Letter to shareholders

Lifting the bar

If you want to become better, you need to raise the bar, again and again. Always stretching for more is at the heart of Hydro’s strong improvement culture.

Now it’s official. Since 2009 we have managed to reduce the cost of producing one tonne of aluminium by 300 US dollars in our fully owned primary aluminium plants. This program has made us the industry’s improvement benchmark. When Hydro started the program four years ago, the goal seemed out of reach and many thought it was mission impossible. I want to congratulate our determined operators, leaders and technical experts for making the impossible possible – The Hydro Way.

Even with aluminium prices touching low levels not seen since the financial crisis, Hydro’s ambitious improvement programs throughout the value chain, aiming to reduce costs and increase effectiveness, have strengthened our robustness in the current weak market conditions, and improved Hydro’s relative industry position.

Do things right – and do the right things

Continuous improvement is an infinite process and the drive to optimize is a Hydro talent. In addition to the USD 300 program, we have re-confirmed the overall improvement targets of Bauxite & Alumina’s ‘From B to A’ program and we’ve realized significant savings through the ‘Climb’ program in Rolled Products. Primary Metal has also launched a USD 180 program for Hydro’s part-owned smelters in close cooperation with our partners.

I would like to add a special tribute to Qatalum, our joint-venture smelter in Qatar, which is performing very well and already producing value-added aluminium products at a rate above nameplate capacity. Not only is Qatalum in the best quartile on the global cost-curve, as was our aim, but is now ranking among the top 10 percent worldwide, delivering dividends even at today’s low prices.

Even though two power outages offset much of this year’s improvement efforts at our Brazilian alumina refinery Alunorte, Hydro has also achieved significant improvements in Brazil. New systems will ensure continued production even if the external power supply should fail, and a new pump station on the bauxite slurry pipeline between Paragominas and Alunorte will secure stable and highly efficient transportation. Alunorte is back on production levels seen before the power outages and the Paragominas bauxite mine continues to deliver steady production improvements.

The Sapa transaction will also contribute to saving costs, with an expected NOK 1 billion in synergies by the end of 2016. But more important, the merger between Hydro’s and Orkla’s extrusion businesses has created the world’s leading provider of aluminium solutions, with global reach and solid market positions. I wish our Hydro Extrusion colleagues all the best in the efforts to build a global champion in which Hydro holds a 50 percent stake.

Hydro is now, for the first time, the largest provider of primary foundry alloys (PFA) in the Asian market outside China. Every fourth car produced in Asia outside China now contains aluminium from Hydro. Also in Europe, we are increasing the capacity for producing automotive parts to accommodate a rapidly growing market for aluminium in cars.

Aiming to set new standards

In parallel, the company continues its drive for technological leadership and setting new industry standards in safety, climate ambitions and corporate social responsibility. We are aiming to lift the bar in all areas and aspects of operations to further strengthen the company’s relative position in an industry with a strong longer-term potential.

Social responsibility is an integrated part of all we do. It is all about assessing risks, planning ahead and doing our homework. In this light, CSR becomes an investment for a stronger Hydro – strategically, financially and commercially, because it reduces risk and builds trust and confidence and positions us for future business opportunities and long-term partnerships.

Our R&D efforts are key to achieve continuous improvement, and Hydro has taken steps towards taking technological leadership in the industry. The average smelter uses above 14 kWh to produce one kilo of aluminium. Hydro’s HAL4e test cells in Årdal have been running on 12.5 kWh for several years. In a new test cell, HALsee, integrating all the best theories and ideas of our researchers in one cell, we managed to break the magic 12.0 kWh barrier. We are now evaluating to build a 70,000 tonne smelter technology pilot at our Karmøy plant, increasing energy-effectiveness, lowering its carbon footprint and strengthening its ability to meet customer demands on quality, reliability and innovative solutions – in short, aiming to test and develop the world’s most energy-efficient electrolysis on an industrial scale. Saving energy is an excellent example that profitability and environment are not opposites, but may very well go hand-in-hand.

Unfortunately, in 2013 we did not reach our most important goal of no fatalities. In March last year, a contractor employee working at our extrusion plant in France died following an accident. Safe operations continue to be the most important factor for us, and the ambition of zero fatal accidents remains our most important goal. Hydro has never recorded fewer major accidents, environmental and security cases than in 2013, hopefully because our focus and efforts on inherent high risks are paying off.

As part of our work in social responsibility, Hydro has signed on to the UN Global Compact, participates in the World Business Council for Sustainable Development and the International Council on Mining and Metals (ICMM), and was included on the Dow Jones Sustainability Indexes and FTSE4Good list for 2013.

Hydro has launched an ambitious climate strategy, aiming to make the company carbon-neutral from a life-cycle perspective by 2020. By continuously working to reduce energy consumption and emissions in our own processes, helping our customers reduce their energy consumption and emissions through lighter and smarter aluminium solutions and bringing more post-consumed metal back into the loop, I believe that Hydro can help save more greenhouse gases than we emit. With good help from our captive hydropower production, Hydro’s carbon footprint is already among the best in our industry, and we want to stretch further.

More tunnel – but light at the end

Despite challenging market conditions since the financial crisis of 2008-09, aluminium demand has continued to grow and by 2013 had risen above pre-crisis levels. Going forward, world demand outside China is expected to grow by 3-4 percent a year over the next decade, and 4-6 percent including China. The future is energy-efficient and will need more aluminium.
The aluminium market is still influenced by historical overproduction. So we will keep up the cost focus in all parts of Hydro and continue the good work performed by the business areas and staffs, characterized by determination, foresight and cooperation, enabling Hydro to move forward with better operational capabilities than ever.

Continuous improvements do work. Our electrolysis cells perform much better today than when they were brand new – 40, 20 or even 10 and 5 years ago. Imagine aiming for that with your car.

Aluminium prices continued to be low last year, but 2013 was a solid year when it comes to the quality and efficiency in our operations. I firmly believe that the continuous improvement efforts will pay off accordingly.

Updated: October 11, 2016