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More aluminium production cuts are necessary to raise prices and lower inventories to manageable levels, Svein Richard Brandtzæg said as he took on the role of ceo at Norsk Hydro.
He takes the helm from Eivind Reiten, who stepped down after eight years in the position, amid difficult market conditions.
“The only way we will see inventories fall to more reasonable levels is if the industry decides to make more production cuts; the industry can’t wait for demand to improve,” Brandtzæg told MB after a ceremony at Hydro’s Norwegian headquarters.
The aluminium price will rise gradually once demand returns to the market, Brandtzæg said, noting that the rate at which stocks in London Metal Exchange warehouses are rising has slowed since December, when inventories jumped by 500,000 tonnes.
“We are starting to see slower rates of tonnages on the LME,” he said. “While I am happy about this, it doesn’t give any signal to the market that things are turning as we are only now starting to experience the results of announced production curtailments.”
There are just below 3.5 million tonnes of aluminium in London Metal Exchange-bonded warehouses. Stocks stood at around 1.1 million tonnes in summer last year.
“When prices start to rise again, they will only do so gradually due to the high inventory levels,” Brandtzæg said, adding that the market would take advantage of improved prices because it will take some time to return output to more normal levels.
Brandtzæg, with more than 23 years at the company and experience in both the upstream and downstream businesses, faces challenges to restructure the business amid a lack of demand and historically low prices.
Hydro’s focus will be on adjusting output according to the market and cutting costs where possible, Brandtzæg said, adding that the company had already reacted to poor market conditions by cutting production at its key smelters.
“We can’t rely on the market to bounce back in the near term,” he said. “I will be looking at operational performance so that they can deliver the best possible returns.”
“Hydro will put its efforts into technology so that production costs can be reduced as well as developing value-added technology for our customers,” he added.
Hydro has cut production by 500,000 tpy, equating to 30% of its 2008 production.
It has cut output at its Sør-Norge Aluminium smelter in Norway by 50% and has closed the high-cost Neuss smelter in Germany (MB Mar 23).
And the company will suspend the oldest potline at its Sunndal operation in Norway for a year, it said last week (MB Mar 26).
Demand for primary aluminium and downstream products fell in the third quarter of last year, as the slump in the automotive sector dragged down prices and consumption.
Three-month aluminium price peaked last year at $3,340 per tonne in July but plunged below $1,800 by November. The light metal settled at $1,420/20.50 per tonne, basis three months, on Monday.
Hydro made a loss of $510 million last year, which it attributed to the severe drop in demand in the fourth quarter and which included $368 million in impairment charges (MB Mar 20).
Although the market speculated that Hydro would sell its downstream businesses after it restructured both its primary aluminium production and its products divisions earlier in the year, it will retain its downstream businesses despite tighter profit margins, Brandtzæg told MB.
“Margins within downstream operations are tighter with the fall in demand but our focus is to develop new markets that are profitable,” he said.
“Our extrusion business is structured in a way that it is flexible and where capacity can be adjusted easily,” he added. “The automotive business will continue to be restructured so that it is cost-effective for us and our customers. Customers want this; they want new products that are lighter and more cost-efficient.”
While the extent of the economic downturn has caught the industry by surprise, Hydro had noticed a drop in demand two years ago, starting in the USA.
“We had noticed markets in the US drop already by 25% at the end of 2006 and then it drifted to southern Europe and then globally,” Brandtzæg said.
He and Hydro did not anticipate such a drastic downturn, he admitted.
And given the lack of clear signs of a turnaround in the short term, it is difficult to forecast where the market is heading, Brandtzæg said,
“People say we are at the bottom but we may not be at the bottom yet,” he said. “Visibility is short… we do expect a better supply-demand balance but the limited visibility makes it impossible to say when the market will return.”
But government stimulus packages will improve demand in part, he added.
“The incentive packages from European governments to the building industry constitute a positive contribution,” he said.
With more buying interest for primary aluminium coming from China, Brandtzæg is looking for East Asian demand to kick-start the market.
“There are a lot of signs that activity in China has picked up,” he added. “The government is purchasing aluminium to stockpile, which will at some stage go into infrastructure projects.”
Brandtzæg and his team are gearing up for the completion of its low-cost Qatar aluminium smelter, expected to come on stream in December.
The 50:50 joint venture with Qatar Petroleum, with cost of production considerably below the current aluminium price, will have an initial output of 585,000 tpy.
Brandtzæg is “looking forward to the challenge” of leading Hydro after the departure of Reiten, who has been with Hydro for more than 20 years.
When asked what he personally hopes to achieve during this difficult time as ceo, Brandtzæg said: “I want to lead Hydro in this downturn and ensure that we come out of it even stronger and more competitive.
“We have been through bad markets before,” he added. “Our customers know we have the experience and that we are survivors and that we will come out of this even more successful.”