Norsk Hydro: Solid upstream results, mixed markets
Hydro's adjusted EBITDA for the second quarter of 2024 was NOK 5,839 million, positively influenced by increasing revenue drivers in the quarter. The second quarter adjusted EBITDA was down from NOK 7,098 million for the same quarter last year, negatively impacted by lower Extrusions volumes, recycling margins and Energy spot sales, and higher fixed costs. This was partly offset by higher alumina prices and lower raw material costs resulting in an adjusted RoaCE of 4.4 percent over the last twelve months and free cash flow of NOK 2.8 billion.
-- Revenue drivers continue to rise, supporting solid upstream results
-- Weak demand and low recycling margins impacting downstream results,
mitigating measures in place
-- Hydro Rein joint venture established, supporting industrial
decarbonization and long-term value creation
-- Strong demand for Hydro CIRCAL, scaling up recycling to meet increased
demand
-- Shaping the greener aluminium market in partnership with Porsche
"The positive development in our key revenue drivers from the first quarter continued into the second quarter, supporting solid results in our upstream businesses. We are mitigating the challenges of a weak downstream market by executing cost-saving measures and maintaining extrusion margins," says Eivind Kallevik, President & CEO of Hydro.
On July 9, a contractor passed away while performing maintenance work at Hydro's joint venture Albras in Brazil.
"I am deeply saddened by this tragic incident which underlines the critical role safety has in everything we do. My deepest condolences go out to the family and the affected colleagues," says Kallevik.
Economic growth forecasts stabilized at relatively low levels during the second quarter, while the economic uncertainty continued to decrease with both headline and core inflation trending downwards, and external sources estimating real GDP growth of around 2.7 percent in 2024. Global primary aluminium demand was up 2 percent year-on-year during the second quarter, driven by a 3 percent increase in China, supporting overall growth in global primary demand of 3 percent year-on-year for 2024. Key uncertainties going forward are inflation stickiness, policy support, Chinese economic growth, the conflicts in Ukraine and the Middle East, and the geopolitical situation.
Positive revenue drivers continued into the second quarter, supporting solid results in Bauxite & Alumina and Aluminium Metal. The Platts Alumina Index $(PAX)$ started the quarter at USD 367 per tonne, gradually increasing to USD 505 per tonne at the end of the quarter, driven by alumina production curtailments and disruptions in Australia and India, bringing the World ex-China market into balance. The three-month aluminium price ended the quarter at USD 2,524 per tonne.
"We are pleased to see solid results in Bauxite & Alumina as well as Aluminium Metal. Positive revenue drivers, combined with ongoing improvement initiatives, including the ongoing fuel switch at Hydro Alunorte, are expected to further strengthen value creation from upstream activities going forward," says Kallevik.
Downstream, demand in the residential building and construction segments in Europe and North America remains weak, but is expected to improve with lower interest rates and a positive industrial outlook. Low activity in these markets continues to challenge aluminium scrap availability and pressures recycling margins, with several recyclers running on reduced capacity, impacting both Hydro Extrusions and Metal Markets. The automotive extrusion demand has been challenged by lower electrical vehicle sales growth, and weak trailer build rates in the transportation segment adversely affected Hydro Extrusions during the second quarter. CRU revised down their extrusion demand forecasts for the second half of 2024, expecting a slower recovery.
Hydro Extrusions has responded with mitigating measures to handle challenging markets. Current production flexibility and adaptation abilities are utilized to maneuver weak demand, while cost cutting programs and manning reductions are used as means to uphold margins. Managing short-term volatility enables Extrusions to continue positioning for long-term growth with the customers, and two new OEM contracts were added to the portfolio during the second quarter, accumulating contracts worth EUR 3.1-3.3 billion since the beginning of 2023. Hydro Extrusions is positioned to deliver on the 2025 EBITDA target of NOK 8 billion when markets recover, though recent extrusion demand forecasts indicate a delayed realization.
Recycling margins pressured by weak markets underscore the need to diversify the portfolio, and strengthen margins and scrap sourcing. During the second quarter, Hydro decided to invest USD 85 million in a new casting line at the recycler in Henderson, Kentucky, to supply the U.S. automotive market with high-quality recycled automotive components. The project introduces HyForge technology to the U.S., serving the automotive market's need for high-quality forge stock, and broadening Hydro's product portfolio. Further, the Alusort joint venture completed the HySort installation in the quarter to enable the U.S. plants to sort and use more post-consumer scrap.
Demand for Hydro's low-carbon and recycled aluminium, Hydro CIRCAL, has remained strong despite weak markets. Recyclers, Luce in France and Atessa in Italy, are upgrading to meet rising European demand, and the bicycle company, Brompton, introduced wheel rims made from 100 percent post-consumer aluminium scrap during the quarter. Beyond Europe, greener products are gaining traction in the U.S., and the first sale of Hydro CIRCAL was conducted during the second quarter. These efforts are estimated to strengthen Hydro's recycling margins and resilience, and align with the 2030 recycling targets.
"Demand growth for low-carbon products remains strong with Hydro CIRCAL sales well above target for 2024. This gives confidence to continue to push forward on strengthening our portfolio to capture long-term positions in the rapidly growing market for low-carbon products," says Kallevik.
Delivering low-carbon products creates value for Hydro's customers at premium pricing. Leveraging the integrated value chain with traceability from mine to component, Hydro is attracting strategic partnerships with industry leaders like the German sports car manufacturer Porsche AG. The agreement signed in Stuttgart on July 9, opens for Hydro to deliver best-in-class, low-carbon aluminium for Porsche's vehicle production in the years to come, and the scope of the agreement includes both Hydro REDUXA and Hydro CIRCAL. Hydro is well-positioned to capitalize on greener premiums, with the potential for NOK 2 billion in earnings uplift by 2030.
"The agreement with Porsche is first of its kind in the aluminium industry and represents a totally new business model proving the underlying value of Hydro's efforts throughout our value chain to pioneer the green aluminium transition," says Kallevik.
Securing access to renewable power is crucial for growth in low-carbon aluminium. Hydro and Macquarie Asset Management launched their renewable energy partnership on June 24, establishing Hydro Rein as a joint venture where Hydro owns 50.1 percent and Macquarie 49.9 percent of the company. With the capital provided by Macquarie, Hydro Rein is expected to be fully funded for its current projects under construction and development cost for projects in the pipeline in the coming years, with an ambition that no new equity will be called on from the owners beyond committed capital.
"We are excited to join forces with Macquarie Asset Management to accelerate the next chapter of Hydro Reins growth journey. With Hydro and Macquarie Asset Management's complimentary capabilities on the ownership side, Hydro Rein is well equipped to continue pursuing profitable growth -- supporting industrial decarbonization through growing in the Nordics, selected European markets as well as in Brazil," says Kallevik.
Results and market development per business area
Adjusted EBITDA for Bauxite & Alumina increased compared to the second quarter of last year, from NOK 817 million to NOK 1,616 million, mainly driven by higher alumina sales prices, lower cost of raw materials, and increased sales volume, partly offset by increased alumina sourcing costs and increased other fixed and variable costs. PAX started the quarter at USD 367 per tonne, increasing gradually to USD 505 per mt at the end of the quarter.
Adjusted EBITDA for Energy decreased in the second quarter 2024, from NOK 854 million to NOK 611 million, compared to the same period last year. Lower production, prices and gain on price area differences were partly offset by the expiry of a 12-month internal fixed price purchase contract from Aluminium Metal with a significant loss in the same period last year. Average Nordic power prices in the second quarter 2024 ended below the prices from the previous quarter and the same quarter last year. Price area differences between the south and the north of the Nordic market region increased slightly compared to the previous quarter, but were significantly lower than the same quarter last year. The increase compared to the first quarter 2024 was primarily a result of lower prices in the north due to wind power production, hydrology and decreased demand.
Adjusted EBITDA for Aluminium Metal decreased in the second quarter 2024, compared to the second quarter of 2023, from NOK 3,215 million to NOK 2,520 million, mainly due to reduced contribution from power sales, increased alumina and energy cost, and inflation on fixed cost, partly offset by reduced carbon cost. Global primary aluminium consumption was up 2 percent compared to the second quarter of 2023, driven by a 3 percent increase in China. The three-month aluminium price increased throughout the second quarter of 2024, starting the quarter at USD 2,337 per tonne and ending at USD 2,524 per tonne.
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July 23, 2024 01:00 ET (05:00 GMT)
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