Ladies and gentlemen, good day, and welcome to the Hydro 23 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stefan Solberg, Head of Investor Relations. Please go ahead, sir.
Good afternoon, ladies and gentlemen, and welcome to Hydro's earnings presentation and conference call for the Q3 2011. We released our earnings today at 7:00 A.M. Central European Time, and the presentation material we will use on this call and the Q3 report is available on our website, hydro.com. Today's presentation will be given by President and CEO Svein Richard Brandtzæg and Executive Vice President and CFO Jørgen Rostrup. After the presentation, there will, as usual, be an opportunity to ask questions. Before we start, I would like to direct your attention to the cautionary note in relation to forward-looking statements that we have provided in the presentation material. With this short introduction, I'm pleased to hand over to Svein Richard Brandtzæg, who will take you through the first part of the presentation.
Thank you very much, Stefan. The headlines for this quarter was, first of all, that we achieved the full production at the Qatalum smelter. The twenty-first of September, we started the last electrolysis cell of the 704 that we have now in operation. This represent a major milestone for Hydro and for Qatalum. Secondly, we improved the performance in Bauxite Alumina with higher volumes in the bauxite mine, Paragominas, and the aluminum refinery, Alunorte. The Q3 represented an additional important step towards the nameplate capacities. We also are seeing the development in the macroeconomy as now impacting the market beyond what is normally a seasonal weaker quarter.
We also see that our customers are now more cautious and the uncertainty is now gradually affecting the market situation. Highlights from the Q3 is of course then that we have an underlying EBIT of NOK 1.646 million, which is NOK 260 million less than Q2 and NOK 700 million above the Q3 last year. The bauxite and alumina production increased with respectively 13% and 7% during the quarter, which adds to the improvement we did from the first to the Q2 this year. In different parts of the value chain, we see raw material cost pressure, which affects the results. The energy business delivered strong result.
In fact, the highest ever result for the Q3 , where the lower prices were more than compensated by higher volumes. We see a seasonal decline as we have summer holiday Q3 . In addition, we see a somewhat softening market situation. I will come back to the portfolio streamlining that we have done during the quarter. If you take a look at the fabricated products, especially the downstream part, where we have seen a 5% reduction in volumes compared to the Q2 , but the year to date, 1% higher in total than the year to date the same period last year. We see in the rolled products, which had a 6% lower demand this quarter compared to previous quarter, a destocking in general engineering and foil.
A seasonal reduction in automotive and heat exchanger, a lower demand in packaging and building, and improved demand in litho and can beverage. In extruded products, we had 4% lower demand than previous quarter, where Extrusion Eurasia had a normal seasonal softening, but also weakening building and construction. Especially Building Systems is very much affected by the very soft building and construction market in Southern Europe, where Iberia is stable but at a very low level. We now see also weakening in Italy and France. Extrusion North America improved due to higher demand in automotive transport, but also less import. Extrusion South America is -7% this quarter, but after a 16% improvement in the Q2 this year.
We saw a seasonal reduction in demand for products in precision tubing, which is very much toward the automotive industry. If you look at the aluminum prices, we realized the realized price in the quarter was $2,592 per ton. In Q2 it was $2,509 per ton. The situation in the quarter was quite volatile, where we saw prices between $2,200 and $2,650 per ton. The market prices that we observed in the Q3 will mainly be reflected in the Hydro Q4 results. The global inventory is stable, and inventory days is going down due to increased consumption, but total volume has been quite stable during the quarter.
Estimated total reported and unreported volumes is about 11 billion tons. This number is uncertain but fairly well known in the market, and in total represent the 3 months of consumption. A lot of volumes is locked in financial deals, which is locking up the metal, which is still profitable on a short-term duration due to the contango and the low interest rate current environment. If you take a look at the ingot premiums, we saw quite stable situation in Europe. We saw last quarter surging premiums in the U.S. market up towards $200 per ton. The Midwest premium in the U.S. now has leveled down to $175.
In Japan, the situation has been quite stable, and the high premiums observed in the market shows that in spite of a high inventory level, this metal is not available in the physical market, so there's still a tight metal market. We also saw in the end of the quarter that there are some weakening of the ingot premiums with a few dollars. It's too early to say if this will continue into the quarter further. In China, we observed still a balancing situation, a bit less than 20 million tons, supply and demand. There is new capacity coming on stream in north and west part of China, replacing high cost production capacity in south and east.
We expect China to continue to be in balance during the quarter. With regard to export from China in semi-fabricated products, we have seen an increasing amount of volumes coming out of China since last year. During last month, there has been some moderation, but we still see that there are quite high level of semi-fab and high volumes of semi-fabricated products coming out of China, mainly to the Asian market. We see very small volumes coming into Europe and into the U.S. market. If you look at the world outside China, the annualized demand is about 25.7 million tons, and the production is about 800 tons higher. There is overcapacity in the world outside China.
We estimate the demand in China to be about 13% this year, and the world outside China a growth of 7% this year. We said in the Capital Markets Day that we estimated the growth outside China would be between 5% and 9% this year, on average, 7%. At the moment, I would say that we are expecting the growth to be in the lower part of the range, so probably below 7% and above 7%. Of course, the uncertainty due to the macroeconomic situation adds to the picture here. We are expecting a volatile environment in the markets going forward into the Q4 . If you look at the alumina market, we have also there a quite volatile situation.
In general, it has followed the LME with the softening alumina prices during the quarter, but not to the extent as we see on the LME. As a percentage of LME, the alumina price has strengthened, and we see levels between 16 and 16.5% of LME currently. We estimate that the alumina market going forward is fairly balanced. On energy, we started the quarter with fairly high prices compared to what we expected in this part of the season. We observed also that the prices came back again during the quarter and after the quarter to what it is now, and the energy prices is now at level of $300.
Excuse me, NOK 300 per megawatt-hour. This is then reflecting uncertainty due to the energy situation in Germany with the nuclear power stations, but also that the market is now in a better situation with regard to consumption and also with regard to the seasonal demand. The reservoir level in southwest Norway has improved during the quarter and in Norway. In the southwest Norway, we have a reservoir level of 86% currently, which is normal level, but 18% higher than the level last year. Over the last months, the uncertainty in the market has increased significantly.
Even we can say it's a positive decision that has been made in the European Union during the last night, but there are still several factors influencing on the situation. We see that our confidence indicators that are pointing downwards. There are still uncertainty in the financial market. As I mentioned previously, we have seen that there is a softening in the market beyond the seasonal variation that we normally see in the Q3. We are expecting that the markets are now weaker than what has been normal situation. For us, it is at least a benefit that we have very strong financial situation if the market are going to be further softening.
We are also prepared to do capacity adjustment measures when necessary. We have a flexible remelt system which also was fully utilized during the previous crisis, 2008 and 2009. We will prioritize margin management, meaning that we will take down volumes to keep up the margins. Of course we, in this situation, we also have strengthened focus on our improvement programs. The $300 program in Primary Metal is well known. We have restructuring and Building Systems, and we have also several other cost reduction initiatives along the value chain. We also continue to have a strong financial discipline, including focus on operating capital, on CapEx, and of course, also following closely the counterparty risk in the market.
The bauxite production increased 13% this quarter, which adds to the improvement we also did from the first to the Q2 . The level or the production rate during the quarter ended up at 8.7 million tons per year. In Alunorte, the alumina refinery, we were able to increase the volumes with 7% in the quarter, which means that Alunorte now is very close to nameplate capacity, and today have a production rate of 6.2 million tons per year.
We continue to focus on implementing the Hydro Production System, the maintenance system and are now very focused also on stabilizing the production in the Q4 at the current level and make the production robust at the level we have as we are now entering the rainy season in the Pará province of Brazil. The improvement program in Primary Metal continues, and we are happy to confirm that we are moving according to plan. We delivered $50 improvement last year, and the target this year is $125 per ton in total, meaning $175 per ton improvement compared to 2009.
On the other hand, the cash cost is at $250 per ton from 2010 due to raw material cost increases, very much due to alumina, which accounts for about $100 per ton, but also due to energy, petcoke, weaker dollar and other factors that is increasing the cost curve for the aluminum industry in general. We continue to focus on cost reduction in Primary and we are focused on delivering the $300 Programme, which will be finished in 2013. Qatalum marked a milestone in 21st of September, and we are now in full production. We produced 120 kilotons of metal in the Q3 .
In the Q4 at full production, we will be able to produce close to 150,000 tons. The current focus is now to optimize the production at full production levels. We are gradually demobilizing additional workforce that has been supporting the start-up processes in the electrolysis. We are now targeting the cost position among the world-class smelters, and that is a process that will continue during the next quarters. It's clear that Qatalum will become a highly efficient smelter with the world-class cost position.
During the quarter, we had a tax-free gain of NOK 658 million due to the sale of the SKS minority production stake that was completed in the quarter. The price of the energy that was sold was at the level of NOK 3.4 billion per terawatt hour. In total, it was a consideration of NOK 1 billion for that sale. We also agreed to sell our Alpart stake, 35% in the Jamaica Alpart refinery. This deal is expected to be closed in the Q4 and will give us a gain of NOK 400 million, as a gain recognized in the Q4.
With regard to the curtail capacity, we are restarting the capacity due to the macroeconomic situation and instability in the market. I leave the word to CFO Jørgen C. Arentz Rostrup.
Thank you, Svein Richard, and thanks for joining us today. If we turn to the financial numbers, let me start by saying that we had an underlying EBITA, as Svein Richard said, of NOK 1,646 million, down NOK 250 million from last quarter. Bauxite & Alumina was a little bit up 11%. The Primary Metal down to downstream activities were down quarter-on-quarter. Energy, as Svein Richard said, significantly up, and we also had low charges this quarter on other eliminations. Let me start with the latter one and then move into the further analysis.
On other and elimination, we had, as I said, also this quarter, low charges of NOK 73 million compared to NOK 65 million last quarter. This is below the normalized level of NOK 150 million that we have indicated. This quarter, we have positive effects from elimination of internal inventory gains and losses, and therefore the charge is off the guidance. If we then turn over to the more aggregate analysis and look at the waterfall analysis, LME prices and higher LME prices and energy result was this quarter more than offset by lower sales volumes and raw material cost increases. LME prices and currencies had a positive effect of NOK 0.2 billion, and energy volume and prices had also an effect of approximately NOK 0.2 billion in Norwegian krone.
Volume significantly more and then prices, as Svein Richard said, going the other way somewhat negative, but all in all, positive NOK 0.2 billion. Variable costs that I will revert to later in my presentation had a negative impact of NOK 0.2 billion. Volumes fairly even distributed from Primary Metal and to the downstream business areas had a negative impact of NOK 0.3 billion. This is the seasonality and the softening markets that Svein Richard was alluding to. We have margin effects and some other cost elements bringing the remaining gap down to NOK 1.6 billion this quarter.
Key financials, we shouldn't spend too much time on this, but it's a 3%–4% decrease in revenues, NOK 900 million, which then indicates that the volume decrease is larger than the price increase, this quarter compared to last quarter. We have a reported EBIT and IFRS EBIT in the range of NOK 2.2 billion. That means that in order to focus on the performing result, the underlying EBIT, we are excluding positive elements of NOK 576 million. The main element in this is by far the positive gain from the divestment of the shares in the power company in Northern Norway called SKS Produksjon.
This was a large positive gain on that sale, and that has been excluded from our underlying EBIT. There are also some unrealized derivative effects due to the decreasing LME through the quarter, but those numbers are smaller. If you go further down on the key financial list, you will see that financial income is quite significant this quarter, NOK 1.36 billion, which is a high number for a quarter compared to previous quarters. The reason for this is that there is NOK 1.2 billion in net foreign exchange losses this quarter. As you know, our income side is very much exposed to dollars, and therefore we also tend to have our loans in dollar currency.
With the appreciating dollar that we're seeing through the quarter, we have a net foreign exchange loss in the range of NOK 1.2 billion. Some NOK 300 million is related to intercompany loans and intercompany balances, but the remaining is external loan arrangements. This gives income before tax NOK 859 million, tax expense of NOK 62 million, which is low compared to the income level before tax is only 7%, but then corrected for the tax-free gain of the sales of the power shares, we are at the 33% tax rate, which is where we have been in the last few quarters.
If we move to the business areas, I would first like to say that, remember that the pro forma that for both bauxite, alumina and also for primary metal, we are discussing this on the pro forma basis due to the acquisition of Vale. Nevertheless, for quarter two and quarter three, those numbers are equal to the real numbers. This is more for your reference when you compare to the Q3 in 2010. If you look at bauxite and alumina, we had an improvement in the result of 11% of some NOK 30 million–NOK 302 million underlying EBIT. This is entirely due to the improved production performance that Svein Richard Brandtzæg spent some time on.
On the other, in the other direction, we see some further increased caustic costs. I will revert to that. Some increase in bauxite costs, which has for purchased bauxite from the MRN mine, which has a typical longer time lag to the LME, and then also some increase in maintenance costs. We have lower realized alumina price, which has only a month or a month and a half time lag to the LME on the income side. I'm also happy to see that we have further improved the result from the commercial activities. There is a very good and active commercial activity out of Lausanne.
If we look at the outlook, we are, as Svein Richard Brandtzæg said, more now concerned about stabilizing production at the present levels for next quarter. While we have guided 2 quarters on increased production with this quarter guide on that you should expect more stable production, not to read out of that that we don't want to move further on. The next quarter after having 2 consecutive quarters with a significant increase, we think it's more prudent of us to now stabilize at this level and then move on from there. We are also reminding on the fact that we have the last part of the hedge that we entered into the strategic hedge described to be at around $2,400 level, U.S. dollar level.
We have the remaining part of that left for the last quarter of 2011. If we then move over to Primary Metal, you will see that we had NOK 653 million in underlying EBIT, a decrease of 15% or NOK 112 million from last quarter. There are some movements both ways in these numbers. Prices and premiums we have said to be a positive effect of NOK 150 million in the quarter. We have decreased sales volumes in spite of higher primary aluminum electrolysis production of 3%, we have sales down 3%, primarily due to lower mix of remelt and cold metal in the cast houses in this business.
That is a response to the market as we have seen it in the Q3 . This gives a negative effect of NOK 90 million, and then we have a raw material cost impact of NOK 150 million, partly alumina and partly carbon costs. If you look at Q4 , we have sold 85% of the production at $2,475 per ton, compared to the 2,592 on the average for Q3 . This is $120 down, plus the fact that there is also then again, 15% more to be sold at what we right now look at lower LME levels.
We have guided previously and through the last capital markets day that $100 change on the LME is approximately on a yearly basis, NOK 800 million in underlying EBIT. If we look a little bit on the raw material side, I will share with you two slides on this, and I will start on the bauxite and alumina area. If you look at the pie chart to the right, two-thirds of the cost structure is energy and bauxite. There is also significant other parts, and one is caustic soda, and another is of course part of the other cost, salary and other local costs in, for us, predominantly Brazil.
On the left-hand side, we have shown you revenue and the cost driver or development in raw material prices, comparing year-to-date 2011 versus 2010. The alumina price on the income side for bauxite and alumina is our own realized prices, comparing these two periods. To the right, the bars for caustic soda, fuel oil, and coal and bauxite are nominated prices in the market, our global market prices. Nevertheless, it's quite evident from this chart that we are experiencing a cost pressure in the bauxite and alumina business. Nothing of this we regard as Hydro specific. We believe this is an industry phenomena.
It's a situation where you have an industry that in spite of fairly good growth, so Svein Richard talked about 7% this year, and it was significantly higher last year. In spite of that, we still have the overcapacity that we have all discussed. Then we have raw material prices that have drivers outside this aluminum industry and therefore have a different pattern in this situation. Caustic soda increased between 40%–50%, energy-related raw materials and input factors increased in the range of 40%. Caustic, as an example, is obviously a combination of caustic and chlorine.
Depending on what is the driver, we could expect that now the caustic side is the driver for the return in that industry more than the building and construction related chlorine product. Therefore, we see quite an extensive price increase in our raw materials in bauxite and alumina. If you look at the same for Primary Metal cost structure to the right, energy and alumina two-thirds carbon is here a significant added raw material, where petroleum coke, petcoke, consists of 60%–70% of the carbon cost, as we see it. To the left, we have compared our realized LME prices with the petroleum coke market prices, the global market prices here, the U.S. Gulf Coast prices.
Again, it's a refining by-product. It's influenced by aluminum demand, but it's also heavily influenced by the refining mix, the mix coming in, production mix coming out of refineries on a global basis. Both for caustic and petroleum coke, we have fairly short term price setting in our contracts. We are up for between 2 and 4 price revisions each year in these contracts. Okay, if we look briefly at the other business area, metal markets, is down. It looks like it's quite significantly down from NOK 244 million– NOK 93 million. We should remember that we had the currency and inventory valuation effects in Q2 of NOK 100 million.
We have a fairly neutral currency and inventory valuation effects this quarter. If you take away the NOK 100 million, there is a performing result gap of NOK 50 million–NOK 60 million between second and Q3 . This is entirely due to the reduction in re-melt production and re-melt sales in the quarter. It's down 12%, and here we are back to the fact that we have met the somewhat softer market and the seasonality in the market by utilizing the flexibility in the re-melting system and taken down production in that system. You should anticipate that we will continue to do so to the degree it's necessary also for the quarters going forward.
If we then look at rolled products, there is a decline in the result of NOK 100 million down to NOK 124 million. Two-thirds of this decline is due to lower volume. Volume is down 6%, predominantly on seasonality, but also what we call some de-stocking in this segment, in particular in foil and general engineering. We are aware of the fact that some of our customers have taken down their inventories during the quarter. It's speculation whether this is a temporary thing, or this is the start of also softening markets, but we are prepared that it could be the latter.
The last one-third is due to somewhat lower margins and the production and sales mix that we have in the quarter. I must say, there is another weak quarter for Extruded Products, NOK 40 million, obviously also hit by seasonality. The pattern is not uncommon, but at low levels, primarily due to the fact that the building industry, building and construction industry in Europe, has not improved and are still at those low levels, in particular in Southern Europe, that we spoke of.
We have been able to take out some cost, and we are working further on that, in particular in the Hydro Building Systems business part, where we take out fixed cost, in the southern part of Europe to quite a magnitude, and you will see more effects from that, in the quarters going forward. Finally of the business areas, a very good result in energy. We have had a quite interesting change from a very dry year towards the summer, and then moving into a very wet year in the summer and during the fall so far. We have moved from very low reservoirs to very high, or for the season, very normal reservoir.
That means that we have produced 50% more in Hydro in this quarter compared to last quarter. We have sold 1 terawatt hour more, 60%–70% more than last quarter in the market. We have an underlying EBIT improved by 40%. I believe that going forward and into Q4 , we should see production at the level or slightly below the level that we saw it in Q3 , still a fairly high production. It looks like prices have moved back to the range that we saw them in the first part of last quarter before they significantly dropped. It's not necessarily high prices for the winter season, but at least it is acceptable prices the way we see it.
Let me round off by just commenting on cash development and net debt. We have generated from operations NOK 3.4 billion. NOK 3 billion through the sales and operating results, and 0.8 of these also from operating capital, and then we paid some taxes in the quarter. If you then look at the investments, we have the divestments offsetting the cash used in investments. And then we have the dollar appreciation effect on net debt, being in the ratio of 0.7 billion in a quarter. All in all, we are at 0.1 billion net debt in the company, Norwegian kroner in the company at the end of Q3 .
We also have NOK 7 billion cash at hand at the end of the quarter. Svein Richard?
Thank you. The priorities going forward is, first of all, to stabilize the production in Brazil, in Paragominas and Alunorte, obtain the levels, and make it robust at the higher levels. Continue the focus on $300 programs and the program in Primary Metal, which will position our smelters on the cost curve. Of course, the fact that we now have Qatalum in full production will also support that development, which comes as an additional effect. We will follow carefully the development in the market, and we are prepared to adapt to the capacity needed in the market.
We will focus very much on margins and ready then to reduce the production volumes according to the market needs. Thank you very much.
Thank you, Svein Richard Brandtzæg. We are ready to take questions.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press star or asterisk key followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will take our first question from Luc Pez from Exane. Please go ahead.
Hi, gentlemen. Luc Pez from Exane. One question if I may. Could you elaborate perhaps a bit further or provide a new guidance for the targeted cost at Alpart in view of the industry-wide cost inflation you were referring? Thank you.
With regard to the Qatalum cost, as I mentioned, we are now demobilizing the additional workforce that has been established to ramp up the production to full capacity. We are gradually moving towards the target at the cost level. It is difficult to give you exact number, but it's clear that our target is to of course to have a good position in the first quartile on the cost curve. This will be a very robust smelter and will be very cost competitive in the market.
Thank you.
We will now take our next question from Robert Clifford from Deutsche Bank. Please go ahead.
Yeah. Good afternoon, gentlemen. Just two quick questions. One on you curtailed capacity. How long does it stay curtailed before you shut it? Can you talk about your decisions on closing that capacity, what political issues there are around that, and how much that would cost? That's the first one. The second one's just a much simpler question. You know, you talk about winding back your remelts capacity. What does that mean in practice? Does that just mean you're melting less or you're doing less scrap collection? How does that work physically?
Thank you, Clifford. I will first start with the curtailed capacity because we have in Norway and Germany curtailed capacity as a result of the previous financial crisis. We are not going to restart that capacity now in the current market situation. When we see the market is softening now, first of all, we take down the remelting of standard ingots, duty paid ingots, in the remelters in Europe. That is the first step. The second step is to reduce the remelting of duty unpaid ingots in the Norwegian smelters, which we do in the Norwegian smelters.
The third level, which we haven't reached yet, is to reduce the purchase of scrap from the market, meaning that will also take down the metal units accordingly. Then we are down to the level where we need to evaluate further curtailment of electrolysis capacity. We are definitely not at that level yet, but the priorities in that respect will be very much as we did last time, that we are looking at the highest cost production lines and then prepared to curtail that capacity.
With regard to the cost of curtailing capacity, I would say it is not very much in a sense to take down the capacity, but it costs more money to bring it back again. So far we have not brought back the capacity that we took out in 2008, 2009. We are not planning to take more capacity out as it looks now. If it is necessary and needed, we are prepared to do it. Of course, we have taken out capacity both in Norway and Germany.
If you think about the political issues related to that, it is of course very much related to the workforce that has to be temporarily out of their jobs. There are already established support systems both in Norway and Germany in that respect. We have some experience in executing curtailing of capacity and are prepared to do that also if necessary if the development goes in that direction.
Thanks for that. I guess the question was, how do you take it the next step forward? In Neuss, for instance, what do you need to do to actually shut it permanently, to go from curtailing to permanent closure? What decision do you need to make and how much would that cost?
In Neuss, it is very much depending on the CO2 compensation system that is now going to be decided during this autumn. Because the Emissions Trading System will start in Europe in 2013 and European Union has opened up for compensation, and it's going to be decided this autumn. If we don't get any compensation at all, it is definitely not the long future for the Neuss smelter. We will turn the smelter into a re-smelter, where we will then use the steel, utilize the cast house production and sourcing sheeting onto the world's largest hot rolling mill, that is across the fence in Neuss in Norf.
We are not at that level to give you any guidance yet because we don't know exactly how the CO2 compensation system will look like. It looks like there will be some compensation, but we don't know exactly how it will be. It's too early to comment on the end game for Neuss. As I mentioned, if there is no compensation, there will be a short lifetime for Neuss as we see it now.
Thank you.
Rob, also, the reason that we did an estimate a couple of years back that we have referred to a couple of times in dialogue with you guys of some EUR 60 million–EUR 70 million cost if we had to close down the operation permanently. You know, that is not an updated number. I just give it for your reference, so you have a ballpark figure the way we looked at it in an old scenario, but it's not an updated number. As Svein Richard said, you know, there are still different alternatives for this.
Right now we are concentrating on running it at zero cost burden and then seeing what comes out of the, in general for us, very important discussion around the CO2 protection in Europe.
Thank you, Jørgen. I appreciate that.
We will now take our next question from Cédric de la Chapelle from Merrill Lynch.
Hi, gentlemen. Thanks very much for taking the conference call. Just two questions. One, on future disposals. We've obviously seen quite a big disposal gain coming through from the sale of your energy assets. You know, are there potential future gains coming through which would be positive, particularly in quite a soft demand environment that we appear to be going into? Secondly, a question on your cost savings plan. You know, cost crept up in the first nine months of this year. You've highlighted the reasons why. What is in your control to actually try and drive those cost savings, or drive the costs down and actually achieve those cost savings? Because it appears that a lot of that's got to do with sort of commodity price exposure and out of your control.
What kind of efficiency gains can Hydro make to achieve those cost saving targets? Thanks.
Yes, thank you, Cédric de la Chapelle, for those questions. To your first questions regarding disposal, I think what you have seen now is some smaller actions to what we have described as a portfolio streamlining. You know, a company of size and history always have some assets that you could find alternatives for. If we see more of that kind, we will do it when time is right. We don't have any plans. We, as you know also, don't in general comment on actions of this nature.
I think we are now at this stage after some years of doing this streamlining, where we at least have clearly defined business areas with belonging assets to it. The structure you see is the structure we work with. When it comes to the cost issue, you're right. What we have discussed today is not at least cost elements that are outside our immediate span of control. Svein Richard Brandtzæg, on the other side, talked quite a lot about the cost program that we launched a couple of years back, the $300 program. We have similar programs in, although then of a smaller magnitude in, the downstream, midstream business areas.
The $300 program, which we think we have conducted so far quite successfully. The dilemma has then been, as you are pointing to, that there are other cost elements that we are in less control of that has gone the other way around, not least due to the fact that the raw materials and commodities in general has had a better development than what we have been able to attract to the aluminum pricing. We don't have a quick answer for you and a good solution. What we can say is that first of all it. We think it is a common situation for the whole industry. If we are facing this, we believe others are facing the same.
That is not helping much, but it's helping a little bit because then whatever we can do on our own side will improve the situation in relative terms. Also we believe that this cost pressure that you see in the raw material side will start to kind of stress the industry a little bit at the price levels that you see today.
Okay. Thanks, gentlemen.
As a reminder, ladies and gentlemen, if you wish to ask a question on today's call, please press star one. We will take our next question from Jonathan Schroer from UniCredit.
Yes, good afternoon. I have three questions. The first is you mentioned production stabilizing in bauxite and alumina at current levels. That would indicate a run rate of 6.2 million tons for Alunorte. Is that reasonable for 2012, or could you see production increasing from that level across the year? Second of all, I was hoping for a further update on the $300 cost program and where you are right now, if you've seen any progress made in the most recent quarter. In particular, I was wondering about on slide 20, where you have the margin and other, where that was a negative effect, if that has any relation.
Where I would guess, I would assume the program might offset something like that. If you could give a little more detail on what that is and where you stand with that program. Finally, with rolled products, why was the EBIT so much lower there than in previous quarters? You mentioned higher personnel and maintenance. I was wondering if you might have pulled forward some maintenance program that typically tends to happen in the Q4 . Thanks.
With regard to production in Alunorte, we have said that we would like to stabilize the production at the current level, which has now a production rate of 6.2 million tons per year. We are not finished with the business plan for next year yet, so I couldn't say what we are targeting now, but it will be in this range or maybe a bit higher. We are approaching the nameplate capacity of Alunorte, so we are definitely not leveling down our ambitions with regard to the production rate in this world's largest alumina refinery. We will stabilize and make the production robust in both Paragominas and Alunorte.
With regard to the $300 program, we are moving according to plan, and it is difficult to give you exact figure of what was the effect of the change in the Q3 . We are gradually reducing the cost in the smelter system. You should also remember that this is only for the fully owned smelters. When we are talking about the Qatalum and the cost position for Hydro in general, this comes on top of the $300 program. Yeah, with regard to the last question, Jørgen. Yeah. Jonathan, I'll briefly give you a comment on rolled products, which I believe was your third question. You were asking about the level of rolled product results.
Let's just discuss it a little bit. First of all, you know, we agree that the level is on the low side, and it's definitely lower than last year. It is better than previous years, but we are not at the level where we should be, and that is disappointing. When it comes to the shape of it, normally we would expect Q3 and Q4 to be lower than the first half of the year, partly for holiday reasons. Whether it's summer or holiday or it's towards the end of the year type of holidays and slowdown in the market.
The other reason being the cost level, in particular the maintenance cost level that we see that is typically concentrated then on the low season, in the low season. That is making the second half of the year normally somewhat softer than the first half of the year. When we looked at the quarter-on-quarter, quarter three versus quarter two and the NOK 100 million in deviation, my intention was to point to approximately two-thirds of that deviation being volumes and one-third being margins. Partly softer margins in the market, but also partly the product mix that Svein Richard Brandtzæg talked about in his introduction.
Costs were, between those two quarters, stable or actually a little bit better in Q3 compared to Q2 . If you compare to last year, you would see that the three quarters, or not the Q1 compared to Q1 , but the two next quarters, are lower than the similar quarters last year. It's a little bit on the volume and margin side, but it's predominantly on the cost side, actually. We came out 2009 and 2010 with a maintenance cost level on the low side of what we think we need to run it at.
We have also had a smaller cost elements that has moved all in the same direction. Without that being a very big issue. When we can't see the same development on the market side, then that every dollar count in that respect. That is not an alarming situation. I think what we have seen is that this business area has firmed up to a certain degree, the margins and the earnings a little bit over the last two, three years. The whole industry seemed to have done that. Then we see now that we have a softening in the market that is unfortunate.
Is that softening then? I mean, it's, you're saying it's mainly related in the volumes rather than pricing.
When we can't see the same development on the market side, then that every dollar counts in that respect. That is not an alarming situation. I think what we have seen is that this business area has firmed up to a certain degree, the margins and the earnings a little bit over the last two, three years. The whole industry seemed to have done that. We see now that we have a softening in the market that is unfortunate.
Is that softening then? I mean, you're saying it's mainly related to the volumes rather than pricing, correct?
Yeah. It's for the last quarter versus this quarter compared to last quarter, it's predominantly volumes. A fair share of that volume decrease, of the 6% volume decrease that we call it, is normal seasonality. We are just pointing to the fact that we believe that on top of seasonality, there is a softening in the market, which we for rolled product have called a destocking effect with our customers, more than the fact that things are stocking up. We have to watch this carefully into fourth and Q1 .
Okay. Thank you very much.
Thank you.
As a reminder, ladies and gentlemen, if you wish to ask a question on today's call, please press star one. We will take our next question from Tim Jarrett from Redburn Partners.
Good afternoon. Just wanted to get your views on where the current aluminum price is sitting in terms of the global cost curve. You know, how far into the cost curve do you see the prices at the moment? And how quickly do you expect the industry to respond to that? That's my first question. And then the second one is, does Rio Tinto's plan to sort of spin off various assets impact your stake in Tomago at all?
I may start answering. Thank you for the question. With regard to the current aluminum price, we see that due to the surge in the raw material cost, there are a number of smelters that is now below water. It's difficult to say exactly because this picture is very dynamic. We see that the cost curve is changing over the time with the raw material cost and also with LME. There is a certain capacity now that are quite in a stressed situation. If you take a look back on what happened in 2008, 2009, some of the companies took out capacity.
Like Hydro, we took out about 26% of the capacity. The Chinese took down capacity very, very quickly also. There were also some other companies that took down the capacity. In general, the aluminum industry did not adapt to the situation according to the demand. We created an oversupply situation for quite a while during the crisis, which also resulted in the buildup of the stocks that we are seeing today. It's difficult to state what is really the outcome of the current situation at the current price level. As I mentioned, there are definitely some other capacities now that are quite stressed.
With regard to the spin-off of Rio Tinto and what is going to happen there, I think you have to ask them about that. We normally don't comment on what our competitors are doing. It is certainly a change in the industry structures that we are seeing now.
Are any of your smelters underwater at the moment?
Excuse me, could you say again?
Are any of Hydro's smelters currently underwater, to use your phrase?
No, they are not.
Okay. Thank you.
We are floating and in a fairly good shape.
Thank you.
Thanks.
As a final reminder, ladies and gentlemen, if you wish to ask a question, please press star one. We'll pause for just a moment to allow everyone to signal. There are no further questions in the queue.
Okay. Thank you everyone for joining us on this call and the good questions. Before we leave you, I would like to mention that there will be a new head of investor relations in Hydro from November first. Mr. Richard Brandtzæg is taking over my position. For myself, it has been a pleasure working with you all these years. I would also like to remind you that we are arranging our annual capital markets day in Oslo on December first. You will find more information about that on our website, and we hope to see you there. Thank you.
That will conclude today's conference call, ladies and gentlemen. Thank you for your participation. You may now disconnect.