Good morning, and welcome to Hydro's Investor Day 2019. My name is Stian Hasle, and I am, together with my colleagues Olena L. Gevoll and Audun Lehn Halvorsen, responsible for investor relations in Hydro. We are very happy to welcome you here today to Oslo and Hydro's headquarters, and welcome also to all of you following us on webcast. The headline for this year's Investor Day is Lifting Profitability, Driving Sustainability, and this will be the key focus areas in the presentations that you will see today. We will provide you with more insight on our new improvement efforts, updated capital allocation framework, as well as giving you clear targets for profitability as well as sustainability. Moreover, there will be an update on the Alunorte situation, the Rolled Products restructuring, and the market outlook, in addition to strategic priorities and direction.
Before we do anything else, I would like to start with safety. There are no scheduled fire alarm tests today, so if the alarm goes off, please find your way to the nearest fire exits, which are either behind you through the doors next to the stairs on the left-hand side, alternatively on the left-hand side of the stage through the corridor out in the neighboring building. The fire exits are clearly indicated by the green sign. Also I would like to draw your attention to the cautionary note related to the forward-looking statements that can be seen on the screen, as well as in the presentations that you have in front of you. Let's move over to the agenda which looks as follows. We will start with the CEO presentation, including presentations from EVP Rolled Products, Einar Glomnes, and EVP Extruded Solutions, Egil Hogna.
This is followed by a Q&A before we have a 20-minute break. After the break, we have the CFO presentation, followed by a final Q&A. After the presentations are done, we will have lunch outside here from 11 to 12, and I hope as many of you as possible can join us for that. With that, I would like to leave the stage to our President and CEO, Hilde Merete Aasheim.
Before I go into the details, I would like to share with you what we have done in my first few months as CEO, what will be different, and how we have mobilized for change. From day one, I have been communicating the urgent need to improve. Earnings have simply been too low for too long time. We have had to face that brutal fact and create a stronger sense of urgency throughout the whole organization. I have to say that I'm truly impressed about how the organization has responded to that message. Today, we are launching an improvement ambition, an improvement program of NOK 6.4 billion. NOK 5.5 billion of these billions to be realized by 2021. On May the eighth, I announced a strategic review, a full potential review of Rolled Products.
Significant improvement potentials have been identified, summing up to NOK 900 million to be delivered by 2023. As you have already seen, we have already started to execute on that agenda by announcing that we are taking structural moves on the foil capacity, as well as the significant manning reductions within the whole Rolled Products area. In addition to improvements and restructuring, we have also worked out a new capital allocation framework going forward, which will be the basis for capital allocation going forward. Which I believe will be crucial for delivering on improving our return on capital employed going forward. Given the strong focus on profitability and improved return on capital employed, we have decided to set a clear goal on profitability.
To deliver at least a ROACE of 10% over the cycle, which means that the business area have to target to deliver above their cost of capital. I believe that financial metrics will drive our behavior towards a more robust portfolio going forward and to allocate capital where we see the best return and to avoid allocating capital where return is insufficient. We are also setting ambitious targets when it comes to sustainability, as sustainability is an important part of our positioning going forward. Our new climate strategy has an ambition of reducing our own CO2 emissions by 30% by 2030. Let me then move to more details as to the profitability. Let me start by saying that our starting point is somewhat challenging. Because on the top of low earnings in the past, we experience current markets affected by volatility and low visibility.
We see the trade tensions between the US and China creating uncertainty on trade, on investments, and underlying growth. The effect for us is lower demand of aluminum. This is an environment that we are currently in and underline the need for strong measures short term. On my day one as CEO of Hydro on May the eighth, I announced some immediate measures. I talked about safety, compliance, and efficient operation. That's always top priority for Hydro. I talked about to bring back the Brazilian assets to full capacity. On the eighth of May, we were still producing at 50%. I talked about Rolled Products having been an underperformer for quite some time, that we needed to take a full strategic review of this business area to improve performance.
I talked about coming back to improvement programs as we have done in the past, mobilizing the whole organization, finding ways to improve our business. I talked about stricter capital discipline and capital allocation in a situation where earnings has been too low for too long time. I said that we also will look into how we work in order to optimize and simplify throughout the whole organization. This has been my agenda since the eighth of May which are areas that I will now go more into the details to tell you what we have been doing in these few months on this agenda. Let me start with Brazil. I have to say that I'm very happy that we are now progressing towards lifting the final embargoes in Brazil.
As you would recall, on May the twentieth, the production embargo in Alunorte was lifted. We could start our production in Alunorte, and that was what we did. On the twentieth of September, last week, I was very happy to hear from the federal court lifting one of the two embargoes on Alunorte's deposit area, the DRS-2. Some of you would have heard us saying several times that to be able to use the DRS-2 is the only long-term solution for Alunorte, using the new press filter, using the new deposit. There were two different lawsuits included in the embargo on the DRS-2, one civil and one criminal. The civil lawsuit was lifted on September the twentieth, and the criminal lawsuit, which is by the same court, is still pending.
We expect a positive decision also on the criminal case shortly. Let me talk about the ramp-up of Alunorte, which started on the twenty-first of May. We have had a successful ramp-up. We could capitalize on the fact that all seven production lines have been in operation during the one and a half years of embargo, and we could start immediately simply because we had the equipment and the people in place. The bottleneck for the full ramp-up is the new press filter technology. We have eight press filters which we're now using, and we still are in a commissioning phase. Remember that when we got the embargo in Brazil last year, we were in a commissioning phase for these press filters. We had to stop, and now we are still in the commissioning phase of the press filters.
As you can see behind me, there are variation week by week, and that is a signal that we are on a learning curve using this new press filter technology. We have been producing in the range of 75%-85% over the last months. We have invested in a ninth press filter to make sure that we have the capacity available for the full production. That will come in now in Q4 and be in full production by the end of the year. That will add 10% extra capacity. At the end of the year, we will be between 85%-95% capacity. It's about further process optimization, learning about how the intensity of the maintenance have to be to reduce downtime, to increase the cycle time in order to be at full capacity.
That will continue during 2020. I cannot say the exact timing, but that will go on during 2020, and we will be in full capacity full year in 2021, 6.3 million tons. As production is ramping up, costs are improving. To the left, you see the cost curve relating to Alunorte. Only producing at 50%, Alunorte would be positioned in the second quartile on the cost curve. Now that we are ramping up and come to 100% capacity utilization, we will regain the position as we had before in the Q1.
Costs has come down during 2019, and we believe that we will be back to Q4 2017 cost levels once we are back in full production in Alunorte. When it comes to primary was also heavily hit by the Alunorte situation. We had to go out in the market and buy expensive alumina during the embargo of Alunorte. We had to cope with many different qualities of alumina, and so the operation was affected. Now, we are more back to normal. Costs has come down, and we believe also in the primary metal segment that we will come back to the cost level that we had before the embargo in Q4 2017.
Before I leave Brazil, I would like to stress that our key priority is continued safe ramp-up of Alunorte as well as Albras and Paragominas. As important it is to build trust in the local community. Continue the good dialogue with the local stakeholders and to demonstrate that we are a good citizen in the local community of Barcarena and in the sites where we operate. It's important for us to also say that we are fully committed to deliver on the obligations under the technical and social agreement that was made with the Brazilian authorities, and we are on a good track to deliver on these agreements. Let me move to Rolled Products. As I said on May the eighth, we put Rolled Products under a strategic review.
As can be seen on the left-hand side, we see the results has been sliding for several years and the profitability has simply not been good enough. When I took over, I appointed Einar Glomnes as new head of Rolled Products with a clear mandate to improve this situation. It has been quite an intense period for a few months to explore the full potential of Rolled Products, which has resulted in initiatives summing up to NOK 900 million to be delivered by 2023 as EBIT effect. We have also realized that we see the potential of releasing NOK 900 million in operating capital, which would be with the main part be released by 2020. These improvements will come through organizational efficiency, which is very much about manning. It will come through operational efficiency as well as commercial excellence.
As you have seen, we have already started to execute on this agenda with the restructuring of the foil business and the announcement of the manning reductions within the whole Rolled Products area. The restructuring will come at a cost. We have announced NOK 1.6 billion, and we plan to book between NOK 1 billion-1.2 billion of these restructuring costs in the Q3 accounts. The improvements that we talk about here is no regrets move to improve the situation in Rolled Products. In parallel, we will look for other potentially more value-creating strategic opportunities. This could mean looking at different scenarios for ownership. We will be working with more information in due time on that topic.
Now, I would like like to ask Einar Glomnes, the head of Rolled Products, to come to the stage and talk more about the full potential review, and how he see the improvement program that has been developed. Please, Einar, come to the stage.
Thank you, Hilde. Good morning. Hilde has already given the highlights and the headlines of what we have done in Rolled Products since the beginning of May, and essentially also what we want to deliver. Let me give you some more background to the analysis that led us to these targets and the actions that we plan to take in order to give you some more comfort of the likelihood of us reaching this. Before that, let me give you some more background on the rolling industry and Hydro's position in it. As part of the aluminum industry, rolling takes roughly 1/3 of overall volumes, so globally, 20-something million tons per year. Hydro entered the rolling business for real through the acquisition of VAW in 2002, and we've been a major player ever since.
This year, we plan to produce roughly 1 million tons of rolled products distributed between our plants in Germany and our two rolling mills in Norway. The unique aluminum cluster in the Rhine region is really the basis for what we do. There we have the Rheinwerk aluminum smelter in Neuss, producing some 260,000 tons of liquid metal per year. We have the Alunorf joint venture. Alunorf is or it used to be the world's largest rolling mill. I think today there might be one or two bigger in China, but it's still undoubtedly the biggest rolling mill outside of China. It's a 50-50 joint venture between ourselves and Novelis. Novelis being admittedly the leading roller in the world.
Alunorf benefits from the joint venture in the sense that it taps into the expertise of both parties, and it is a well producing asset. From Alunorf, we bring most of our semi-produced products into our finishing lines in Grevenbroich. Grevenbroich, located between Düsseldorf and Cologne, some of you will have visited that, has been built successively over many, many years from the old foil lines, which we'll get back to the newly commissioned automotive line, AL3, that was started in 2017. Grevenbroich is the largest piece of the puzzle. It employs close to 2,000 people, and it is fair to say it's also where we have identified the biggest improvement potentials. In addition to the German cluster, we also have three plants in Hamburg, Karmøy, and Holmestrand respectively.
In Hamburg, we are next door to TRIMET's aluminum smelter, so we essentially take all the liquid metal that TRIMET produces. At Karmøy, similarly, we are next door to our Karmøy aluminum smelter, and we take up to 85,000 tons of liquid metal per year. Holmestrand is a standalone plant, and perhaps for that reason, it was also a pioneer in recycling. First, external process scrap, increasingly over the years, post-consumer scrap, and is really a model plant for what we want to achieve in terms of recycling as part of our portfolio. In volumes, the German cluster produces roughly two-thirds of the million, and the regional mills, Hamburg, Karmøy, and Holmestrand, produces one-third. We run customer satisfaction surveys on a regular basis. Now, as part of this exercise that Hilde alluded to, we did intensive interviews with customers during the summer.
The very good news is that our customers are very happy with Hydro. They prefer our quality in metal, our consistency in that quality, our customer service, essentially you name it. We score really top of the pops when it comes to customer loyalty. We have excellent assets. We have lots of great people. We have happy customers. Our financial returns have been way too poor. Below expectations, and frankly, below our requirements, and certainly, below our requirements to continue to invest in the business. Over the summer, we have spent time analyzing the market, our competitors, our own competencies, our improvement targets, and this is essentially what we found. In terms of segment attractiveness, I shouldn't, you know, claim this to be rocket science, but we see the can market being very attractive.
It grows considerably and partly or mostly these days because of the substitution from all sorts of plastic bottles to can. There's been hardly a week or two without new announcements from the likes of Coke and Pepsi, where they replace PET bottles with cans since I started. Can is a fairly consolidated business. There are few customers. Ultimately it will become some sort of a scale game. Here with Alunorf, the biggest rolling mill outside of China with our partner Novelis, we believe we are very well put to take part in that competition. It's now the ever-mentioned automotive industry. Due to lightweighting, automotive has been attractive, has had high growth many years. Both can and automotive has had higher returns than other products, higher margins.
With the AL3 line now up and running, we are very well-positioned also to compete in this segment. The automotive industry is characterized by demanding sophisticated customers, exactly the type of customers that Hydro wants to serve. Here too, we believe we have a good starting point and lots of stuff to do. Comes the general engineering segment, which is a portfolio of lots of different products. They vary from the standard stuff that competes head-to-head with Chinese imports to quite sophisticated and difficult products to produce, such as stuff for the high voltage electric components, new appliances for batteries to EVs and the likes. Here too, we see attractive segments where we should be well fit to compete, both from the German setup and from the Norwegian plants.
I guess there are, you know, somewhat more challenging products, the lithographic sheet and the foil business, where Hydro has been market leaders in terms of quality, history and to some extent, volumes for many, many years. We still see decent returns on the litho side, despite falling markets, declining markets year by year. If we can control our cost, we're pretty confident that this can be an attractive market also going forward. On foil, we have already announced the biggest piece of the restructuring. We will unfortunately be closing our foil mainline, which has produced since the fifties by the end of next year. That does not mean that we will exit foil altogether. We have two further lines in foil in Grevenbroich that are much more automated.
Again, if we can fill these and control our costs, we still believe there is margins to be gained. I think it's also fair to say that as a portfolio, the packaging piece and the can part will be less cyclical than markets such as the automotive industry or building and construction, which partly falls into GE. You know, a balanced portfolio, at least now for the first few years, we believe could be beneficial. In the context of both sustainability but also what we believe in terms of business sustainability going forward, it's worth mentioning that in terms of recycling friendliness, can is a big hit. I don't think there is any single product eating more scrap, including the post-consumer scrap, than what the can business does.
For automotive and GE, this is a bit more mixed, but there are numbers of applications and products that can be produced using both process scrap and increasingly post-consumer scrap, which also makes these products attractive from a sustainability and from a cost perspective. Litho foil are produced on higher purity metal, typically the prime metal, so they allow for lesser expense of recycled volume, and for that reason also have special kind of challenges. Part of the target with what we're now embarking on is to shift, as you will see, our volumes between these product groups, increasing in can, increasing in automotive, and reducing on all of the others.
Here it's important to understand that without CapEx, which is essentially the caveat for what we're now embarking on, the limiting volume in our portfolio in Germany is the Alunorf rolling mill. We run metal through Alunorf to send them either directly to the customers or via the Grevenbroich finishing lines for further processing. When we shift these volumes, it's essentially keeping volumes as of today, 1 million tons, but that's demonstrated with higher margin products, and as we'll get to in a second, with lower manning cost. As Hilde also mentioned, and as these improvement programs typically go, we have identified three main buckets of improvement levers. The first, where we've also started executing, is on the organizational rightsizing.
We announced two weeks ago that we will let a total of 735 FTEs go compared to the 2018 baseline over the years until 2023. Of those 735, we have identified 586 in the Grevenbroich plant. Grevenbroich currently employing 1,700 people-1,800 people means almost one-third will be going. It's a major effort, and we are working with our works council and unions to find the best possible solutions for this ambition. In addition, as Hilde also mentioned, we will, or we have identified opportunities, roughly 150 FTEs at the other plants, and here too we are embarking on an exercise to find good solutions for these manning reductions.
I should add that of the 735, 117 was working, and partly still is working on our foil conversion line that we announced the closure of last year, which we will finish closing by the end of this year. Already today, people are walking out that door. In total, we have identified a cost reduction potential of up to EUR 60 million per year. As we'll get to, this will be executed as we speak and in the years ahead. In addition, it's been important for me to change some of the mentality in the system and to get some new leaders in place. Middle of July, we announced a new management team with a new operating model, emphasizing more accountability to the bottom line. There are now five individual P&Ls compared to one today.
We've gotten some good talent from the organization, many with entrepreneurial experience, which we believe will also benefit us in terms of driving that agility. Comes the second bucket, operational efficiency. This is a bucket of the usual suspects, so to speak. We have embarked on a large procurement efficiency program which goes across the plant. It's not so much about haggling harder at the bazaar as it is about identifying our opportunities for reducing costs in terms of the necessary quality, how we go to the market, how we run our own stocks, and make versus buy. The second bullet, the lower metal cost, is really not so much about procuring as it is about finding the right mix between prime metal and recycled metal.
Only a few years ago, you know, the typical scrap quality in Europe would be priced at 90%-95% of LME, so the savings weren't necessarily that great. Now, following both increased availability of post-consumer scrap and the Chinese, Indian, other Asian import restrictions, we find scrap much cheaper in the market. This is also, as mentioned, you know, part of why we want to focus more on the recycling-friendly products, because it will allow us to source cheaper material going forward. You have, you know, the more operational efficiency topics, lower scrap rates, higher productivity and the likes, which we will be working on. Ultimately, it's the commercial excellence piece. A lot of this will be related to the product mix, as demonstrated on the previous slide.
Also, you know, we realize that we have something to learn when it comes to how we go to market and how we properly, you know, work with our customers, on the commercial side. We have discussed our program and now living in the Euro economy, we will be labeling this program Robust One Hundred. We like the word robust also as Hilde uses it, because it refers not only to the profitability, which I guess for this group is maybe the most important piece, but also how we want to create safe and good workplaces for our employees going forward. The EUR 100 million translates to NOK 900 million in an improvement program, which will affect the EBIT ultimately. We have identified, or rather projected, the speed of the improvements, where we will see effects already next year.
That comes primarily from the cost reductions. By 2023, we will have reached the full NOK 100 million. Hilde mentions the difficult marketplace, and I think it's fair to say that we too will be depending a bit upon the market to see the improvements flowing through to the bottom line. This has partly to do with our product shifting. We need off-takers for all of the products or the metal we're now shifting. Generally speaking, also from the commercial excellence piece, you know, it's hard to chase better margins in a generally falling market. You all saw the news from Germany yesterday, which aren't necessarily supporting us short term.
I think good news is that the cycles in rolling are usually much shorter, at least from the primary piece where I come from, so this should be feasible within this timeframe. Obviously, we will be reporting to you on a consistent basis on our performance. Further, as Hilde mentioned, we have identified the potential to release roughly EUR 100 million in net operating capital. Now, the rolling business has a long value chain, and Hydro Rolled Products probably among the longer. Some of our slabs will be produced in the Middle East. We get them into Alunorf, where they are pre-produced and semi-produced. They shift to the Grevenbroich setup, where again, it runs through several pieces of equipment and mills before ultimately getting to the customer.
We are quite confident that by better planning, better forecasting, a somewhat simpler product portfolio, and simply better operations of equipment, and not making it necessary to keep stocks at all levels, we will achieve this. It's important to emphasize that this is now solely focusing on the raw material side, so it's really inventories. It's not taking sophisticated and exotic financial instruments to use. It is simply by reducing the metal volumes in the whole value chain. I guess here too, you know, the market isn't necessarily helping as we speak, but within 2020, 2021, we're comfortable that we'll reach this target. Ultimately, as Hilde already gave away, the NOK 900 million in EBIT improvement, the NOK 900 million in operating capital improvement, will send us back to a ROACE level above our cost of capital.
You could question, you know, is this sufficient? Are we happy with this? How would we here compare to our peers? The truth is, we would be comparing roughly to peers. We won't be, you know, outstanding. To me, it also tells us something about the likelihood of us reaching this. I think it's certainly achievable. As Hilde emphasized, there is a strategic review ongoing in parallel. We will be evaluating structural alternatives if we believe those create better owners for Rolled Products. Again, in the meantime, we will be reporting to you on a consistent basis. That was Rolled Products. Hilde?
Einar, you have an important job to do. Let me continue with the launch of the new and ambitious improvement program. I'm happy that we are back in the continuous improvement mode. As a company, I would like to see Hydro standing out in terms of or in the way we work. Capitalizing on our competencies in terms of being in control and capable, in terms of using our innovative experiences, in terms of being even more cost effective, producing at an even lower carbon footprint. I would also like to develop the commercial edge in terms of how we go to market, and how we work with the customers, and how we produce more and more advanced products to more and more advanced customers. This is a way to stay.
I believe this is a way to stay ahead and improve our relative position, and we need to be better than our peers. We are competing in a world championship every day, and we have to be on the podium in each of the businesses that we are in. That is why improvement programs are so important. The improvement program that we launched today of NOK 6.4 consists of many different improvement initiatives throughout all the business areas, and a lot of these initiatives are already ongoing. One example being the portfolio review undertaken now in Extruded Solutions, resulting in some closures and divestment. Focus has been on better capacity as well as capital utilization, taking out costs as well as react to the market volatility.
Of the NOK 6.4, 2.7 relate to bringing back the Brazilian assets at full capacity. The rest is the NOK 3.8 is, as I said, it's improvement initiatives throughout the whole company. It's about operational excellence, it's about fixed cost, it's about digitalization, it's about commercial excellence, and I know Pål will come back to that in his presentation. I'm happy that we have a front-loaded program with the majority of the potentials being realized by 2021. I would be very happy to come back to this audience to follow up on more improvement programs as the years go by, but now we have to focus on realizing as much as we can in the short term of the program.
In addition to the improvement initiatives throughout all the business areas, we are also targeting improvement programs related to staff and support functions, as well as a recent initiative relating to procurement. The procurement initiative, it's the first time in many years that we work across the whole company in terms of procurement. We're looking at improving our procurement practices as well as increased procurement coordination throughout the company. We have identified opportunities in the area of NOK 400 million. We have also identified improvements within the staff and support function in the area of NOK 500 million to be delivered by 2023. This initiative actually started back in 2017. Targeting step changes mainly in finance, IS/IT and HR.
Here we're looking from end to end, from plants to through the business areas at the corporate. Here we aim to reduce manning with 250 FTEs in staff functions at the end of 2023. An important enabler for this is the establishment of what we call the Global Business Services. Taking over a number of the operational tasks within finance, within IS/IT and HR, focusing on standardization, automation, scale, as well as labor arbitrage. We have already established hubs in Hungary as well as India. We have also revised our operating model, giving a stronger mandate to the business areas, allowing for flexible business models. Remember that we are invested in this long value chain, and it's very different to do mining than to operate an extrusion plant in New York.
We are focusing on empowering the business areas to have flexible models to drive their business on the drivers that is important to be the best in class. We have scaled down the corporate center, focusing on the shaping role as well as the safeguarding role. I decided to establish a new separate function in the corporate management board, focus on corporate development, on portfolio development, on strategy, on capital allocation, as well as shaping the sustainability agenda going forward using technology as one of the most important enablers. All in all, these are strong improvement efforts with significant cash flow contributions with a total effect of NOK 7.3 billion if we add up the NOK 6.4 and the effect from the Rolled Products restructuring.
I announced on my first day that I would also be focusing on stricter capital discipline and capital allocation. When it comes to net operating capital, we are targeting to get back the approximately NOK 4 billion we incurred during 2008 due to the Alunorte situation, due to the Rusal sanction, as well as extreme high alumina prices. The majority of these NOK 4 billion we expect to release by the end of this year. On CapEx, we have on the background of our weak earnings, we have looked into our sustaining and growth capital portfolio for 2019 and 2020, and scrutinized where we can reduce. Realizing that we are far into 2019, and 2020 are very close, much of the capital is already committed.
We have reduced the same in CapEx with NOK 1 million for 2019 and 2020, compared to what was communicated to the capital market in November last year. I'm sure that Pål will come back to discuss more about the CapEx, but also the new allocation framework will, over time, result in CapEx focus. All in all, this measure will improve the bottom line and cash generation short-term. They are ambitious, but I believe they are reachable, and it will be my main task to follow up and to make sure that we are able to deliver on the improvement program that we have launched today. As I mentioned at the start with given our strong focus on profitability and the fact that we.
Our return on capital employed has been too low. We have decided to set a clear target on profitability. A target of reaching at least 10% ROACE over the cycle. With every business they are targeting to deliver above their respective cost of capital. All the improvements initiative that I have mentioned will help to close the targets. To help to close to reaching the targets. Depending on how the market develops, it might not be enough. Therefore, we also need to take a closer look at how we allocate our capital and align it with our strategic direction of creating a robust and profitable industry leader. Let me then go into some more details on how we think about the strategic modes of the different business areas and how that corresponds to capital allocation going forward.
As I said, our ambition is to create a robust and profitable industry leader based on innovation and sustainability. This overall strategic direction is the same for all the business areas. The business areas are different by nature. It's about the market dynamics, it's about the competitors, it's about the historical performance, and it's about the outlook. We have translated this overall strategic direction into different strategic modes for the different business areas. Let me now go through the business areas more in details and explain the rationale behind the strategic mode. Let me start with the upstream business areas, Bauxite & Alumina and Primary. Here we have defined the strategic mode to be sustain and improve. That means focusing on improving existing assets and the portfolio that we have, and less on large volumetric growth.
This reflects the history where we have not been able to deliver sufficient returns, and the fact that the development in China has led to depressed prices over quite some time. The outlook for the next years is also highly uncertain, reflecting the geopolitical situation and with low visibility. Going forward, we will therefore be more cautious of allocating growth capital to the upstream business, except for recycling, which we find very interesting, which is part of Primary Metal. We will rather have strong focus on costs, cost improvement programs, as well as getting more out of the assets we already have. In Energy, energy in Hydro is about competitive sourcing of energy, security of supply, and CO2 footprint. Here we have defined selective growth if we see that we can further support a sustainable competitive value chain.
For Rolled Products, I think that is clear with the strategic review that's to be fully explored. Then finally, the strategic mode for Extruded Solutions is selective growth, which refers to both segments as well as geographical interests. Here we see interesting growth opportunities simply by the nature of the extrusion business, which are more local. We work more with the local customers, short lead times, working with product development very close with the customers, and which has also make us less exposed to Chinese export. These strategic modes result in also different differentiated capital allocation. Growth and return-seeking capital will be allocated according to these strategic modes, increasing relative share towards areas with reduced exposures to China and more stable earning profile.
In addition, we will ensure that the allocation of sustaining capital is based on benchmark on affordability, but obviously also about safety, license to operate, as well as operational stability. The newer capital allocation framework will be based on the differentiated cost of capitals in the respective business areas. With less volatility, more stable margins, we operate with lower cost of capitals in the downstream area, as we do in the upstream with higher cost of capital reflecting more volatility and more cyclical by nature. Where does this leave us then? Let me try to visualize a roadmap to profitability. All the improvements that we have announced today refer to 2018. The roadmap should start with 2018. 2018 was an abnormal year for Hydro.
We had a 6% ROACE in a situation where Alunorte was out or embargoed. We saw extreme alumina prices, and also resulting of the [inaudible] sanction. I have to normalize 2018 to a more normal situation. I will use LME $1,900 and PAX price of $330, and a dollar north of eight to the Norwegian Kroner, which gives a ROACE of 4%. For simplistic reasons, I put in the announced improvement programs of the NOK 6.4 and the NOK 900 million from Rolled Products, which brings us close to the ROACE target of 10%. We know that we are in a business of volatility.
If we use today's spot prices, we will not be able to reach our target. If we use the forward curves, we will be close. If we use the CRU assumptions, we will be above our 10% ROACE target over the cycle. To me, this roadmap shows, first of all, that what we can do ourselves has a significant effect on our profitability and on our earnings and the return on capital employed. We must realize that we are heavily exposed to the macro sentiment and to macro market. Reaching a 10% ROACE in today's business environment is difficult. That is why we continuously have to look for improvement.
We have to create that continuous improvement or bring back the continuous improvement culture in Hydro to make sure that we continuously look and are aggressive, in terms of being the best in the industry that we are in. We also have to look now at our new capital allocation framework in order to allocate capital where we see better returns than what we have had in the past. Let me turn to sustainability. My ambition is to lift profitability short-term, medium-term, and long-term. Long-term, we cannot simply be more profitable without being more sustainable. Sustainability is about the foundation of our strategy. It is about our license to operate. At the same time, it is about opportunity to differentiate representing market and business opportunities. Let me walk you through some highlights from our new sustainability strategy. Hydro has a good starting point.
We have had our purpose for 114 years to contribute to a more viable society. Sustainability is in our DNA. For many years, we have been pushing the boundaries in terms of producing with as low carbon footprint as possible. Today, we are among the best in the industry when it comes to the lowest CO2 from the electrolysis process using hydropower. In 2013, we announced a climate strategy which was about being carbon neutral by 2020, meaning that we took the benefits from aluminum in use and included the recycling effects to offset the emissions from the processes. We are about to reach that target this year.
We see high-end customers in automotive, in packaging, in business, in building and construction that are leading the way now, demanding greener aluminum. I'm happy that we just some few weeks ago announced our two green brands, the REDUXA, which is based on primary production using hydropower, where we guarantee that we can deliver a kilo of aluminum with 4 kilo CO2 per produced kilo aluminum. That is one of the lowest in the world based on primary metal. Then we have REDUXA. Then we have CIRCAL, which is based on minimum 75% post-consumer scrap. Two green brands standing out now and also getting traction in the market. We define.
We say that sustainability is the basis for our future positioning, and we have decided to prioritize three areas in our sustainability agenda: social responsibility, environment, and climate. Our sustainability platform will be commercialized through a greener portfolio of aluminum products. Let me start with the social responsibility. Social responsibility is to be a good neighbor in the local environment where we work. It is about building trust in the local community, not through what we are saying, but what we are doing. Brazil was a learning lesson for us. We realized that we have done too little, too late. When the rainfall happened, we didn't have allies. We didn't have the trust among the neighbors, among our neighbors. Now we have to work to reestablish that trust.
I am very happy to see considerable efforts from the Bauxite & Alumina organization that is now put in place, and we now have constructive dialogues with local communities and other key stakeholders on a regular basis, including weekly meetings with the communities and the community leaders. I will go to Brazil on Saturday, and I look forward to meet community representatives in Barcarena. Another example from Brazil is the way we work with supplier development programs. We invite local suppliers, local entrepreneurs for training in administrative issues, in commercial issues, in operational issues to build the society in Barcarena, to give people a chance to get to work and to be employable. Globally, we have an ambition to empower 500,000 people in terms of education and skill training.
The supplier development program in Brazil is a good example, but we also have other examples, like our plants in Norway have summer school for young aspiring scientists. We are supporting a school in India close to our extrusion plant in India, with iPad learning in the classes. This is an important part of being sustainable going forward. It's about environment. We have been working now for the last year updating our environment strategy. Work is still ongoing in this area, but we are focusing on Hydro's key environmental challenges and setting new targets on how to minimize the impact from our operations. As you know, our mining operations are located in the Amazon region. We are part of a global mining industry that is being increasingly scrutinized after several serious incidents. We have to take this very seriously.
It is about rehabilitation of the rainforest after mining and to sustain the biodiversity in these areas. It is about sustainable tailings, and it's about bauxite residue management. On biodiversity, we have a target of a one-to-one rehabilitation of available areas after mining, working locally together with scientists from the University of Pará and the University of Oslo. We are also in the process of exploring more sustainable tailings management practices, and we have several R&D project now looking at how to turn the bauxite residue into a resource, avoiding to put it in deposit but turning it into a resource. Here we have set ourselves a target of utilizing 10% of the bauxite residue after 2020, 2030. In addition, we are focusing on recycling of waste throughout the whole organization. We simply cannot leave anything behind anymore. We are working on water-related risk here.
We have done substantial improvements when it comes to water management in Brazil with the water basins as well as the water management treatment systems, and we're also working on air emissions. On air emissions, we have an ambition to reduce non-greenhouse gases emissions, it's SOx and NOx, to air by 50% by 2030. As I said, we will achieve our previous climate target, the carbon, being carbon neutral, this year. Now we have to set ourselves a new and bolder targets for reducing our CO2 emissions. Now we focus on our own emissions, and we have set a target to cut CO2 by 30% by 2030.
We have identified a total range of initiatives in the value chain from greener sourcing through greener production, and then hopefully bringing the low footprint material into greener products. Greener sourcing is about how we source all the materials that we need to use in our operations. It's about energy, obviously, but it's also about all the other raw materials and supplies that we need, increasing the awareness of what we buy and how it is produced. Greener production is obviously about reducing the carbon footprint from the process. Here we have the Karmøy technology pilot, which has the lowest energy consumption in the world with the lowest climate footprint.
I expect that we will see spin-offs from the Karmøy technology pilot into this metal portfolio we have. As I said, when we are working with our own emissions, we can also commercialize this in more and more Greener brands. How are we going to get there with a 30% reduction? One important enabler is to change the energy mix in Alunorte. First, we're talking about a fuel switch project, which will take out the heavy oil from the calciners and remove that or to replace that with gas. This will reduce the CO2 emissions from Alunorte by 600,000 tons by 2025, which will be a major contributor to a reduction of 10% by 2025.
The next step in the project in Alunorte is to switch from coal, boilers to renewable power. Reducing CO2 emissions by 2 million tons of CO2 by 2030. The first project, the Fuel Switch project, is well underway and has a positive business case. But we need to go further than that. We have to look beyond 2030 towards 2050 to explore different paths towards a zero carbon process. In Hydro, right now we are focusing on our efforts in three areas, carbon capture, the CO2 from the fuel gases, it's about biomass anodes, and it's about looking into a carbon free process. The climate strategy is closely linked to the development of our Greener brands.
Here you see when we talk about REDUXA 4.0 , this is CO2, this is 4 kil CO2 to produce 1 kilo aluminum. The composition of this 4.0, we see from this chart, from the bauxite through the refineries, through the power generation to the smelting and the cast house. It's a composition of all the CO2 that is emitted to produce that kilo of aluminum. This we also have certified by a third party when we stamp the REDUXA 4.0 . When we are now talking about reducing our CO2 emissions with 30%, changing the energy mix in Alunorte, that will be a great help to get further down from 4 to 2. We also need to succeed when it comes to reducing the CO2 from the smelting process.
Then we also need to see how we can use more post-consumer scrap in the cast houses rather than buying cold metal or standard ingot. Once we are successful with this, we should be able to reduce REDUXA 4.0 to REDUXA 2.0, which means that we can be even better positioned in the future low carbon society. Greener brand is not only about low carbon REDUXA from the primary. It's about how we can turn post-consumer scrap back in the aluminum loop. We are targeting to grow in recycling of post-consumer scrap. Because as Einar said, more and more metal is coming back after use. This is a good business case, and it's also an important part of our greener offering and differentiator in terms of other materials.
Our recycling efforts are based on our capabilities in terms of sorting and shredding technology, as well as our alloying expertise, in order to be able to turn that scrap into a good metal. One such example is the CIRCAL brand, which I said is based on minimum 75% post-consumer scrap. Now, Hydro Building Systems in extrusion currently offers building solutions based on alloy with this minimum 75% post-consumer recycled metal. I would like to invite Egil Hogna, the VP for Extruded Solutions, because he will now tell you more about the demand for Greener brands and how we work together with the customers to expand this market. Before Egil comes to the stage, let's start with a short video from Økern Portal, a very interesting building system project here in Oslo.
On Økern Portal, the whole project follows a degree of circular economy. The load-bearing system can be dismantled and reused, and the facades can be dismantled and reused.
Sustainability for us as architects is very important. We work, after all, in an industry that leaves large footprints in the city, in the landscape, and we care a lot about leaving a positive impact after us. There has been a greater and greater focus on sustainability in the industry, and we notice that there is a demand for it when we design for our customers. There is also an increasing awareness among the end users, the tenants here, about sustainability. Among them is Telia, which is the first major tenant in this project. They have set a requirement that this building must be BREEAM Excellent certified.
This certification, the environmental certification we are talking about, it sets requirements for all the materials that are used. From facade plates to surfaces inside, sustainability is important. It is a very large facade that is to be built here, and the facade plates are an important part of that. There was a lot of discussion throughout the project about how the facade design should be, and we were very happy when we found out that we could have recycled aluminum in the facade, so that the sustainability perspective is also taken care of there.
CIRCAL 75R is the world's first aluminum alloy that is based on at least 75% post-consumer scrap. That is, aluminum that has been used before, reached the end of its life, and then we reuse it. So far, only we have managed to do that.
Product we began to sell just over a half year ago. We have so far sold it to 15 large façade projects and many small, and we see that as the market becomes aware that this option exists, demand is growing very quickly. This is currently our fastest growing product, and we hope that more and more people will discover this environmentally friendly alternative.
Two years ago, Sapa became part of Hydro. Shortly after, we had a capital markets day, and that was when the two new environmentally friendly alloys were launched. At that time, called 4.0, today REDUXA, and 75R, today CIRCAL. During the first year after that launch, we spent extensive time verifying the product properties, corrosion resistance, surface appearance, and endurance of those products. Because we wanted to make sure that for our customers, they should get products that were at least as good as existing alloys, in addition to being more environmentally friendly. We started selling them more or less one year from now. The video is recorded a little bit, a few months back in time. We were curious when we started marketing these products. Would there be a demand?
Would customers and consumers care if their aluminum had been produced in an environmentally friendly way or not? We started by educating both ourselves, our suppliers, and our customers about what matters. We started with the life cycle emission perspective, because it's not only how the aluminum is produced which counts. It's also how long it lives before it is recycled, and it is about how you maintain it. Aluminum, for example, has very good corrosion properties. Compared to, for example, wood or plastic, both maintenance costs and emissions are much lower, and it lives for much longer. A key point is also the fact that you cannot only recycle scrap and produce aluminum, because there isn't that much scrap available. Two-thirds to three-quarters of all aluminum ever produced is still in use, actually.
That means that we still need to produce primary aluminum or virgin aluminum, and that has to be done in the most environmentally friendly way. That is where REDUXA comes into place, which is hydropower-based aluminum with a carbon footprint, which is approximately 20% of coal-based aluminum. It's a huge difference. REDUXA has 80% lower carbon footprint than what coal-based aluminum has. However, the best in terms of environmental footprint is CIRCAL. That's based on minimum 75% post-consumer recycled metal. That alloy has about 10% the carbon footprint of coal-based aluminum, 1.5 kgs-2.3 kgs of CO2 per kg of aluminum. When you combine that with a very long life, very low maintenance cost and emissions during the lifetime of the aluminum, it's a clearly superior product for facades of buildings.
That is where we started launching these alloys, because this is where we historically have seen some of the greatest environmental consciousness, and we wanted to give our customers a choice, so they could choose to buy this kind of alloy with a much lower carbon footprint. We then worked together with architects and designers to make sure these products are also designed for recycling. That means that they are designed to be easy to disassemble at the end of their lifetime. The problem is, if you attach many different types of material and they are difficult to detach, it becomes both costly and difficult to recycle at the end of life. Therefore, you need to start thinking about the recycling when you design the initial product. The final and very important part of our educational work is to incentivize recycling.
In Norway, for example, we have a great deposit scheme for cans. That system, which is managed by an organization called Infinitum, and all of the cans in Norway are recycled at our Rolled Products plant in Holmestrand, ensures that 95% all cans in Norway are recycled. That's great, but in some countries that percentage is down to only 50% when there are no good deposit schemes in place. It's living proof that incentivizing recycling helps. It's both about positive incentives and also taxes for material which are produced in a not environmentally friendly way. Based on this educational work, we have also been investing in greener production. Our Aluminium Metal has established production of this alloy in Germany and Luxembourg.
The large scrap sorting facility in Germany, production of the billets in Luxembourg, and then we extrude them into profiles for building systems, both in Germany, in Spain, and several other places. We then assemble together with our customers locally. Finally, we work hard to differentiate these products to, again, give customers a choice. That is why we have introduced the brands. Because what we realized was that many customers and consumers, they don't know the difference between different types of aluminum. They don't know, and you cannot actually see it on the metal if it has been produced based on coal, or based on hydropower, or based on recycled metal. We think this is a crucial step, because it does require investments to establish more production in order to produce more environmentally friendly alloys and products.
It is when we succeed in differentiating these products, and today we do, we actually get a premium for these products, a premium which gives a good and decent profitability, both to our primary metal division producing the alloy, and to building systems producing the facades, doors, and windows based on this. That is when we get this virtuous circle, where a new technology for producing greener products leads to an initial investment in greener production, and then we in the downstream part of Hydro, we put greener products on the market. When we are then able to stimulate demand, and we see that people are willing to buy these products and pay a reasonable premium for them, that is when we are also able to get the financing in order to continue research into even more environmentally friendly technologies and more production, and so on.
This year, we are sold out for this alloy. We are selling everything we get from primary metal. Next year, primary metal will more than double its capacity in this area. They are currently in the process of establishing production capacity in Spain. We believe that we can at least double again our consumption, our demand in only the building systems area, again, on that over the next three years. This is only the beginning, because we're also working with car manufacturers, for example, in order to establish similar schemes where they are able to get our aluminum into their car as part of their differentiation of their products. We are in the starting blocks right now.
We have the demand, and we are getting good premiums, but we need to continue to build capacity and to educate the market to further stimulate the demand. Thank you.
Thank you, Egil. It's a good example of how we can commercialize our sustainability agenda. Oops. Let me turn to our strategic priorities. I've talked about profitability, I've talked about sustainability, and now let's try to turn this into our strategic priorities going forward. Now I have to start with the metal. We believe in the metal, and we believe in the aluminum going forward. Simply because of the characteristics of aluminum, we see continued growth across main segments and in all regions.
Segment growth is expected, as we see on this chart, remains healthy and above GDP level, also supported by growing demand for low carbon products, including the recycled metal that Egil just talked about, as well as substitution in segments such as automotive and packaging. Light weighting of cars favors aluminum, and we now see that also aluminum cans are increasingly favored compared to plastic alternatives. We expect the chemical demand to grow by 2%-3% per year over the next 5 years. These growth rates will require more primary metal.
We expect 2% growth, but then more and more of recycled material simply because more metal is coming back, and recycled material will increase its share of the metal supply, and we expect a 3%-4% growth rate for the next five years in terms of recycled material. I would like to comment that these growth number are somewhat lower than what we have previously communicated, simply because it reflects a weaker 2019 and 2020 market. Talking about the market, we believe in the long-term growth for aluminum. However. In the short term, we are concerned about the macro outlook, and the effect for us on aluminum demand. We have recently updated our global supply-demand balances for 2019 and for 2020.
The main changes for 2019 compared to what we talked about at our Q2 release is that the world ex-China, which is the green bar, has been reduced based on a downgrading of demand from estimated in Q2 0%-1% growth to -1% to 2%. In all regions, and we see in Europe, it's particularly Germany. While we see that China has turned into the deficit, simply because we have seen some disruption in three big plants in China, which has resulted in a deficit in China for 2019 as we see it.
In essence, we still see a deficit in 2019, but it is trending towards a lower deficit than what we have seen in the past. For 2020, we see a more or less balanced global market, supply-demand balance, for next year. That is a new situation where we have seen a deficit over many years. World ex-China, we see demand continues to be weak in 2020, but we also see a stronger supply growth simply because we see the full year effect of Alba, of Bécancour, as well as our own Albras. China, we expect to be more or less in balance, which makes up the statement of more or less balanced, for the next year.
On the right-hand side, we see the inventory levels that we have followed all the way since the financial crisis. After the huge metal buildup, we have seen that inventories has coming down. But even though inventory levels are coming down, we see that metal is available in the market. So the main sort of question here is how will the demand develop in the world ex-China? How will China develop in terms of demand and also in terms of export? Then it's about will there be more restarts or will we see closures in the situation we see now? That is the territory we are working in. That is why we need to address these immediate challenges and maneuver in the market we have now with strong measures while positioning for the future.
Let me translate this into our strategic priorities. First of all, it's about safe and responsible operations the Hydro way. That's always at the top of our priorities. It's about cost. It's about cost-competitive assets throughout the value chain. For the upstream part, it's to be in the best part of the cost curve. Q1 in the Bauxite & Alumina, second quartile in primary metal. It means cost efficiency throughout the whole organization, and that is why to deliver on the immediate improvement programs now is very important to become more robust also in this situation we see right now. It's about strong market positions.
Even in difficult times, it's important to work very closely with customers to really make sure that we get the volumes, that we are the preferred supplier to work with the customers in terms of innovative solutions, in the main segments as well as particularly focus on the growth segments, as well as further exploring substitution opportunities like we see now, in the can market. Then it's about differentiating on our sustainable footprint. As we have talked about, it being innovative in how we go to market with the new brands and how we continuously work to commercialize on our more and more lower footprint, meaning also that we intend to increase our production of using post-consumer scrap. These are strategic priorities, which is very much in the area where we can influence.
In difficult times, I have realized at least that then we cannot do anything with the sort of the turmoil in, with the trade tensions, but we can work on what we can influence, and that is why these are the strategic priorities. It's about cost. It's about how we go to market with our advanced products. It's also now more and more also how we can commercialize our low footprint from the production phase. In terms of strategic objective, where does this take us in a sort of a five-year perspective, obviously driving shareholder value? When it comes to profitability, the improvement program, I sincerely hope that can make us more robust. The new capital allocation framework will over time contribute towards a more, a portfolio or more stable earnings profile.
We also need to have an active portfolio management to support that. We aim to reduce our direct exposure to China, in particular in the upstream, as I talked about in the strategic mode discussion, and more also in the areas where we are fighting head to head in more commodities, like Einar was talking about in the foil business. We will develop our downstream positions, our customer base with innovative capabilities and greener material being a competitive force. I believe that the 10% ROACE target over the cycle should drive our behavior towards a more robust portfolio. As I said, to start with allocating capital towards areas with better returns than in the past and also to avoid allocating capital in areas where return is insufficient.
In terms of sustainability, when we look back from 2023, I sincerely hope that we have been successfully able to differentiate ourselves in the marketplace through sustainable products and solutions, and innovative solutions in close cooperation with our customers. The ambition to reduce CO2 with 30% by 2030 is a key enabler for our greener products. To be able to deliver on this, we need to be focused on our strategic direction of becoming more robust, more profitable, with a more active portfolio management, and to use our new capital framework for capital differentiation through the business areas.
With a clear and firm target on profitability, to reach a ROACE at least 10% over the cycle, and to cut CO2 emissions by 30% by 2030, we will create a more robust and profitable company. A robust and profitable industry leader built on innovation and sustainability. I truly believe that we have what it takes to achieve our ambitions. With that, thank you for the attention.
Thank you, Hilde. If you could please come back on stage for a Q&A session.Pål , Egil, and Einar, if you could please join us as well. We have a few microphones around here. Let us know if you have a question. Please wait for the microphone before you ask the question, so the ones on webcast can hear us as well. Also, please state your name and the company you work for.
Hi it's Daniel Major from UBS. Couple of questions. Just first, to be clear on your comments around bringing unit costs or costs back down to 2017 levels. You talk about fixed costs. If we look at the variable element to that across the bauxite and alumina and primary aluminum business, would it be fair to assume that those inputs are broadly similar to achieving the unit cost levels seen in 2017? Would that be fair? About $1,730 on primary aluminum and $240-$250 in bauxite and alumina.
I think Pål will come back to that in his session later today, and we can perhaps-
No, in large terms, that is okay to expect. If you look at the main cost materials for primary metal, we now see alumina prices around $300, which is below what we saw at the tail end of 2017. Coke prices have been on the way down, and also alloy material, et cetera, have started coming down from the higher levels observed earlier. In addition, we are seeing quite good currency tailwinds on fixed costs, both Norwegian and Brazilian assets. For primary, we should be at, if not even lower, if this currency environment continues. On Bauxite & Alumina, this is very much dependent on the pace of production.
We will not be at those levels before we have production up towards full capacity at Alunorte. Paragominas, we expect to be closer to that level at the end of this year, much helped by the BRL exposure and the large fixed cost base.
Very good, thank you. Just second question on the NOK 0.9 billion target on Rolled Products. What sort of underlying growth rates in demand for products in the market are assumed within those numbers?
Einar, will you comment on that?
We haven't necessarily assumed any particular growth rate in the market. We are assuming the same volume on our side, but shifting between the different products. Any kind of volume growth on our side would come in addition, if you like, to the NOK 900 million.
Okay, maybe it's a slightly different way. In the segments you're hoping to gain market share in, are you hoping to gain market share from your competitors? Or will organic growth in the markets be sufficient on your estimates for you to allow to shift that product mix?
In the can business, we're clearly seeing growth in the market and will participate in that growth. On automotive in this period of time, we're also seeing growth, which as mentioned by 2023, should allow us to place those volumes without increasing any particular market share.
Great. Thank you.
Sandeep?
Sandeep Deshpande from J.P. Morgan. I have a couple of questions. First one on Bauxite & Alumina. To reach a nameplate capacity of 6.4 million tons, do you need additional press filter apart from the 9 press filters that have already been commissioned or are in the phase of commissioning?
Secondly, what will be the CapEx involved for the ninth press filter? If there is an additional press filter that is planned.
We do not plan to install a tenth press filter. We will base it on the ninth press filter. When it comes to the cost of the ninth press filter, I think we have already communicated that.
BRL 1 billion.
Yeah. One for the total.
For the total. It's already included in the CapEx, which has been guided on earlier.
Okay, thank you. One additional question. For the improvement program, are you assuming any additional volumes coming from bauxite or alumina, or this is just based on 6.4 million tons?
6.3 million tons is the
6.3.
Is the capacity that we are targeting?
Okay, thank you.
Anne Gjoen , Handelsbanken Capital Markets. I wonder if this targeted profitability 10%, 13%, if you could also say something more about kind of your other assumptions in addition to the aluminum price, like the PAX price and the dollar and other costs. Also if you could elaborate a little bit about the market balance, market situation, how you see it nowadays in bauxite and alumina and what the Chinese is doing, for example.
I think when it comes to your first question, Pål will go into more details in his presentation. If you can keep that question on until that session. When it comes to the bauxite, alumina and the alumina market, we see that market now is more or less in balance. I mean, we saw the peaks in the turmoil of the Alunorte situation and also with the Rusal sanction, which now has normalized. China is now in an import situation compared to what we had, what we saw in the turmoil. We see that the alumina market is, as I say, in balance.
We have also seen that cost has come down on caustic soda and other imports. It's supporting the price level we see now.
Just to supplement, Anne, if you look at page 76 in the presentation, it has the various LME, currency and PAX assumptions used for the four different scenarios.
Thank you.
In the first row. I thought there was an advantage of sitting in the first row.
I thought so too. Yeah. Hans- Erik Jacobsen, Nordea. You said you're going to have a more active portfolio management. Have you considered reducing the long position within Bauxite & Alumina? Obviously, there's a lot of capacity that you are not going to use for the foreseeable future.
Well, what I've been focusing now up to now is to take some strong measures to improve the robustness. As I've been saying, we will focus on our capital allocation forward. We will focus on our portfolio as such going forward. That is not something I will comment on now.
Thanks.
Morning, it's Liam Fitzpatrick from Deutsche Bank. Just one question on Rolled Products. Why have you not made bigger cuts? I mean, based on your improvement targets, if you hit them, you'll just about cover the cost of capital. Why is this a business that you want to stay in? Thank you.
Einar, will you comment on that?
Well, I think in terms of bigger cuts, we're believing that what we're now targeting is really getting the most out of our current asset portfolio. When we aim at reducing FTEs by 735, I think that's already a fairly ambitious target, which we will meet, but is nonetheless, you know, in the range where we're then, you know, at benchmark really when it comes to lean operations. I think if you compare us to the wide portfolio of peers, I mean, there is still something around the product mix that could be further improved, but that's not within the current CapEx picture that we're seeing. As of now, as presented, this, you know, these targets are without any particular CapEx investments, so any further improvements would be kind of in the next phase.
Eivind Lysaker, DNB Markets. Just a question on CapEx. Historically, we had around NOK 8 billion in CapEx per year. Now you're guiding all the way down to 2023, NOK 9.5 billion-NOK 10 billion. How does that fit in with your previous communication of being very capital disciplined? Also a question on the roughly NOK 3 billion above sustaining CapEx. Should we expect some return on capital on that on top of your guided improvements, or is that included? Thank you.
Will you comment on the CapEx, Pål?
No, I think if you look at our historical CapEx profile, then you have seen an increase in line also with an increase in activities. We have some increased volumes, we have some new assets, et cetera. You also have seen inflation over the same period. If you look at compared to what you've seen in the latter years, then this is the first time in some years where we have not increased the levels. We have looked within our power CapEx portfolio, and especially focused on sustaining CapEx to see if it's possible to get some out in the short term, while we also plan to see if we can get more out in the longer term.
This is really the sustaining CapEx level that we're comfortable running at in 2019 and 2020, given safety, asset integrity, et cetera. The absolute CapEx level is a bit higher than what we've had as a total level earlier, because there's quite a bit of return-seeking investments in there also. This is visualizing the investments which are necessary to take out the improvements in order to lift the profitability across our operations. Tying this to capital allocation and capital discipline, for me and for us, that is not just about the total level of CapEx. It's about where we spend our CapEx and what assumptions we use when planning for longer term investments.
If you look at our CapEx spending over the latter years, there's been a lot of good smaller investments, but there's been some bigger investments which have been based on margin assumptions, which have turned out to be a bit lower than we and the industry expected due to the emergence of China as a large player on the primary side. Going forward, capital discipline for us is also about where we allocate capital, where we have seen good profitability on investments. It's about business areas earning the right to grow, and it's also about the hurdle rates that we use. If you look within a typical business area, you have a cost of capital. We have a hurdle rate which comes on top of that, which is higher.
We have differentiated hurdle rates given the different risks of investments that you have within a portfolio. Capital allocation is about the total level, but it's also about the specific projects. We believe that the projects that amount to the NOK 3 billion or so in return-seeking capital should provide the returns well above our hurdle rates. These investments that come on top of sustaining CapEx, they are what is included to deliver on the improvement program. Additional improvements on top of that should not be expected from the current CapEx.
Good. We have time for one more question. Jatinder over there.
Morning. Jatinder Goel from Exane BNP Paribas. Three questions if I may. First, on Rolled Products product review, what's your timeline for the final conclusion? Because you're still conducting it. Do you think inorganic expansion is a way out to high grade the portfolio further, or would you look at more reduction and reallocation within your current 1 million ton capacity? Second question, just on your previous production ambitions. You have talked about 7 million tons of alumina and also maybe 250,000 tons of aluminum. I don't see it anywhere in the pipeline. Is that because of the market being in surplus, or is there a return on capital equation which doesn't work for you on CapEx, et cetera?
The final one, for the current improvement program, what's the investment required, and is that part of the total CapEx guidance that you look for, 2019-2023 time period? Thank you.
I think the first question was about the Rolled Products. Then it was the 7 million tons of alumina. If I can comment on that. You heard I talked about the strategic move. We do not see that we will allocate a growth capital to volumetric growth in Bauxite & Alumina, neither in primary, with the visibility we have now.
Should I respond to Rolled Products? Your question is how long we will continue to evaluate strategic opportunities or the strategic review. I think that will take whatever time it takes. Hilde's already promoted, you know, portfolio management. Pål emphasizes that we need to earn our right to grow. I don't think there is any particular end to that. On the inorganic growth opportunities, there are clearly options out there that, again, leaving to the CFO and his very clear mandate. I think right now we will be focusing on fixing our own shop before actively seeking inorganic growth.
Jatinder, on the last point, when you look at the improvements which have been identified now, the 6.4 + 0.9, then all CapEx required is in the guidance that we announced today. Basically, the return seeking and growth CapEx is purely allocated to those improvement programs, in addition to some CapEx allocated for the fuel switch project because that is necessary to deliver on a 30% CO2 reduction target.
Can you put a number?
Wait, yes.
Sorry.
Sorry.
Can you put a number around the total improvement target, the amount of total investment required over this five-year time period?
We have allocated around NOK 10-11 billion in CapEx related to improvements.
Great. Thank you.
That also includes the Husnes restart, which is part of the improvement program, which is quite a large project. The rest are more smaller and spread investments.
Great. Thank you.
Very good. We will leave for a 15-20 minute break. You should aim to be back here at around 10 o'clock. Thank you.
Welcome back to the second and last session of today with a presentation from our CFO, Pål Kildemo, focusing on our financial priorities, our new capital allocation framework, as well as presenting the roadmaps to profitability. Please, Pål, the stage is yours.
Good morning, everybody. It's a true pleasure to be working with so many familiar faces again from the investor and analyst space. It's a special big pleasure to be doing that with Hydro's new agenda that Hilde has just been through. I will present the profitability part of Hilde's agenda, including our financial targets and ambitions going forward. As the title of my presentation suggests, we are focusing on improving our cash flow generation capabilities, lifting it, as well as improving and lifting returns. Let me start by introducing a framework that I will explain throughout my presentation today. Hydro are committed to creating long-term value for our shareholders.
In the shorter term, this means lifting cash flow by addressing the challenges we have been through in the last few years. If we have the 2023 horizon in sight, then we are launching a new and ambitious improvement program. We are looking for ways to optimize our capital spend, especially on the sustaining part, and we are working hard to release net operating capital, as well as the comprehensive restructuring of Rolled Products. Longer term, in order to be a preferred investment and deliver shareholder returns according to your expectations, we need to improve the potential for delivering on those returns. We believe that we can do that by focusing on four key priorities. We will focus on maintaining our financial strength and delivering a robust shareholder payout.
In addition, we have spent some time over the summer to update our capital allocation framework and develop clear roadmaps for Hydro, but also for each and every business area on how to get to targeted profitability levels. You, as myself and the rest of Hydro, are all very aware that our financial performance has deteriorated since 2017. Alunorte hit us, the cyberattack hit us, and at the same time, the aluminum industry is feeling the macro and market outlook uncertainty. As a result of this, earnings, cash flow, net debt, and also returns have weakened. The measures that we have introduced today are all measures that we hope will improve each and every one of these metrics going forward. NOK 6.4 billion was measured in improvement ambitions.
NOK 1 billion in sustaining CapEx is freed up in the years 2019 and 2020. These are years where a lot of big projects have been allocated already. What gets taken out is quite a large share of the unallocated, sustaining capital. We will also reduce operating capital days by 12 days towards the end of 2020, compared to what we have at the end of 2018. The restructuring efforts will deliver NOK 900 million from Rolled Products. This in total is NOK 7.3 billion in EBIT effects and NOK 5 billion in operating and CapEx effects. When it comes to making improvements which impacts the return part of the ROACE equation, then we have many interesting initiatives to share with you today.
Over the years, Hydro's improvement culture has been an important tool to strengthen the relative position in our industry, and also an important tool to lift earnings. The whole of the Hydro organization are disappointed that we were not able to deliver on the previous NOK 3 billion better improvement programs due to the forced curtailments of Alunorte, Paragominas, and Albras. It is therefore an organization today which is more motivated than ever to ensure that we're able to come back and deliver on our promises to the markets. This NOK 6.4 billion consists of very different items across the value chain. It is important for you to know that these improvements are also based on margins for some parts of our operations.
In order to have a somewhat conservative margin to guide on improvements, we have used the LME price from the last three years of around $1,900, a PAX of 17%, and a NOK to the USD of 8.1. If margins become better than this, then our improvements are worth more. If margins are worse, our improvements are worth less. If you look at current market prices today with the LME to NOK to alumina, then this improvement program is worth a bit less than what we see in the market today in NOK terms and a bit more in dollar terms. The improvement program consists of three main categories. You have curtailment reversals, which is getting back to where we were before we had the embargo, with embargo-related effects.
We have upstream and centralized initiatives, and we also have downstream and energy initiatives. If we look a bit closer at what is driving the improvements in each of the business area, and starting with Bauxite & Alumina, then since Alunorte is already a very efficient refinery in terms of fixed cost when it is at full production, most of the improvement potential for Alunorte comes from increasing production and optimizing consumption factors. Our first task is, of course, to reverse the curtailment effects and getting Alunorte back up to 5.5 million tons in the first instance, and then gradually moving up to 6.3 million tons. Further production towards nameplate capacity will be driven by press filter commissioning and performance optimization.
While consumption factors includes optimized energy mix at the refinery, as well as higher caustic soda recovery in the press filtration process. These improvements on top of the embargo reversal will contribute with another NOK 700 million, adding to the NOK 2.7 billion. In Primary Metal, reversing Albras curtailment and optimizing operational parameters in our smelters is first priority. Improvements of NOK 900 million on top of the NOK 0.7 billion in curtailment reversal will be driven by some production creep through debottlenecking and spin-offs from the Karmøy technology pilot. It will be driven by process digitalization and automation, as well as raw material optimization and improvements in our cast houses. The Husnes smelter and upgrade, which is taking place next year is also included with around NOK 300 million. As the smelter now comes back with improved operational parameters using spin-offs from the Karmøy technology pilot.
If we move to Extruded Solutions, then around NOK 1 billion is expected to be delivered in net EBIT improvements over the next years. The extruded improvement program is a bit different than the upstream improvement programs because here you are not as exposed to fluctuations in raw material prices and LME prices. Here you have a net EBIT improvement, whereas upstreams, you are more focusing on the elements that you can impact yourself. Extruded will continue their strategy of value over volume and selective growth with improved focus also on production and SG&A costs going forward. The new contributor into our improvement program is energy. Here we have a net EBIT improvement program when we exclude the net spot sales of the energy operations.
This is mainly driven by wind and renewable projects, in addition to some investments we've already done into battery and storage capacity, like the Corvus project that you've probably heard of. Just as our upstream operations should be Q1, we need to push for Q1 performance in our staff functions. I am therefore very pleased that we have NOK 0.9 billion coming from centralized initiatives with around NOK 500 million of that driven by lower overhead costs with 90+ initiatives across the staff functions in Hydro. This goes all the way from plant to corporate. In addition, NOK 400 million is delivered from new procurement initiatives, a very exciting project where we're looking at procurement across business units, but also business areas to ensure that we're able to get our procurement costs down.
Both the staff function Fit for Future project and the procurement initiatives is something I will be following very closely in my new role going forward. We've had a lot of questions on production costs, and I answered some of them, in the Q&A, but I'll try and go out a bit more into detail here. Because many of you are wondering if you're able to get down to the production costs that we had in Q4 2017, which was the last quarter before we had the embargo. On the charts here, we are showing index cost developments for Alunorte, Paragominas, and Primary Metal in total.
Please note that this is not the implied cost that we report on a quarterly basis because the implied cost is an EBITDA cost, and it includes elements like sourcing of alumina and bauxite and alumina and sales of power from Albras in Primary Metal, for example. This is cash cost or business operating costs. The development in all of these areas since Q4 2017 has been impacted by lower production levels, both in bauxite and alumina, as well as in Primary, in addition to increased raw material cost pressure. If we start with Primary Metal and look into the H2 of 2019, based on what we're seeing in the market now, then we expect costs to drive down towards those levels.
That is around $150 or so dollars compared to what we saw in the Q2. As you know, a lot of the raw material prices are under pressure now. If that continues to go down, we could see additional improvements in the cost base. Cash costs in Paragominas in H2 of 2019, we are already expecting to be below where we were in Q4 2017, but that is much related to the BRL depreciating due to the very high fixed cost base in Paragominas, around 65%-70%, which is BRL denominated, in addition to production coming back up.
It is just Alunorte which are not back towards their Q4 2017 cost levels at the end of this year, and that is due to production levels not being back at 100%. We still expect the scale effects to come as we ramp up production. In case it was unclear earlier today, we expect to be at 6.3 million tons towards the end of 2020. When we start 2021, we should be running at 6.3 million tons. Once the ramp-up is complete for Alunorte, there are no structural changes in our portfolio which should indicate that we should not be able to be back at the cost levels which we have observed earlier.
If anything, there is an upside in terms of lower costs driven by the fact that raw material prices are coming down. The cost level is also very important for our downstream operations, including Extruded Solutions. While net added value per kilo has been improving over time, reflecting the successful value over volume strategy, we have seen some decline in EBIT per kilo in the last 12 months, which of course also includes all cost elements. This is partly driven by the cyberattack, where we have around 500 million or 450 million-500 million of costs in Extruded Solutions. It has also driven by somewhat higher SG&A costs and looking at variable costs, these are also somewhat higher.
As market uncertainty is increasing and we are starting to see some signs of weakening in some of our market segments, then in addition to growing margins, we need to increase focus on streamlining our operations to increase efficiency and reduce costs also in Extruded Solutions. To ensure we focus more on that and that you can have the same focus as we have, we are introducing an alternative performance measure, which is direct contribution, which is defined as a net added value minus process variable costs and direct labor. It takes into account the variable and direct fixed costs for production in Extruded Solutions. Extruded Solutions are working very hard to review and optimize the large asset portfolio to identify ways of improving and simplifying to reduce costs.
There have been several plants already closed or divested throughout Europe and the US, and in most cases, these volumes are being transferred to other facilities. This also leads to large manning reductions. We have seen large manning reductions in Rolled Products, but also in Extruded Solutions. These figures are around 1,000 employees-1,200 employees based on what we've announced so far. More efforts to restructure and reduce costs are being looked into, including an ambitious effort to take down SG&A costs, which we will come back to at a later stage. As Hilde mentioned, there are costs related to these restructurings. We have taken NOK 228 million in the Q2, and we expect around the same total amount spread across the Q3 and Q4 also.
If we go ahead with these planned restructurings, the net EBIT benefit from these efforts should be around NOK 300 million for the Extruded Solutions operations. This is one of the efforts supporting the NOK 1 billion improvement target that we have in Extruded Solutions. If we then move to the bottom part of the ROACE equation, which is capital employed, then we are increasing focus on cash. In such an environment, optimizing net operating capital is one of our key priorities. 2018 was a very special year for Hydro when it comes to operating capital. We had NOC days increasing from 53 to 64, and that was mainly due to the Alunorte situation, but also geopolitical market uncertainty, including the Rusal sanctions.
In such an environment, the key priority for us was to ensure continuity in our operations and ensure we didn't run out of alumina or metal in order to support our production. A normal situation would be more focused on having the lowest inventories possible, and that is what we are focusing now, as most of the external efforts have now returned more to normal. Part of this NOK build has also been driven by inefficiencies in the Rolled Products business area. As Eivind mentioned, Einar mentioned, we have NOK 900 million in operating capital, which is supposed to only come out of Rolled Products. Seven hundred of this will be delivered already by 2020, but that is included in the figures that you see here.
For those who follow us just tightly, you've already seen a positive trend in the operating capital for the first six months of this year, and it should continue as we move forward into 2019 and 2020. As a disclaimer, I would like to say that as the markets now are becoming more challenging, we and our suppliers and our customers are working to free up capital all through our value chains in order to safeguard cash flows. We need to work extra hard in the next couple of months to ensure that we release this, but that we will do. There's been a lot of focus on CapEx today, also both here and in reports which have been distributed among analysts and investors.
Optimizing CapEx and prioritizing projects is a top priority for us, and it is a top priority for the finance and performance functions. If we compare our updated CapEx to what we said at the Capital Markets Day in 2018, we see that the NOK 20 billion level is around the range that we indicated last year of around NOK 18.5 billion-NOK 20 billion, somewhat at the higher side, driven by new return-seeking projects. We have been working hard to get sustaining CapEx NOK 1 billion lower for the 2019 and 2020 period. This is still while maintaining the integrity of our assets, but it's looking at different ways we can do things and seeing if there are some things which can be postponed while we're looking at maybe more CapEx-friendly initiatives.
Going forward, as I will come back to in our capital allocation framework, we will work hard to see if there are some other levers we can pull on to run our operations at a lower sustaining level going forward. If we look at the longer term, we have targeted around NOK 9.5 billion-NOK 10 billion in total CapEx needs. You have to remember that these figures are nominal. Given normal inflation, you should expect a small increase every year, all else equal. Of this, around NOK 7 billion is sustaining CapEx, which is stable in real terms from what we have communicated earlier. Please also note that sustaining CapEx at NOK 7 billion is still below our targeted depreciation of around NOK 8 billion in the years to come.
I also think it's important to stress and underline that the return-seeking CapEx that you see here is really what we need in order to deliver on the improvement efforts. When we sit and evaluate CapEx, we evaluate it from what are our alternatives to spend it on. We believe that the profitability in these improvement measures, which are less and less for some parts of it relevant, on the margins, is a safe and good way to allocate our return-seeking capital and should provide better returns for you as investors. We have now gathered the improvement potential in our portfolio, and we need now to put this into an expected market context and see if this is enough to satisfy yours and our return requirements over the cycle.
Since our long-term priority is to create values for investors by delivering returns above the cost of capital, this should also be reflected in total shareholder return. I will revert now to our four key priorities to explain a bit more in detail what it means for us. We will continue as Hydro to maintain and work to maintain an investment-grade credit rating. We believe that a strong balance sheet is the best tool that we have to weather the highs and the lows of the cycle. It also allows us the possibility to act when we believe it is best to act, not necessarily when we have the highest cash flow. Currently, we still have the strongest balance sheet among our comparable peers when you look at the total debt to total equity perspective.
When we talk about balance sheet strength, it first and foremost reflects maintaining our BBB rating. Last year, Moody's revised our outlook from stable to negative, mainly reflecting the high uncertainty related to the Alunorte situation. We are now maintaining a close and constructive dialogue with the rating agencies. They will be updated on the results of today's presentation, and we will ensure that we work in order to satisfy their return or the debt requirements. We continue to operate with our two balance sheet ratios over the cycle. One is net adjusted debt to equity, which should be below 50%. This has not been an issue for us over the latter years, and looking at today's spot prices, we are at around 40%. Number two is funds from operations to net adjusted debt.
Here we seek to be above 40%, and if you look at the last twelve months rolling, we have been around 29%, so not in optimal territory. At current spot price, we are around 39%-40%, so more or less at the limit to where we aim to be over the cycle. Secondly, we aim to offer a predictable dividend and satisfactory yield over the cycle. That is for the investors which hold the Hydro share both through the lower parts and also the higher parts of the cycle. We would much rather supplement our dividend payout with extraordinary dividends or share buybacks than cut our dividend in periods where the earnings are not so good.
We understand and we know the need for predictability and robustness in yield for long-term investors, and we will continue to focus on that going forward. At current share price, our yield is around 4%, and if you look at the payout ratio that we've had over the last 5 years, then it has been around 57% of net income, right above our 40% targeted level. Thirdly, we have established clear priorities and guidelines for capital allocation. In the longer term, this determines our ability to deliver on our strategic direction. Our current strategy is to allocate more growth and return-seeking CapEx to the areas that are relatively less exposed to direct competition from China and have a more stable earning profile. In addition, that have earned the right to grow through the returns on the investments that they have made so far.
For the moment, that is Extruded Solutions and Energy, where we are seeing selective growth opportunities. Finally, we are very clear that value creation is about being able to deliver above the cost of capital over the cycle, and that is the reason for introducing the 10% ROACE target today. In addition, we have introduced differentiated return requirements for each business area based on their nominal cost of capital. Let me then spend a couple of minutes to go through our revised capital allocation framework. I mentioned it in the Q&A, but I will mention it again, as I often do internally. We can do everything right when it comes to improvement programs, getting more out of what we have.
Where we as a company really create or destroy value is about how we allocate capital, and especially how we allocate capital when it comes to larger investments. It does not matter if we have a huge portfolio of small, good investments, if you make that one huge investment that does not play out as you expected. As Hydro and the whole of the aluminum industry. We have been making investments based on margin assumptions that have turned out to be too optimistic, driven by the increase in China's primary growth. As such, we as a company need to be more cautious going forward when making such type of investments. If we then go and look at the capital allocation framework, then the first step in such a framework is to identify how much capital we have available for allocation.
This will be based on projected funds from operations, stressed across several market scenarios to allocate for the cyclicality in our business. If we are on the higher part of the cycle or the lower part of the cycle, we need to reflect that cyclicality when defining capital available for allocation. In addition, our two key priorities, maintaining a strong balance sheet and honoring minimum commitment to shareholders expressed as the dividend floor, always need to be taken into account and planned for. Our commitment to you as shareholders comes first. The next step is to allocate sustaining capital based on long-term needs per business area, which should be based on a broad analysis. Of course, when it comes to sustaining capital, we need to take into account the license to operate. We need to ensure that our employees are safe.
We need to ensure that we're doing the right things for when it comes to CSR, and we need to ensure that we are compliant. When those things are in place, we need to ensure that our sustaining CapEx is competitive. We have, over the last period and years, been running benchmarking exercises on sustaining capital. Upstream, it's about looking at how much we are spending compared to our peers, adjusting for elements which are not directly comparable, and then setting targets longer out in time to ensure that we are not spending more sustaining CapEx than our comparable alternatives.
For Extruded Solutions, having hundreds, or 50 facilities-100 facilities, you can do a lot of internal benchmarking to see if there are things that other plants can learn from each other to ensure that we are running as lean sustaining capital as possible. Finally, sustaining CapEx also needs to be affordable. It needs to reflect the cash flow generation potential of an asset. It doesn't matter if a specific asset in our portfolio is able to run sustaining capital at a competitive level if the net present value of that asset is not positive given our market price assumptions. Then we need to reevaluate that asset's license to operate. After having allocated sustaining capital, we are left with excess cash flow that can be used for growth.
However, prior to allocating such growth capital, we need to take some other considerations into account. First, we need to look at how a business area is operating its net operating capital. If they are not able to keep operating capital at a competitive level, that will impact their ability to grow going forward. We also need to ensure that there's a proper review of assets sitting in the portfolio. If there are non-strategic or non-returning assets, these need to be worked on before just embarking on new growth and return-seeking projects. We also need to evaluate as a company, if given the current growth portfolio, if it would be better to either return excess dividend to shareholders or buy back our own shares, especially in periods where we're trading well below the book value.
After we have made those evaluations, then we can start allocating, return-seeking and growth capital based on the specific return requirements within the various business areas. As I mentioned earlier, there are different hurdle rates between upstream and downstream, and there's also different hurdle rates within a specific business area. For example, Primary Metal, where I came from, we would operate with a higher return requirement on investments, which had a larger market, aspect to them, where there is uncertainty and volatility, where somewhat lower hurdle rate if it was investments that were just about getting out fixed costs, which were quite safe and little on security. In the end, this capital allocation process is aimed to be more dynamic to ensure flexibility, continuous review, and reallocation, as well as high competition for capital internally, both between business areas, but also between business units.
As Hilde mentioned, our newly established corporate development function will be a key unit in facilitating this process, heavily supported by the finance function, of course. I am very pleased that Hydro today are introducing an underlying ROACE target of 10% to emphasize that value creation is the ability to deliver returns above the cost of capital. We cannot, as a company, rest happy with only improving the things we can influence ourselves because this may not be enough over the cycle. We need to think differently about our portfolio as a whole. Moreover, having a return target should increase the focus at different levels of our organization to improve returns where it is possible. We are now ensuring alignment by tying ROACE targets across the organization to performance-related pay at all levels of our organization.
We will also be following up capital returns as visualized by this capital returns dashboard, which represents a summary of the key relevant measures for us going forward. Our 10% target is 1% higher than the nominal cost of capital to account for items excluded from our underlying EBIT, but also to have some element of stretch in it. In the last five years, we have delivered an underlying ROACE of around 7%, which is below the cost of capital and is below the targeted level. This has also been impacted by the high volatility as 60% of our capital is allocated in the cyclical upstream business. When we have spent the summer now, and we've gone through all the efforts that we've put in place, we need to ask ourselves, is this really enough?
Is this enough on a business area level? What are the key upside and downside risks for us being able to deliver on this? If we want to answer these questions, we should look at some different scenarios, both when it comes to ROACE, EBITDA, and total cash flow. Let me remind you that these are scenarios. They are not forecasts, but a simplified and indicative long-term potential based on sensitivities. In the additional information, as I referred to earlier, you will find a detailed description of the assumptions we have taken here, as well as additional factors which could impact the upside or downside. Hilde has already explained the adjustments needed to get our 2018 starting point.
What I would just like to stress is that this starting point has margins which are very similar to what we use in our improvement program. It's quite comparable. As Hilde went through, we will see ROACE between 7%-13% given the various price assumptions which we have included in your book. This shows that our target is stretched, but it's not completely unrealistic. This 9% is really based on the prices that we have seen in the last three years as it is comparable to our improvement program assumptions. When it comes to further upside or what we can do on top of the identified improvement potential, I also as a finance person believe that sustainability focus will have a positive impact in the longer term, as well as technology and innovation.
I remember spending time with many of you three to four years ago when we launched our Greener brands, and the key question was always, "Well, are you able to get that premium on top? How much will this improve earnings?" I would always have to answer, "Well, we're not getting a premium yet, but it will come. It will come." Therefore, I'm so happy that Extruded Solutions have been able to now achieve this premium, working tightly with Primary Metal, with their alloy capability, but using their sales force and sales experience to get a premium on top. This differentiates Hydro as a company, and I believe will be a key value for improving our returns going forward. On the key risk sides, you know them well, as well as we do. Market developments are uncertain, as we now stand.
Also, the operational performance and the ability to deliver on improvement efforts is always a risk because our competitors are also improving. If the ninetieth percentile on the cost curve improves just as much as we do, we don't necessarily get to benefit from these improvements to the same extent. If the market needs more capacity and the ninetieth percentile is based on the weak start of high-cost capacity, then we will benefit from the full improvement potential. Our ability to improve and how much of that you see on the bottom line is very much tied to how the cost curve and how the market will develop going forward. We have also identified underlying EBIT potential and cash flow potential using the same logic. The cash flow potential is after tax.
Total CapEx is included in this cash flow potential, as well as our dividend floor or commitment to yourselves. This indicates the cash, which is available for further growth after we have paid out CapEx and our dividend floor. For us to be able to reach the overall target for Hydro, it is important that each and every business area contributes by delivering on or above their nominal cost of capital. We will follow business areas up to the same extent as we do on Hydro. If we start with Bauxite & Alumina, which has around 30% of the total capital employed in Hydro and has a long-term nominal cost of capital of 10%-11%, then we have only been able to achieve 4% over the last 5 years. There has been challenging alumina markets here.
There has been the embargo situation, and there was also several operational challenges following the B&A acquisition. We did see a strong improvement trend in the returns of Bauxite & Alumina until we were hit with Alunorte embargo in the start of 2018. If we look at the CapEx picture, then let me again emphasize that the project pipeline you see in the business areas should be aligned with their strategic themes. For Bauxite & Alumina, you have a theme of sustain and improve. You should not expect to see big growth investments there, but you could expect to see smaller improvement investments to take down fixed costs.
You might question that there is quite some CapEx at the end of the period, and this is mainly reflecting the Alunorte fuel switch project, which delivers on both our profitability and sustainability metrics. The fuel switch project will bring our CO2 down the cost curve, and also has our internal rate of return well above our hurdle rates. If we look at the scenarios for ROACE potential in Bauxite & Alumina, then we see that our improvement efforts will take us up to 6%, but only 3% if we use current spot prices of around 300 on the Platts Alumina Index. Using the forward is not enough, and you need to use a CRU's assumption in order to be able to deliver on our cost of capital.
In Bauxite & Alumina, as it stands today with the targeted improvements, we are dependent on additional help from the market. There are several elements of the Bauxite & Alumina story which are not included here. As I mentioned, the fuel switch project, the main effects comes after 2023, so this would contribute positively, further. We are also looking into many interesting initiatives on the sustaining capital side, which I hope to get back to at a later stage, which might solve two of our challenges that we discussed today. When it comes to risk in B&A, the ramp up is a key risk, at the moment. We believe we should be able to ramp it up as announced, but it is new technology. We are trying and failing, so it is a risk.
Optimizing sustaining CapEx is also a risk. As you know, there's a lot of big investments in our bauxite and alumina chain when you're moving into new mining areas, for example, and we need to ensure that we do this at the lowest CapEx possible. Regulatory and country risks are also present in Brazil, as we all have felt well over the last couple of years, and we are working hard to reduce this risk going forward. If we move into Primary and Metal Markets, then Primary also accounts for around 30% of Hydro's capital employed, and Metal Markets accounts for around three percent. Primary Metal also has around 10%-11% of nominal cost of capital, and in the last five years, Primary has reached around 9%, which is slightly below the target.
If you exclude the very special year of 2018, we would have been at around 10%. Metal Markets has delivered very good returns of 18%, which is well above their cost of capital of around 7%-8%. This reflects the good results and profitable growth we see in the recycling and remelting areas, which is also a driver for that being a strategic growth area going forward. There's been a lot of good investments within the recycling, which have delivered good returns above their hurdle rates. I should also mention that the capital employed in recycling is quite low, which impacts us in a positive direction. For Primary Metal, we have a relative stable and downward trending sustaining profile on the coming years.
This is very much based on the benchmarking exercises that I talked about earlier. We spent a lot of time trying to find a competitive level for CapEx in Primary Metal and ensuring that we're moving down towards that level on the sustaining side. The same goes for growth and return-seeking CapEx. We have had some big growth investments, the Husnes restart, for example, that we announced some years ago. In addition, we have also reduced the number of creep investments with that Tønder asked about earlier because we're really not seeing the same business case in them, and we're focusing more on improving current efficiency and reducing energy consumption, which is not as dependent on the market outlook.
There will be some return-seeking CapEx going forward, and a larger and larger part of that should be tied to the recycling operations. If we here also look at the ROACE scenarios, then 3% we get from the identified improvement potential, but that only brings us to 6%. At current spot, we are around 4%. If we use the forward curve, we move towards 8%, and if we use CRU's assumptions, we are around 13%. Also here, the market is needed to support our improvement agenda if we are to deliver on return requirements over the cycle. When it comes to further potential for Primary Metal, commercial differentiation, including our Greener brands and high share of renewables, will become increasingly important over time. Also further attractive opportunities within recycling, we believe could support the growth in return story.
On the risk side, in addition to operational and commercial performance, our relative cost position is key here. The simplified assumptions here assume that we are able to benefit from all of the improvement efforts, but as I mentioned earlier, if our competitors improve to the same extent, we might not be able to get all of this on the bottom line. Also for Primary, we do have some regulatory risk, especially related to Brazil and to some extent to Qatar. Extruded Solutions also accounts for a fairly large share of Hydro's capital employed, around a quarter or 24%. In the last two years since Extruded Solutions became part of Hydro, they have delivered more or less in line with their cost of capital.
This reflects a leading market position in several key markets as well as their value over volume strategy. Reflecting this good historical performance, relative in our portfolio, in addition to fairly stable earnings and the potential to reduce the exposure to China in some key markets, Extruded Solutions are in the strategic growth mode, and you can see that on the return-seeking CapEx, which is being allocated to this business area. Sustaining CapEx is quite low for our downstream operations compared to upstream, but return-seeking will be a big part of the story for Extrusion going forward, given that their investment cases turn out to be well above their internal hurdle rates. If we look at the ROACE potential, then the identified improvements will bring us from around 7% to around 9%. There are also risks involved in the Extrusion story.
We are seeing somewhat weaker development in some markets, and although Extrusion results are not directly linked to the LME price, they are linked to the developments in the markets which impact the LME price in the end. In weaker markets, further upside from Extruded Solutions will be dependent on the restructuring efforts which are being undertaken, as well as their initiatives to further take out costs. Rolled Products we've been through in some detail today. They are a noticeable part of our capital employed with around 12%. Here we are very well aware of the declining trends, which is really the reason for initiating the restructuring and strategic review.
We have been through the improvements in detail, but as you can see from the CapEx side, sustaining is really what we're allocating to Rolled at the moment until we are more on the way with these efforts. Einar showed us that we're getting from 2% to 8%, which is at the higher indicated range of their nominal cost of capital. The main risk, but also opportunity, for Rolled Products going forward, is their ability to deliver on the restructuring efforts, as well as what we're seeing taking place in the markets today. Finally, Energy accounts for a very small portion of the total Hydro capital employed, only 2% due to very well-depreciated assets.
This, combined with a stable earning profile, has resulted in around 18% ROACE over the last five years, which is well above their cost of capital. However, most of you are very, very well aware that the alternative market value for Energy assets are significantly higher than what is reflected in our books. If we took that into account and took into account the identified improvements in Energy, we would be expecting more around the cost of capital in returns from this business area. In addition, to the new identified improvement potential, we mentioned at last capital markets day that there is NOK 700 million in additional improvements coming in Energy due to external and internal changes in the contract portfolio.
If we look a bit closer at that upside, then that is NOK 700 million and NOK 400 million of this is related to the expiry of a legacy contract entered in 2008 at what is now unfavorable terms. In addition, we have the expiry of the Statkraft contract in 2020. That is being replaced with a number of new sourcing contracts. Based on this, the internal power price from Energy to Primary Metal will be somewhat higher in line with external pricing because we have market pricing between these two business areas, resulting in a gain of NOK 300 million. The total EBITDA upside potential for Energy is actually a whole NOK 900 million.
When it comes to translating this into cash flows, then these improvements are not necessarily subject to resource rent tax and therefore will also result in a reduced effective tax rate for Energy. You also know that earnings for Energy are very much affected by production and power prices, and also that regulatory frameworks, including a tax level as well as CO2 prices, can impact earnings for Energy quite significantly. I have now been through our profitability ambitions, and I would also like to briefly address our part of our new agenda, which is sustainability. We firmly believe that by differentiating on sustainability, we will stand out in the long term with our production processes and products that satisfy our customers' needs. They also satisfy the requirements of the regulators, as well as the increasing financial markets' expectations of responsible operation and ESG.
The Hydro definition of sustainability includes climate, environment, and CSR, and many of these initiatives are necessary to secure our long-term license to operate and will not always translate into profits in the short term. However, we believe that it's becoming more and more normal to see bottom-line benefits from responsible initiatives, and we have already many good examples of these shown on the chart here. As the sustainability agenda picks up trend, we will only have more examples like this, where sustainability translate directly into profitability, both in the short term as well as in the longer term. To conclude, I would like to bring all the elements of our financial framework together. Shorter term, we will lift cash flow potential with a number of improvement initiatives.
Longer term, we will continue to focus on maintaining a strong balance sheet and delivering a robust payout to you, our shareholders. In addition, we will increase our focus on meeting capital return targets for Hydro and each and every business area, also supported by our new updated capital framework. These priorities and these targets will drive long-term value for you, our shareholders. With that, I would like to open up for today's final Q&A. Thank you.
Hilde, can you please also join us on stage? Again, there's three microphones here. Please await getting a microphone before you ask a question.
Hi, it's Daniel Major from UBS again. A couple of questions. Firstly, can you give us any update on the expected timing of the insurance claims from the cyberattack?
Yeah.
I leave it to the finance.
As we said earlier, it's not one insurance claim we're working on. It's a lot of different elements across our operations, and we're documenting each and all of them in order to send over to the insurance companies. We will probably have some smaller positive effects in the Q3, and then they will continue to come in the quarters following that. It's not one big go. It is every case that is being delivered, is being reviewed, and then we get back or not. It will be spread among the periods going forward.
Would you suggest allocate around half of it to this year and half of it to next year?
I think it's too early to speculate on the exact allocation. We can get back to you on that in the Q3 if we have more concrete details on it.
Okay, great. Thanks. The second one, can you give us any preliminary indication of how much cost improvement you would achieve medium term at Alunorte as a consequence of the energy switching program? What sort of internal rate of return that project is expected to generate?
Yeah. Of course, when you mention good internal rates of return, so you get that question afterwards. We are not at a DG3 stage yet at that project. We will get back to the exact details when we have seen what the total costs will be and how we progress with that project.
Okay. Just final one. The impacts of the energy contract changes, are they the same as what you communicated last year?
Yeah.
There's no change there.
You will see that the figure is a bit lower, and that's due to the energy price being a bit higher in the market. The positive effects from one of the contracts expiring is not as positive as the energy market has moved a bit also.
Great. Thanks.
Hi, Jatinder Goel from Exane BNP Paribas again. A couple of questions. On Extrusion, you had this 10% EBIT CAGR target for three years. Is that gone, with this NOK 1 billion improvement target, or are these two different targets now? Second question on rolled products, do you need to take any impairments based on what you've announced so far, or would you take a more comprehensive review once your internal review is complete? Thank you.
I think for Extrusion, it follows what we have said before, the 10% for the three years.
Thank you.
For impairment testing, according to IFRS standards, we test for impairments every quarter. We also evaluate if we have triggers at specific points of time. If we have a trigger, then we look into that immediately. We don't save it for a later stage. Based on us not announcing an impairment so far, we have not identified any triggers to date.
Thank you.
30 seconds left. Question to Pål. You mentioned that you're now receiving or achieving premiums within Extruded Solutions. Could you please elaborate a bit on that?
Yeah. I can, but I will just going to not be able to give these exact levels. We are producing 75R in Aluminium Metal. Here there is a premium negotiated between Extrusion and Primary, which covers the cost with an upcharge. Then Extrusion has the commercial responsibility and are able to get a premium on top of that with their respective customers. The details of that premium are between the customers of Extrusion and Extrusion.
Okay. Can you please remind us what type of volumes are we talking about there or the total?
Yeah.
in Extrusion?
In this year, I guess we're approaching 10,000 tons or so of 75R. We have a target for 25,000 tons for next year. Of the total portfolio, it is-
Still early days.
Still early days.
Yeah.
You know, the 75R has seen extremely good demand, and that will need further improvements in recyclers, et cetera, in order to be able to sell more. As we are sold out, we are working as fast as we can on that. On the REDUXA, if we are able to start selling bigger quantities of that at a premium, that can really make a difference for a larger part of our portfolio, as you have the whole Norwegian operations sitting there, which don't require any investments or improvements in order to sell.
Thanks. Any further questions? No? Okay. That concludes Hydro's Investor Day, 2019. Thanks for listening both here in Oslo, as well as on webcast. Lunch will now be served, as I said, outside here, so please join us for that as well. Thank you.
Thank you.