Maximizing value through integrated value chain
In 2017, Hydro completed the acquisition of Sapa, establishing Hydro as the only aluminium company with a global presence that is fully integrated across the value chain and markets. The acquisition enforces Hydro's strength in technology, R&D, innovation and product development, as well as a broad product and service offering to the benefit of more than 30,000 customers throughout the world. The integrated model provides Hydro with the capability and freedom to grow in the most attractive areas of aluminium, as well as strengthening the sustainable solutions for the future low-carbon economy.
Hydro made further progress towards the company’s overall strategic direction Better, Bigger, Greener. Hydro continued to deliver significant operational and commercial results. The Hydro model allows the business areas to be run according to their specific business drivers and needs. Hydro believes this contributes to the ability to generate added value and to serve leading customers by ensuring operational excellence, driving improvements and extending our lead in technology and innovation.
Hydro’s safety performance deteriorated in 2017, and we experienced two fatal accidents. The company's TRI rate increased from 2.6 in 2016 to 2.9 in 2017 and did not meet the 2017 target of 2.4. The development is concerning. The addition of Extruded Solutions from October 2, 2017, did not have a significant impact as they recorded similar accident rates for 2017.
Hydro's underlying EBIT increased to NOK 11,215 million from NOK 6,425 million for 2016. The increase reflects a higher all-in metal price and alumina sales price, partly offset by increased raw material costs, fixed costs and negative currency effects.
Hydro's improvement target has been lifted to NOK 3.0 billion from 2.9 billion by 2019. NOK 1.8 billion of improvements have been realized since 2015, with stronger-than-expected improvement results in the Bauxite & Alumina business area compensating for slower-than-expected progress in both Primary Metal and Rolled Products.
In February 2018, extreme rainfall in Barcarena in the state of Pará, Brazil, lead to regional flooding. Due to concerns over possible water contamination from Alunorte during this flooding, authorities have taken several measures against the alumina refinery. These include orders to reduce production by 50 percent and halt operations at its DRS2 bauxite residue deposit, which is currently under commissioning. In addition, suspending operations on one of two tailing dams at the Paragominas bauxite mine. Hydro issued a force majeure notice towards its alumina and alumina hydrate customers due to the production cuts and current lack of clarity into what measures it would take to return to normal operations.
Measures are being implemented to resolve the situation at Alunorte, including establishing an internal task-force to conduct a review of Alunorte and commissioning an independent external review of Alunorte. Hydro has also decided to initiate a NOK 500 million investment to the water treatment system at Alunorte. This aims at increasing the water treatment capacity by 50 percent and improving the robustness of the plant to withstand future extreme weather conditions. So far, no spills or leakages have been detected from Alunorte’s bauxite residue deposits after the extreme rain event.
Regardless of the cause of contamination, Hydro collaborates with local institutions on humanitarian relief to assist communities in Barcarena within health and water. For neighboring communities Vila Nova, Burajuba and Bom Futuro, Hydro commits to working with local partners and investing in proper water supply. Hydro further commits to work with community, civil society and government to clarify the sources of water pollution and other water-related issues in the Barcarena region.
For Bauxite & Alumina, 2017 was a year ofoperational progress and positive market development. The production levels at the Paragominas bauxite mine and Alunorte alumina refinery remained high. At Alunorte a new state-of-the-art dry disposal of bauxite residue using press filter commenced commissioning. While there were delays finalizing the installation, the ramp up process is planned to be completed during 2018.
A new area for mining residue at Paragominas commenced operations during 2017. The reforestation program at Paragominas is progressing according to plan, and renewed research partnerships have been established as a base for its mining rehabilitation. For the part-owned bauxite mine MRN, an important part of our bauxite sourcing strategy is developing a "mine life extension" in new mining areas which will contribute to securing long-term bauxite supply to Alunorte.
Primary Metal experienced strong operational and financial performance during 2017 and is utilizing technology and innovation to differentiate in the highly competitive environment of primary aluminium production. The 75,000 mt technology pilot at Karmøy started production in January 2018, marking the start of verifying the world’s most climate- and energy-efficient smelter technology with considerable spin-off effects for Hydro’s existing smelter portfolio. In December Hydro decided to upgrade and start up the second production line of our smelter at Husnes, Norway. Annual production of primary aluminium at Husnes will double to around 190,000 mt.
On February 26, 2018, Hydro made a binding offer to acquire Rio Tinto's Icelandic aluminium plant Rio Tinto Iceland Ltd (ISAL), its 53 percent share in Dutch anode facility Aluminium & Chemie Rotterdam B.V. (Aluchemie) in which Hydro currently holds 47 percent, and 50 percent of the shares in Swedish aluminium fluoride plant Alufluor AB. ISAL produces 210,000 mt liquid metal and a total of 230,000 mt extrusion ingot for the European building, construction and transportation segments from its newly built casthouse with full ultrasonic testing capabilities. Completion of the transaction is subject to approval from relevant competition authorities, and is expected in the first half of 2018
Recycling is an important element supporting Hydro's ambition to become carbon-neutral by 2020. The company aims to be a leading player in this growing market segment by pursuing commercial opportunities and reducing the environmental impact of its operations. Further increases in the capability and capacity to use post-consumer and other types of contaminated scrap are targeted together with increased sales of recycling-friendly alloys. Towards the end of 2017, Hydro launched two new certified sustainable billets. The 4.0 billet has a guaranteed maximum carbon footprint of 4kg CO2/kg aluminium and is produced from hydropower based smelters. The 75R billet is produced in our remelters and has a guaranteed minimum post-consumer scrap content of 75 percent.
Rolled Products faced a very challenging year. Technical issues caused significant delays in the ramp up phase of both the new recycling line for used beverage cans (UBC) and the Automotive line 3 (AL3). These delays, together with performance issues at Alunorf and Hamburg, adversely affected Rolled Products’ improvement ambition in 2017. However, the main performance issues at Alunorf and Hamburg have been resolved and operations are back to normal. The UBC line, after some design modifications that were completed in 2017, is now technically ready to reach targeted output. The AL3 is still in the product qualification process, which will continue into second half of 2018. Production will ramp-up successively following successful qualification.
Extruded Solutions continued its strategy of increasing the share of value-added sales, and a simplification and collaboration drive for continued improvement . As a result, Extruded Solutions delivered a strong financial result for 2017. Hydro has agreed with Arconic to acquire its two extrusion plants in Brazil. The agreement will strengthen Hydro’s downstream position in Brazil and create a solid platform for further growth. Extruded Solutions re-opened its manufacturing plant in Bedwas in the UK, to supply the growing automotive industry for lightweight body structure solutions. The first customer to be supplied from the refurbished facility will be London Electrical Vehicle Company (LEVC), which has developed a new zero-emissions-capable black taxi cab.
Securing long-term competitive power sourcing is of critical importance to sustain the viability of Hydro's smelter portfolio. In 2017, Hydro entered into a long-term power contract with Markbygden ETT AB for the annual supply of energy totaling 1.65 TWh for Hydro's Norwegian smelters for a 19-year period beginning 2021, enabling competitive aluminium production in Norway. This was in addition to an annual 1.0 TWh sourced in the previous year.
Global demand growth for primary aluminium in 2017 reflected positive macroeconomic developments. Global supply largely matched demand, resulting in a rather balanced market . A largely balanced global market is expected to continue into 2018. Responding to continued economic stimulus, demand growth for primary metal in China, reached high single digits. Production increases continued to exceed demand growth, resulting in a continued production surplus in China for 2017. Chinese primary production growth is expected to reduce in 2018 , influenced by environmental and supply-side reforms resulting in cutbacks of illegal capacity. This is in line with directions given by the Chinese government in 2017 closely controlling capacity expansions.
On March 8 2018, President Trump signed a proclamation levying tariffs of 10 percent on aluminium imports to the US. Exemptions for certain countries are currently under discussion. The final framework is yet to be decided, and long-term effects are uncertain. In the short-term, Hydro does not expect any significant impact on its operations.
Creating value by becoming Better, Bigger and Greener
Hydro's strategic business approach aims to add value to our customers and society. This approach is reflected in Hydro's mid-term strategic goals reflecting the company's aspiration to become Better, Bigger, Greener.Hydro will become Better by raising performance and improving our customer offering. This will be achieved by extending Hydro's leadership in advanced technology and product innovation, creating value through raw materials access, customer collaboration and our integrated model, and continuing to benchmark performance and ensuring attractive returns over the cycle.
To become Bigger, Hydro will aim to expand the use of aluminium and strengthen Hydro's platform for growth. This will be achieved by the promotion of Hydro and aluminium through value-adding products and solutions for our customers. We aim to be the preferred and trusted partner, and the most trusted voice of the aluminium industry. Hydro pursues selective growth from raw materials to products, solutions and recycling.
Hydro believes that sustainable business practices will make the company Greener, in addition to improve the company's ability to create shareholder value while making a positive difference wherever it operates. Hydro aims to advocate aluminium as a building block for the low-carbon circular economy, continue to reduce its environmental footprint from own production and solutions, and to make a positive difference by strengthening local communities and our business partners.
Strong position in an industry with growing demand
Growth in aluminium demand remains firm, despite volatile economic conditions, driven both by a general increase in consumption and the increasing substitution to aluminium from other materials. Aluminium products are important in all phases of economic development due to the diversified nature of applications such as capital investment in infrastructure and housing as well as consumer goods such as packaging, transportation, electrical and technical applications and household goods. Substitution effects are driving demand primarily in mature markets and in the transportation segment, while investments in infrastructure and construction as well as increasing urbanization and hence consumption are supporting demand growth in emerging economies.
Hydro has strong positions throughout the value chain and an attractive asset base.This includes competitive positions in bauxite and alumina, hydropower production, and our smelter portfolio, European leadership in rolling operations, strong position in recycling and a world leading position in extruded solutions. Following years of depressed earnings and unsatisfactory returns for the industry as a whole, continual improvement, restructuring efforts and positive currency developments have strengthened Hydro's position relative to its industry peers and improved the company's position to utilize opportunities as the global economy evolves. Based on its favorable carbon footprint, recycling efforts, and an integrated value chain, Hydro is in the position to offer to its customers solutions responding to demand for more sustainable products. In this area, Hydro may combine its renewable power sourcing, use-phase benefits of products, the recyclability of the metal, and its efforts in recycling into profitable product solutions.
Hydro's project portfolio includes the possibility for a new alumina refinery in Barcarena, close to Alunorte, a possible expansion of the Paragominas bauxite mine, and a possible expansion of primary production in Norway. Hydro is actively working on opportunities within recycling to expand the business and source more challenging scrap material. The restructuring of Hydro’s Norwegian hydropower assets within the regulatory framework could create further opportunities in the Energy sector. Extruded Solutions will continue to consider investments and acquisitions to strengthen its position in specific segments or markets. Partnerships and joint ventures across the value chain provide the potential for further developing Hydro's asset portfolio. Investments in these projects are, among other factors, dependent on ongoing developments in the balance between industry supply and market demand and cost competitive positions, including power supply.
Climate, health, safety, security and environment (HSE), corporate social responsibility (CSR), and complying with laws, regulations, and Hydro's steering documents a, is fundamental to Hydro's way of working and are considered key elements of the company's license to operate. Hydro is on track to becoming carbon-neutral from a life-cycle perspective by 2020. Hydro has been involved at all stages in the multi-stakeholder development of the Aluminium Stewardship Initiative's (ASI) standards and is participating to develop ASI's supporting systems for a certification platform for responsible production, sourcing and stewardship of aluminium.
Priorities for 2018
Going forward, Hydro aims to strengthen performance, drive value creation and strengthen its relative industry position. Priorities in 2018 include:
- Strengthen performance within health, safety, security and environment (HSE), corporate social responsibility (CSR) and compliance
- Finalize and follow up Alunorte reviews, enhance community dialogue and provide humanitarian relief to affected communities, return to normal operations
- Ensure a successful integration of Extruded Solutions
- Strengthen relative industry position through improvement drive, digitalization and leading Research & Development
- Continue shifting portfolio towards high-margin segments for leading customers
- Maintain financial strength and flexibility, a predictable dividend level and provide attractive returns over the business cycle
In line with the HSE strategy and the 2020 targets, Hydro will continue to follow its HSE roadmap: Improving leadership qualities, ensuring better control over tasks and processes with inherent high risks, and increasing the engagement of operators. Two additional sub-strategies, on health and environment, are under development and will include Extruded Solutions in 2018. HSE is integrated in Hydro's existing business systems as well as in new projects and process modifications.
A revision of Hydro's board-sanctioned Code of Conduct and its integrity program handbook was delayed in 2017 due to the Sapa acquisition and will be updated in 2018. An external review of Hydro’s compliance system was completed in 2017. The review concluded that Hydro’s compliance system, as designed and implemented, appears robust and addresses substantially all of the international benchmarks necessary for an adequate and effective anti-corruption compliance program.
The following prioritized areas for CSR, defined in 2017, will be further developed in 2018: To contribute to long-term societal development through quality education; decent work and economic growth; and promotion of peaceful and inclusive societies. An example of initiatives is the planned project for improved handling of municipal waste in Barcarena in Brazil. The project aims to improve the working conditions for those currently involved in waste collection as well as more secure waste handling in the community.
Given the current situation at Alunorte, a key priority going forward will be to finalize and follow up the internal and external reviews of the refinery and its water treatment system, as well as realizing the announced investment to the water treatment system at Alunorte, and return operations to normal in a safe manner. Regardless of the cause of contamination, Hydro collaborates with local institutions on humanitarian relief to assist communities in Barcarena within health and water. For neighboring communities Vila Nova, Burajuba and Bom Futuro, Hydro commits to working with local partners and investing in proper water supply. Hydro further commits to work with community, civil society and government to clarify the sources of water pollution and other water-related issues in the Barcarena region.
A successful integration of Extruded Solutions and its 22,000 employees into Hydro's operating model is a priority for 2018. This includes realization of integration synergies which have been confirmed at a level of NOK 200 million per year mainly within the remelting and recycling area. Further synergy potentials are being developed, including innovation, research and development. Given Hydro’s long value chain, spanning both upstream and downstream from bauxite extraction to products, solutions and recycling, the operating model offers a high degree of flexibility. This ensures that the business areas are able to be managed according to the specific business drivers and challenges of each area. In order to facilitate integration and enable the organization to prepare for the future, two new initiatives have been established during 2017. The first, New Chapter, aims to create a common platform and identity for Hydro’s 35,000 employees, renewing the company’s value platform the Hydro Way, its aspiration and strategic direction Better, Bigger, Greener, stakeholder positioning strategy and visual profile. The second initiative, Fit4Future, aims at step-change improvements to lift staff value creation and lower costs, divided into three main focus areas: strategic fit, differentiation and simplification.
During 2018, Hydro will continue with its improvement drive. Bauxite & Alumina will develop a technical concept for the replacement of part of our fuel oil consumption at the Alunorte alumina refinery to more climate and cost efficient natural gas. The 75,000 mt technology pilot at Karmøy has started production, utilizing Hydro's next-generation HAL4e technology, and is expected to contribute further to reducing energy costs and lowering greenhouse gas emissions. Hydro intendsto improve margins through high-grading its product portfolio and differentiation through innovation, quality and reliability.
Hydro's digital strategy has a clear purpose: how to enable Hydro becoming Better, Bigger and Greener. Digitalization is not a goal in itself. Rather, we build digital solutions to improve our profitability, commercial edge, safety and CO2 footprint. Relevant examples of digitalization include smart robotics, analytics, visualization and machine learning, process automation and commercial solutions. Currently, all Business Areas and corporate functions are exploring the potential benefits of digitalization.
Hydro aims to provide its shareholders with competitive returns compared to alternative investments in peer companies by lifting the operating cash flow generation potential in all of its business areas. The company will continue to focus on securing its financial position through exercising strong capital discipline while maintaining a sustainable level of capital expenditures to safeguard its operating portfolio. Offering a predictable dividend level to shareholders and preserving Hydro's investment grade credit rating continue to be key priorities.
About Hydro's Board of Directors
- Position: Non-executive Director
- Education: Degree in Economics and Business Administration (siviløkonom) from the Norwegian School of Economics (NHH)
- Current directorships: Chair of International Post Corporation, Chair of Sparebank 1 SR Bank ASA, NSB AS, Telecomputing Topco AS, Telecomputing Finco AS and his wholly-owned investment company Nobel Partners AS and deputy chairperson of SAS AB
- No. of Hydro shares: 35,000
- Position: Executive Vice President, New Energy Solutions in Statoil
- Education: Master of Science in Geology/Geophysics (sivilingeniør) from the Norwegian University of Science & Technology (NTH)
- Current directorships: None
- No. of Hydro shares: 5,000
- Position: Process operator / full-time union official. Represents the Norwegian Confederation of Trade Unions (LO)
- Education: Trade school (mechanics)
- Current directorships: None
- No. of Hydro shares: 4,587
- Position: Independent businessman
- Education: Degree in Economics and Business Administration (siviløkonom) from the Norwegian School of Economics (NHH). Master’s degree in Business Administration from the University of California, Los Angeles
- Current directorships: Chairperson of Kavli Holding AS. Board member of A. Wilhelmsen AS, Nel ASA, Norfund, Future Technology AS and his wholly-owned company Fateburet AS
No. of Hydro shares: 53,406 including shares owned by Fateburet AS
- Position: Process operator / full-time union official representing the Norwegian Confederation of Trade Unions (LO)
- Education: Certificate of apprenticeship in electrochemistry. Work supervisor training
- Current directorships: None
- No. of Hydro shares: 5,643
- Position: Group Chief Executive Officer, FL Smidth
- Education: PhD Mining & Mineral Processing, Rheinisch-Westfälische Universität Aachen RWTH, Germany
- Current directorships: None
- No. of Hydro shares: None
- Position: Partner, Advokatfirmaet Selmer DA
- Education: Candidate in Jurisprudence (cand. jur.) University of Oslo
- Current directorships: Chair of the board of the Russian-Norwegian Chamber of Commerce, Varanger Kraft AS, Klemetsrudanlegget AS and Rosneft Nordic Oil AS. Board member of Solveig Gas Norway AS, Broadnet AS and Biomega AS
- No. of Hydro shares: None
- Position: Executive vice president and Chief Financial Officer, Ørsted (former Dong Energy A/S)
- Education: State Authorised public Accountant
- Current directorships: Board Member and Chair of the Audit committee of J. Lauritzen A/S. Board Member and Chair of the Audit Committee of Hempel A/S
- No. of Hydro shares: None
- Position: Technical supervisor, Relining/part-time union official representative in The Norwegian Society of Engineers and Technologists (NITO). Representing the employees through the Central Cooperative Council (Sentralt samarbeidsråd)
- Education: Bachelor of Science, HIST Trondheim
- Current directorships: None
- No. of Hydro shares: 5,208
- Position: Chief employee representative/full-time union official representing the Norwegian Confederation of Trade Unions (LO)
- Education: Air Force Candidate School, Machinery Focus School
- Current directorships: Board Member of Hydro Extruded Solutions AS, Hydro Extrusion Norway AS and Union Leader Fellesforbundet, Hydro Extruded Solutions AS
- No. of Hydro shares: None