Hydro Annual Report 2011b

108
RISK REVIEW
Risk factors
Risk factors
Below is a description of certain risks that may affect our business, financial condition and the results of operations from time
to time and, hence, our share price. All of the information in this report should be carefully considered, in particular, the risks
described below.
Continued uncertainty and volatility in global economic and market conditions could have an adverse effect on our
operating results and liquidity
Our financial condition and results of operations depend heavily on developments in market demand and global economic
conditions. Market demand and prices declined dramatically in the final quarter of 2008 and first part of 2009 leading to
considerable losses within Hydro's upstream operations and substantially lower earnings for the company as a whole in 2009.
Prices strengthened and demand recovered close to pre-crisis levels in 2010 and Hydro's underlying operating performance
improved significantly in 2011 following the strong recovery in the previous year. However, there has also been a substantial
increase in uncertainty regarding economic developments within the various countries and geographic regions in which we
operate. In Europe, the fiscal crisis has escalated resulting in deteriorating economic conditions in several countries and
southern Europe in particular. It remains to be seen whether initiatives implemented by the EU will be sufficient to adequately
address the underlying fiscal and economic problems. Although considered remote, there is a risk of failure within the currency
union and the political union as a whole. Recovery has been weak in the US and growth has slowed in China and other major
emerging markets.
Based on operating revenues, around 50 percent of Hydro's business is generated within the EU and about 70 percent in
Europe in total. Of this amount, southern Europe represents about 15 percent. Nearly 80 percent of Hydro's business is
generated within Europe and the US combined.
A failure of the Euro or European Union would have far reaching consequences for both Europe and the world economy. In
addition to the indirect effects of a severe general macroeconomic downturn, Hydro's counterparty risk towards key customers
or groups of customers in weak and deteriorating economies could increase significantly. See also risk factor below "Hydro
faces the risk of counterparty default".
Despite significant curtailments, the global production of primary metal excluding China continues to exceed market demand
and inventories remain at high levels.
Significant cost pressures in the countries in which we operate may inhibit our ability to reduce the operating cost of
our smelter portfolio sufficiently to compensate for an extended period of weak aluminium prices
Hydro acted quickly to reduce costs and production capacity following the severe market decline at the end of 2008 and into
2009 but was unable to adjust the costs of its primary smelters sufficiently to avoid substantial underlying operating losses
within its primary aluminium business during 2009. Hydro has implemented an improvement program targeting savings
within its wholly owned smelter operations of USD 300 per mt by the end of 2013. However, cost pressure has increased, in
particular raw material costs, which has more than offset targeted savings that were achieved.
The majority of Hydro's smelters are located in countries experiencing strong currencies and/or inflationary pressures such as
Norway, Australia, Brazil, Qatar and Canada. These factors increase our operating costs and weaken our competitive position
in some of the regions where we operate. In January, Hydro announced a partial curtailment of its Australian smelter which has
been negatively impacted by the strong Australian dollar.
We may not succeed in making the cost reductions necessary to achieve a sustainable level of profitability for our smelters'
operations in the event of an extended period of weak aluminium prices.
A deterioration of our financial position or a downgrade of our ratings by credit rating agencies could increase our
borrowing cost and cost of capital and have an adverse effect on our business relationships
It is important for Hydro to maintain its investment grade credit rating for competitive access to capital and to support its
business relationship with customers, suppliers and other counterparties. Our credit rating is also an important factor in
making Hydro attractive as a joint venture partner for new growth initiatives. Following the severe market downturn in the
aluminium industry at the end of 2008 and beginning of 2009, our ratings were downgraded, together with other competitors