Norsk Hydro CEO Sees Aluminum Cuts in West, Not China

Look to the west, not China, to make further aluminum production cuts to help reduce the market oversupply, the chief executive of Europe's largest producer of the metal said Thursday.

Speaking in an interview with Dow Jones Newswires, Norsk Hydro ASA's Svein Richard Brandtzaeg said that history shows China keeps its domestic market as close to balance as possible by adjusting its imports, exports and production.

"We haven't calculated on short-term support from China," he said. "Companies in the west are realistic about what they can achieve [with production cuts]."

The aluminum industry has been in a surplus "for quite a long time," he said, aided by a flurry of new smelters and expansions.

"There has been a big appetite for investment in capacities during several years, and we are now in a surplus that is holding down the price," he said. "If you look at other metals, they have benefited from a price level that is far above the cost of production, while the aluminum price has been determined by the marginal cost of production in the industry."

Early Thursday, Norsk Hydro reported it swung to a fourth-quarter net loss after posting writedowns of around 1.3 billion Norwegian kroner ($224.1 million) because of production cuts in response to weakening demand and lower prices.

The company posed a loss of 749 million kroner, from a profit of 658 million kroner last year. Revenue was 21.75 billion kroner, up from 19.4 billion kroner.

Norsk Hydro estimates that one million metric tons of aluminum, used in construction and transportation, have already been slated to be curtailed in the west. But with demand growth forecast at 3%-5% this year, the surplus will lessen during 2012, Mr. Brandtzaeg said.

Three-month, benchmark aluminum prices have fallen about 28% since May, trading Wednesday around $2,165/ton on the London Metal Exchange. The decline is forcing companies to make tough decisions about whether they can afford to operate plants.

So far, Norsk Hydro has cut 60,000 tons of capacity at its Kurri Kurri smelter in Australia, an operation plagued by high energy prices and hit by the appreciation of the Australian dollar against the U.S. dollar. The company could cut more, but no decision has yet been made.

"We are definitely concerned about currencies in countries where there are a lot of minerals—Norway, Brazil, Australia, Canada, for instance—there are a lot of countries that are struggling after substantial currency appreciation," Mr. Brandtzaeg said.

In 2008-09, Norsk Hydro cut output at its highest cost operations, reducing 26% of its production capacity. Mr. Brandtzaeg declined to comment on whether other capacity might be at risk, but said "it' i a step to the next level" before further cuts are made.

"We are implementing cost-cutting measures as we have done previously, but now we need to increase the speed, and Australia has the additional challenge of a fairly strong currency today," he said.

According to Mr. Brandtzaeg, an aluminum market surplus and weaker demand means fewer new smelters will come onstream.

"We are busy with what we have now and the market doesn't need more capacity," he said. The firm has been bedding down its acquisition of the aluminum operations of Brazil's Vale SA, where it worked to boost volumes significantly last year.

Mr. Brandtzaeg said a key challenge for the recovery of aluminum demand is the euro-zone crisis, which is taking a long time to resolve.

"Our customers are concerned and nervous, so we see less investments [such as in building and construction in southern Europe]," he said. "It is influencing possible market developments, and we have to live with that uncertainty for quite a while as I believe that this situation will continue, there is no quick fix."