Hydro has acted decisively in response to an unprecedented drop in aluminium markets.
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 towards the end of the year.
Due to the deteriorating market conditions and high input costs, reported EBIT and Income from continuing operations was charged with roughly NOK 2.5 billion of impairment losses.
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, and the remainder will be 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. Alumina production at the part-owned Alpart refinery in Jamaica has been reduced by 50 percent. 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 soda, 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 for 2008 declined for the Aluminium Products business due to the sharp drop in market demand, particularly toward the end of the year. The Energy business area 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 was about 60 percent complete by the end of 2008, on schedule for start-up around the end of 2009 and within budget frame. 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 cost of the Qatalum project is USD 5.6 billion, of which Hydro’s share is USD 2.8 billion. Fifty-five percent of the total cost is funded by equity investments from the partners Qatar Petroleum and Hydro, while the remainder is 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. An existing USD 1.7 billion multi-currency stand-by credit facility maturing in 2014 is fully undrawn and available as back-up for unforeseen funding requirements. In addition, on March 6, 2009, Hydro signed a new EUR 750 million revolving credit facility with a syndicate of international banks. 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.
Since 2006 Hydro has headed the aluminium sector of the Dow Jones Sustainability Index (DJSI). We have been listed on DJSI every year since the start of the index in 1999. We are also listed on the corresponding UK index, FTSE4Good. Even though our systematic safety work continued through 2008, we failed to reach our targets. We did not reach our target of a 20 percent improvement in total recordable injuries (TRI), and we had three fatal accidents in 2008 and one in February 2009. Our ambition is still to improve TRI by 20 percent per year, and we are taking suitable measures to make this possible.
In 2008 we rolled out an interactive e-learning program dealing with our policies and employee rights and obligations. Produced in 12 languages, it is mandatory for all employees worldwide and discusses issues such as work environment and ethical dilemmas.
Since 1990 we have reduced our climate gas emissions by 49 percent. In 2008 we completed a comprehensive climate change strategy, including a revised set of priorities to guide our business to address this challenge.
In recent years we have accomplished several demanding restructuring processes world-wide, in line with The Hydro Way, which encompasses our vision and values. These experiences are important to build on as we are now in the middle of even more challenging restructuring.
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 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 in the Qatalum project and to minimize other funding requirements. During 2008 we repurchased 4,408,000 shares for NOK 149 million.