‘Trying to understand what will happen in Q3 is our biggest challenge yet': Norsk Hydro

The European aluminium market will face further uncertainty over the coming months amid high energy prices, low inventories and weaker premiums, Norsk Hydro chief financial officer Pål Kildemo told Fastmarkets in an exclusive interview on Friday July 22

Primary aluminium and value-added product (VAP) premiums have been trending downward over recent weeks, falling from previous record highs.

The outlook remains split with some participants noting weaker demand and concerns over a potential recession, and others continuing to offer high with expectations that supply will be tight when consumers return to the market.

Kildemo shared this uncertain view of the market, telling Fastmarkets, “Trying to understand what will happen in the third quarter is our biggest challenge yet.”

“How do we plan for Q3 and Q4? Our biggest challenge is to ensure that we are prepared to take the volumes that are there for taking, while also at the same time balancing our inventories so that we are prepared if the market falls further,” he added.

Hydro’s latest quarterly results showed that the extrusions business achieved record results, but Kildemo recognised that demand was weakening.

“The development in the [European aluminium billet] premium reflects pretty much what we are seeing in the physical side, that demand is weakening, to some extent,” Kildemo said.

“So far, we have struggled with automotive demand whereas the more general extrusion market for building and construction and industrial has been strong,” he added.

Fastmarkets assessed the aluminium 6063 extrusion billet premium, ddp North Germany (Ruhr region) at $1,250-1,350 per tonne on July 22, unchanged from a week earlier but down from its recent record high of $1,500-1,600 per tonne in April.

“Into the third quarter, we see that shifting somewhat – automotive is expected to be the stronger and building and construction and industrial coming off somewhat,” Kildemo explained.

“This is going to impact different VAPs to different extents, but overall demand for extrusion is expected to be somewhat lower, which is likely to impact the billet premium and has already done so.”

Billet premiums remain historically high; the German premium is up from $1,175 per tonne at the same time a year ago and is 420% higher than $250 per tonne two years prior, supported by high P1020 and energy prices.

Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam at $540-580 per tonne on July 22, up by 62% from $335-355 per tonne one year earlier.

“I guess the big question going into Q3 and Q4 will be how much capacity will we have on the aluminium side to produce these products? With around 1 million tonnes of capacity at risk due to the high energy prices, that might counteract some of the weakness in demand that we are seeing,” Kildemo said.

“Which of these effects will be the strongest is impossible to say today,” he added.

The market is already feeling the effects of previous smelter cuts announced at the end of 2021, with participants experiencing fresh concerns over additional curtailments amid rapidly increasing energy costs.

“On aluminium metal, in Norway we are okay as we have power contracts until 2030 and 2040, and for those outside of Norway we have at least until roughly 2024. There is only one which is at risk, which is the one in Slovakia where we only have power out until the end of the year and no power contract in 2023,” Kildemo added.

“So unless aluminium prices go significantly up or power prices move much lower, things at Slovalco will be more challenging than the rest of our portfolio.”

Hydro previously announced production cuts at its majority-owned primary aluminium plant Slovalco in Slovakia. The decision was made to reduce production to around 60% capacity, corresponding to an annual production reduction of 35,000 tonnes.

“We are more gas and oil exposed in extrusion and in recycling. It is not a high share of the costs, but with the increasing prices that we are seeing now it is starting to eat into margins,” Kildemo said.

“The real fear of course is if you get rationing of gas, as it is not reasonably replaceable, and for the majority, it means you will have to reduce production. At the end of the day, if there is rationing in Europe then probably our customers will also have to reduce production also so it might not be the gas that hits us it would be the reduction in offtake.”

Kildemo explained that the most “significant risk” that Hydro sees from the energy side is the rationing of gas.

And he added that the ongoing disparity between weaker London Metal Exchange prices and declining stock levels further adds to the uncertainty.

“What is also a bit special in the current market is that we have okay inventories as a whole, but the LME inventories are becoming quite low, and that could force movement in the market. But we haven’t seen this happening much in aluminium so far,” Kildemo said.

“When LME inventories fall to a certain low, you should expect prices on spot to increase to attract metal sitting outside the LME into the LME in order for the market dynamics to work. That is also something that can give quite volatile price movements in the coming quarter.”

Global LME aluminium inventory levels were most recently at 304,125 tonnes, down from 939,200 tonnes at the beginning of the year and the lowest level in almost 22 years.

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