Hydro’s results for 2008 were significantly impacted as the global financial crisis led to a dramatic fall in world demand for primary aluminium and aluminium products toward the end of 2008. Underlying EBIT declined to NOK 6,009 million, down from the solid result achieved in 2007 of NOK 10,153 million. Higher raw material costs affecting the entire industry had a substantial impact on Hydro’s underlying results, in addition to the significant market downturn in the fourth quarter. Underlying results were also impacted by inventory write-downs of about NOK 700 million due to the sharp drop in aluminium prices toward the end of the year.
Due to the deteriorating market conditions and high input costs, reported EBIT and Income from continuing operations were charged with roughly NOK 2.5 billion of impairment losses.
The severe downturn in the global economy has led to a sharp decline in demand for aluminium and rapidly increasing stocks. By year-end and into 2009, prices reached a level that is lower than the cash-costs for a majority of the aluminium industry’s smelter capacity. The decline from the high price levels experienced in the middle of 2008 was of a magnitude which is unprecedented in the history of the industry. In response, announced smelter curtailments excluding China reached a global level of around 1.5 million tonnes per year as of the end of 2008, and have increased further to around 3 million tonnes. The major part of the announced capacity reduction is expected to be implemented within the first half of the year. Markets for metal products in Europe and North America weakened dramatically during the fourth quarter of 2008. The automotive markets collapsed, leading to a sharp decrease in demand for automotive components and aluminium foundry alloys. In addition, the building and construction markets in the U.S. and Europe deteriorated significantly, leading to reduced demand.
Hydro has made wide-ranging adjustments in response to the severe drop in aluminium markets, and has announced reductions in its primary aluminium production of 23 percent, representing about 400,000 tonnes per year of our higher-cost production capacity. Approximately 140,000 tonnes of the total will be shut down by the end of the first quarter of 2009, with the remainder shut down by the end of the second quarter of 2009. These measures will improve the average cost of our smelter system.
Production of remelted metal at Hydro’s casthouses has been cut by 45 percent, or around 500,000 tonnes per year. A decision was taken for the temporary closure af alumina production at the part-owned Alpart refinery in Jamaica. Hydro has also taken out significant capacity in its downstream operations through shift reductions and has implemented cost-cutting measures throughout the company.
Underlying EBIT for Aluminium Metal declined significantly for the year, impacted by lower realized prices and substantial increases in the cost of power, fossil fuels, freight, caustic, alloying materials and carbon in addition to the effect of the inventory write-downs discussed above. Prices measured in Norwegian kroner declined, having a negative impact on underlying results. Underlying EBIT declined for Aluminium Products business for 2008 due to the sharp drop in market demand, particularly towards the end of the year. Energy delivered record underlying results for the year, mainly due to record power production and continued strong spot prices. The new 585,000-tonne Qatalum smelter – owned 50/50 by Qatar Petroleum and Hydro – was about 60 percent complete by year-end, on schedule for start-up around year-end 2009 and within budget. Once on stream, Qatalum will be one of the most cost-efficient smelters in the world positioned within the first decile on the industry cost curve. The total estimated investment of the Qatalum project is USD 5.6 billion of which Hydro’s share is USD 2.8 billion. Fiftyfive percent of the total cost is funded by equity from the partners, with the remainder provided by project financing on favorable terms.
The third expansion of the Alunorte alumina refinery in Brazil was successfully started up in third quarter 2008 and achieved stable production at designed capacity in the fourth quarter. The project was completed on time and within budget.
Due to our present high investment level and expected lower level of cash generated from operations, Hydro is in the process of raising additional financing to meet future capital requirements. Hydro has recently signed a EUR 750 million syndicated three-year revolving credit facility. In March 2009 EUR 100 million of this facility was drawn upon. A USD 1.7 billion multi-currency stand-by credit facility entered into in 2007 and maturing in 2014 is fully undrawn. In order to secure our financial position, capital expenditures (excluding Qatalum) have been reduced by NOK 2.5 billion, roughly 40 percent from the 2008 level.
Investor information
Hydro’s share price closed at NOK 27.80 at the end of 2008. Taking into consideration the dividend of NOK 5.00 per share paid in 2008, the total return for 2008 was negative with NOK 44.80 or 58 percent.
Due to demanding markets and low forward visibility in both the aluminium and financial markets, Hydro’s Board of Directors proposes to forgo a dividend payment for 2008. The Board regards it as prudent to conserve the company’s financial resources for organic investments into the Qatalum project and to minimize funding requirements.
During 2008 we repurchased 4,408,000 shares for NOK 149 million.
