plan. In Extruded Products, we have raised our ambitions, and we have now implemented an EUR 80 million improvement program for 2012 and 2013. More than half of this is already delivered in 2012, mainly in Building Systems, by the way, but also Extrusion Eurasia is a part of this program. We have closed more than 50 distribution centers and sales offices. We have idled three presses and closed two presses on top of that. We are reducing the manning, so far 770 people in these two sectors. We continue with the operational improvements, optimize logistics, turnaround plants, and again take the necessary steps to deliver on these improvement programs.
Of course, we continue to grow in emerging markets. Our investments that we have recently done in Brazil and Suzhou in China will continue as planned, and also where we take our opportunities to grow in emerging markets. I leave it up to Jørgen, please.
Thanks, Svein Richard. Okay, I get the pleasure of taking you through some numbers for the quarter.
We start as usual with the underlying EBIT slide showing the business areas and the totality. As Svein Richard said, NOK 549 million underlying same level as last quarter. I will get back to the various business areas. Just comment on other and eliminations here. It's underlying -NOK 166 million. It was NOK 137 million, so a difference of some NOK 29 million quarter-on-quarter. This is all due to these eliminations of the internal gains and losses on inventory. The charge for common services and other businesses were approximately just below NOK 150 million, and that is in line with our NOK 150 million- NOK 200 million guidance. There is not much more to say about that.
If we look at the high level quarterly analysis, you know, as we said, a stable quarter-on-quarter result. There are limited changes as we see it from an aggregate level on the earnings elements for the group. We had NOK 0.1 billion in changes on the alumina and aluminum prices. There are costs with a total benefit of NOK 0.1 million, also a limited effect. It's primarily within Primary Metal and a little bit on Rolled Products, as you probably have noticed. The effect of lower production and lower prices on energy is NOK 0.2 billion, but a fairly stable picture quarter- on- quarter. The dilemma is not the changes that have taken place.
The dilemma is the low earnings for us and the low earnings in the aluminum industry. That is at least for the management of Hydro, the big issue, and I assume for you as well. Key financials, 21 and change billion on the revenues. Again, very stable from last quarter. There are some minor adjustments, more from the aluminum side and less revenue generated from the energy side, but it's a fairly stable picture, also on the revenue side. We have reported EBIT, so not underlying, but reported EBIT, -NOK 720 million, which means that we have excluded negative items and items excluded of a little bit less than NOK 1.3 billion.
I will obviously get back to that in a little bit detail, but it's mostly related to Kurri Kurri and the impairment charges and the restructuring taking place there. I will get back to that in a minute. We have financial expenses of NOK 968 million, a large negative number this quarter, but NOK 883 million, the by far large portion of that is related to the appreciation of U.S. dollar versus Brazilian reais and versus Norwegian krone on the dollar debt that we have. You might recall that we borrow most of our debt. We don't have much debt. The debt we have is mostly in dollars simply because our revenue line is so heavily impacted by the dollar strength.
When dollar is appreciating towards Brazilian reais and Norwegian krone, then you get a hit here, and eventually on a nice little beta, we should get a benefit on the revenue side, obviously, from the same. NOK 883 out of this, so the remaining are more the normal items. There is a table in there for you that you can get the details from. Income before tax NOK 1.7 billion, close to NOK 1.7 billion, negative reported. There are some minor tax expenses simply because even though there are negative results, the power surtax in Norway is to be paid. It's a separate tax area, and it's to be paid from the revenues and incomes in the energy area.
Reported net loss of NOK 1.7 billion and underlying net income of NOK 268 million, the latter much in line with the previous quarter again. If you look at excluded items, as I said, there is a charge of NOK 1.3 billion in the quarter compared to an income of NOK 108 million, I believe, in the previous quarter. This charge has a few elements. The three top elements that you see in the tables are the same as you have seen before. It's all driven by commodity prices. What has happened in this quarter is a decrease in LME level, as we know, a decrease in coal indexes. There has been a slight opposite effect by the increase in dollars.
Predominantly, LME and coal indexes have taken down the power contracts that we have as derivative contracts and created a gain of NOK 300 million. This is fluctuating on a continuous basis depending on those commodity price developments. We have rationalization charges of NOK 408 million. More than 3/4 of that is related to Kurri Kurri, and the remaining is in Extruded Products Europe. We have NOK 1.175 billion in impairment charges. All of that except NOK 20 million, but all of that is then related to Kurri Kurri closure of two production lines. As Svein Richard has said, line number two, so line number one was closed in first quarter. Line number two is closed now.
The last line we believe will be out within third quarter. It's a rapid closure when we decided to do this. Let's visit the business areas for a while. Underlying EBIT of -NOK 188 million in Bauxite & Alumina and EBITDA of NOK 250 million positive. Decrease on the EBIT level of NOK 44 million compared to last quarter. Many similar elements as compared to last quarter. Sales is a little bit up, production is a little bit up. We are at the production level of Alunorte at approximately 6 million ton in yearly production level. It's moving towards a satisfactory level.
You know that nameplate capacity is 6.25 million ton or whatever and that's what we are aiming at in a stable fashion throughout the year. Production in Paragominas a little bit down due to a scheduled maintenance. Also on the alumina price level, fairly stable prices quarter-on-quarter. Cash cost as well, as you can see from the apparent alumina cash cost, is stable. Obviously the strengthened dollar or opposite the weakened real should lead to lower cash cost we should assume. We do see that development in our books. The positive effect from depreciation of the Brazilian real is lowering the cash cost. This is offset by increase in the cost of fuel.
The increase in cost of fuel is related to the ICMS taxation in Brazil, which is a VAT tax on state level, not on federal level, but on state level. There is a change of policy on the part of the state, effective as of March, I believe. They have changed the charging place for those taxes. It's moved from the distributors of the fuel oil and backwards to the refineries. Hydro has an exemption of this tax. We have an ICMS tax exemption approved many years ago and being an exemption that is once again verified. When the distributors were responsible for charging this tax, they excluded it for us.
Now, that the refinery themselves are responsible for this, selling the product to the distributor, the distributor is not exempted from it and have to pay it. Therefore it doesn't show up as an item excluded, so to speak, on the invoice to Hydro. We then are faced with the total bill. Therefore we have for four consecutive months paid this. We were hoping that we would be out of this situation in second quarter. We haven't so far succeeded. The effect is approximately NOK 50 million a month. As you can understand, we are in dialogue, and we hope to get out of this situation soon. We will get back to you when that happens to inform you.
Going forward, continued operational focus that will obviously be a continuous item on the agenda. To move on that cost program that we have talked a little bit about, that Svein Richard addressed. We see stable material, raw material cost, meaning that we don't see softening in the raw material markets of any significance. We also see an increase or a decrease in realized prices for next quarter. The realized prices in the legacy contracts are mostly dominated by the LME aluminum price with one month lag. The current price environment on the LME represents approximately a 10% decrease, and this will obviously have a significant effect on earnings next quarter.
Primary metal, a good improvement on still low levels, but a good improvement in result of NOK 210 million, up to NOK 240 million for the quarter. Somewhat higher prices of 2% quoted in Norwegian currency, Norwegian krone. Primary premiums were broadly unchanged in the quarter. Sales volumes as you will see decreased a little bit, approximately 2%. This is obviously due to Kurri Kurri closure. The effects of lower fixed costs both on Kurri and on other assets more than mitigated the effect of this loss of sales volumes. Petcoke, some relief as we have talked about last quarter, this quarter, some relief, approximately NOK 40 million effect of relief on petcoke side.
We expect a similar type of relief also in the third quarter. Petcoke prices are, as we anticipated, coming gradually down. Going forward, I will comment on Qatalum on the next slide. Going forward, we have sold around 80% of our production, excluding Qatalum, on forward prices for third quarter at $2,050 per ton. The remaining 20% will, as you see the price level today, be sold at a somewhat lower level. If we look at Qatalum, as Svein Richard said, we have not only stable, but we also have what we recognize as high production of Qatalum above nameplate capacity, and that is, we are very pleased with that.
These numbers are the same table as you saw last quarter, on a 50% basis. It's the breakdown of our share of Qatalum. Underlying net income up NOK 80 million, underlying EBITDA up NOK 120 million, and underlying EBIT up NOK 80 million. There are somewhat higher depreciation this quarter. That is we have changed the depreciation profile on a very minor asset element in the plant, and there are some catch-up effects from that from the two previous quarters. Depreciation level will come down towards the depreciation level as we saw it in first quarter, but not exactly all the way down. It's a very minor adjustment with a catch-up effect in total NOK 40 million deviation.
If we look into the NOK 80 million change, this is predominantly because of two one-time effect. We then have to take you through the insurance case. We have two cases, remember in Qatalum. One is the incident in 2010, which is the power outage that Svein Richard talked about. We said at that time that we believe we had robust insurance coverage, and we have taken in insurance proceeds on a gradual basis. Now, we have closed the case, and the net effect on the final compensation is NOK 140 million Norwegian krone Hydro share. In total, Hydro share on the insurance proceeds has been NOK 600 million, so NOK 1.2 billion in total for the company Qatalum.
Approximately 500 of this is charged to or has been income on the underlying level, and approximately 100 on our share has been item excluded. This relates to the fact that the 100 relates to a write-down of assets, and therefore was taken as underlying, while the 500 is our share of compensation of lost business. It's insurance against lost business, which is obviously affecting the underlying income level. That is NOK 140 million that way, and then we have a negative impact by the latest incident, the fire in the cooling tower of approximately NOK 70 million, which is NOK 60 million more than last quarter.
This is related to extra purchase of electricity in the quarter, so that brings down the net effect of these two elements of around NOK 70 million, explaining most of the, as I said, at least NOK 120 million change on EBITDA level. We expect the cost for cooling tower or extra purchase of electricity in third quarter to come down 20% and to be negligible in fourth quarter due to the fact that then we should be in operation on these steam turbines. Metal Markets, very briefly, I think basically we can say that the change in the result NOK 44 million is due to higher currency effects on sales in euros versus buying the metal in the dollar.
Excluding these currency effects, the performance in the business is NOK 117 million versus NOK 116 million last quarter, so it's the same overall performance. Volumes in our remelters was taken down by 6%-7% in the quarter as a mitigation for somewhat lower demand in Europe was offset by increased result from sourcing and trading activities. We believe that we will have stable remelt volumes for third quarter, which is kind of a volatile business area with trading and currency effects, as you are aware. If we then move into the two downstream business areas, they look quite different still.
Rolled business has a fairly large exposure towards the global market, either through overseas sales or through at least contracts based on global pricing mechanisms and somewhat longer contracts, while the extrusion business is a very local business, very short lead times, and very much influenced by the very local markets. You see that also in the results. EBIT for rolled, underlying is NOK 204 million. It's actually up by 30% in the quarter, although volumes are fairly stable, as we can recall from Svein Richard's discussion. So the effect here is cost, basically. It's lower cost in the quarter.
Some of it is effect of the program that we're running, but I would say that the major part of this cost improvement in the quarter are more the sum of all kind of one-time effects that came in the right way this quarter. I'm not warning on increased cost next quarter. I'm just saying that some quarters you have the elements swinging the right way, and this was one of these quarters. We have been warning about decreasing margins. We have seen that in Europe, but on the other hand, we have gained higher margins due to the strengthening of the U.S. dollar on overseas sales in the quarter, so that has kind of leveled out in a nice way.
Next quarter we believe in stable volumes here, so this business is not delivering very strong results. Obviously, we are affected by the weaker economy, but it's holding up much better than the next business area, the Extruded Products business area. We still have weak results in a, I must say, very weak European market. Fortunately, our programs are starting to give some effect, but we don't see any improvements in the Southern European markets, I'm afraid. Underlying result NOK 53 million, up from a very low result around zero or NOK 14 million. Last quarter it's a NOK 40 million improvement. It's a 3% improvement.
From a seasonal point of view, you know, you should expect that kind of direction, and 3% is not a significant improvement from Q1 to Q2, so I'm afraid also there is no signal to be more optimistic for the fall, the way we see it. Going forward, somewhat lower results in Q3, and we are then working on what we can do, given the fact that we don't see the market getting better. We don't see, however, I should probably mention that. We don't see, however, a weakening yet in the more, you know, Germany, France.
As I said, we have very short lead time here, so I'm not ruling out that, you know, that could show in our books eventually. I'm just referring to the discussion that we see in newspapers and other places these days about where is Germany going and what's happening. We don't see that in our books as of now. I'm not going to take you into a lengthy discussion on the energy business, but since it's good weather in London today, I thought it made sense to show this graph and dwell just a minute with it. Again, remember this is hydropower business in the Nordic market.
I have said a few times it is surprisingly stable year-on-year in earnings, because it is very volatile on a quarterly basis. You can see the earnings, but you can also see how volatile it is from one year to the other when it comes to prices and volumes. Now, we are into a situation with high production and low prices. You can see that prices are 50% down compared to last year, second quarter. Some 20% down from first quarter this year, while production here illustrated with the water reservoirs, but production was actually up 40% quarter-on-quarter last year’s second quarter. Here you see the large reservoirs to the right, high reservoirs above normal this year.
You also see a small curiosity almost. If you see the shift in the angle, you saw that in week 13 last year. This is an illustration of when the snow melting in Norway starts. You see the snow melting starting later this year, in the midst of second quarter, which means that we are late in snow melting, which means that we are still melting snow in the Norwegian mountains. On these high reservoirs that we interpret, we give that the meaning that we should be prepared for low prices in third quarter because there are still more water coming in to the reservoirs. This is just a fascinating volatility in the energy business.
Now, I need to keep on because if not, people will remind me that I was an energy guy in the first plan. Okay, energy results, still good numbers, NOK 362, down NOK 194, at the same level as I said, with a very different mix in drivers from second quarter last year. We are having one third of our large production system out July and August for some significant upgrading in the Rjukan system, which is now meaning low production in Q3, but also probably with low prices. That is the guiding for third quarter.
Cash situation in total NOK 0.8 billion cash flow from operations. Similar to the investment level in the quarter, and then we have paid dividends to our shareholders in the quarter. Also there is a small effect in that number of NOK 1.7 of some minority dividends going to a joint venture partner taking dividends on a consolidated company into the group. All in all, this leads to a debt situation of NOK 0.4 billion, so close to zero in net cash or net debt. In these numbers is NOK 7.2 billion in cash. We did in June reenter the bond market.
This was with NOK 1.5 billion, seven-year maturity, and a coupon rate of 5.4% bond. We experienced quite high interest for that bond. It was closed in an hour or so. For me, that was a fascinating exercise. Why do we do this? As we have said a couple of times, we seek diversification in the financing. We would like some longer maturity on our financing and to reestablish ourself in the bond market to get a kind of a feel for it. We see the bond market as a natural source for financing jointly with banks also going forward.
If we decide to do more of this in the future, I would anticipate we would go for a larger chunk, maybe with a longer horizon, and most likely a U.S. dollar market, and a U.S. dollar bond. That will fit our philosophy around a dollar debt nicely. We have the revolving credit facility. That's a standby facility. We haven't drawn on that. All of this tells at least me that we have a robust financial position also going forward. I guess what we are alluding to is that, you know, we don't see any firm signals pointing out any specific directions since last we talked.
As Svein Richard said, there are definitely things on the aluminum side to be at least somewhat pleased about, a better balance, high premiums, tight physical market, et cetera. Maybe if you read it carefully, also see some positive signals from the inventory side. On the other hand, there are so many macroeconomic signals that also give a different flavor of it. The dilemma in the aluminum industry is obviously a fundamental that has driven down the aluminum prices over time to a very low and very tough level. We obviously spend some time on that, but we spend most time on doing what we can, and for us it is continue to improve our operations. That's what we keep ourselves busy with.
Okay. That concludes the presentation. If there are any questions to Jørgen at this point, please feel free, and we will pass around the microphone. Please introduce yourself as well for the people on the web.
Hi, Jørgen. Owen Scarrott, Goldman Sachs. On Qatalum, when should we really expect to get that cash cost down to the kind of $1,500 level that we were hoping for?
First of all, at least for those who have spent less time on it, let me just give some background to your question. We have stated some years back, and we have restated that we are aiming for a cash cost level, as you are alluding to, between $1.400 and $1,500, depending on what the LME level in the market is, and that is simply because of the cost of alumina. You should use, when you do your calculations, probably a two-month LME price as your on the income side. Qatalum is influenced by a two-month LME price. We believe we are very close to that level.
If you do your calculations, we think you will see that we are very close to that level. But you know, we are close to that $1,500 level actually. So close that we believe that the program through this year will take us into that space. But this is, you know, again working on the cost elements and working through the plant on fine adjusting all parts of the plant. It's a full job. But that's why we also have been so detailed on the insurance and the extra cost on the fire to help you do that calculation.
Thank you.
Tim John from Redburn. Just continuing questions on the portfolio. With Kurri Kurri now closed, are there any aspects of the Hydro portfolio that give you cause for concern, or all smelters now sort of on the right side of the cost curve?
Well, the quick answer would obviously be in these times that I'm worried about all the assets. There are no assets that we are secretly planning to close around the next corner. We think we have done what we should do. So, you know, we are concentrating on the performance of all assets with various type of programs, et cetera, et cetera. On the primary smelting side, on the large asset side, there are no new things coming up the way we see today. Then, we will swiftly communicate if we see differently, but there are no such things on the block now. On the downstream side, on the smaller assets, there is obviously a continuous restructuring program in extrusion.
I hope you have seen most of the book effects there. You know, on Extrusion Eurasia, there might be some more, but it's on a different scale obviously than Kurri Kurri.
Please ask a follow-up. How disappointed are you that you're not seeing more response from the wider industry that, you know, we've seen lots of rumors of plants in Australia, like Point Henry, other things in Brazil, which people are, you know, saying that should be getting close to closure, and then you've got government stepping in with various offers on power and other things. You know, how disappointed are you by those factors in the Western world?
You mean from a scale from 1- 10?
If you want to do it that way.
No, you know, I think I should concentrate on what Hydro is doing. We are very much occupied with do what we need to do and talk about it and then do it, and very concerned about deliver on what we say we should do. I think we announced just after Christmas, sorry, the Kurri Kurri closure of the first line, and said we would fight whatever we could to see if we could save the two other lines. We took out first line, and then we said, no, we can't actually prevent from taking the two other lines, and now it's out. The last line will be out in a few weeks' time.
The industry has not handled supply-demand in a very good way. I think that's. I should stop the comment to that.
Hi, I'm Nicola Tang from Bank of America Merrill Lynch. Just a question on sort of costs, and where you kind of see them going in the second half of the year. Also, to what extent will the costs or the improvement programs be permanent, and to what extent will they be temporary?
First of all, on costs, Svein Richard showed a slide saying that the cash cost of our primary metal business has come down for some various reasons, our program, currency effects, alumina effects, and the inclusion of Qatalum, which is also an important part because it brings our portfolio down on the cost curve, which was the intention from the beginning. I'm not going to give any precise guidance about where we are going next. You know, we will have a continuation of the cost program, so that element should be there, and that is including the cost in Qatalum. Alumina prices will obviously still, to a large degree, due to the contract structure, be dependent on where the metal price is going.
Again, we are about to launch a fairly substantial cost program in the units in Brazil, the mine and the refinery. We have so far concentrated on getting production up. We are not done with that, but we feel it's time now to move over to also work more on costs. You will see effects of that, but I don't believe you will see significant effects of that in second half. Then an important question on your side, how permanent are these? The strong intention and belief is that the cost measures that you see in the upstream part of our business, they are permanent.
Let me put some cautions around the word permanent here because in the long run, nothing is permanent, obviously. They are not very influenced by volumes so to say, in the intermediate period. Then obviously inflation and other things will challenge those measures, and we have to do more of it. On the downstream side, however, you could believe that some part of that is volume dependent, and that if volumes are changing, i.e., revenue stream is picking up again, that you will incur cost because it's also taking out ships and that kind of cost.
Thanks. This is Danielle Chigumira from UBS. Just a couple of more general questions on the aluminum market, I guess. Earlier on in the presentation, it was mentioned that a lot of production is underwater. Just in your opinion, how much of global production do you think is underwater? And also, you said you're not currently considering any further closures. How bad would it have to get? How much further would aluminum have to fall before you reconsider closures? Thanks.
Yeah, that's two very tough questions. I'm hesitating to give you a percentage of how much is underwater. First, what is being underwater? If that is zero EBIT or whatever. You know, then you have quite good premiums on the ingot right now, as Henrik was pointing to. We would typically say a significant part, whether that is 20% or it's more, I don't know. And these numbers are hard to get hold of because the cost curves that are around are actually not showing you the full update. To me, the point is not how many percent it is.
To me, the point is that it is a significant part of the industry and of the volumes. It's by far a big enough part that if those assets get tired of being in that situation, then things will come to an important milestone, to put it that way. I'm not able to guide you on whether that will happen or not. How bad will it have to get for us? Again, I'm not going to give you any number. In 2008, 2009, we saw a decline from over $3,000 to $1,300 for a short while, and then it rapidly up again. The situation this time is different.
So far it has been a more gradual step down and a much more stable situation at low levels, but not a very low level. I don't believe it will come down to the very low levels, but it might happen, but I don't believe it will, because I think then more players will suffer more quickly. They are not coming in from high revenue streams beforehand, so they're coming from a tougher financial situation before they are getting into it. I can just promise you that we will continue to restructure when and if we think we have to. At the same time, you know, it's worthwhile to fight for an asset.
There is nothing wrong to fight for an asset that has a fair opportunity to survive in the longer picture, but it should be within reason. We will also fight for an asset that we think we should keep for the future.
Thanks.
Hi. Rob Clifford, Deutsche Bank. Two questions on strategy. First, the first one is around combining Metal Markets and primary metals. You split them apart not very long ago. This suggests you didn't get the benefits that you're after from that. Where did you fall short, do you think? The second question on strategy is on the upstream business. You've put billions of dollars into the X Vale's assets. They're now loss-making at EBIT level. You've got legacy contracts. You're selling alumina below market prices, and by definition then to customers who are also your competitors. Effectively, you're subsidizing competitors to keep producing aluminum, which is affecting the price that you're receiving. You know, that doesn't sound like a particularly good strategy. What recourse do you have to say, "Look, we're making a loss.
We can't keep selling at these contract prices" to renegotiate those?
Yeah. Two obviously very good questions again. First of all, I would say to the contrary, I believe the opposite. I understand your question on Metal Markets and primary metals, but to me, the situation is opposite. We split it out because we felt it didn't work as good as it should work, and we wanted more focus on two elements, two very obvious and important elements. We wanted a much tougher stand to the operational aspects of our smelters, i.e., we wanted what led into the $300 program. We didn't know what we were aiming at, but we wanted something that was of substantial impact on the smelters.
As we talked about a couple of years back, I think I even said that I think we have to admit that we haven't done our full job that we should have done over some time, and we need to get those smelters back in shape. That was one of the reasons why we did the split up. At the same time, we wanted a much more considerate focus on margin management in the metal part, the market part of it. Now I think we have at least succeeded in parts of that. Therefore, I think we can go one step, not back, but one step further. We believe now that there are so many interfaces that done in the right way, and then it depends, will we be able to do it the right way?
Done the right way, we think now is time to bring it together to extract those benefits from all the interfaces there are between those two businesses. I see this more as a natural next step and a very good thing to do. Then we have also decided to keep the reporting separate, actually to prove to ourselves and to you to be transparent and not try to kind of not have the opportunity to hide anything. We have decided to keep it for going forward as to the reporting side. It's going to be an interesting journey to see if it works out. Bauxite & Alumina.
First of all, we think the strategic rationale for the acquisition is still there and has been, if not proven, at least there has been indications in the market. That, the rationale is there, with what we have seen. We have seen a somewhat higher alumina price in percentage points. Obviously, as Svein Richard said, that will also happen when you get a very weak metal price. But still, there is a higher spot price of alumina. We have seen reaction and responses in Indonesia. We have seen more stress in the market. We have seen that other players have either paid more or invested more per ton than what we paid for these assets.
We have seen that fortunately, although at a cost obviously for the shareholders, but fortunately, we paid with something that at least moved in parallel so that we didn't pay a whole lot more than what the aluminum industry kind of allowed for in a valuation perspective. You're pointing to a dilemma. Yes, there are legacy contracts. I don't think going back and negotiate those today is going to work very well. I think we will have to live with them and gradually move volumes over to more liquid parameters and shorter contracts, and we are doing that as soon as we have the opportunity. Most of that comes a couple of years down the road. The earnings are not satisfactory. That's quite clear. Remember, we did this acquisition in a third year or whatever perspective.
I can disclose that we used a higher aluminum price as the assumption than what we see today. I think that is no secret. The earnings are not satisfactory. What is satisfactory is that we still believe in the strategy behind it, that we also see that we are improving production. Then, let's hope that we will eventually also see market prices that are lifting this to a reasonable level. It's, you know, the earnings right now are not good, but we don't see that. You can always discuss timing, et cetera, but remember that this was a point in time where others were, you know, able to take a move like that.
We believe that we were gradually coming out of a situation in 2009, which we partly were. We have hit a new challenges in the industry after that. Yeah, I understand the question. It's fair. We need to improve earnings. We have to live with subsidizing a competitor or two for a couple of years. I think in the long run, I hope at least in the long run, this will pay off to be a good move.
Steve Karpel, Metal Bulletin.
Yeah.
There are very few big alumina suppliers, just as there are very few iron ore suppliers. Why haven't you got the same amount of clout as the iron ore suppliers in determining the price?
I'm not going to speculate in that. We have been a significant alumina supplier for a little bit more than a year. We are working hard in being a good alumina supplier, both for customers, obviously, and also for ourselves. You know, we'll see how this develops. I think there are changes in this market, not because others have done it, but simply because, you know, they set a pricing on its own merits and not to piggyback some other product. There is no commodity or a product like alumina based on something else. Although there's a link between alumina, you should still have a pricing on its own.
You're pointing to one. I mean, take the simplest one in gas pricing in Europe. You know, it was priced on 30-year contracts, oil index, and suddenly it changed. This is just the way markets are developing, and I believe that the aluminum market is going in this direction as well, and we are very much promoting that on our end.
Okay.
Okay.
Any other questions then? No.
Thank you for your attention, and I will be here after the presentation.
Thank you.