Following an extraordinary market decline towards the end of the previous year, 2009 has been characterized by weak and volatile financial markets, significantly weakened demand for our products and historically low prices for our primary metal. The company has handled these dramatic developments by swift responses within its production system and organization while at the same time securing the successful development and start-up of the Qatalum joint venture.
Responding to the economic crisis
Hydro acted quickly to the market decline and global economic downturn at the end of the previous year including:
- Early closure of Søderberg line at Karmøy (120,000 mt)
- Temporary curtailments at Neuss, Sunndal, Søral and
Slovalco (340,000 mt)
- Temporary curtailments of alumina production at Alpart (578,000 mt)
- Manning reductions in downstream operations equivalent to about
3,100 employees
- Manning reduction in corporate staff functions by about
250 - 300 employees
- Reduction in capital expenditures amounting to almost
NOK 6 billion excluding Qatalum
- Reduction in operating capital by close to NOK 6 billion
Curtailments of primary production capacity at Hydro's least efficient smelters amounted to 460,000 mt in total or about 26 percent of its upstream capacity. Cash cost per mt declined by 30 percent as a result of the curtailments and reduced raw material costs. However, although the company made good progress reducing the operating cost of its smelter system in 2009, it has been unable to adjust the company's cost profile to a sufficient extent and its smelters have generated significant underlying operating losses within the depressed market environment. Downstream, the company's focused efforts have enabled it to cover nearly 80 percent of the loss due to the market downturn within its rolled and extruded products operations helping these businesses to return to profitability during the second half of 2009 and demonstrating a high degree of flexibility to adjust to the new market realities. This flexibility was also apparent within Hydro's mid-stream business where remelt production was quickly reduced by nearly 50 percent and then ramped up to full capacity in the third quarter in response to tight physical markets for metal products. Hydro also made portfolio adjustments during the year including the divestment of its automotive structures business and Inasa rolling mill located in Spain. A decision was also taken to close the company's precision tubing plant located in Adrian, Michigan in the US, relocating the production volumes to plants in Rockledge, Florida and Reynosa, Mexico.
Qatalum and beyond
In December 2009 the first cell of the new Qatalum primary aluminium smelter was started as planned. This achievement represents a major milestone in our strategy emphasizing a sustainable upgrading of our portfolio aimed at securing an operating cost position among the best in the world. The new primary aluminium plant in Qatar has an initial production capacity of 585,000 mt. Substantially all of Qatalum's production will be shipped in the form of value-added, cast-house products. A second phase of the Qatalum smelter may present an attractive opportunity with the potential of expanding the plant up to 1.2 million mt.
Going forward, Hydro has an ambition to expand its upstream activities worldwide while maintaining a strong emphasis on sustainable development. In addition to the possible expansion at Qatalum, Hydro is a joint venture partner in Companhia de Alumina do Para (CAP) together with Vale and Dubal for the construction of an alumina refinery close to Alunorte in Brazil. Hydro will continue to advance the operational excellence of its existing smelter portfolio. New proprietary technology is under development with the aim to raise its cost competitiveness, further strengthen its environmental standards, and support the company's growth ambitions.
Ongoing focus on extracting value from Hydro's midstream and downstream businesses will continue. Hydro will further develop the company's leading position in the metal products markets in order to optimize the capacity of its integrated casthouses, grow its remelt operations and offer substantially higher volumes of value added products into the marketplace. An emphasis on operating efficiency and margin management will underlie development for Hydro's rolling operations. Hydro intends to maintain the strong operational performance of its extrusion business targeting further business development based on its existing platform of technological strength and strong market positions. Entry into new markets will be a priority and Hydro intends to be recognized as an industry specialist in energy-neutral building solutions.
