Norsk considering further production cuts, does not rule out closure

Norsk Hydro Aluminium workers Paul O'Brien and Evan Ryman at the Kurri Kurri plant in the Hunter Valley which is threatened with closure. Picture: Jane Dempster 

NORWEGIAN aluminium producer Norsk Hydro said overnight that it is considering reducing production further at its Kurri Kurri plant, after a write-down on the plant weighed on the company's earnings.

The company said last month that production at Kurri Kurri wasn't profitable in current conditions, due in part to a strong Australian dollar, which resulted in the decision to shed 150 jobs at the plant.

Norsk chief executive Svein Richard Brandtzaeg said overnight that, even after these earlier cost reductions, the strong dollar continued to weigh on Kurri Kurri, adding that lower aluminium demand, higher raw material costs and high power prices were additional pressures.

Mr Brandtzaeg said Norsk Hydro hadn't yet decided on further production curtailments, and that "it is impossible to say" whether it would close just one more production line at Kurri Kurri or shut down the entire plant.

Norsk Hydro, which is Europe's largest aluminium producer, shuttered more than 300,000 tonnes of production, about 25 per cent of its capacity, after the financial crisis in 2008. Most of this is still idle. Aluminium producers have already announced 1 million metric tons of curtailments in 2012, according to Norsk Hydro, and with continuing overcapacity in the market, any further production cuts could affect prices. 

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

One of the three production lines at the Kurri Kurri plant has already been closed, reducing production by 60,000 tons a year from a full capacity of 180,000 tons a year. 

The company said it has written down the Australian Kurri Kurri plant by 970 million Norwegian kroner ($157 million), and the book value of the plant is now 1.2 billion kroner. The write-down weighed heavily on the company's fourth-quarter results, with Norsk Hydro swinging to a net loss of 749 million kroner from a net profit of 620 million kroner last year. Underlying earnings before interest, taxes, depreciation and amortisation, which excludes write-downs, rose to 2.52 billion kroner from 2.21 billion kroner a year earlier and against expectations for 2.47 billion kroner. 

Sales for the period totalled 21.75 billion kroner, up from 19.4 billion kroner a year earlier. 

Mr Brandtzaeg said that the total industry curtailment of 1 million tonnes of production will "create a much better balance in the market," but he wasn't sure if this would affect prices, and said he didn't want to speculate about further curtailments in 2012. 

Norsk Hydro maintained its guidance of 3 per cent to 5 per cent aluminium demand growth, excluding China, in 2012, with the company's chief financial officer, Jorgen C. Arentz Rostrup, saying he expected growth to be in the lower range of that estimate. China is the world's largest consumer of base metals. 

He said that although European demand is only about one third of the total, excluding China, the European financial turmoil particularly affected Norsk Hydro's extrusion business and rolled products. The company has written down its building systems operations in Southern Europe by 230 million kroner.