Hydro had an underlying loss before financial items of NOK 618 million in the second quarter, compared with a NOK 493 million loss in the first quarter, as the weak global economy continued to weigh on historically low aluminium markets. Results in downstream operations improved due to seasonally stronger demand and swift adjustments made early in the downturn.
Second quarter underlying loss before financial items of NOK 618 million
Focus on preserving cash, NOK 2.0 billion in operating cash flow in quarter
Aluminium demand apparently flattened out at low level after historic drop
Capacity curtailments of 460,000 tonnes a year completed
Solid progress on cost reduction program, significant savings in operating costs
Qatalum 84 percent complete by end-June, on schedule for start up around end of year

SECOND QUARTER: Even though it was midsummer, Hydro's result presentation on July 22 generated much media interest. (Photo: Kåre Foss)
Energy posted an underlying EBIT of NOK 281 million in the quarter, down from NOK 447 million in the previous quarter due to lower production and spot sales.

"Although we are going through the most difficult period the aluminium industry has ever experienced, we see very positive effects from our significant cost and capacity adjustments," President and Chief Executive Officer Svein Richard Brandtzæg said.

"We remain cautious about the outlook for global aluminium demand ahead of the second half of the year, which is normally seasonally weaker than the previous six months, and will continue to execute our cost reduction program and maintain financial flexibility," he said. "With the substantial reduction in operating capital, reduced input costs and strengthened market positions, we are well-positioned for capturing opportunities."

Aluminium prices seem to have flattened out at historically low levels, following a small pick-up after one of the sharpest drops on record. Key end markets, most notably construction and transport, remain weak.

Due to Hydro's policy of forward selling, the company's average realized aluminium price was about USD 1,470 per tonne, down from around USD 2,000 per tonne in the previous quarter, as the weak market prices of the first quarter was reflected in the earnings of this quarter.

During the second quarter, Hydro completed previously announced capacity curtailments within primary aluminium production and reduced output by about 460,000 tonnes per year, or around 26 percent of 2008 production. Shutdown of the remaining 50,000 tonnes capacity at Neuss is currently on hold. Closure of the part-owned Alpart alumina refinery in Jamaica was also completed during the quarter.

"We have reached our targets in rightsizing the structure, manning and cost level of staff and support functions, expected to result in cost savings of NOK 700-800 million from 2010," Brandtzæg said. In total, Hydro will reduce manning by 4,500 positions by the end of 2009 compared with the middle of 2008.

The joint venture with Qatar Petroleum on the Qatalum smelter was 84-percent complete by the end of the quarter and on schedule for start up around the turn of the year. Once in operation, Qatalum will make a significant contribution towards lowering the average cost of Hydro's global smelter
system.

Market developments and outlook
Following a sharp fall in the first quarter, demand for aluminium increased in China during the second quarter due to higher activity levels. Demand in the rest of the world was largely unchanged. LME inventories reached 4.4 million mt by the end of the second quarter, compared with a level of 3.5 million mt at the end of the first quarter, 2.3 million mt at the end of 2008 and 1.1 million mt at the end of the second quarter of 2008. LME three month prices started the quarter at USD 1,378 per mt and closed at USD 1,651 per mt.

In response to the falling demand, announced capacity curtailments reached a global level of 3.4 million mt annually in the first quarter excluding China. This represents about 13 percent of the 26 million mt produced in 2008. There were limited new curtailments announced during the second quarter. However, capacity has continued to decline as previously announced curtailments were put into effect.

Aluminium prices are expected to remain low. However, forward visibility continues to be limited and there is significant uncertainty regarding developments. Global primary aluminium consumption excluding China could decline by 15 - 20 percent in 2009 from a consumption level of 25 million mt in 2008.

The significant drop in demand for aluminium has resulted in declining demand for raw materials and smelter input costs have been falling globally.

The underlying demand for metal products (extrusion ingot, sheet ingot, foundry alloys and wire rod) in Europe and North America has remained weak during the second quarter 2009. There continues to be considerable uncertainty regarding timing of any significant recovery.

The decline in demand for flat rolled products in Europe appears to have reached the bottom in the second quarter of 2009 although transparency regarding pipeline effects is still low. Market demand is expected to be stable in the coming months. Demand for extruded aluminium products improved slightly from the previous quarter due to a seasonal increase and may have also been influenced by the replenishment of inventories. However, demand was significantly lower than the second quarter of 2008. The overall outlook for the European extrusion market continues to be weak across most market segments but there are signs that markets are stabilizing. However, we expect seasonally lower demand in the second half of the year.

Nordic spot prices for electricity continued to decline during the second quarter but stabilized 13 percent lower than the first quarter of 2009. Spot prices in Southern-Norway developed in parallel with the Nordic system price. By the end of the second quarter, the total water and snow balance in Norway was estimated to be approximately 19 percent lower than normal and about 25 percent lower than at the same time in 2008. Increasing spot prices toward the end of the quarter together with forward price developments on the NordPool power exchange indicate higher expected spot prices in the third quarter.

Outlook for Hydro
Hydro has taken active steps to capitalize on falling prices for key raw materials and expects further reductions in the second half of 2009. Fixed costs are expected to decline further as the full effect of announced curtailments as well as other cost savings initiatives comes into effect.

At the end of second quarter, Hydro had sold more than 90 percent of its primary aluminium production for the third quarter of 2009 forward at a price level of around USD 1,475 per mt. Hydro expects a continued weak result in the third quarter of 2009.

In fourth quarter 2008 and first half of 2009 Hydro made provisions for future rationalization and closure costs relating to the plant shut-downs of roughly NOK 450 million in total. These are reported as items excluded from underlying EBIT and will mainly have cash effects in future quarters. If it becomes necessary to permanently close plants that have been curtailed on a temporary basis, additional substantial closure costs would be incurred.

The curtailment of electrolysis production at the Neuss smelter in Germany was completed during the quarter with the exception of about 4.000 mt per month which will continue going forward.

Hydro's water and snow reservoirs were lower than normal at the end of the second quarter, and considerably lower than the corresponding periods in 2008 and 2007. The low reservoir levels, together with the outage of the Suldal I power plant, is expected to result in lower power production for the third quarter of 2009 compared to the second quarter and significantly lower than the third quarter of the previous year.

The Suldal I power station is currently being repaired and the plant is expected to be back in operation at the beginning of 2010. The cost of repair and lost revenues are covered by insurance. The outage will also result in production being moved from the fourth quarter of 2009 into 2010.

Our business activities expose us to the risk that counterparties may default on their obligations, resulting in direct financial loss, an unexpected increase in market exposure or higher operating costs. The present weak economic conditions increase the risk of defaulting counterparties. So far we have not experienced any significant defaults and are carefully monitoring the situation.

More Info on www.norskhydro.com