Hydro Annual Report 2011b

and Hydro – but both have also restructured their downstream
portfolios significantly during the last several years.
Restructuring is expected to continue as the major metals and
mining companies reduce their exposure to downstream operations
and streamline their metal portfolios, targeting specific
markets to increase the scale of their core operations. These
developments have led to the opportunity for Hydro to acquire
the aluminium operations of vale. New capacity is also
expected to be developed in emerging, fast-growing markets.
Aluminium price developments
Primary aluminium is traded on various metal exchanges, primarily
the London Metal Exchange (LME). The Shanghai
futures Exchange (SHfE) has grown in importance for international
trade of standard ingots with China. However, China
has followed a policy of promoting a balanced internal market
and has used incentives to discourage the export of primary
metal, while encouraging the export of higher-value added
fabricated and semi-fabricated products.
Aluminium prices are heavily influenced by economic and
market developments. During the financial crisis of 2008/2009
prices exhibited an historic decline as turmoil in the financial
markets spread into the general economy. Prices remained
volatile but improved continuously throughout 2010 and into
the first half of 2011 before falling to around USD 2000 per
mt at the end of the year. In addition, as a result of trading by
financial investors in the derivative markets, price volatility has
been high during the past several years and may continue.
Reported inventories increased significantly in the previous
downturn, more than doubling from under 3 million mt to over
7 million mt, representing about 2 months of global consumption.
Inventories have remained at around this level with a large
portion of the metal owned by financial investors
Aluminium price in USD/mt
3,500
3,000
2,500
2,000
1,500
1,000
LME (3m quarterly average)
LME forward (January 9)
BusIness DesCrIptIon
Primary Metal
29
taking advantage of low interest rates, warehouse incentives and
contango in the forward aluminium markets. The increase in
inventories has resulted in a tight physical market and historically
high ingot premiums, although premiums have declined recently.
Cost developments
In the last five years, the aluminium industry cost curve has
increased on average about USD 300 per metric ton, mainly due
to higher input costs driven by strong demand for raw materials
in emerging economies and in China in particular. More than half
of the increase is related to power with the remainder reflecting
higher costs for carbon and alumina. The upward trend paused
temporarily in 2009 as commodity prices in general fell. However,
costs increased in 2010, and there has been a further increase
in cost pressure during 2011.
In the future, primary aluminium production is expected to be
developed in energy-rich areas where power prices are more competitive
than in developed energy markets such as Europe and the
U.S. Such countries and regions are expected to include the Middle
East, India, Iceland and some countries in Africa, Asia and
South America. China will also continue to be an important producer
and consumer of primary metal.
Strategy and targets
A key ongoing strategic focus for Primary Metal is the continuous
improvement of the efficiency of our smelter system,
while constantly addressing the cost challenges facing our
business. In order to secure the viability of our operations over
time, we intend to focus on business opportunities that
enhance our cost position. We also intend to maintain our
technological leadership, which contributes to lower operating
costs, reduced emissions and ensures our attractiveness as a
partner for world-class projects within an industry with sound
long-term fundamentals.
Improve our average smelter-cost position
A core strategy for Hydro has been the continual upgrading of its
smelter portfolio, replacing higher cost, less-competitive production
with new capacity in larger and more efficient smelters. To
further improve our competitiveness we are executing an
improvement program targeting USD 300 per mt for our
wholly-owned smelters by the end of 2013. Substantial savings
have already been achieved, and we expect to meet our target
through further improvements in efficiency and reduced costs in
areas such as purchasing, logistics, technology, manning and
organization. following the completion of a successful ramp-up,
another key priority in the coming year will be to secure stable
production and the first quartile cost position of Qatalum.
Optimize our position in alumina, power, carbon
and other key raw material costs
With the vale acquisition, we have secured our equity alumina
coverage and captured the value of this important part of the
value chain. We also have an industry-leading captive power