Hydro Annual Report 2011b

for foundry alloys continued to be strong in Northern Europe
and in Germany in particular, and also improved in Asia. Annualized
production of primary aluminium was relatively stable in
the final quarter of 2011 amounting to 26.6 million mt globally
(excluding China). Corresponding annualized consumption
declined, however, to 24.7 million mt. Recent announcements
of smelter closures and limited new capacity coming on stream
are expected to improve the supply demand balance in 2012.
Demand for primary aluminium is expected to grow by about
3-5 percent in 2012. However, market sentiment continues to
be influenced by significant economic uncertainty.
European demand for downstream products was somewhat
higher compared to 2010 as most markets continued to
recover in the first half of 2011. However, demand weakened
in the second half of 2011 due to increasing economic uncertainty
in Europe and in Southern Europe in particular. Economic
and market developments for 2012 are uncertain with
low visibility. However, certain leading indicators are positive
for rolled products. European demand for extruded aluminium
products is expected to decline in 2012 with the building
and construction market continuing to be the weakest end use
market segment. Outside of Europe, the market outlook is
positive, and within the automotive and transport segments in
particular.
Power production in Norway amounted to 127 TWh, which
is 3 TWh higher than 2010. Hydro’s water reservoirs were well
above normal at the end of 2011 and snow reservoirs increased
significantly. As a result, production is expected to be high
through the first quarter of 2012.
Risk
Risk management in Hydro is based on the principle that
risk evaluation is an integral part of all business activities.
Consequently, the business areas have the main responsibility
for risk management, utilizing established policies and
procedures. Their work is coordinated by staff units at the
corporate level. The board of directors regularly reviews and
evaluates the overall risk management system and environment
within Hydro.
Hydro faces risks and uncertainties within its worldwide
business operations and in the global marketplace. The company
is exposed to changing economic and market conditions
and there has been a substantial increase in uncertainty
regarding economic developments within the countries and
geographic regions in which Hydro operates. The majority of
Hydro’s primary aluminium plants are located in countries
experiencing strong currencies and/or inflationary pressures,
which weaken the competitive position of some of our operations.
Compensating for future market declines is dependent
on the company’s ability to sufficiently reduce our operating
costs. The vale Aluminium acquisition represents a significant
portion of Hydro’s capital employed and the company
BoArD oF DIreCtors’ report
Risk
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may not realize the benefits expected. A deterioration of
Hydro’s financial position or downgrade of the company’s
credit rating could increase its borrowing cost and cost of
capital. Hydro faces an ongoing risk of counterparty default.
Price volatility can have a significant impact on Hydro’s
reported results. Hydro’s reported and operating results and
competitive position are influenced by developments in currency-exchange
rates and in particular the U.S. dollar, Brazilian
Real, Euro and Norwegian krone. Hydro is exposed to
changing legislation on reducing CO 2 emissions. Major accidents,
legal proceedings or investigations and incidents relating
to HSE and corporate responsibility could impose
significant costs and substantially damage the company’s
reputation.
Hydro’s main strategy for mitigating risk related to volatility
in cash flows is to maintain a solid financial position and
strong creditworthiness. In order to protect processing and
manufacturing margins against raw material price fluctuations,
Hydro’s downstream and other margin-based operations
are hedged to a certain extent. Hydro also uses
derivatives to reduce its overall financial and commercial risk
exposures. forward U.S. dollar currency contracts have been
used and Hydro has, to a limited extent, entered into forward
contracts in other currencies to hedge certain revenue
and cost positions. No major currency-forward contracts
were outstanding at the end of 2011.
Controls and procedures
Hydro follows the Norwegian Code of Practice for Corporate
Governance of October 2010. A detailed description of
Hydro’s compliance with this code is presented on page 132.
Information regarding the company’s shareholder policy can
be found on page 115.
The board’s audit committee carries out a control function and
arranges for the board to deal with the company’s financial
reporting.
Research and development
In 2011, research and development costs recognized as an
expense amounted to NOK 508 million compared to NOK
543 million in 2010.
The greater part of our R&D expenses goes to our in-house
research organization, while the remainder supports work carried
out at external institutions. See Note 14. Our main R&D
centers are in Årdal (primary aluminium technology) and
Sunndal (alloys and casting) in Norway, Bonn in Germany
(rolled products) and Toulouse in france (building systems).
We reviewed our R&D organization in 2011. Starting in
2012, all business areas will be responsible for their own technology
development and execution of their respective technology
strategies. As part of the new organizational model, a