Board of Directors' report

board of directors group photo
Board of directors, left to right:Sten Roar Martinsen, Finn Jebsen, Liv Monica Bargem Stubholt, Dag Mejdell, Marianne Wiinholt, Billy Fredagsvik, Irene Rummelhoff, Ove Ellefsen.Thomas Schultz was not present when the picture was taken.

Key developments and strategic direction 

Innovation and differentiation through integrated value chain 

In 2016, Hydro made significant progress towards all main aspects of the company’s overall strategic direction Better, Bigger, Greener. Hydro’s industry-leading improvement drive continued to deliver significant operational and commercial results. Hydro pursues a model of full value chain integration, and firmly believe this contributes to the ability to generate added value and to serve leading customers by ensuring operational excellence, driving improvements and extending our lead in technology and innovation. The company continued to be on track with its ambition to become carbon-neutral from a lifecycle perspective by 2020.

No fatal accidents occurred in Hydro’s operation, but several incidents with high risk potential occurred. The number of high risk incidents and major accidents continued to fall in 2016, and Hydro's safety performance remains among the best in the industry. The company reduced its TRI ratefootnote 1 graphic from 3.0 in 2015 to 2.6 in 2016. The injury rate for contractors also reduced, resulting in the same TRI rate as for own employees. This was the best recorded safety result ever and was better than the target of 2.8 for own employees and 3.0 for contractors for the year.

Hydro delivered on targeted improvements again in 2016. The company is ahead of schedule with its NOK 2.9 billion Better improvement ambition by 2019, achieving NOK 1.4 billion of annual improvements for 2016, with stronger-than-expected improvement results in the Bauxite & Alumina business area compensating for slower-than-expected progress in both Primary Metal and Rolled Products. Primary Metal completed the USD 180 per mt joint venture improvement program at the end of 2016.     

For Bauxite & Alumina, 2016 became a year of strong operational progress, with an all-time low implied alumina cost and record production levels above nameplate capacity for both the Paragominas bauxite mine and the Alunorte alumina refinery. During the year,  Hydro and Brazilian mining company Vale ended negotiations on the possible acquisition of Vale’s 40 percent interest in Brazilian bauxite producer Mineração Rio do Norte (MRN). The two companies entered into a letter of Intent (LoI) regarding the possible transaction in October 2015, but have not been able to agree on commercial terms. Hydro will continue to directly own 5 percent of MRN, as well as to purchase bauxite from Vale under commercial agreements entered into in 2011. The put/call option for Vale's remaining shares in Paragominas has been exercised, the transaction was completed in the fourth quarter of 2016. 

Hydro is utilizing technology and innovation to differentiate in the highly competitive environment of global aluminium. In February, 2016, Hydro made the final build decision for the construction of the 75,000 mt technology pilot at Karmøy, which by year-end was around 70 percent physically complete. Production is expected to commence during the fourth quarter of 2017, verifying the world’s most climate and energy-efficient smelter technology with considerable spin-off effects for Hydro’s existing smelter portfolio. Primary Metal is progressing to deliver on the ambition to increase production with 200,000 mt per year based on creep in existing production lines in our fully owned and joint venture plants within 2025. So far approximately 35,000 mt have been delivered.

Both Primary Metal and Rolled Products, as well as our extrusion Joint Venture Sapa, are pursuing a strategy of high-grading and shifting the product portfolio towards higher-margin segments. In Rolled Products, this has resulted in a special focus on the high-growth automotive market, and trial production has now started at the new automotive line 3 in Grevenbroich, Germany, that will serve European-based car makers with premium products. In the first quarter of 2016 Rolled Products signed a multi-year contract for deliveries to UK-based car maker Jaguar Land Rover.

Recycling is growing at an even faster rate than primary metal, as more scrap is becoming available on the market. Hydro is targeting the recycling area from several angles, such as turning remelters into recycling plants, optimizing scrap sourcing and processing, increasing our sales of recycling friendly alloys and developing closed loops in cooperation with our customers. Metal Markets upgraded its Clervaux remelter during 2016 to take more post-consumer scrap and lift production to above 100,000 mt. Rolled Products also completed construction of the new recycling line for used beverage cans this year, which is expected to reach full capacity during 2017 after experiencing some difficulties during the ramp-up phase.

Securing long-term competitive power sourcing has been of critical importance to sustain the viability of Hydro's smelter portfolio. In 2016, Hydro entered into a long-term power contract with Nordic Wind Power DA for the annual supply of energy totaling 1 TWh  for Hydro's Norwegian smelters for a 15-year period beginning 2021, and 0.7 TWh for the period 2035-39, enabling competitive aluminium production in Norway. This was on top of 1.05 TWh sourced in the previous year. During the year, power contracts were also entered into that will fully supply our smelter operations in Germany up to 2025. In 2016, Norsk Hydro Energia Ltda was in its second year of operation continuing as a vehicle for power market operations in Brazil.

In 2016, an important regulatory change was implemented in Norway that allows for private ownership to waterfalls through companies with liability, often referred to as industrial ownership or ANS/DA, enabling further progress on Hydro’s work to restructure ownership and protect the value of our power assets. This would enable Hydro to maintain access to physical power through a one-third ownership position in a company with liabilitythat might otherwise revert to the Norwegian State.

Better-than-expected Chinese primary demand, supported by stimulus measures, in combination with moderate production growth resulted in a global market deficit in 2016. Moreover, the market deficits in the key consumer regions North America and Europe also grew larger. LME prices were at weak levels at the start of the year, but increased during the year supported by tighter market balances and rising energy and alumina prices. On average the USD strengthened against the Norwegian kroner and Brazilian real, benefiting the company’s competitive position.

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. This approach is reflected in Hydro's mid-term strategic goals reflecting the company's aspiration to become Better, Bigger, Greener.  

Hydro will become Better by continuing to drive improvements focusing on all aspects within the company's control. These include health, safety, environment, corporate social responsibility and compliance, operational excellence, commercial expertise, customer satisfaction as well as product and process innovation, continuous technology advancements and the NOK 2.9 billion (2016-2019) improvement ambition. Tight capital discipline and competitive shareholder return will remain top priorities together with maintaining the company's robust financial position.

To become Bigger, selective, growth opportunities will be evaluated to improve Hydro's relative industry position including investments in high-grading the products portfolio, lifting alumina and primary production through debottlenecking and creep as well as strengthening recycling capabilities. Hydro is also maturing growth projects for the future, mainly depending on developments in the balance between industry supply and market demand as well as competitive power supply.

Hydro believes that sustainable business practices will make the company Greener and 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 to enhance its social contribution through targeted initiatives within a range of areas, including biodiversity, recycling and water management, stakeholder engagement, community investments and promoting corporate social responsibility in its supply chain.

Operating performance

Hydro's underlying EBIT decreased to NOK 6,425 million compared with NOK 9,656 million in 2015 primarily due to a decrease in realized alumina prices and all-in metal prices, partly compensated by positive currency effects, lower raw material costs and ongoing improvement efforts. In 2016, Bauxite & Alumina achieved record production at both Paragominas and Alunorte, Sapa performance continued to improve, while Rolled Products delivered a weaker result driven by lower margins and higher costs.

Sapa Profiles Inc. (SPI), a Portland, Oregon based subsidiary of Sapa AS (owned 50 percent by Hydro) is under investigation by the United States Department of Justice (DOJ) Civil and Criminal Divisions regarding certain aluminum extrusions that SPI manufactured from 1996 to 2015, including extrusions that were delivered to a supplier to NASA. SPI is cooperating fully in these investigations. The investigations are currently ongoing, and, at this point, the outcome of the investigations and of any identified quality issues, including financial consequences on Sapa, is uncertain. SPI also has been temporarily suspended as a federal government contractor. Based on the information known to Hydro at this stage, Hydro does not expect any resulting liabilities to have a material adverse effect on its consolidated results of operations, liquidity or financial position. 

In response to these pending investigations, Sapa and Hydro have performed audits of their respective quality assurance processes at all relevant operations. The audits were finalized in 2016, and necessary actions taken.

Priorities for 2017

Going forward, Hydro intends to continue to lift the performance and profitability of its operations while securing safe, sustainable business practices. Priorities in 2017 include:

  • Continuing to strengthen performance within health, safety, security and environment (HSE), compliance and corporate social responsibility (CSR)
  • Enhancing workforce performance, engagement and diversity
  • Strengthening relative industry position through improvement drive and leading R&D
  • Systematic dialogue with stakeholders on framework conditions
  • Continue shifting portfolio towards high-margin segments for leading customers
  • Pursuing recycling opportunities to improve earnings and environmental impact 
  • Securing long-term access to raw materials, including energy sourcing efforts
  • Maintaining capital discipline, reliable dividend level and strong financial position
  • Digitalization and cyber risk protection

In line with the HSE strategy and the 2020 targets, Hydro will continue to follow its HSE road-map: Improving leadership qualities, ensuring even better control over tasks and processes with inherent high risks, and increasing the engagement of operators. Two additional sub-strategies, on health and environment, are under development and will be implemented in 2017 to further strengthen Hydro's performance. HSE is integrated in Hydro's existing business systems as well as in new projects and process modifications. 

Implementation of Hydro’s updated people strategy will continue in 2017 with an emphasis on strategic workforce planning and competence practice. Hydro received excellent results from its employee engagement tool, the Hydro Monitor. Maintaining high employee engagement will be a key priority going forward.

Hydro has performed a feasibility study on a project for improved waste handling in Barcarena in Brazil. The project aims at improving the working conditions for those currently involved in waste collection.

Hydro's board sanctioned Code of Conduct will be updated in 2017, and the revised Hydro Integrity Program will be finalized and rolled out in the organization. An external review of Hydro’s compliance system will be performed in 2017. 

Bauxite & Alumina are on track to reach the NOK 1 billion "Better Bauxite & Alumina" improvement ambition by 2019. Hydro intends to continue increasing its share of alumina sales volumes at index pricing as old legacy LME-linked contracts gradually expire.  Hydro has signed a Memorandum of Understanding (MoU) with Shell Brasil Petróleo LTDA and also a Letter of Intent (LoI) with the state of Pará, with the aim to replace a major part of its current fuel oil consumption at the Alunorte alumina refinery in Brazil with more climate and cost efficient natural gas. 

Hydro is engaged in a systematic dialogue with local, state and federal politicians, industry associations and non-governmental organizations regarding the regulatory challenges facing its worldwide operations. In 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. Hydro is committed to support verticalization through the aluminium value chain, contribute to the development in the region and act as an enabler for sustainable growth in the state of Para. 

Hydro is committed to sustain realized improvements and to identify further potential as part of its "Better Primary Metal" ambition of NOK 1 billion by 2019. In addition to further improving productivity and reducing costs, Primary Metal aims to lift production capacity at existing plants through the 200,000 mt 2025 creep ambition, based on known technologies and enablers, as well as technology spin-offs from the Karmøy technology pilot. The main drivers for these volumes are larger anodes, new cathode technology, improved process control systems, modeling tools and our world-class business system, AMBS. The 75,000 mt technology pilot at Karmøy, utilizing Hydro's next-generation HAL4e technology, is expected to contribute to reduced energy costs and lower greenhouse gas emissions. Experience gained from building and operating the plant will also enable further improvements in the productivity of the current smelter portfolio.

Optimizing margins by focusing on product differentiation will continue to be high on the agenda for Hydro's Metal Markets operations. High focus on and investment in R&D and finalization of the new casting technology at the company's sheet ingot casthouses, will enable Hydro to target more advanced market segments in particular customers in the automotive segment.

Hydro intends to improve margins through high-grading its product portfolio and differentiation through innovation, quality and reliability. Based on strong demand in the automotive Body-in-White market segment, Rolled Products has invested in a new production line to lift its nominal capacity for aluminium car body sheet to 200,000 mt per year. Construction of the new production line was completed in 2016 with ramp up expected to be complete during 2017. The "Better Rolled Products" improvement ambition is targeting NOK 900 million by 2019 through improved product mix, reduced metal cost due to increased recycling and further operational improvements. 

Recycling is an important element supporting Hydro's ambition to become carbon-neutral by 2020. The company aims to be a leading player in this growing market segment to pursue commercial opportunities and reduce the environmental impact of its operations. Further increases in the capability and capacity to use post-consumer and other types of contaminated scrap are targeted together with increased sales of recycling friendly alloys. The most important project currently includes the ramp-up of a recently completed recycling line for used beverage cans at Hydro’s smelter in Neuss, Germany.

Capturing the full value potential from Hydro's Norwegian hydropower assets and using energy market competence to secure competitive energy sourcing for the company's activities both in Norway and abroad will continue to be high on the agenda for 2017. Operational excellence in Hydro's hydropower portfolio 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 by lifting the cash flow generation potential in all of its business areas. 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. Offering a predictable dividend level to shareholders and preserving Hydro's investment grade credit rating continue to be key priorities.

Digital systems and capabilities are growing in importance and impact. Relevant examples for Hydro include smart robots, predictive maintenance, finance automation and enhanced collaboration for employees. Further work focused on improving cyber security has shown that this is an increasing risk. Currently, all Business Areas and corporate functions are exploring the potential benefits of digitalization. In 2017, these benefits will be organized into a company-wide digital strategy.

Strong position in an industry with attractive potential 

Growth in aluminium demand remains firm, despite volatile economic conditions, driven both by a general increase in consumption and the increasing substitution of aluminium for other materials. Aluminium products are important in all phases of economic development due to the diversified nature of applications such as capital investment in infrastructure and housing as well as consumer goods such as packaging, transportation, electrical and technical applications and household goods. Substitution effects are driving demand primarily in mature markets and in the transportation segment, while investments in infrastructure and construction as well as increasing urbanization and hence consumption are supporting demand growth in emerging economies.

Hydro has strong positions throughout the value chain and an attractive asset base. This includes 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, continual improvement and restructuring efforts have strengthened Hydro's position relative to its industry peers and improved the company's position to utilize opportunities as the global economy evolves. Based on its favorable carbon footprint, recycling efforts, and an integrated value chain, Hydro is in the position to offer to its customers solutions responding to demand for more sustainable products. In this area, Hydro may combine its renewable power sourcing, use-phase benefits of products, the recyclability of the metal, and its efforts in recycling into profitable product solutions.

Hydro's project portfolio includes the possibility for a new alumina refinery in Barcarena, close to Alunorte, a possible expansion of the Paragominas bauxite mine, a possible expansion of primary production in Norway, and the possibility to expand the part-owned Alouette smelter in Canada. Hydro is actively working on opportunities within recycling to expand the business and source more challenging scrap material. The restructuring of Hydro’s Norwegian hydropower assets within the regulatory framework could create further opportunities in the Energy sector. Partnerships and joint ventures across the value chain provide the potential for further developing Hydro's asset portfolio. Investments in these projects are, among other factors, dependent on ongoing developments in the balance between industry supply and market demand and competitive power supply.

Climate, HSE, CSR, and complying with laws, regulations and Hydro's steering documents is fundamental to Hydro's way of working and are considered key elements of the company's license to operate. Hydro is on track to deliver the industry's most ambitious climate target of becoming carbon-neutral from a life-cycle perspective by 2020. The company's safety performance is among the best in the industry, and Hydro is aiming for further reductions to a TRI below 2 by 2020. Hydro has been involved at all stages in the multi-stakeholder development of the Aluminium Stewardship Initiative's (ASI) standards and is participating to develop ASI's supporting systems for a certification platform for responsible production, sourcing and stewardship of aluminium.

footnote 1 graphicTotal recordable injuries per million hours worked

About Hydro's Board of Directors

Dag Mejdell (Chairperson)
Dag Mejdell

• Position: Non-executive Director
• Education: Master degree in Business Administration from
  the Norwegian School of Economics & Business Administration (NHH)
• Current directorships: Chair of International Post Corporation, Chair of Sparebank 1 SR Bank ASA, NSB AS, deputy chair of SAS AB and board member in Telecomputing AS.

• No. of Hydro shares: 35,000

See CV

Irene Rummelhoff
Irene Rummelhoff

• Position: Executive Vice President, New Energy Solutions in Statoil
• Education: Master of Science in Geology/Geophysics (sivilingeniør) from the   Norwegian University of Science & Technology (NTH)
• Current directorships: None

• No. of Hydro shares: 5,000

See CV

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: 8,461

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: 4,076

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 Technology AS and his wholly-owned company Fateburet AS.

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

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: 5,132

See CV

Thomas Schulz
Thomas Schulz

• Position: Group Chief Executive Officer, FL Smidth
• Education: PhD Mining & Mineral Processing, Pheinisch-Westfälische Universität Aachen RWTH, Germany
• Current directorships: None

• No. of Hydro shares: None

See CV

Liv Monica Bargem Stubholt
Liv Monica Stubholt

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

• No. of Hydro shares: None

See CV

Marianne Wiinholt
Marianne Wiinholt

• Position: Executive Vice President and Chief Financial Officer, Dong Energy A/S
• Education: State Authorised public Accountant
• Current directorships: Board Member and Chair of the Audit committee of J.Lauritzen A/S

• No. of Hydro shares: None

See CV

Updated: January 25, 2017