President & CEO Hilde Merete Aasheim and Chair Dag Mejdell's letter to stakeholders in Hydro's 2021 annual report.
The aluminium market has been strong during 2021, with global demand outpacing supply growth, reducing inventories and supporting LME prices above USD 3,000 per tonne. Along with the firm economic recovery, the business environment has been heavily impacted by the pandemic, energy shock and supply chain disruptions – and increasing expectations on climate and sustainability from customers, markets and regulators.
We expect a healthy demand growth for aluminium of around 4 percent annually this decade. As a building block of modern societies, aluminum plays an important role in the transition towards a carbon-free economy. Lightweight, durable and infinitely recyclable, aluminium is a catalyst for reducing emissions in several sectors of the economy. We experience increasing interest and demand for our low-carbon aluminum in the market. This gives confidence that our efforts until now, combined with our strengthened climate ambitions announced at our Capital Markets Day in December last year, build a strong foundation for long-term value creation.
However, as a company we are not only defined by our climate footprint. Sustainability for Hydro goes beyond climate and the environment. Issues such as health, education and social development in the societies in which we operate, will be even more important going forward as a basis for how we will deliver long-term value for our shareholders and society at large. This reflects Hydro’s 116-year history and purpose, and how the success of Hydro has been closely and mutually interlinked with the societies we are a part of.
Based on The Hydro Way and our values – care, courage and collaboration - our ambition is lifting profitability and driving sustainability, creating sustainable value for all stakeholders.
A safe and secure work environment
Our most important responsibility starts with the health and safety of our employees. The Covid-19 pandemic has been distressful for our employees all over the world.
Sadly, we are mourning the loss of 35 good Hydro colleagues and contractors due to Covid-19 during the past two years. We commend the efforts of our plant managers, unions and all our employees that have been protecting the workplaces from the virus and keeping the wheels turning, and for supporting the local communities in which we operate.
Safe operations are our first priority. There were no fatalities, nor life-changing injuries, in 2021. We have emphasized high-risk incidents during 2021 and we are pleased that the number of high-risk incidents declined by almost 14 percent from the year before. However, the total number of recordable injuries per million hours worked increased to 3.3 in 2021, up from 2.7 in 2020. The ultimate target is an injury-free work environment and to make sure that every employee returns home from work safely.
Profitability and sustainability
Over the past two years we have worked with determination to implement our agenda Lifting profitability, Driving sustainability. We are impressed with our organization’s ability to continuously focus on new improvement initiatives, even in times with strong markets. Through 2021 we have delivered NOK 6.3 billion of the total original improvement program of 7.4 billion.
With this momentum, we have now stretched the overall program to NOK 8.5 billion to be delivered by 2025.
One important lever for the strong performance in 2021 is that Alunorte and Paragominas in Brazil have been operating at full capacity utilization throughout the whole year, which is a result of the focus on improved asset integrity and increased robustness in both plants.
Strong demand, higher prices, robust operations with higher volumes and improved margins, in addition to determined improvement efforts, yielded a strong EBITDA result of 28 BNOK in 2021. We have lifted profitability across all our business areas and we delivered a return on capital employed of 18.6 percent in 2021, which is well above our target of 10 percent over the cycle. In addition, Hydro ended 2021with a net cash position of NOK 3.2 billion, from a net debt position of NOK 7.8 billion the previous year.
Having a clear profitability agenda has guided our prioritization in terms of portfolio development and capital allocation. We have worked within a strict capital allocation regime and allocated return-seeking funds where returns are highest. To support this, we concluded the strategic review and subsequent divestment of Hydro Rolling in 2021, providing capital for further profitable growth.
Moreover, we are satisfied that we have made the investment decision to switch fuel oil with natural gas at Alunorte which is a major enabler to reach our 30 percent CO2 target by 2030.
Driving the green transition
In 2021, we sold three times the volume of our low-carbon brands Hydro REDUXA and Hydro CIRCAL compared to the year before. It strengthens our belief that our investments in sustainability will not only improve our impact on climate and the environment, but also demonstrates that aluminium is part of the solution by lowering the footprint of our customer’s products. Increased sales of our greener products will contribute to our profitability going forward in a world that is increasingly turning words into action in its response to climate change.
The specific pull we experience in the market for the low-carbon aluminium products comes as a consequence of the decarbonization, electrification and circularity trends in sectors like automotive, building and construction, as well as renewable energy infrastructure.
The green transition will be challenging and require tremendous investments on a global scale. On the other hand, the green transition will also represent a lot of opportunities. We are determined to seize opportunities where Hydro’s capabilities match global megatrends, enabling our company to take a leading position in the green transition.
Executing on Hydro 2025
In 2021, we have taken key steps in the execution of our 2025 strategy, strengthening our low-carbon aluminium position as well as maturing business opportunities within new energy solutions.
Cost reductions and operational excellence have continued to be our top priority in addition to continuing to shape the demand for aluminium and our low-carbon product portfolio as well as increasing recycling of post-consumer scrap.
Last year, we announced our ambition of becoming net-zero in terms of direct and indirect emissions by 2050 or earlier.
We have defined three pathways to be able to produce carbon-free primary aluminium towards 2050. One pathway is to use carbon capture and storage technology to produce carbon-free primary aluminium. A second pathway is our proprietary carbon-free electrolysis technology called HalZero. This technology will keep the CO2 in a closed loop and reuse it as a source of carbon in the electrolysis process. We are very enthusiastic about the prospects of both routes to carbon-free primary aluminium.
A faster pathway to carbon-free aluminium is more recycling of post-consumer aluminium scrap. Our ambition is to deliver the first commercial volumes of near-zero carbon aluminium already in 2022, based on 100 percent recycled post-consumer scrap. Our network of recyclers and their proximity to scrap suppliers and customers are key competitive advantages to enable and capture value from more circular business models.
The second pillar of our strategy is to grow and diversify in new energy solutions. Access to abundant renewable energy is crucial to make our own aluminium value-chain carbon-free and for the world to drive the green transition and reach its climate targets. In 2021, we continued to execute on our strategy to grow in new energy areas that will support decarbonization and develop profitable businesses for Hydro. These areas include renewable energy, batteries and hydrogen.
In executing our strategy, people are at the heart of our success. We depend on attracting and retaining the best people to lead the way. Leadership to develop people, drive change and deliver results is crucial to fostering our Hydro culture and in achieving the business strategy. We aim to nurture the entrepreneurship and commercial instinct within our organization and improve opportunities to develop competencies for operators, experts and leaders. We believe that diverse and inclusive teams lead to higher levels of innovation, a learning culture, better customer understanding and cultural awareness, as well as higher financial results. It also makes a better place to work.
Industries that matter
Climate, environment and social responsibility are deeply interconnected. Responsible business is a prerequisite for long-term value creation through access to new markets, lower cost of capital and access to best talent. Sustainability is also about creating value to society by improving lives and livelihoods where we operate.
Our environmental ambition emphasizes protecting biodiversity and reducing our environmental footprint, with a particular focus on eliminating landfilling of waste in the long term. A significant contribution here, is our pioneer tailings dry backfill method at our Paragominas bauxite mine in Brazil, which will eliminate the need to establish new tailings dams.
We believe that we can only be successful as a business if the societies where we operate are thriving. The pandemic has shed light on how rising inequality among people and regions amplifies the vulnerabilities and risks in today’s interconnected, yet fragmented world. We want to do our part, and are progressing on promoting education, just transition and a responsible supply chain.
Hydro is engaging with a range of international organizations, working to improve industry standards for human rights, transparency and responsible production. Hydro is also a signatory to the UN Global Compact and a committed member of the Aluminium Stewardship Initiative (ASI).
Hydro remains committed to driving long-term value and paying attractive dividends to our shareholders. We prioritize maintaining our investment grade rating, and we are a stable dividend stock. We aim to pay out a minimum of 50 percent of adjusted net income over the cycle, with a floor of 1.25 NOK per share. In light of the strong financial performance last year, and reflecting our robust balance sheet, the Board of Directors has proposed a dividend of NOK 5.4 per share, equal to 80 percent of adjusted net income for 2021.
After the second year of the global Covid-19 pandemic, we would like to acknowledge the impressive efforts and relentless commitment by our employees, demonstrating once again that the people of Hydro are Hydro’s greatest asset.
As a global aluminium and energy company, Hydro is committed to contribute to building industries that matter and creating sustainable value for all stakeholders.