Board of Directors' report

Left to right: Pedro José Rodrigues, Irene Rummelhoff, Dag Mejdell, Finn Jebsen, Ove Ellefsen, Inge K Hansen, Eva Persson, Liv Monica Bargem Stubholt, Billy Fredagsvik and Sten Roar Martinsen. Click on person to view CV.

Key developments and strategic direction

Strong position in an environment of improved market conditions

Several years of significant operational and commercial improvements implemented throughout the value chain have strengthened Hydro's ability to create value in an environment of improving market fundamentals.

Bauxite & Alumina's From B to A improvement program is back on track, reaching about NOK 700 million of annual improvements in 2014. Recovering from operational setbacks at Alunorte in the previous year, bauxite production at Paragominas reached 10.2 million mt (annualized) in the fourth quarter of 2014, and Hydro continued to lift alumina production at Alunorte towards name-plate capacity of 6.3 million mt per year. In 2013, Primary Metal launched new initiatives targeting savings of USD 180 per mt for its global portfolio of part-owned smelters and further savings for its fully-owned smelters on top of the USD 300 per mt achieved at the end of 2013. These programs had generated roughly NOK 2.3 billion in annual improvements by the end of 2014. Rolled Products' Climb program has contributed around NOK 600 million, while continued focus on operational and commercial improvements have strengthened Hydro's Energy business. Since 2009, the programs discussed above have generated increasing improvements, reaching around NOK 3.7 billion annually by the end of 2014 including cost savings related to our headquarter operations. Additional savings of 1.5 billion relating to these programs are expected to be realized by the end of 2016. In addition, NOK 1 billion (Hydro's share NOK 500 million) of restructuring improvements and synergies have been targeted for the Sapa joint venture by the end of 2016. The program is ahead of plan, with about half of the expected savings reflected in underlying results for 2014.

Securing long-term competitive power sourcing has been of critical importance to sustain the viability of Hydro's smelter portfolio in Norway. In 2014, Hydro entered into long-term power agreements for the annual supply of energy totaling 2.7 TWh to its Norwegian smelters over a 10 year period from 2021 onwards.

Following several years of challenging market conditions, the global aluminium market has improved with higher all-in metal prices due to a better demand and supply balance for primary aluminium with a market deficit of around one million mt in the world outside China. Considerable weakening of the Norwegian kroner and Brazilian real against the US dollar, both major cost currencies for Hydro's operations, has strengthened the company's competitive position. However, significant uncertainty continues surrounding general economic developments in Europe in particular.
In China, the aluminium market was oversupplied in 2014 resulting in a market surplus of one million mt. An oversupply in China combined with high metal price differentials could increase the export of fabricated and semi-finished products and result in further export of primary metal.

Creating value by becoming better, bigger and greener

Hydro is committed to a proactive, strategic business approach aimed at strengthening the company’s ability to add value. Hydro will continue to drive improvement, focusing on all aspects within the company's control, including health, safety, environment and compliance, operational excellence, commercial expertise and customer satisfaction. Tight capital discipline will remain a top priority together with maintaining the company's robust financial position.

Selective, profitable growth opportunities will be pursued to improve Hydro's relative industry position, including high-grading the products portfolio and maturing attractive growth projects, mainly depending on developments in the balance between industry production capacity and market demand.
Hydro believes that sustainable business practices improve the company's ability to create shareholder value while making a positive difference wherever it operates. Hydro aims to reduce its environmental footprint and has the goal to become carbon-neutral by 2020. The company also intends to enhance its social contribution through targeted initiatives within a range of areas, including biodiversity, recycling and water management, stakeholder engagement and promoting CSR in its supply chain.

Operating performance

Underlying EBIT more than doubled in 2014 amounting to NOK 5,692 million compared with NOK 2,725 million in the previous year influenced by a significant increase in all-in metal prices together with the strengthening US dollar compared to the NOK and BRL. Higher realized alumina prices, higher alumina sales volumes and lower operating costs for Bauxite & Alumina also made a significant contribution to underlying results for the year.
Hydro met its most important target of no fatal accidents in 2014, and the number of serious accidents was at historically low levels. Hydro's safety performance is among the best in the industry. In 2014, we reduced our TRI rate (total recordable injuries per million hours worked) by six percent, down to 3.19, however, we did not meet our target for the year.

Priorities for 2015

A resource-rich, global aluminium company, Hydro intends to continue to lift the performance and profitability of its operations while securing safe, sustainable business practices. Priorities in 2015 include:

  • Strengthening performance within health, safety, security and environment (HSE), compliance and corporate social responsibility (CSR)
  • Enhancing workforce performance and engagement 
  • Delivering on targeted cost reduction and improvement programs and identifying further potential
  • Pursuing recycling opportunities to improve earnings and reduce environmental impact
  • Further developing high-margin growth segments through innovative and differentiated products
  • Maximizing energy asset potential and continuing long-term sourcing efforts
  • Advancing the company's leading position in technology development and innovation
  • Maintaining capital discipline and strong financial position
  • Continue our proactive approach to regulatory challenges including ICMS taxation by systematic dialogue with key stakeholders in Brazil

Hydro is intensifying its efforts to improve its TRI rate for 2015 based on leadership, employee involvement and defined risk mitigating activities. Continued strengthening of the company's compliance activities is also an important objective for 2015, including allocating additional resources, further awareness training and stronger emphasis on integrity risk management in the supply chain.

Implementation of Hydro's people strategy will continue in 2015 with an emphasis on people performance and development processes such as My Way and Hydro Monitor. Hydro will continue its focus on strategic workforce planning in order to secure future requirements for managers and technical specialists and meet Hydro's diversity aspirations.

Hydro will continue to lift alumina production in Alunorte towards name-plate capacity of 6.3 million mt per year together with achieving the NOK 1 billion improvement target by the end of 2015. During the coming year Hydro will maintain momentum and continue to concentrate on increased production, higher productivity, lower operating costs and manning, as well as further optimization of the company's sales portfolio. Measures include sourcing arrangements aimed at reducing logistical costs and improving margins. Hydro also intends to continue increasing its share of alumina sales volumes at index pricing as old legacy LME linked contracts gradually expire.

Hydro is committed to sustain realized improvements and to identify further savings beyond the USD 300 improvement program completed in 2013 for Primary Metal's global portfolio of fully-owned smelters. Progress toward achieving savings targeted for Hydro's portfolio of partly-owned smelters of USD 180 per mt is also an important objective in the coming year. The program, which is planned to be completed by the end of 2016, is expected to generate annual improvements of roughly NOK 1.2 billion (Hydro's share) compared to 2011 cost levels.

Product premiums have become an increasingly larger share of total aluminium metal prices and reached record-high levels during 2014. Optimizing margins by focusing on high-premium products will continue to be high on the agenda for Hydro's Metal Markets operations. Implementation of new casting technology at the company's sheet ingot casthouses in Høyanger and Årdal, Norway, will also enable Hydro to target more advanced market segments including customers in the automotive segment.

Recycling is an important element supporting the company’s ambition to become carbon-neutral by 2020. Hydro aims to be a leading player in this growing market segment to pursue commercial opportunities and reduce the environmental impact of its operations. Plans include increasing the capability and capacity to use post-consumed and other types of contaminated scrap and to increase sales of recycling friendly alloys. The most important projects currently include a recycling line for used beverage cans at Hydro’s smelter in Neuss, Germany, and a plant upgrade in the Clervaux, Luxembourg, remelter.

Hydro intends to improve margins through high-grading its product portfolio and differentiation through innovation, quality and reliability. Based on expected strong demand in the automotive Body-in-White market segment, Rolled Products is investing in a new production line to lift its capacity for aluminium car body sheet fourfold to 200,000 mt per year. Initiatives relating to the Rolled Products' Climb improvement program will continue with the goal of generating annual revenue and cost improvements of NOK 800 million by 2016 compared to cost levels at the end of 2011.

Capturing the full value potential from Hydro's Norwegian hydropower assets and using its competence to secure competitive energy sourcing for the company's global activities is a key element of Energy's improvement strategy. Operational excellence will continue to be a priority to secure cost-effective, safe and reliable production.

Hydro aims to provide its shareholders with competitive returns compared to alternative investments in peer companies through ongoing cost reductions, product portfolio optimization, efficiency improvements and product innovation. The company will continue to focus on securing its financial position through exercising strong capital discipline while maintaining a sustainable level of capital expenditures to safeguard its operating portfolio. Strong cash generation and preserving Hydro's investment grade credit rating continue to be key priorities.

Hydro is engaged in a systematic dialogue with local, state and federal politicians, industry associations, non-governmental organizations and local communities regarding the regulatory challenges facing its operations is Brazil. The focus of the dialogue is on Hydro's contribution to a sustainable aluminium value chain in the state of Para and underlines the need for competitive and predictable framework conditions for Hydro's operations.
Well positioned in an industry with attractive potential

Hydro is well positioned with attractive positions throughout the value chain and a highly attractive asset base including high quality bauxite and alumina, captive hydropower, a competitive smelter portfolio, European leadership in rolling operations, strong position in recycling and a world leading extrusion position through its investment in the Sapa joint venture. Following years of depressed earnings and unsatisfactory returns for the industry as a whole, improved market fundamentals together with years of dedicated improvement and restructuring efforts provide the basis for moving toward more sustainable profitability. These factors have strengthened Hydro's position to utilize opportunities as the global economy evolves.

Hydro's drive for technological leadership will continue in order to raise its cost competitiveness, strengthen environmental standards and support long-term growth ambitions. A 75,000 mt pilot plant for full-scale industrial testing of the world's most energy-efficient smelter technology is planned for Hydro's smelter at Karmøy, Norway. The project is supported by a contribution of NOK 1.5 billion from Enova, a Norwegian public enterprise that supports new energy and climate-related technology. Execution of the project is subject to obtaining a sustainable power solution for the plant.

Hydro has an attractive project portfolio, including the possibility for a new alumina refinery in Barcarena, close to Alunorte, a possible expansion of the Paragominas bauxite mine, the potential of doubling the capacity of the Qatalum smelter and the possibility to expand the part-owned Alouette smelter in Canada. Partnerships and joint ventures across the value chain provide the potential for further developing Hydro's asset portfolio. Investments in these projects are mainly dependent on ongoing developments in the balance between industry production capacity and market demand.

Hydro is committed to maintain the viability of the company's global business operations and is working systematically to ensure stable, predictable framework conditions in the countries where it operates.

1. Calculated on a real basis with 2014 as a reference year.

2. The all-in price refers to the LME aluminium price plus premiums

Amounts relating to annual improvements achieved by the end of 2014 are based on a comparison to cost and revenue levels in 2011 except for the USD 300 per mt program which is compared to 2009.

About Hydro's Board of Directors

Dag Mejdell (Chairperson)
Dag Mejdell

• Position: President and CEO of Posten Norge AS
• Education: Master degree in Business Administration from
  the Norwegian School of Economics & Business Administration (NHH)
• Current directorships: Chair of International Post Corporation,
  Chair of the Employers Association Spekter, deputy chair of SAS AB and directorships within the Posten group.

• No. of Hydro shares: 35,000

See CV

Inge K. Hansen (Deputy chairperson)
Inge K. Hansen

• Position: Independent adviser
• Education: Degree in Economics and Business Administration
   (siviløkonom) from the Norwegian School of Economics (NHH)
• Current directorships: Chair of the board of Harding AS, Troms Kraft AS, World Championship Biathlon 2016, Norsun AS, Gjensidige Forsikring ASA, Hotell og Restauranthuset Continental, Core Energy AS, Nets AS and Arctic Securities AS, and is a board   member in Sissener AS and the Fram Museum.

• No. of Hydro shares: 12,000

Irene Rummelhoff
Irene Rummelhoff

• Position: Executive Vice President, New Energy Solutions in Statoil
• Education: Master of Science in Geology/Geophysics from the Norwegian University of Science & Technology (NTNU)

• No. of Hydro shares: 5,000

See CV

Liv Monica Stubholt
Liv Monica Stubholt

• Position: Partner, Hjort DA
• Education: Candidate in Jurisprudence (cand. jur.), University of Oslo.
• Current directorships: Chair of the board of the Russian-Norwen Chamber of Commerce, Rosneft Nordic Oil AS and Varanger
  Kraft AS. Board member of the German-Norwegian Chamber of
  Commerce, Solveig Gas Norway AS, Broadnet AS and
  VNG Norge AS.

• No. of Hydro shares: None

See CV

Finn Jebsen
Finn Jebsen

• Position: Independent businessman
• Education: Degree in Economics and Business Administration
  (siviløkonom) from the Norwegian School of Economics (NHH).
  Master's degree in Business Administration from the
  University of California, Los Angeles
• Current directorships: Chairperson of Kongsberg Gruppen ASA and
  Kavli Holding AS; board member of A. Wilhelmsen AS, Norfund,
  Future Subsea AS and his wholly-owned company Fateburet AS.

• No. of Hydro shares: 53,405 including shares owned by Fateburet AS

See CV

Pedro José Rodrigues
Pedro José Rodrigues

• Position: Global Director of Vale S.A.
• Education: Chemical Engineer from Fundação Armando Alvares   Penteado, São Paulo, Brazil
• Current directorships: None

• No. of Hydro shares: None

See CV

Eva Persson
Eva Persson

• Position: Independent businesswoman
• Education: Master of Law from the University of Lund, Sweden
• Current directorships: Board member of Platzer Fastighets
  Holding AB, Deutz AG and appointed expert of the Swedish
  Securities Council (Aktiemarknadsnemnden)

• No. of Hydro shares: None

Ove Ellefsen (Employee representative)
Ove Ellefsen

• Position: Project Supervisor / full-time union official representing the Central Cooperative Council (Sentralt Samarbeidsråd).
• Education: Certificate of apprenticeship in electrochemistry. 
  Work supervisor training.
• Current directorships: None

• No. of Hydro shares: 7,547

See CV

Sten Roar Martinsen (Employee representative)
Sten Roar Martinsen

• Position: Process operator / full-time union official representing the Norwegian Confederation of Trade Unions (LO)
• Education: Certificate of apprenticeship in electrochemistry.
  Work supervisor training.
• Current directorships: None

• No. of Hydro shares: 4,218

See CV

Billy Fredagsvik (Employee representative)
Billy Fredagsvik

• Position: Process operator / full-time union official. Represents the Norwegian Confederation of Trade Unions (LO)
• Education: Trade school (mechanics)
• Current directorships: None

• No. of Hydro shares: 3,162

See CV

Updated: October 11, 2016