Letter to shareholders

svein richard brandtzæg

Short-term challenges – long-term opportunities:
Future proof

Aluminium is an essential building block of modern society and a surprisingly big part of life. Being an industry leader in a sector expecting 70 percent growth in demand within the decade should be a great position for the future. Despite the current economic turbulence, I have never been more certain that we are future proof.

While financially speaking, aluminium has been challenging over the past decade, it may not be because of a lack of confidence, but paradoxically because of an over-confidence in aluminium. An exaggerated optimism has led to over-investment and surplus capacity, weighing down prices and profitability, amplified by weaker demand due to the financial and economic unrest that started in 2008.

Now placed somewhere between crisis and recovery and in a multi-speed global economy, our global businesses are exposed to both flourishing and contracting markets at the same time. China still drives growth, although at a slower rate – and while this aluminium giant is still self-supplied with metal, we can expect increasing imports of bauxite. But with a slower overall global growth rate, a prolonged European debt crisis and a U.S. economy that is far from recovery, there is still plenty of uncertainty looming.

Freedom to act

Given the current uncertainty, we cannot count on the market to lift our profitability, at least not in the short term. We are focusing our efforts on what we ourselves can do to improve, further reinforcing our repositioning measures and performance improvement programs, firmly controlling costs and margins. We are also maintaining our financial robustness, rather than focusing on new capacity investments in a situation of oversupply.

Short-term cash preservation is not the same as having a short and narrow perspective. On the contrary, it is a crucial means to safeguard our long-term freedom to act. It was financial prudence during the financial crisis that enabled us to pursue and close the Vale deal, which would otherwise have been inconceivable.

It is a balancing act to be dimensioned and designed to resist short-term volatility, while at the same time preparing for a future market that eventually will continue to grow.

Still, even the demanding challenges facing us should be regarded more as an opportunity than a liability. It is often when confronted with a need to change that we find new ideas, new solutions, re-think established truths, modernize structures and habits that may be out of date, and shape the company for tomorrow.

Improvement culture

The will to improve should be an integrated part of everyday work. In fact, operational improvements implemented last year helped offset large parts of the negative impact from deteriorating markets during the second half of last year. It is encouraging to see that we are able to transform plans and ambitions into tangible results.

Qatalum reached full production in 2011. The aim now is to stabilize operations in the best quartile of the global industry. Qatalum is already producing above its nameplate capacity.

Within our Brazilian operations, performance has been stabilized at a significantly higher level than the previous year. In the bauxite mine Paragominas, production increased by 23 percent and in the alumina refinery Alunorte by 9 percent.

The Primary Metal improvement program proceeds according to plan for a USD 300 cost reduction per metric ton of aluminium by the end of 2013. Similar programs and reviews with a multitude of actions and measures are ongoing in the other business areas.

Our researchers are determined in their efforts to realize the twin goals boosting productivity and curbing energy consumption. The HAL4e electrolysis cells in Årdal, Norway, are now running at only 12.5 kWh/kilo of produced aluminium. Downstream, our researchers manipulate aluminium at the nano level to generate alloys that have tailor-made properties for its specific use.

It’s satisfying to see better results. It’s even more satisfying when they result from great accomplishments.

InspirationAL

The philosophy of continuous improvement - performing better today than yesterday, better tomorrow than today - should always inspire us. The will and ability to adapt and change is key to success, and surprisingly often for the mutual benefit of business, people and society.

Economic uncertainty can act as a catalyst for change, as should the climate challenge. The world needs to turn words into action to combat climate change. In this context, developing the solutions the world needs to fight climate change, such as lightweight vehicles, energy-efficient buildings and lower-cost renewable energy production, will be highly appreciated and well rewarded.

As a global aluminium champion we have a responsibility to address the climate challenge, we have the ability to contribute and it will be profitable to do so in the long run.

Challenge responsibly

I believe that aluminium, with its versatile range of properties, is part of the solution. And I believe that The Hydro Way of doing things is a healthy approach to survive and prosper even in troubled times. There is a clear connection between performing well in all aspects of everyday operations and in achieving the deserved bottom line results.

I am deeply saddened by the fact that three of our colleagues did not return safely home due to fatal accidents at Hydro plants last year. Zero is the maximum number of fatalities we can accept. Our operations, precautions and ability to avoid high-risk incidents should be so good that accidents like this simply do not happen.

Also, the environmental impact of our operations must be minimized, regarding greenhouse gas emissions (GHG), energy consumption, waste, water and biodiversity. I am pleased that GHG emissions from Hydro’s comparable operations decreased further by 5 percent last year. Following the integration of the Vale aluminium assets and after Qatalum moved into full production, Hydro’s nominal GHG emissions increased. We are committed to continue our determined efforts in technology development and operational improvements to resume our long trend in the right direction.

When it comes to the impact of mining and refinery operations, Hydro has plenty to learn, but I also believe that we have something to contribute. We have become member of the International Council on Mining and Metals (ICMM) to benefit from advice from our peers, to report and to exchange knowledge and best practices. In the communities where we now operate in Brazil, we initiate and take part in important community infrastructure, social and environmental programs.

We enjoy a very good relationship with local unions. I believe that we have something to contribute by taking our “Hydro model” of respect and cooperation with us to Brazil – and I am convinced that the unions have a lot to contribute to Hydro.

Hydro is affiliated with the UN initiative Global Compact, takes part in the World Business Council for Sustainable Development and is included on the Dow Jones Sustainability Indexes and FTSE4Good.

The metal and material of the future

I am still convinced that aluminium is the metal of the future. Aluminium shall not only take part in creating growth and prosperity the next decades, but also be a part of the solution to bringing about growth in a way that respects the limits of nature, people and society and the limited resources that we all depend upon.

Aluminium is an energy bank. The energy is not wasted when turned into aluminium, the energy is stored in the metal, enabling it to be recycled time and again and turned into new products that we need every day. Consequently, 75 percent of all aluminium ever produced is still in use. As millions strive to climb out of poverty and into the global middle-class aluminium both plays a role in enabling infrastructure developments and in saving much of the energy and emissions this otherwise positive development implies. Aluminium is future proof.

Building a bridge between short-term challenges and long-term opportunities for aluminium is a balancing act and requires determined efforts. We will challenge our minds, talents and efforts to solve the challenges ahead, because the long-term prospects of aluminium are promising and we look forward to take part in shaping that future.


Updated: October 11, 2016