Norsk Hydro: Higher production costs of alumina may affect company’s profit in Q3 2020

Despite the robust second-quarter earnings, Norsk Hydro analysed that it might face higher production costs going ahead in the third quarter of 2020. The overall production costs of alumina fell to a four-year low of $192 per tonne in Q2 2020, but in the third quarter, rising costs would likely add $15-20 a tonne, said Norsk Hydro executives on a call with analysts.

“If we look into third-quarter we expect to see an increase in the main raw materials ... costs are expected between 20-30% for the two materials (fuel oil and caustic soda),” chief financial officer Paal Kildemo said.

Hydro’s Chief Executive Hilde Merete Aasheim even signalled that higher production costs might mean lower profit in the third quarter of 2020.

In the second quarter results, Hydro reported an increase in its underlying earnings before interest and tax to NOK 949 million from NOK 875 million during the same period last year, exceeding NOK 594 million as was expected by analysts in a poll published by the company.

Credit Suisse analysts said in a note that Hydro’s Bauxite & Alumina business, which includes Alunorte refinery, primarily drove the Q2 results.

Agreeing to it, Hydro said the fall in raw material costs, including fuel oil and caustic soda, pulled down the production costs at Alunorte refinery to record lows in the quarter.

Hydro also pointed that going ahead the global demand for primary aluminium would likely remain weak due to industrial activity hit by the COVID-19 pandemic, resulting in an estimated surplus of 3 to 4.7 million tonnes in 2020, despite signs of recovery in China.

Hydro expects primary aluminium demand in China to significantly recover in 2021, while that in North America and Europe would still be lagging, said Asheim.

Aasheim also said the board was planning to discuss 2019 dividend payment later this year after it was put on hold in April due to the coronavirus impact.