Hydro Annual Report 2011b

Active risk management
We have developed expertise within our sourcing and trading
operations to enhance the value of our commercial portfolio,
using strategies aimed at reducing the exposure of our margins
to changes in the LME commodity prices and currency rates.
We will continue to leverage this expertise by developing and
executing strategies to hedge such risk exposures within our
upstream and downstream businesses, mainly resulting from
time lags between our manufacturing process and the pricing
of products to our customers.
Operations
Metal Markets includes all sales and distribution activities
relating to products from our primary metal plants, our standalone
remelters and our high purity aluminium business. We
operate nine remelters, which recycle scrap as well as standard
ingot 1) into new products. We also market metal products
from our part-owned smelters and third parties and engage in
other sourcing and trading activities, including hedging activities
on behalf of all business areas in Hydro.
Cost and revenue drivers
Our results are mainly impacted by the operating results of our
stand-alone remelters and high purity aluminium business,
margins on sales of third party products and results from physical
and LME trading activities.
Revenues for our stand-alone remelters are influenced by volumes
and product premiums over LME. Costs are driven by
the cost of scrap and standard ingot premiums over LME,
freight costs to customers and operational costs including
energy consumption and prices.
Our results can be heavily influenced by currency effects 2) and
ingot inventory valuation effects 3)
Competitive strengths
• Leading worldwide supplier of extrusion ingot, sheet ingot,
wire rod and foundry alloys
• Extensive multi-sourcing system including broad network
of primary casthouses, stand-alone remelters, and partly
owned primary sources
• Flexible sourcing system enabling significant, rapid and
cost effective volume adjustments
• Growing market position in US and Asia through Qatalum
volumes
• Commercial expertise and risk management competence
enabling us to secure manufacturing margins
European supply network
Primary casthouse
Remelter
Part-owned primary source
BusIness DesCrIptIon
Metal Markets
35
Remelting
We have a network of nine stand-alone remelt plants that convert
scrap metal and standard ingot into extrusion ingot. We
have six plants in Europe, one in Taiwan and two in the U.S.
with a total capacity of about 0.6 million mt including roughly
0.4 million mt in Europe. Our facilities in Europe are located
in Luxembourg, the United Kingdom, Germany, Spain and
france. Total remelt activity, including remelted metal from
casthouses integrated with our primary metal plants and thirdparty
sourcing, normally represents about half of our total
sales of metal each year. In addition to remelting scrap returned
from customers, we purchase clean scrap and end-of-life scrap
from third parties. Standard ingot is procured globally under a
combination of short and long-term contracts.
1) Aluminium standard ingot is a global aluminium product traded on the London Metal Exchange (LME).
2) Currency effects are comprised of the effects of changes in currency rates on sales and purchase contracts denominated in foreign currencies (mainly U.S.
dollars and Euro for our Norwegian operations) and the effects of changes in currency rates on the fair market valuation of dollar denominated derivative
contracts (including LME futures) and inventories mainly translated to Norwegian kroner. These amounts can be very substantial. Hydro manages its external
currency exposure on a consolidated basis in order to take advantage of offsetting positions.
3) Ingot inventory valuation effects are comprised of hedging gains and losses relating to standard ingot inventories in our metal sourcing and trading operations.
Increasing LME prices result in unrealized hedging losses, while the offsetting gains on physical inventories are not recognized until realized. In periods of
declining prices, unrealized hedging gains are offset by write-downs of physical inventories.