As part of the “Better” ambition, Hydro is raising its improvement ambition with an additional 2.9 billion NOK by end-2019, it is realizing the “Bigger” ambition with selective growth projects such as the Karmøy Technology Pilot, and it is on track to become carbon-neutral from a life-cycle perspective as part of the “Greener” ambition. A complete status update on the Better, Bigger, Greener aspiration will be presented at the Capital Markets Day.

A fully-integrated and technology-driven aluminium company, Hydro launched the “Better, Bigger, Greener” aspiration and a set of strategic goals at Capital Markets Day 2014. The aspiration defines strategic priorities for each business area with the overall aim to deliver sustainable shareholder value:

• Better: Operational and commercial improvement drive and technology lead
• Bigger: High-grading and selective growth to improve relative industry position
• Greener: Reducing carbon footprint and turning leading sustainability agenda into competitive advantage

* Based on 2015 estimate or status YTD

By the end of 2015, operational and commercial improvement efforts have contributed with NOK 4.5 billion since 2011, whereof NOK 0.8 billion is to be delivered in 2015. Building on a strong track record of delivering on improvement goals, Hydro has now introduced a new improvement ambition, Better, which aims to deliver NOK 2.9 billion of added value throughout the value chain in the period from 2016 to 2019, with NOK 1.1 billion of these expected in 2016. The ambition builds on the previous programs, and includes lifting production capacity in the Primary Metal plants through technological developments, high-grading Rolled Products portfolio towards higher margins, and further lifting production backed by robust operations in Bauxite & Alumina.

“Market conditions have deteriorated compared to a year ago, underlining the importance of Hydro’s continuous improvement culture,” says Hydro President and CEO Svein Richard Brandtzæg. “Hydro views weak markets as an opportunity to become stronger. As we are about to deliver on the ongoing improvement efforts, which have made our operations much leaner, identifying new potential becomes more challenging. Still, through technological advances, debottlenecking efforts and best practice sharing between the business areas, we were able to identify more measures.”

The 1 BNOK “From B to A program” has been successfully completed in Bauxite & Alumina, and the new Better Bauxite and Alumina ambition was launched, targeting another NOK 1 billion. Paragominas is running well above its nameplate capacity, and at Alunorte, production has been stabilized and prepared to be lifted to 6.6 million tonnes. In addition to the improvement ambition, increased value will be created in 2016 from selling more alumina volumes on index-based pricing. The ICMS framework established for the next 15 years as well as a potential acquisition of Vale’s 40% stake in the MRN bauxite mine are important milestones towards long-term value generation in Brazil.

Although Primary Metal has delivered significant improvements since 2009, our technological leadership has created the basis for another 1 billion of value creation. The Karmøy technology pilot, pending a build decision in 2016, will verify the world’s most energy-efficient smelting technology. Spin-off effects of this technology will improve productivity of the current portfolio beyond lean operations, and contribute to the increased capacity creep of 200 kmt by 2025. In addition, building on product quality and commercial competence, Primary Metal aims to further increase sales of advanced products, demanding higher margins.

The Rolled Products Climb improvement program has been delivered one year ahead of plan, and is now replaced by a new ambition of NOK 0,9 billion. The main contributors include operational improvements and continuous product innovation, shifting product mix towards higher-margin segments, such as a fast-growing automotive body-in-white market, as well as reducing metal cost by increasing recycling capacity with the newly completed used beverage can facility.

Terms of long-term energy supply determine cost competitiveness in all business areas. As an energy provider, Energy has contributed to reducing metal production costs by sourcing 4.1 TWh over the last years in Norway, and another 2.6 TWh globally in a moderate price environment. As an energy operator, Energy continues to raise income potential from operational and commercial optimization. On the framework side, the Norwegian Government made a proposal potentially making the preferred long-term solution, maintaining industrial ownership of the RSK assets, possible within the current reversion regime.

Hydro sees our sustainability agenda as a competitive advantage and a license to operate. Hydro is on track towards becoming the first carbon-neutral aluminium company from a life-cycle perspective by 2020. This involves increasing energy efficiency and reducing emissions in production processes and improving Hydro’s energy mix. It also involves strengthening the recycling position by utilizing advanced sorting technology, development of recycle-friendly alloys and increased post-consumed scrap recycling, as well as development of new products and applications for aluminium to help our customers lower their carbon footprint.

Global aluminum demand is estimated to grow around 4% in 2015 and 4-5% in 2016. Aluminium fundamentals remain attractive due to the metal’s many positive properties, such as lightweight, formability and recyclability, and the global primary aluminium market is expected to show long-term growth of 3-4% annually over the next 10 years, also driven by environmental regulations worldwide.

“Although the demand picture is promising, the supply side looks somewhat more challenging in the near term. While the world outside China is expected to run a deficit of 1.5 - 2 million tonnes, China is expected to produce 2 – 2.5 million tonnes in excess of their consumption in 2016, adding up to  a global oversupply of 0 - 1 million tonnes,” Brandtzæg says. “On the back of the oversupply in China, there have been exports of semi-fabricated products, assumed for remelt purposes, taking advantage of downstream export incentives. This, together with a cost curve shifting down due to weaker fuel prices and currencies, has resulted in a steep fall in aluminium prices and premiums during 2015. LME is now priced below the 90th percentile, and at today’s prices, around 50% of global smelter capacity is expected to be incurring cash losses, making curtailments, which are needed to balance the market in the medium term, more likely.”

“Effective risk management and a prudent financial framework are crucial in the cyclical industry Hydro operates in, which has once again been highlighted by the recent industry developments. A strong balance sheet is the best tool we have to respond to market volatility, in addition to continuously improving our relative industry position. Today, Hydro is a first quartile aluminium and alumina producer with a strong balance sheet. This allows us to offer a safe and reliable dividend to shareholders, as well as enables us to strategically utilize lower parts of the cycle to increase our value creation potential,” says Brandtzæg.

Hydro is committed to disciplined capital allocation at all times. Our long-term sustaining capex guidance remains below depreciation at 3.5 – 4.0 BNOK per year, adjusted somewhat up from the previous level of 3.5 BNOK and reflecting long-term inflationary pressures and a portfolio update.