Hi. Welcome to presentation of first quarter results for Hydro today. They will be presented as usual by Svein Richard Brandtzæg, CEO, and CFO Jørgen Rostrup. We will have time as usual for Q&A afterwards. Please, Svein Richard.
Thank you, Inger. The first quarter of 2012 started out with a higher demand than the end of 2011, but weaker than what we saw in the first quarter of last year. We see geographic differences, and this is reflecting a multi-speed global economy. The situation in Europe is very much influenced by the weak demand in Southern Europe, where we see weak underlying demand in several market segments. I'm happy to confirm that we have stabilized production in our strategic important assets in Brazil at higher levels, and Qatalum is running full speed at the level of 600,000 tons annual capacity, which is about nameplate capacity.
If you look at the result, NOK 557 million is about 50% of the result in the previous quarter, influenced by lower aluminum prices and lower alumina prices. The higher demand in the end user markets created a higher demand for metal. The metal sales is increased, but alumina sales is lower due to timing of shipments and also reduction of third-party sales. We have very strong result in energy with record high production. If you take a look at the different market segments and compare with the fourth quarter last year, we had the improvement of 7% in total with the sales in Rolled Products and Extruded Products.
In Rolled Products, very good development in several market segments, especially in general engineering, where we saw a destocking in the previous quarter that has now ended. Good development in litho and foil. In extrusion, we had a good development in Europe, in the U.S., South America market, and also in precision tubing. In Building System, the development is reflecting the very weak situation in Southern Europe. This is a high margin market and influences, of course, the total result in extrusion. In total, we saw 6% improvement in the Rolled Products and 10% improvement in the quarter in Extruded Products. If you then compare with the first quarter last year, it is a reduction of 6%.
There we saw in the different market segments in Rolled Products, significantly weaker demand compared to the previous year in several areas except can and litho. In extrusion, we saw, in fact, positive development in Americas, which is very much the situation in North America, which is now picking up demand and which goes in a positive direction, while we are still struggling, as I mentioned, in the Building System market. There are two factors that we should keep in mind here. First of all, that the first half year last year, and especially the first quarter last year, was very strong. It was first quarter last year was more than a seasonal strong quarter. It was also a rebound effect in that quarter.
This last half year in 2011 was a very weak half year, weaker than a normal seasonal variation. In 2012, we expect that we have a more normal situation in the second half. If we look at aluminum prices, we've seen a development from around $2,000 to around $2,140 in the end of the quarter, average $2,216. If you look at the realized prices, which was then the aluminum prices that was done in the three to four months time lag, we realized $2,155 per ton as average price or the market price in first quarter.
In the fourth quarter last year, we realized $2,439 per ton as the price. If you look at the general price level here, this is not adequate. I would say the price level is too low to give adequate return for the aluminum industry. We are now doing what we can influence on ourselves with regard to improvement programs, and we will come back to that later in my presentation. If you look at the supply-demand balance, we see improvements since the weak fourth quarter last year. At the same time, there has been curtailments. In total, there are about 1,000,000 tons of capacity that has been announced to be curtailed. That is a reason for a bit lower production in the quarter.
It is a bit tighter balance this quarter than the previous quarter, but it is still overproduction in the aluminum industry today. We expect that the growth will continue during the year and create a tighter balance in the end of the year. The high production still creates an issue with regard to the buildup of inventories. If you look at the different regions, we expect this year that Europe will have zero growth. 5% in the U.S. and 4% in other markets outside China. There are questions about the growth in China, but we maintain 9% growth in China this year. We have previously communicated 3%-5% growth outside China.
We are now estimating that the growth is closer to 3%. The global growth, including China, we estimate to be close to 5%. There are, of course, uncertainties with regard to this number, but we are now a bit more conservative with regard to the growth in the areas outside China. Therefore, we communicate expected 3% in 2012. Inventories are increasing with 200,000 tons in the quarter due to the higher production than demand. The contango is still positive, which, from the low interest rate level we see and our low warehousing cost means that the positions are rolled forward. There are investors that still make profit from rolling forward inventories.
If you look at ingot premiums, we see especially in Japan and the U.S. that there has been a positive development, which again shows that the metal volumes are not available in the physical market. There's a tight physical market in spite of a very high inventory level. If you look at the alumina price, it has been quite stable in US dollars during the quarter, trading at $325-$330 per ton. Due to the lower and weakening LME, the alumina price in percentage of LME has increased during the quarter. The development in the market of alumina, we follow carefully, of course, these days. We expect it to become a bit softer as the capacity in Primary Metal is going to be curtailed.
If 1 million tons is going to be curtailed this year, as has been announced, we expect that there will be also influence on the capacity on alumina, and we expect that there could be alumina capacity be taken out this year as a consequence of the situation. If you then go to China and take a look at import and export balance, we still see a significant import of bauxite to China. All in all, China is a net importer of aluminum units. It's quite stable on and balanced on Primary Metal, but on alumina we have seen quite a significant increase in import to China. This is helping the alumina market, of course. I'm not going to say that this is a new trend for China.
It is too early to say, but China is obviously dependent on imports of raw materials to keep up the high production capacity that they are currently running. They aim to, at least short-term, to be balanced in supply-demand in aluminum of Primary Metals. The export of semis has been lower in the first quarter, which is in line with previous first quarters in previous years, and can be ascribed to the Chinese New Year, and we expect that this could be changed and picked up to higher levels in the coming quarters. We have communicated previously that there was a raw material challenge in the aluminum industry, and this slide shows the development of LME from first quarter 2010 to first quarter 2011 and also to first quarter 2012.
Compare the development of LME with the development of prices of petroleum coke, which is very important raw material for the aluminum industry, and also the caustic soda price, which is important for the alumina refineries. From 2010 - 2011 first quarter, the price on LME increased with 15%, but we had 84% increase in price of petroleum coke, which goes to the anodes for aluminum production, and 87% increase in caustic soda price for alumina production. That creates, of course, a squeeze in the aluminum industry. If you look at the first quarter 2012, it's 1% higher than the first quarter of 2010, but we had 67% higher petroleum coke price and 127% increase in caustic soda price.
These price levels of raw materials is not sustainable for the aluminum industry. It is several smelters and also now alumina refineries that are not making money at these levels. This is ascribed to the fact that there has been a growth in aluminum that has gone faster than the growth in raw materials, but also that the growth in aluminum has been accompanied by also higher capacity and too high capacity in aluminum, while the capacity in raw material development has not been following the same curve. We have definitely a raw material squeeze in this industry. When we take a look at Bauxite & Alumina, I mentioned I'm very happy that we had stable and high production in our Bauxite & Alumina facilities in Brazil.
Paragominas is running at high level and the same with Alunorte. We have lower sales volumes due to the fact that there were some shipments that are now sold after the first quarter that was on the limit, but also the third-party sales has been reduced in the quarter. We, of course, also in Bauxite & Alumina running a cost-reduction efforts as we do in all other parts of the value chain. We decided in the quarter to postpone the CAP project, which we still regard as one of the most attractive alumina projects in the world. We see that the capacity is still sufficient for a while.
We will still evaluate the development in the alumina market before we make a decision to restart the CAP project that is still seen as very attractive. In Primary Metal, I'm happy to confirm that we continue the $300 program according to plan. We are going to add another $35 per ton cost-cutting in this program in 2012. This is a program for the wholly owned smelters. We have now a cash cost of $1,900 per ton. It went down $100 due to lower alumina price from the fourth quarter last year to the first quarter this year. This is a very important program to reposition Hydro on the cost curve.
Of course, Qatalum comes on top of that, which will be among the most cost-efficient smelters in the world. This is an effort that will continue. We have said previously that we aim to finish the 300 dollar program in the end of next year. In Qatalum, as I mentioned, we have full speed producing at an annual rate of 600,000 tons per year, which is above nameplate capacity. We have very good performance. But as we communicated previously, we had a fire in the water cooling tower in Qatalum, which means that we had to stop the steam turbines. They are dependent on the cooling tower. The steam turbines themselves are not affected.
Of course the gas turbines are run smoothly and are delivering power to the plant. We also now sourcing some additional power from the grid. That means that while we are building up the new cooling tower, we have a somewhat higher energy cost because we are sourcing from the grid. As I mentioned, we are running the four gas turbines full speed, and the production has not been affected. The production of aluminum is running as it should be. This is again incident. No accidents or injuries connected to that. That is now a cooling tower that is going to be rebuilt, and in some months' time, the steam turbines will be back in full production.
In energy, we started with EUR 25 per kWh in the beginning of the year. It was the price almost doubled in the Nordic market in February when the temperature went down. Then when it was milder weather, then the price went down to close to EUR 20. This is also affected by the very high reservoir level. It is above, it was significantly above last year's reservoir level, going from 80% down to 50%-60% in the end of the quarter, which is now about 13% above normal level. Hydro's reservoir levels is very much the same as the average water level for Southern Norway.
We expect the production to be very high in the second quarter, also due to the fact that we are going to have some maintenance work in Rjukan during the third quarter. We will have a very high production in second quarter, but probably not as high as it was in the first quarter. We have also communicated previously that we have some upgrades and also some additional capacity that we are building up in energy. We finished the Holsbru project, which is 84 GWh. That was started first of April. It was a project that was run according to budget and according to the time. This is now adding to the total capacity.
We have now all in all about 9.5 TWh in a normal year as a capacity of energy production in the company. Due to the situation in this industry, we continue with our efforts along the whole value chain. I've already mentioned that we are stabilizing production in Brazil at higher levels. Also focusing on cost reduction and optimizing the production in Brazil. We are also targeting index pricing of alumina in this market. In Primary Metal, we have already discussed the 300-dollar program. We are focusing on stabilizing and optimizing production in Qatalum and taking the cash costs down to the level where we are aiming for.
In Rolled Products, we continue with the Climb 10 program, which is a cost reduction program and also a program where we are high-grading and optimizing the product mix between the rolling mill, rolling mills in the system. In Extruded Products, we have a restructuring program. We have a cost-cutting program. In Building System, we are progressing according to the plan, where we are reducing the cost to EUR 40 million, which is then adapting also to the challenging situation in the building and construction market, especially in Southern Europe. Also in extrusion in general in Europe, we are adapting to the situation. All in all, in Hydro, we focus on the cash flow, focus on keeping the CapEx down and also the working capital down. Of course, in the...
As this market is imposing challenges to Hydro, I feel confident that we are able to adapt to the situation and influence what we can to create a better position for Hydro going forward. Thank you for your attention.
Thank you, Svein Richard . I will take you through some of our financial numbers in a format that most of you now are quite familiar with. Underlying EBIT, as Svein Richard said, came in NOK 557 million in the quarter. That is approximately 50% or NOK 576 million down from NOK 1.1 billion in Q1. Aluminum and alumina prices somewhat compensated by higher volume in Primary Metal and downstream in the value chain. We'll get back to that later, of course. Just a comment on other and eliminations. We have this quarter a charge of NOK 137 million compared to a positive contribution of NOK 92 million in the previous quarter, a change of NOK 229 million.
We had large positive elimination gains on these internal inventories that we have talked about earlier in previous quarter. On a net basis, the elimination gains and losses were neutral this quarter, so the underlying NOK 137 million in charge is reflecting the burn rate that we have guided on in this segment. If we look at a high level variance analysis quarter- on- quarter, you see then a change of NOK 0.5 billion negative development. We have just short of 500 GWh higher production and also higher spot sales in the quarter. That is the main explanation of the NOK 0.1 billion in positive contribution on energy prices and volumes.
Prices counted a little bit, but it's primarily due to the volume change of 0.5 TWh. We have a positive contribution, as we have said on volumes. It's on a net basis, aluminum volume's NOK 0.2 billion, and alumina is NOK 0.1 billion negative. Primary Metal and downstream is NOK 0.3 billion positive in this number. On variable cost, Svein Richard touched on that. We have a net effect of NOK 0.1 billion. More than this effect comes from alumina. We see a slight effect from petcoke this quarter.
You saw the price development that Svein Richard commented on, but we still have old petcoke inventory priced on the 2011 prices used in first quarter, so we will get a more significant effect in the second quarter, we assume. LME in dollar terms was down 15%, and this is the major part of the NOK 0.9 negative development quarter-on-quarter on the prices and currencies, and obviously the key impact on the quarter. If we look at key financials, we have revenues fairly flat quarter-on-quarter, but obviously within this number, prices then down and volume up. Underlying EBIT, as we have said, NOK 557.
We have excluded positive elements this quarter of NOK 108 million versus 1.5 in negative effects in Q4. Reported EBIT is at NOK 665 million for the quarter. If we look at financial expenses, they are income this quarter due to currency gains of NOK 410 million due to a depreciating dollar versus Norwegian krone and Brazilian reais. The financial income then is at NOK 433 million for the quarter. This gives income before tax of NOK 1.1 billion and tax expense of NOK 513 million, which is at a high level.
If you look at even an adjusted level, it is in the mid-40% range, which is a signal that most of our taxable income comes from the surtax or the power regime, and then the surtax regime within power. We have included a tax of financial expense slide for you in the material, but you have seen it before, and I will skip it now. If we briefly touch at items excluded in the quarter, as I said, we have excluded positive elements of NOK 108 million versus negative NOK 1.8 billion previous quarter.
The three top elements on this slide is all driven by commodity prices, and the key development is a slight increase in LME through the quarter, thereby leading to a net unrealized gain effect of NOK 250 million. The other way goes rationalization charges of NOK 132 million, which consists of two elements. One is NOK 112 million on the Kurri Kurri production line one restructuring closure, and that program is completed now, and this is the charge for that. On top of that is NOK 20 million from the continued program that we have talked about within Building System, in particular in Southern Europe. We don't anticipate in the program that we have launched a significant new charges going forward.
There might be a few dollars in the second quarter, but not much. Then we have impairment charges on the write-down of the cooling tower in Qatalum, so this is at least a part of it due to the cooling tower incident that Svein Richard talked about. That's NOK 38 million. Then moving to our operating business overview. We have an EBITDA at some NOK 330 million on Bauxite & Alumina, half of the level in Q4. Underlying EBIT is -144, a decrease of NOK 300 million quarter-over-quarter. As Svein Richard said, production at Alunorte and Paragominas is stable around a yearly production level of 9 million tons and 6 million tons respectively. Sales are somewhat down.
Again, the reason were partly timing issues, loading it out of Alunorte and also the exit of a couple of external third-party contracts. Part of the significant part of the reduction in earnings this quarter and on top of the volume is of course then related to prices. Prices are down in the order of $13 per ton. Bear in mind that Q4 2011 was the last quarter of the hedge that we entered into when we acquired the assets in Brazil. That gave a positive effect in Q4 of close to NOK 100 million, and that hedge is now terminated and the impact then on the lower return in the quarter.
I think also we have commented on slightly increase in cash costs $8 per ton in the cost level. Going forward, optimizing production fine-tuning it and continuing above the 6- and 9-million-ton levels is important. As Svein Richard said, equally important is to then work on the cost position and put more priority on that. That is nothing you will see as major impact quarter-on-quarter, so that is obviously a longer exercise. We are assuming more stable raw material cost for the quarter. Primary Metal EBITDA of just south of NOK 300 net NOK 600 million underlying EBIT of NOK 30 million, down by some NOK 450 million from last quarter.
Prices and premiums in Primary Metal has a negative effect of NOK 700 million in the quarter. That is then more than explaining the deviation quarter-on-quarter. Going the other way is increased sales volumes. Production in the Primary Metal was somewhat down, but we have had a higher utilization of our casthouse in the quarter, and thereby have increased sales in the quarter, also taking down inventories. That gives a positive effect of NOK 70 million. We have the 0.2 billion in raw materials, predominantly alumina. We have sold for second quarter approximately 80% of our production, excluding Qatalum, at $2,200 per ton. Only marginally above the prices that we saw in first quarter.
We expect, as I said, some more relief on the petroleum coke side, since we now are changing to the inventories that we have newly acquired at lower global prices for petcoke. Svein Richard mentioned the fire in the cooling tower. We will buy some more power and also gas from the local utility in Qatar. Our primary smelter production is not affected, but due to buying this gas and power, cost will increase somewhat in the next few quarters. This is obviously an insurance case. With every incidents, there will be something we have to pay ourselves.
There will be some cost incurred on our hands, and then we still believe we have a good and sufficient insurance backing on that smelter. When it comes to the old incident with the power outage, I don't have an update for you on that on the insurance side on that. As you know, we have proceeds of $150 million in total. We feel confident that our previous guidance to you is still very valid, and we are awaiting a final conclusion of that case shortly. We have this quarter included some additional reporting on Qatalum. As we have talked about, this we wanted to do when we were up in full production.
That happened last quarter, and therefore it's natural for us to present this for you now. This table is showing 50% of the earnings in Qatalum, so Hydro share. We have underlying EBITDA of $226 million in the quarter. We have a depreciation level of $240 million. You arrive at those $240 million by taking the CapEx number of $5.8 billion, which it could be translated to NOK 33 billion-NOK 34 billion. We have said that there is ±18 years of depreciation time or life depreciation time on these assets on average.
This gives just short of NOK 2 billion in depreciation per year, which again then is less than half a billion on a 100% basis per quarter, and then our share is NOK 240 million of that. We have also said that the sales out of Qatalum is on an M-1 basis. When you are looking into our numbers and doing your calculation, which I assume you will, then you should probably more use a price that is closer to an M-2, because we have inventory delays or inventory effects on the metal going out before it hits our profit and loss. So that is probably a better price for you to use. Then I will tell you that that will obviously vary a little bit.
The cost development, you know, we should be prepared. This is, as we have said, a plant that we are now stabilizing through the year. We should of course be cautious reading the quarterly numbers quarter-over-quarter, but rather see it over some more time length. Good. Metal Markets has an underlying EBIT of NOK 87 million versus negative NOK 39 million in Q4. There was significant negative currency effects of NOK 120 million in Q4. They are negative NOK 30 million now, so there is a difference of approximately NOK 90 million on that.
Looking behind that, we have an improvement in the operating result, excluding these currency effects, from NOK 80-NOK 116, which is entirely due to better performance in the remelters and higher utilization, higher production in the remelters. They are up 15% in production in the quarter. We believe in fairly stable volumes for the next quarter. We could see some pressure on margins for two reasons. We could see product premiums. We see them coming somewhat down, and we also see a tight scrap market in Europe due to curtailment of production. That could also influence the margins a little bit in the next quarter.
Rolled Products has an underlying EBIT of NOK 151 million, substantially up from the NOK 86 million we saw in the last quarter. This is entirely due to volumes, higher volumes as Svein Richard talked about. Sales were down 6% in Q4 versus Q3, and then up again in the same range in this first quarter. As Svein Richard also said, we saw a significant pickup in general engineering volumes, which were hit significantly due to the restocking in the second half. It is a key here in an understanding a somewhat longer picture that that 2011 was very tight and good in first half and was really stocking up in the second half.
We are assuming behind the growth numbers that we will see a more normal development throughout 2012. Of course, our growth estimate of 3% is not least exposed to what will actually happen in Europe going forward. We have some insight into that on a monthly basis, but we don't have the longer perspective any better than the rest of you. Higher sales in Q2 simply because of the seasonality, and this is how we see the order books. Again, here, margins could be somewhat under pressure, but not anticipated to be significant. Extruded Products still a significant negative impact on this business area from the very low Southern European markets and development.
We don't see any improvement that is in a way noticeable in the market. We see that our programs are gradually coming through, and we expect a more clear trace of that going forward, but we don't see improved markets as of yet. Result up by NOK 114 million to slightly positive, obviously not satisfactory, but fortunately, again, back to positive numbers. Seasonally stronger first quarter is again the main reason for this result. That will also be the situation next quarter. Europe is still the question mark. We see good prospects in Americas, but obviously our exposure there is less than to Europe, and we continue our programs.
I said 3.2 TWh of production in Q1 for energy, very high and solid production, which implies 0.5 TWh almost higher production than previous quarter and almost the same increase in external spot sales. That is the key reason for the improvement of NOK 115 million in a quarter to a result of NOK 556 million. We have seen very volatile prices through the quarter. They came in low at the start, and then they spiked due to very cold weather and also some production issues on the continent and then have come down again.
The price picture for the quarter one is very much reflecting what we should expect, namely high production has a negative correlation effect in the Nordic markets giving lower prices. In a historical perspective, the prices we have seen in Q1 are low, and we expect them to also be low in Q2 because there are still significant surplus water in the reservoirs, healthy snow reservoirs. We expect lower production for Hydro, but high in a seasonal context also in second quarter, and we expect weaker prices and then historically speaking at a somewhat weak level. Net debt development is fairly stable quarter on quarter. We have all in all the same result at the end of the quarter as we came in with.
We generated NOK 0.6 billion from business, and then we invested somewhat more, predominantly in our upstream business. If we look at the financial position then, it is reflecting this, and there are very few changes except some, should I call it translation effects, due to the depreciating dollar. Our translation of that dollar debt in Qatalum comes out a little bit less in the Norwegian krone than at the end of previous quarter. Svein Richard.
The priorities for Hydro going forward are of course to continue the $300 program, to continue the Bauxite & Alumina program, improvement programs, both with regard to stabilize production and also reduce the cost. Of course also to stabilize and further optimize Qatalum. Not at least responding with appropriate measures downstream to adapt to the market situation including in the Rolled Products, where we have programs along the value chain and then also improve the return in these assets. Hydro has a strong financial situation, which I think is necessary in the market situation where there are raw material challenges. There are low margins, low prices of products and also low visibility.
We still keep a strong focus on capital discipline and also to keep a strong focus on the cash flow, and that's why we are also postponing the CAP project. Thank you for your attention.
Okay. We open for questions if there are any, and you will get a microphone, I guess. Please introduce yourselves before you ask questions. Okay, over here.
Hi. Carl Bach, RS Platou. To get a bigger or better grasp over the upstream earnings, you are saying that the lower sales in alumina is affecting the results. The flip side is that you have a higher sales than produced in from the casthouses in Primary. To what extent does this affect if you try to, let's call it, adjust that out of your quarterly figures? For instance, in Bauxite & Alumina, you report a weak figure but low volumes. How would that affect if you normalize that sales level to the production level?
Well, with the danger of not answering on what you are asking. I think, first of all, production levels in Bauxite & Alumina has been, as we said, on the same level as in Q4, more or less. If you call it normalizing to sell what we sold last quarter or at least what we have produced and not less than that, then it has a notable impact on the results this quarter. But the key in this quarter is not production, it's not sales. Production has been okay. We need to lift production going forward, as we have said on alumina and bauxite. The key is the production levels. We are pleased with those.
The key is not the sales levels because they will fluctuate around this level on a continuous level. The key is the significant weakening in the prices, and that is explaining entirely the result, the development, I would say.
Yeah. Yeah. Okay. You are indicating at least that there are some periodic effects in alumina, but that is by and large negative.
No.
You should sort of.
Well, it's no-
Look away from that or what?
No, I would say it's notable enough for us to help you understand some of the movements in the numbers, and since we are giving you both production and sales, et cetera. Again, the key is here that on the technical and operational side, things have moved quite satisfactory through the quarter, except from the incident in Qatar. The dilemma is what Svein Richard started with, namely that the price level with the raw material squeeze is of such a burden right now that we see this significant downtick in earnings.
Okay, thanks. If I may follow up. Cash costs Qatar, have you changed your guidance there, or are you giving any new indications?
We have mentioned previously that we have now been through a period where there's been additional efforts to ramp up the smelter and also to optimize the smelter. It is possible to take some numbers from what we have published already. You can calculate, in fact, the cash costs from there. You will see it's not far away from what we had communicated previously as what we are aiming for.
Can I add one explanation and one disclaimer to that? The explanation would be remember to have a view on the raw material picture in that exercise. Svein Richard conclusion is what we believe in. The disclaimer would be, as I said, this is one quarter, and let's then work through some quarters. We believe that we can confirm our previous guidance, and that is the program we are working towards, as you see it.
Thanks.
Any more questions? Behind you.
Given the backdrop with very low prices, low visibility, and increasing raw material costs, do you expect any more announcement for the industry in general in terms of capacity adjustments?
I already said that there are 1 million tons capacity that has been announced to be curtailed in smelting. I also said that we could expect that there will be some adaptation to the situation also on alumina. We have heard some announcement that there could be also volumes to be taken off the market according to the curtailment development. It remains to be seen how much that will be really taken out both on the smelting side and on the alumina side. There are several players now that are underwater, and it will be natural that we see some volumes to be taken out.
Maybe we should add that we are continuing to evaluate how we will handle our Kurri Kurri smelter in full, which is obviously the issue that we have closest on our desk.