Norsk Hydro warns of higher costs after strong second quarter

OSLO (Reuters) - Aluminium producer Norsk Hydro's NHY.OL on Wednesday reported stronger than expected second-quarter earnings, but said the company faced higher production costs in the third quarter.

FILE PHOTO: A production line under construction at a casting house in the Norsk Hydro aluminium plant in Karmoey, Norway April 26, 2019. Picture taken April 26, 2019. REUTERS/Gwladys Fouche

Overall production costs of alumina, a chemical compound used to produce aluminium, fell to a four-year low of $192 a tonne in the second quarter, but rising costs were to add $15-20 a tonne in the third quarter, Norsk Hydro executives told 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.

When asked whether higher costs would mean lower profit in the third quarter, Norsk Hydro’s Chief Executive Hilde Merete Aasheim told Reuters: “Yes... that is fair to say.”

The company’s Oslo-listed shares opened more than 3% higher on Wednesday, but later reversed and were trading down 2.2 by 1127 GMT.

Hydro’s underlying earnings before interest and tax rose to 949 million Norwegian crowns (82.1 million pounds) in the April-June period, from 875 million crowns a year earlier, exceeding the 594 million crowns 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 Brazil’s Alunorte, the world’s largest alumina refinery, had almost entirely driven the results.

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

Global demand for primary aluminium is expected to remain weak due to industrial activity hit by the COVID-19 pandemic, resulting in estimated surplus of 3-4.7 million tonnes of in 2020, despite signs of recovery in China, Hydro said.

The company expected demand in China to recover in 2021, while demand both in North American and Europe was seen still lagging in 2021 and 2022, Aasheim said.

Norsk Hydro took an impairment of 1.5 billion crowns at its Extruded Solutions business, which produces products for construction, to reflect weaker growth outlook, mainly in North America.

Aasheim 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.

Hydro has promised to pay a minimum annual dividend of 1.25 crowns per share when its financial situation and the market conditions allow.

Reporting by Nerijus Adomaitis; Editing by Muralikumar Anantharaman/Vinay Dwivedi/Jane Merriman