Norsk Hydro ASA
Q4 2021 Earnings Call Transcript

Published: 22 Feb 2022

[Line Haugetraa:]

Good morning, and welcome to Hydro's Q4 presentation and conference call. We will start off with a presentation by our CFO, Pal Kildemo, followed by a Q&A session. Note that you will need to be dialed into the conference call to ask questions. With that, I turn the microphone to you, Pal.

[Pal Kildemo:]

Good morning, and welcome from me as well. It is a pleasure to share both our fourth quarter and full year results today, the first year we combined the reporting of these. I also hope that you enjoy our new annual report, which has gone through a substantial improvement process over the latter months. Q4 has been a historical quarter from many aspects, and I would like to start with the key highlights. Let's then turn to Slide 2. For Q4, we report a record EBITDA of NOK 9 billion, while free cash flow came in at NOK 4.7 billion. We are pleased to see the continued positive trend in our 12-month rolling ROACE from right below 13% in Q3 to 18.6% in Q4, almost double our overall profitability goal of adjusted ROACE of 10% over the cycle. The tight markets that we have experienced over the latter quarters continued in the fourth quarter, and not only for aluminum. We also experienced tightened markets for alumina, energy and extruded products. Continued strong and increased market prices improved revenues and results, and we are proud to report new record results upstream and also in energy. And while market prices help a lot, so does our own improvement effort as every additional tonne or megawatt hour produced contribute significantly more to the bottom line than only a year ago. I'm therefore most pleased with our ability to deliver improvements 25% above the targeted level for 2021 at NOK 6.3 billion in total and NOK 2.6 billion for 2021 in isolation. In addition, we have delivered NOK 1.5 billion of our NOK 2.5 billion commercial ambition. On the back of the strong financials, the Board has decided to propose a cash dividend distribution of NOK 11.1 billion or 80% of adjusted net income from continuing operations to Hydro shareholders. This is at the top end of our 70% to 80% guidance from our recent Capital Markets Day in December. At the same Capital Markets Day, we also announced new ambitions within our 2 strategic pillars of strengthening our position in low-carbon aluminum and diversifying and growing in new energy. We have been busy since then, and I look forward to sharing our progress with you in these 2 areas a bit later. Let's then move to Slide 3. Let's first start with the market side. During the fourth quarter, the LME price increased from start to end, hitting a high of close to $3,200 per tonne. The product premiums also followed, reaching new highs with the European extrusion ingot billet premium trading over $1,600 per tonne. The European premiums moved upwards on tightening markets driven both by stronger demand, but mainly tighter supply. European demand is up 7% year-over-year, contributing to demand outside China being up by 5% compared to Q4 last year. This is in contrast to 6% weaker demand in China, bringing the band down by 2% for Q4 globally. However, the tight markets in the fourth quarter are primarily driven by the supply side reacting to soaring energy prices with especially European smelters exposed to spot energy markets, which saw their business operating costs increasing several thousand dollars. This in turn has led to significant curtailments with around 650,000 tonnes curtailed to date, contributing to the large deficit in world ex China estimated by CRU. According to CRU's cost model, around 700,000 tonnes more is at high risk of curtailment and around 400,000 tonne is at medium or high risk of curtailment. A potential curtailment of this would bring the total deficit closer to 3.5 million tonnes, confirming our view from Capital Markets Day that there seems to be a larger risk of a tighter market in 2022 than the opposite in the current energy price environment. China is still expected to be largely balanced in 2022. However, also here, we are seeing supply side risk, most recently represented by the COVID outbreaks in the Guangxi region. Let's move to Slide 4. In order to deliver on our strategic ambitions, we need to make progress every quarter. And even though it's only a couple of months since our last market update, we have seen good progress. We were structured to strengthen our position, to reduce our footprint and delivering low-carbon aluminum to our customers, as is exemplified here by our recently announced recycling investment in Cassopolis, which we are progressing well towards final build decision. Here, we contribute to our recycling growth ambitions while also entering the U.S. market with our Hydro CIRCAL green product, which consists of a minimum 75% post-consumer scrap content and is sold at a premium to nonbranded products. In addition, our journey to create new value through profitable growth in our new energy businesses continues at full speed. Let's move to Slide 5. Strengthening our position in low-carbon aluminum starts with having a robust position on the cost curve. And we have a long track record of establishing and delivering on targeted improvement programs in Hydro for every business area, every business unit and every person. And throughout these years, it has always been very important to ensure that the improvements can be traced back to the bottom line. Our newest program was initiated in 2019 with a baseline in 2018 when our adjusted EBITDA, excluding Hydro Rolling, amounted to NOK 15 billion. Since 2018, we have gotten good help from the market, as you can see here, with around NOK 10 billion in positive impact from aluminum and alumina prices as well as currency, only partially offset by NOK 2.1 billion in higher raw material costs. Downstream volumes, margins and Energy results contribute with another NOK 4.6 billion, and we then have NOK 2.4 billion in negative other effects like the Bauxite & Alumina, ship and motor outage, higher eliminations and nonrecurring scrapping of assets, in addition to NOK 3.4 billion in fixed cost inflation. Without our improvement efforts, our EBITDA today would have been NOK 21.7 billion, but adding the NOK 6.3 billion in improvement brings it to NOK 28 billion. And we still have NOK 2.2 billion to deliver in the years to come, which you should expect to contribute to our bottom line in the same way. I'm also pleased to confirm that we have delivered NOK 1.5 billion in commercial improvements compared to a baseline in 2018 and aim to deliver NOK 1 billion in the coming years, much supported by our targets to grow our sales of greener products and selling these at premium pricing. Let's then move to Slide 6. The world is moving from talk about future climate commitments to a real pull in the marketplace. And we are experiencing 2 things

[Line Haugetraa:]

Thank you, Pal. We will now start the Q&A. Please note that you will need to dial in to the conference call to be able to ask questions. It will not be possible to ask questions over the webcast. Operator, we're now ready for questions.

[Operator:]

. And our first question comes from the line of Liam Fitzpatrick from DB.

[Liam Fitzpatrick:]

Pal, 2 or 3 questions. Just firstly, on the power division. Obviously, a very strong set of numbers. There's a few moving parts which you talked us through there. Last quarter, you gave us kind of the uplift, which I think you said ended up being NOK 800 million in terms of the regional spreads. Can you give us a similar number for Q1 given all these different moving parts? That's the first question. Secondly, on extrusions, you're highlighting some cost pressures. So if we look at the NOK 1.7 billion in Q1 last year, should we be thinking a similar sort of range for that division in Q1? I'll keep it to 2 questions. So those are the 2.

[Pal Kildemo:]

Thank you, Liam, and thank you for joining us today on the call. As you say, there has been a lot of moving parts within the Energy business area from the pricing perspective. And the guiding we gave at Q3, if you adjusted that for the actual market prices we experienced during the quarter, actually ended quite spot on. So as you know, we ended up around NOK 800 million for the fourth quarter. Then if you look into the first quarter, there are more moving parts. You don't only have the prices. You also have movements in the actual exposed position. If you start with the prices, if you say that we realized around NOK 800 million, and you divided that by the price spread that we had in the quarter of NOK 847, then -- and multiplied that by the current price in the market which is NOK 1,094, that should bring the price area difference up to around NOK 1.05 billion or so. But then as I said, we have a lower area price exposure, 30% to 40% lower. So if you take 60% to 70% of that NOK 1.05 billion or so, you will get closer to NOK 600 million to NOK 700 million. So if you use prices realized so far, if you use the guidance on the exposure, then you would be between NOK 600 million and NOK 700 million. But just remember that these are price differences are extremely volatile now. We've seen a big pressure downwards in prices. So it's good to update that with the final difference at the end of the quarter.

[Liam Fitzpatrick:]

Understood. And just to be clear, that's a NOK 600 million to NOK 700 million uplift versus Q4? I mean, just on the...

[Pal Kildemo:]

Absolute amount. That's absolute amount. It would be somewhat lower than Q4. So it would compare to the NOK 800 million we had in Q4.

[Liam Fitzpatrick:]

Okay. Understood. And then when you said on the spot sales -- sorry, you said stock volumes are normalizing or Hydro is normalizing in Q1. I assume that, I mean, that means normalizing up, i.e., higher spot sales.

[Pal Kildemo:]

All else equal, if you have high energy prices at the start of the year, if you have a strengthening hydrological balance and the forward curve tends to look -- to fall towards the end of the year -- or the mid of the year, then you should expect that to impact production positively. And then your second question, I guess, was on extrusion and looking into the first quarter. Also here, there are several moving parts which might impact each other in one direction or the other. So given that we're in a situation where we are continuing to expect higher results driven by improvement programs, we have seen a tick up in costs in the fourth quarter. These things should work against each other, which should indicate that the first quarter, as we see it now, should not be significantly worse than the first quarter last year. Of course, there are some moving parts here. You have the billet premium. If billet premium strengthens further from the price level we're seeing today, then you could get a metal price effect as well as increased results in the remelters. But on the flip side, if you have a very strong energy price development in the European area now, that could impact negatively. So those are the moving parts, and we will have to see at the end of the quarter how they even each other out.

[Operator:]

Our next question comes from the line of Jack O'Brien from Goldman Sachs.

[Jack O'Brien:]

First question is just whether Norsk Hydro could now be into a new era of distributions. I guess if we take a look at your balance sheet, you've ended the year with $3 billion of -- or NOK 3 billion of net cash. Yes, you've got CapEx stepping up to NOK 11 billion in 2022. But assuming that the early backdrop remains relatively supportive, particularly given the curtailment, do you think we could see an era now of higher dividends? I mean, you've just paid out 80% in FY '22. Do you think there's a scope for that to now be the new normal? And even if early prices were to reverse, of course, you would get a massive working capital unwind as well. So just trying to understand what the threats are to perhaps a sustainably high dividend.

[Pal Kildemo:]

Jack, a good question. And if your market analysis materializes with respect to LME prices, it will be some very different years for a company like Hydro compared to what we've had the last decade or so. Our ambition is to pay a minimum of 50% of adjusted net income over the cycle. And but the payment will reflect the current and expected future financials. So in a scenario where you have stronger markets, where you have a strong outlook, that makes us or the Board more comfortable to increase the recommendation. Because, as you say, we have a robust balance sheet. We have many safeguarding measures in place, huge building operating capital, strategic hedging. So even if you were to reverse to an average margin type scenario, it would not necessarily mean a large deterioration on cash for us. So when you ask what scenario could be negative for Hydro going forward, it's more the scenario where we have a very strong push on costs and not the responding movement on LME. So you have a cost-driven margin squeeze. So far, we've seen that being taken quite well out by the 90th percentile on the curve and how the LME prices move. But that is, of course, a risk. So it's a round and long answer, but in general, of course, strong markets, robust balance sheet, good operations, delivering on improvement programs is a good recipe for increasing payments to shareholders going forward also.

[Jack O'Brien:]

And can I just check that when we think about REIN and Havrand, I think in the past you've mentioned that Hydro's capital sort of injection requirements should be fairly limited. You'll rely on external capital for that. Perhaps just again thinking of threats to CapEx and the extent to which cash flow could come in lower than expected. So perhaps, could you just give an update on when we should hear more on REIN and Havrand? I might have missed that during the call, and also sort of likely capital requirements.

[Pal Kildemo:]

Yes. No, REIN and Havrand are into a bit different situations, where REIN is in a phase now where they are spending cash, and we'll also have a ramp-up in cash spend as more and more projects mature towards final investment decision. Havrand is more in the situation where projects are being matured, concepts and the like. So we don't expect large cash necessary for Havrand in the coming year. That's more into 2023 and the like. The ambition for us is still the same as it has been since day 1

[Jack O'Brien:]

And then I'll just squeeze one last in, which is in terms of your cost improvement program, obviously going well. Of the couple of billion NOK still that you're hoping to deliver, which divisions should we see that cost benefit coming through? And again, just thinking with respect to offsetting any high costs that may be coming this year, next and so on.

[Pal Kildemo:]

Well, if we look purely at the operational improvement programs and the NOK 2.2 billion that you referred to. Firstly, remember that a lot of this is not necessarily cost-driven. It is also improving efficiency in operations and likewise squeezing out more volumes and also reducing consumption of raw materials. So as a starting point, this NOK 2.2 billion are going to be worth more than NOK 2.2 billion in the coming phase if we continue with today's margins. And the 2 business areas which deliver the most of those are Aluminum Metal and extrusions. As you know, extrusions has an ambition to improve EBITDA to NOK 8 billion, and Aluminum Metal still has quite a bit left on their improvement program. The largest part of the B&A improvement program was to get the operations back to stable level at nameplate capacity. So the additional improvements are more incremental compared to the 2 other improvement areas. But we are working, as we always do, to identify new improvements, and we'll keep to continue to update you on a yearly basis as that materializes.

[Operator:]

Our next question comes from the line of Jason Fairclough from Bank of America.

[Jason Fairclough:]

A couple of questions for me. First on Primary Metal. How do you think about the incentive price to consider adding capacity? And what volume optionality do you have in the portfolio? Second, just on your decarbonization efforts. You've got your aluminum peers, Rio Tinto and Alcoa, working together on lower-carbon aluminum smelting via an inert anode. You seem to be looking at carbon capture for the last 2 tonnes of CO2. So why the different approach?

[Pal Kildemo:]

Jason, a pleasure to have you on the call. When it comes to the primary side, we have little possibility to increase at existing operations. Basically, unfortunately, the only real volume increase that we see going forward is ramping Albras up after the power incident we had on Saturday. And then the question is if we are able to find an attractive energy contract for Slovalco, which is running at 60% capacity. Apart from that, we are running pretty much full, and it's more incremental creep through debottlenecking, improvement efforts, et cetera, which will contribute. When it comes to incentive prices for building new aluminum smelting capacity, we are still in the phase where we define the aluminum metal as sustain and improve, meaning we want to move aluminum down the cost curve and ensure that we produce as green metal as possible. But we are, as you referred to, preparing alternatives for the period to come through our technology developments within green aluminum. So we have 3 pathways that we're currently exploring now, Jason. One of them is, as you mentioned, the carbon capture and carbon storage. This is what we believe will be most relevant for existing operations. The new technology is probably, for our part at least, expected to be used mostly for greenfield. But we have a way to go on existing operations, and there that could make sense. And we're very happy to have made progress with Verdox, the company that we announced, our small acquisition into today, as they have a technology which seems to be very feasible for aluminum production. But we also have a second pathway, which is our own HalZero technology, which is also carbon-free but not based on inert anodes but based on our chloride process, where the carbon goes in loop. And we have had good progress in RMB or lab setting so far. And we are gradually rolling this out towards smaller and potential industrial piloting as we see that this succeeds. And as we see, there is a demand for this material in the market. And that was the NOK 2 billion or so capital that we allocated at our Investor Day to ensure that we move forward with these pathways. The third one is recycling of aluminum, ensuring that we get to 100% post-consumer scrap usage, combined with hydrogen in the casthouses. So we are working across 3 axises. We believe that the aluminum industry needs to see success in -- be it HalZero or Elysis or other initiatives so that we also have a carbon-free alternative in the period to come.

[Jason Fairclough:]

Okay. If I could just ask a tricky one here, Pal. We were worried about magnesium in the third and fourth quarter of last year. Is magnesium no longer an issue?

[Pal Kildemo:]

Well, as responsible for finance, you never rule out issues completely. And it's still a tighter market than what was the case going back in 1.5 year or so. But the market has improved somewhat. Prices have come down, and we have visibility and safety and supplies into the third quarter -- well into the third quarter. So it's not as pressing an issue as it was in the midst of the third to fourth quarter, but it's still high on the agenda to ensure that we continue to mitigate here.

[Operator:]

Our next question comes from the line of Ioannis from Morgan Stanley.

[Ioannis Masvoulas:]

So the first question is again on capital allocation. You indicated that free cash flow this year is likely to be much stronger than last year if the current market environment persists. So that would put you firmly into a net cash position even after the significant dividend that you've announced. Shall we assume that any excess cash comes back to shareholders? Or are you also considering accelerating some of your growth projects?

[Pal Kildemo:]

Well, we have a communicated CapEx ambition that we've gone to the market with. And this covers strategic growth areas such as extrusion and recycling. And as you know, we have quite a good track record on moving these projects going forward, and we also have a longer pipeline. So we -- as we do every year, we will run strategic processes to evaluate if there is a market or a capacity for increasing this even further, and then we will evaluate that versus extra returns to shareholders. So this is a constantly moving evaluation. But as of today, we have the CapEx guidance that we have and we have the dividend policy that we have.

[Ioannis Masvoulas:]

Okay. The second question on the CO2 compensation. You flagged the fact that the reference CO2 price has doubled. Shall we expect a similar development in the compensation that you booked through the P&L starting in Q1?

[Pal Kildemo:]

Well, if you look at the basis for what we recognize, then it should indicate a higher recognition in Q1 also, yes.

[Ioannis Masvoulas:]

Okay. Understood. And the last question. There have been a number of one-offs in Q4. I just wanted to check, on Aluminum Metal you showed NOK 360 million of one-offs. Are those part of the adjusted EBITDA line or not? And secondly, within that, can you talk about the eliminations line which was a pretty big number this quarter?

[Pal Kildemo:]

Yes. No, and firstly, we try to adjust out as little as possible from the results. What we are just out is mainly periodization effects, costs related to closure, environmental costs relating to closed sites, et cetera. But the effects that were included in the results this quarter were either related to assets in operation or things that have already been excluded from the results which now were brought in. So if you look at, for example, Aluminum Metal, the NOK 360 million composes 2 items

[Ioannis Masvoulas:]

Great. And then on eliminations?

[Pal Kildemo:]

Eliminations, basically we have -- we sell quite a lot internally across our operations. So in Bauxite & Alumina, we supply our whole system with alumina. And in the Q4, fourth quarter, you had a very good development in margins for alumina. So the results for Bauxite & Alumina should be strong on the back of that. But then Bauxite & Alumina sells this alumina to Aluminum Metal. It sits on both for a while. It's a small time in the inventory. And Aluminum Metal uses it to create aluminum, which is not sold externally in the same period. So to ensure that you don't count the profit, which has been generated outside of the -- or only generated inside the company, you need to eliminate the positive result on alumina. And that is what drives the eliminations up. As you see, the other line and the other-like costs are more according to guidance and are a bit higher in Q4, as they usually are following a calm Q3. Going forward, that effect should of course reverse. So if you have a strong increase in the fourth quarter and then prices remain where they are for alumina, then you will get that back as a reversal on the elimination line in the -- either coming or the quarter after that. But if prices continue to increase for alumina, you might have a new negative elimination, which offsets the positive that you have reversed. And if prices decrease in the first quarter, you could get very strong positive eliminations. So it's difficult to guide at current stage to what the eliminations will be at the start of the quarter. But this is, of course, something we should have better insight into at the end of the quarter.

[Operator:]

Our next question comes from the line of Amos Fletcher from Barclays.

[Amos Fletcher:]

I just wanted to ask a couple of questions in respect of Slovalco, just on -- a further question on how easy is it to secure long-term, low-cost energy contracts in Europe at the moment. And hence, what do you think is the risk of some of the closed European smelter capacity returning?

[Pal Kildemo:]

Yes. It's a good question, Amos. And from our perspective and for Slovalco's perspective, unfortunately, it's not very easy to source long-term competitive power contracts in a European context. And we've been working quite aggressively on this long time before we had the latest movements on gas and CO2 emissions, et cetera. So as I mentioned in my presentation, currently, we see more risk of smelters being challenged by the really high power prices than the opposite way. What could change that picture is, of course, if local governments or countries act. The aluminum industry is still a noteworthy industry with supply chains on both sides. And I think in order to be able to create a cost-competitive power contract, you will need something more than just market prices currently.

[Amos Fletcher:]

Okay. And then I just wanted to ask about working capital build in 2022. If spot prices stay where they are, what sort of do you see with capital...

[Pal Kildemo:]

Yes. The line was a bit bad, but I think you asked about what the capital build would be in 2022 at current spot prices. And we -- of course, we ended the year with somewhat low prices -- or not low prices, but lower compared to where we were at the highest and where we are now. So there is some upside to operating capital given current price environment. But I would have to get back to you with an exact guiding on sensitivities there, Amos. But we can follow up on that.

[Operator:]

Our next question comes from the line of Daniel Major from UBS.

[Daniel Major:]

My line wasn't very good earlier. But I just wanted to check on Liam's question around the uplift in power. Is that NOK 600 million to NOK 700 million increase delta quarter-on-quarter in the area of payments in Q1?

[Pal Kildemo:]

No, it's the NOK 600 million to NOK 700 million compared to the NOK 800 million we had in Q4. So it's a reduction of a couple of hundred millions.

[Daniel Major:]

Okay. Very clear. And on the recycling side, you've previously indicated that split between Primary Metal and Metal Markets. Can you tell us how much attributable EBITDA is coming directly from recycling and what the sort of upside there is there?

[Pal Kildemo:]

Yes. If you look at the current pricing environment, then most of the remelter premiums are impacting Metal Markets. And then you will be getting a more and more positive impact in Aluminum Metal as we use more scrap in the process. Like for example, we are doing now at Høyanger where we're introducing 40,000 tonnes of scrap. So what I said in my presentation is that typically, we have guided on a level of NOK 650 million or so for Metal Market segment as a whole on an annual basis. And it's been well above that this year, as you're very well aware of. And if you use the prices we see in the market now, you're probably closer to NOK 400 million per quarter in average. And then we've given a range of NOK 300 million to NOK 400 million because of course the premium swing quite significantly now. And you should expect that to be quite a bit higher in the first and second quarter than the latter due to seasonality. And that uptick is purely driven by recycling.

[Daniel Major:]

Okay. And would you expect that to continue to grow in subsequent years?

[Pal Kildemo:]

Well, It should continue to grow because we are growing volumes also. So this is mainly just the price-related impact. If you look at our recycling ambition from, for example, Investor Day, that should come on top of that and, of course, also with a higher margin than what was used for those calculations. So significant profitability applies for recycling if market continues to be where they are.

[Daniel Major:]

Okay. And then final question just on REIN. You previously given an indication of a capital raise in 2022. Can you, one, give us any indication on time line within the year? And two, can you give us any sort of range or indication of your expectation of the capital outlay for this business from -- directly from Norsk Hydro this year?

[Pal Kildemo:]

I'm sorry, Dan. It's 2 questions that I don't have much more to give than what I already have. We -- it will be -- or our ambition is now to do it within the year. Of course, the earlier the better from a capital perspective, but we will ensure that the substance is sufficient so we get the best value risk setup. So it's within 2021 is all I can say there. And the same goals for the cost side. If we see that this pulls much longer into the year of 2021, then we can evaluate if we should spend some time in the second quarter to get back on some more details relating to CapEx. But until then, CapEx inflow is somewhat more limited from our side, and we would prefer to present all details regarding REIN in the prospectus to the IPO.

[Operator:]

Our next question comes from the line of Krishan Agarwal from Citi.

[Krishan Agarwal:]

Most of my questions have been asked. A couple of questions left. On the CO2 compensation, you said that recognition will go up in Q1. So how should we think about the cash or the realization of that due to compensation in the cash flow?

[Pal Kildemo:]

Yes. So far, there's been no cash compensation because we're still awaiting the final approvals of this from a regulatory perspective in Norway. And the latest, I believe, I read on this is that one believes the cash effect for 2021 to come into the later part of 2022. And then you'll probably see a similar setup for 2022 without me having all the details there now.

[Krishan Agarwal:]

Got it. So NOK 180 million quarterly run rate, so we are looking something between NOK 500 to NOK 600 million cash coming in 2022?

[Pal Kildemo:]

Yes. We had somewhat lower in the first quarter. I guess we had NOK 120 million in the first quarter, and then we have 3 quarters of NOK 180, yes. So that's the totality.

[Krishan Agarwal:]

Okay. And then second question is on the hedging. So you haven't disclosed any incremental hedging in the quarter. So has that, the hedging, sort of stopped? Or it's just kind of a temporary pause in terms of volume hedging on aluminum as well as the currency?

[Pal Kildemo:]

No, I think if you look at the additional factors impacting Hydro in our quarterly report, we have updated the hedging which has been done up to report date. Basically, what we've done is that we closed part of the Slovalco hedge, as I mentioned, sold the LME -- sorry, bought back the LME and sold the power. And then we reentered the LME hedge for the legacy part of the company for 2022. So we're still at around 450,000 tonnes or so for 2022. And then for 2024, going into the year, we had hedged around 20,000 tonnes. We've put 80,000 tonnes on top of that. Now we're around 100,000 tonnes for 2024.

[Operator:]

Our next question comes from the line of Jatinder Goel from BNP Paribas.

[Jatinder Goel:]

Two questions. First one, on hedging. Is 2022 hedging evenly spread in terms of $2,200 price? Or is there a greater variation as we move between the quarters?

[Pal Kildemo:]

Evenly spread, more or less. We hedge annual contracts. So yes, evenly spread.

[Jatinder Goel:]

Just another one. On power outage in Brazil, we had a power outage, I think, in 2019 as well or 2020. Is there any diagnosis so far for this power outage? And is REIN the only solution? Or is there anything else the company can do to ensure more operating sustainability?

[Pal Kildemo:]

Well, we have, as you referred to -- mentioned that it was an internal power impact, which is different from the event last time for Albras where it was an external event. And for Albras, as for Alunorte, we take this seriously with respect to ensuring that we continue to work on our maintenance programs, ensuring that we are ahead of these events and then learning from every one of them to see how we can mitigate for similar things in the period to come. So for everything that impacts our operations, we learn from it and we implement mitigating actions to reduce the risk of that happening going forward. Going forward, in addition, we will have the discussion with the insurance companies to see how they view it and if we can have this compensated.

[Operator:]

Our next question comes from the line again from Liam Fitzpatrick from DB.

[Liam Fitzpatrick:]

Just one quick follow-up on Slovalco, which you touched on. It's now operating at 60% of capacity. Can you just give us your outlook for the smelter and just remind us when the power contracts are up for renewal?

[Pal Kildemo:]

Yes. Liam, it's basically this year we have left. So our long-term contract is expired. This year, we're running on the hedged volumes and for 2023. If we don't find a long-term solution or short-term, power prices are at an attractive level to lock in a good margin, then it will be challenging to continue to operate at Slovalco for primary aluminum.

[Operator:]

The next question comes again from Jason Fairclough from Bank of America.

[Jason Fairclough:]

Just a quick one on your joint venture in the Middle East, so Qatalum. Once upon a time, there was a plan to double the production at this site. Is that completely off the cards now? Or is that something that you'd revisit at some point?

[Pal Kildemo:]

Well, at the moment, as I mentioned earlier, for us, as Hydro, the focus is on sustaining and improving the operations that we have. And we're not in any discussions regarding increased capacity based on whole area of technology for the time being.

[Operator:]

Our next question comes from the line of Truls Engene from SEB.

[Truls Engene:]

Apologies if this has already been addressed. But on Aluminum Metal and the outlook for Q1, could you please elaborate and quantify the higher raw material costs you expect in Q1 compared to Q4, please?

[Pal Kildemo:]

Yes. No, for the first quarter in Aluminum Metal, there's 2 cost elements based on how we see market prices now. And of course, market prices are volatile that we expect to increase the cost base. And it's alumina which, I guess, you have a good overview over; and it's carbon, which is less visible, I guess, from an external perspective. Our totality based on market prices today is that, that accounts for around NOK 650 million compared to the fourth quarter.

[Truls Engene:]

And also on the -- just a quick follow-up on the LME hedge on Slovalco. You said that there will be a positive effect on the power price in 2022? How will that be booked throughout the year?

[Pal Kildemo:]

That will be booked with the profile of the contract. So basically, it will be spread out overall 4 quarters, totality.

[Truls Engene:]

And that will come as a positive effect in LME?

[Pal Kildemo:]

That will come as a positive effect in Aluminum Metal. So now we've taken a hit of NOK 260 million negative on LME. And then we expect well around NOK 600 million or so positive in power realization during 2022. So around NOK 150 million per quarter compared to all else equal.

[Operator:]

We do have another question from Ioannis from Morgan Stanley.

[Ioannis Masvoulas:]

Just a quick follow-up for me. In light of the rising geopolitical tensions in the past few weeks, are you seeing any shift in purchasing patterns among your customer industries in Europe, either in terms of restocking or preference for domestic material?

[Pal Kildemo:]

That's a good question, Ioannis. In general, there has been an attempt to restock for quite some period of time. So it's kind of -- it's a bit difficult to separate out what drives the restocking. As you know, the markets have been so tight that customers have been struggling to get hold of what they need in the first place. So I'm not in any position to say if anything's changed due to the tension in the market. What we from other industries is that, of course, people are more proactively discussing their open power exposures and the source of different goods and material. But we haven't anything particular to report from our industry.

[Operator:]

Thank you. We have no further questions on the line so I'll hand you back over to the hosts.

[Line Haugetraa:]

Okay. Thank you for -- thank you very much, operator, and thank you all for joining us today. And please don't hesitate to contact us in IR if you have any further questions. Wish you all a great day. Thank you.

[Pal Kildemo:]

Thank you.