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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you, operator. Good morning, and welcome to Hydro's Q2 Presentation and Conference Call. We will start with the presentation followed by a Q&A session. Both will be hosted by our CFO, Pal Kildemo; while our CEO, will be present at Q1 and Q3, which will include a more strategic... [Technical Difficulties]
of EUR 435 million and strengthens our ability to deliver on our strategic direction for 2025. Our adjusted ROACE for the last 12 months holding Q2 '21 comes in at 9%, 4% higher than Q1 and over double last year's results. If we just look at the underlying growth for Q2 alone, we would have come in at 15%, exceeding our overall profitability goal of recording ROACE of 10% over the cycle. During the quarter, we were pleased to see an overall continuation of the economic recovery, which began in the second half of 2020. The outlook for GDP growth remains positive. However, we have started seeing the pace of recovery flattening somewhat as we approach pre COVID levels. Following this, global aluminum demand was strong and in particular, in the world, excluding China, where demand rose 33% year-over-year. These fundamentals, combined with fewer new supply additions in China than expected, have resulted in a strong LME development during the second quarter with the cash price for aluminum trading at its highest level in nearly a decade. The strong demand dynamics have also elevated premium and these factors supported a record result of NOK 2.8 billion in aluminum metal. Based on these strong fundamentals, aluminum metal completed its ramp-up of Neuss line B in June. The plant is now back to full capacity of 195,000 tonnes for the first time in over a decade, producing aluminum at world-class standards in terms of climate and the raw material consumption. Overall for the quarter, across business areas, we have seen robust operations with most of our facilities producing up or above nameplate capacity, including our first quarter alumina refinery, Alunorte. This contributes to delivering on our improvement program, which is also well ahead of plan, driven largely by Extrusion's ongoing work in reducing fixed costs and restructuring their portfolio. This continued improvement in extrusion, in addition to positive demand dynamics, active market positioning and higher margins support a record high EBITDA of NOK 1.8 billion in Q2 '21. The quarter saw strong demand in automotive [Audio Gap]Even more in the years leading to 2025. Next slide, please, Slide 3. Let me now get into a high-level result overview. Given the large impact of COVID-19 last year, I will focus the analysis on comparing Q2 to Q1 this year to give a better overview of developments in key variables in a more normalized scenario, and comparing to Q1 2021, Q2 adjusted EBITDA is up by around NOK 1.4 billion. On the positive side, as I referred to in the opening, we have experienced higher all-in metal prices and volumes within aluminium metal. Realized LME price is up by 12% compared to last quarter, while realized premium is around 25% higher compared to Q1. In total, these contribute NOK 1.35 billion, and this is partly offset by $5 lower alumina price, bringing the total to NOK 1.2 billion. Moving downstream in extrusions, improved margins and volumes lifted results by nearly NOK 100 million with another NOK 100 million uplift coming from better recycling volumes in metal markets. In addition, our uplift in Other is driven by another NOK 200 million in metal markets from currency and also improved commercial performance. These positive developments were offset primarily by NOK 200 million higher raw material costs and NOK 100 million higher fixed costs upstream. Please move to Slide 4. If we then take a look at the key financials for the quarter, then year-over-year revenues increased by about 40% to NOK 34.6 billion for the second quarter. Compared to the first quarter, the revenue increase was 8%. Adjusted EBITDA came in at NOK 6.6 billion. And during Q2, we had around NOK 1.7 billion in adjustments to EBITDA with NOK 1.6 billion of this coming from unrealized losses on LME-related contracts, mainly related to our strategic hedging positions entered into in the recent quarters. Other sizable adjusting items in the quarter worth mentioning include around NOK 300 million in rationalization and closure costs related mainly to the closure of the [ aluminum anode ] plant and the sale of the Lichtervelde Precision Tubing plant in extrusions. We also excluded the recognition of a NOK 232 million deferred tax asset in Qatalum up to the end of the tax holiday period in September last year. Moving on, we had depreciation and amortization of around NOK 1.9 billion in the quarter, resulting in adjusted EBIT to NOK 4.9 billion. Financial income of NOK 355 million for the quarter included a net foreign exchange gain of NOK 550 million, reflecting gains from a stronger BRL versus dollar, affecting dollar-denominated debt in Brazil, offset by the weaker NOK versus euro, affecting euro-denominated liabilities and also the embedded derivatives in our power contract. Our tax expense amounted to NOK 992 million or about 29% of income before tax, well in line with our long-term guidance of 30%. Overall, this provides a net income from continuing operations of NOK 2.4 billion, up from negative NOK 1.5 billion in the same quarter last year and up from NOK 1.9 billion in the first quarter. Adjusted net income was positive NOK 3.2 billion compared to NOK 300 million last year in Q2 and not NOK 2.4 billion in the first quarter. And consequently, adjusted earnings per share was NOK 1.45 up from NOK 0.17 in Q2 and NOK 1.15 in the first quarter. Let's then dive into the results in the business areas and move to Slide 5. Adjusted EBITDA for Bauxite & Alumina declined from NOK 1.55 billion in Q2 '20 to NOK 855 million in Q2 '21. On the market side, the average plus alumina index decreased in the second quarter of [Audio Gap]If we look at the regional balances in the Atlantic market, it's currently tighter than the Pacific market, reflecting an Atlantic price premium, which contributes positively to our results. This quarter saw positive effects from volumes and realized alumina prices. Alunorte produced slightly above nameplate capacity in Q2 '21 with an annualized rate of 6.36 million tonnes of alumina compared to an annualized rate of 5.7 million tonnes in Q2 '20. Realized price was also higher by $28 per tonne. However, these positive effects were offset by higher costs, both in terms of raw materials and also higher costs of around NOK 200 million relating to the decommissioning of the crane used for unloading bauxite from ships. Compared to Q2 '20, realized prices for heavy fuel oil unfold are up 120% and 60%, respectively, year-over-year, resulting in an implied alumina cost of $246 which is $54 higher than 1 year ago. Sustainability in Brazil remains a key priority and an enabler for delivering on our 2025 strategy. And during the second quarter, Hydro Bauxite & Alumina also received licenses to operate its advanced bauxite residue deposit, DRS2, which in combination with the installed press filters, allows for stacking of tailings and reduce storage areas. In addition, we also signed an agreement with the University of Sao Paulo to research more sustainable alternatives for bauxite waste in civil construction. If we look into the third quarter, the Alunorte production is expected to remain around nameplate capacity. However, we do expect the operational costs associated with the decommissioning trends to impact Q3 results also of 100 million lower than seen in the current quarter and then also slightly lower than this in Q4. In addition, the outlook in the market is for increases in raw material prices in Q2 to Q3 with current market prices indicating around $5 increase due to movements in caustic and energy, but the largest movements we expect in the next quarter is due to an annual maintenance of 2 of our coal boilers which increases fuel oil consumption compared to coal, which has a higher price and thereby, it increases the cost with around $12 at current prices for Q3 in isolation. Please then move to Slide 6. The global primary aluminum market remains tight in Q2 following recovering demand and also market deficit in China, resulting in a reduction of global costs. Demand in China rose by 16% from Q1 to Q2, while production remained relatively flat. The demand increase follows a seasonal pattern normally seen in Q2 following the Chinese New Year. In world ex. China, demand decreased by 2% from Q1 to Q2, following strong demand in Q1, while production also remains relatively flat. In total, CRU expects a global deficit in 2021 due to lower-than-expected supply growth in China and better-than-expected demand growth in world ex. China. And on the back of these tight markets, we see LME and premiums rising across the geographies. The billet premium specifically is at a record high level, and it has increased more than 3x since the start of the year, reflecting the demand for extruded aluminum products in downstream segments like building and construction and automotive. While Premiums are also these data supported by the announcement of a Russian export act for primary aluminum. Please then change to Slide 7. Adjusted EBITDA for aluminum metals increased from 550 million in Q2 last year to 2.8 billion in Q2 this year, a 5x increase. In general, we experienced stronger margins year-over-year with all-in prices significantly higher, both in terms of LME and Premiums. In addition to our return to 70%, 75% ratio of value-added products, this has further supported the realized premium of $332 per tonne. We also had risk-adjusted compensation of NOK 180 million for Tier 2 compensation accrued for in the second quarter. These positive effects were partly offset by a somewhat higher cost position per tonne, mainly driven by higher energy, alumina and carbon prices, in total impacting results by around 800 million. In addition, the strengthening of the NOK also impact our results negatively. Total production and sales are also up on higher production at Slovalco and Albras, and of course, our Husnes plants now ramp up to capacity. Slovalco and Albras are now running at 95%, 96% of full capacity, and we expect them to reach full capacity during the fourth quarter. When it comes to the outlook for the third quarter, we have, by the end of June, sold approximately 57% of our primary aluminum production forward at a price level of around $2,360 per tonne, which includes our strategic hedge. On the premium side, we have secured about 52% at around $481, and we expect the premium level within the range of $400 to $450 for the coming quarter. In line with the general market demand, we do expect some increases in raw material costs in aluminum metal as well, with carbon prices and energy costs potentially rising by around 700 million before deducting Tier 2 conversations compared to the second quarter if we use current spot rate assumptions. On the strategic side, the closure process of Aluchemie is on track for year-end with employee layup and preparation for cessation of production and cleanup activities proceeding according to plan. Finally, I would like to provide a brief update on the tax rate at Qatalum. Until September 2020, Qatalum has been granted a 10-year income tax holiday. And on the expiry of the holiday in September last year, it has been consistent position that general applicable income tax rate currently at 10% should apply to Qatalum, while for accounting purposes, Qatalum and we have been using 35% since then. However, the JV partners have not been able to agree on a common interpretation of the applicable tax law. And on June 30, Qatalum has filed its 2020 tax return, applying a 35% rate. Given the differing views on tax rate, Hydro is carefully considering alternative measures to protect our financial interest in this matter. Please move to Slide 8. This quarter, Metal Markets delivered an adjusted EBITDA of NOK 335 million compared to NOK 58 million in Q2 last year. The result is driven by improved results, both in recycling and in our commercial segment. Within recycling, we saw strong demand for extrusion in both in the quarter compared to a challenging market in Q2 '20 when some recycles were curtailed. By now, all of our facilities are producing as much as possible at higher margins lifting results from NOK 41 million last year to NOK 131 million this year. Commercially, we saw higher sales volumes and improved margins year-over-year as volumes shifted to value-add products. If we exclude currency and inventory valuation effects, primarily currency, the result for the quarter was NOK 326 million, which is up from NOK 172 million in the second quarter of last year. And if we then look into the next quarter. As always, remember that trading results and currency effects in metal markets are by nature volatile. In addition, the third quarter of the year is lower recycling production due to summer maintenance stops in Europe. Please then move to Slide 9. The strong recovery in demand is visible in the extrusions market and in our extrusions results. The markets are ahead of industry forecast for the quarter as CRU originally estimated growth of 30% and 36%, respectively, for Europe and North America in Q2, and these were later updated to 32% and 40%, as you see on the slide. We see the same in Q3 in Europe, where the market forecast for Europe has been lifted from 6% to 10%. In Europe, the optimism is driven by continued strong demand in industrial segments and residential building and construction, while underlying automotive demand remains strong, but is somewhat impacted by semiconductor forfeitures. In North America, the market forecast has been slightly downgraded from 6% to 5%. And this is mainly due to uncertainty in automotive. Internally, we saw a 53% increase in our sales volume compared to Q2 last year, outperforming the market. The quarter saw growth across all key segments with volumes sold in automotive more than doubling year-over-year, as we have been minimally affected by the semiconductor sorted so far, and the electrical vehicle substitution effect is strong. This volume growth, combined with improved margins and continued cost savings from improvement program initiatives, has contributed to a record quarter for extrusions exceeding previous record set in the last quarter by around 100 million. In line with this, EBITDA per tonne of NOK 5,400 is also at its highest level. Extrusions continues with a strong focus on portfolio restructuring, and in July signed an agreement to sell 100% of Precision Tubing Lichtervelde in Belgium. To further improved performance and cash generation supporting our improvement program and commercial ambition, investment decisions have also been made to invest in new fresh capacity in Cressona U.S. and Nenzing, Austria. Investments will increase capacity by 30,000 tonnes and grow volumes in attractive segments, including transportation, engineering and building and construction. Now let's take a look at the financial results for extrusion. Please move to Slide 10. As mentioned on the previous page, adjusted EBITDA for extrusions significantly increased from NOK 649 million last year to NOK 1.8 billion this quarter. Comparing the Q2 results to the previous year, we see a positive impact from higher volumes and margins. However, it is important to note that some fixed costs increased in the quarter due to higher activity levels and increased maintenance compared to last year. Further, it is important to note that Q2 2020's results included insurance related to the cyber attack and some government grants, which we are, of course, not receiving this quarter. Looking into the third quarter, extrusion is working hard to support their earnings with the ongoing portfolio optimization, fixed cost reduction initiatives and procurement optimization. However, with great productivity levels and maintenance picking up compared to 2020, some fixed costs will return. If we look at the fixed cost savings from last year, we are now happy to share that we now estimate that only 1/3 of these will return in total as these were driven by temporary COVID measures. However, the exact timing of this is difficult to say. This compares to 50%, which we have earlier guided on. Most likely a gradual transition will occur over time. And as of Q2, a limited amount of these costs has returned. This element is also one of the main drivers for us expecting our improvement program to deliver well above targets for 2021. If we compare Q3 expectations to Q3 last year, then we experienced very strong margins in Q3 2020 on product mix and strong market recovery, and we expect somewhat weaker markets in Q3 of 2021 or weaker margins. Finally, on volumes, we should see growth in Q3, which exceeds the market forecast in Europe and North America. But remember that sales are seasonally weaker in the third quarter compared to the second quarter. Let's move to Energy on Slide 11. Adjusted EBITDA for Energy increased from NOK 122 million in Q2 '20 to NOK 761 million in the second quarter of 2021. Prices have been driven up by dryer high low wind levels, particularly in the NO2 southern region of Norway, where continental prices have also supported this trend. Compared to last year, NO2 power prices were 10x higher. And the fuel prices have increased more than in mid and Northern Norway, creating additional gains from area price differences as a large share of our production sits in Southwest Norway, where a significant share of our delivery commitment is in mid-Norway with those metrics. Additionally, the shift in our contract portfolio, which began at the start of this year continues to support our results year-over-year due to repricing of internal contracts and also exploration of an onerous external legacy contracts. The quarter also saw improvement in production volumes by nearly 300 gigawatt hours as the spring store was somewhat delayed in the second quarter of 2020 compared to what we've seen this year. Moving on to the Q3 outlook, then through the summer last quarter, we have seen drier and warmer weather, creating below normal reservoir levels. This translates in additional gains in power prices in the Nordic region with average NO2 spot price of close to NOK 600 so far in July. The price and volume uncertainty is as always large and production and prices will depend on hydrological conditions going forward. But current market conditions indicate low or even a negative spot position into the third quarter. Please move to Slide 12. In addition to a strong quarter, we have continued to progress our 2020 strategy in Q2. When it comes to Pillar 1 of strengthening our position in low-carbon aluminum, we see a sizable uptick of more than 200% in green aluminum space Hydro REDUXA and Hydro CIRCAL and that is when we compare this year to last year. This is a good example of how our aluminium enables our customers to minimize their carbon footprint, and we expect strong demand to continue for these products, supporting our commercial improvement conditions. We have also taken several investment decisions throughout the quarter, which will increase our output of recycled aluminum by 185,000 tonnes, and I will deep dive into this on the next slide. When it comes to Pillar 2, diversifying growth in new energy, we've also developed growth opportunities and partnerships in new energy during the quarter. Hydro's dedicated company for renewables development, Hydro REIN and Swedish wind developer, Eolus agreed to acquire Stor-Skälsjön, a licensed wind power project in Sweden, totaling 260 megawatt. Hydro REIN along with Equinor and RWE Renewables has also signed a collaboration agreement to prepare and submit an application to develop a large-scale big bottom offshore wind farm in the Norwegian North Sea. Our newly established hydrogen company also signed an MOU with Everfuel. The 2 companies will use the capacity in future Hydro owned or jointly owned hydrogen production facilities to supply the maritime sector industry and the green mobility market in Europe with renewable leverage. Finally, on batteries, Hydro Volt, our joint venture with Swedish battery producer Northvolt, is on track and set to start recycling batteries at the end of this year, and the facility is being finalized in early August. We also expect the results from the joint battery initiative study to be finalized after the summer. To conclude on the strategic slide, we will deduct on a regulatory note. The EU Commission released on 14th of July, its Fit for 55 package with the proposed legislation regarding implementation of the carbon border adjustment mechanism CBAM. It is important to note that this proposal is to be reviewed and adjusted in the European Parliament and the European Council, a process which is expected to take around 2 years. This proposed CBAM legislation includes aluminum within its scope and aims to gradually place a carbon duty on direct emissions in the first instance, but indirect emissions may follow later. We support the intention of the European Green deal to reduce carbon emissions. And we are more than ready to work constructively to achieve intended emissions reductions by providing our solutions in a central product for the green transition such as Hydro CIRCAL and Hydro REDUXA. And also by further reducing emissions through our climate gas reduction initiatives like the Alunorte fuel switch projects. However, at the same time, we believe that the unilateral CBAM on parts of the aluminum chain will increase carbon lease current carbon lease measures should be contained. We were, therefore, relieved to see that the commission has understood the complexity and not included indirect emissions in the scope of CBAM so far. This way, carbon leakage protection is maintained while transforming the current proposal into a workable CBAM solution. Slide 13, please. Recycling will play a part in the transition towards the low carbon economy. Recycling has a great potential for us, both from a sustainability and profitability perspective. We have an ambition to grow the current repacking business substantially to double our use of post-consumer scrap and lifting EBITDA with between NOK 700 million and NOK 1.1 billion at very attractive returns. Since Q1 reporting, we have increased the number of recycling projects underway with some investment decisions and a signed letter of intent. In total, these projects will add an annual recycling capacity of 185,000 tonnes based on 65,000 tonnes of additional recycled post consumer scrap and will provide around NOK 450 million in EBITDA uplift. The letter of intent that we have signed with Midwest Energy and Communications to build 120,000 tonnes aluminum recycling plants in Michigan, United States also marks the first large-scale production of low-carbon Hydro CIRCAL in North America. In addition, investment decisions to increase remelt and recycling capacity by a total of 65,000 tonnes have been taken up our operations in Sjunnen, Sweden; Navarra in Spain and Rackwitz in Germany. We look forward to further substantiating this strong pipeline of opportunities in the quarter to come. Next slide, please. We now move over to the development in net debt. Before getting into the quarterly movement, I would like to inform you of a change in our net debt definition going forward. As you know, our strategic hedging activity has increased in recent periods, and in turn, we have larger collateral positions. To provide a better view of Hydro's financial solidity at the balance sheet date and increased transparency, we have reviewed the definitions of net cash debt and adjusted net cash debt. The net cash debt definition has been changed to include cash collateral for long-term liabilities compared to only cash collateral for short-term liabilities in the previous definition. The adjusted net cash debt definition has been updated to not include cash collateral for short and long-term liabilities. With these changes, increases or decreases in cash collateral will not impact Hydro's net cash debt, but will be reflected in adjusted net cash debt and information for previous periods have been represented accordingly. At the end of Q1, we had around NOK 700 million in collateral. And therefore, we begin with a net debt position of NOK 8.3 billion as opposed to NOK 9 billion, which we disclosed last quarter. Based on this starting point, our overall net debt position decreased by NOK 4.7 billion quarter-on-quarter. We generated adjusted EBITDA of NOK 6.6 billion, but net operating capital increased by NOK 1.5 billion driven mainly by increased prices. Strong customer demand is also impacting NOK. However, the tight metal balance in Europe has also led to very low inventories. Other operating cash flow adjustments amounted to negative NOK 1.1 billion, driven mainly by tax expenses, and as a result, we generated net cash flow from operations, excluding collateral, of a positive NOK 4 billion in Q2. Investments came in at around NOK 1.6 billion, and we also paid out 2020 dividend of NOK 2.6 billion in May. Finally, the conclusion of the sale of Hydro Rolling in June provided a onetime cash uplift of NOK 4.4 billion as part of discontinued operations. Throughout the end of Q2, we ended with NOK 3.6 billion in net debt under the new definition. If we then move on to our updated definition of adjusted net debt, we start by adjusting for a NOK 3.2 billion in collateral included in the net debt for Q2 which also includes NOK 800 million in collateral, not related to strategic hedging or rather operational hedging. The next adjustment of NOK 3.9 billion mainly reflects among asset retirement obligations as well as assets in Hydro's captive insurance companies but are not available to service Hydro. Finally, we have a small pension assets, reflecting the large reduction in pension debt after the rolling traction. With these adjustments, we end up with an adjusted net debt position of around NOK 10.2 billion at the end of Q2. Slide 15, please. The current market conditions are favorable, and they could support a further reduction in net debt by year-end. Comparing market prices from a few days ago to realized prices in the second quarter, we see an even stronger LME, 8% higher than today's levels while more or less flat on [indiscernible]. And if we look at the spot prices for premiums and we weigh them based on our product mix, you could see realized premiums approaching $575 to $600 into next year. This is around $250 increase from the current quarter, which would give a full year effect of NOK 5 billion on a production volume of 2.25 million tonnes of aluminum. Following suit, we also see increases in the market price outlook for our main raw materials and a general strengthening of our main currency vis-a-vis the NOK compared to what was realized internally in Q2. And if we use our Q3 sensitivities on this percentage change since Q2 and the market based realized premiums you could theoretically see a full year uplift of NOK 7.6 billion in EBITDA based on today's rates compared to realized rates in the second quarter. From this, one needs to subtract the negative effects from the strategic hedging initiatives above what is reflected in the 2020 hedges which for 2022 will be around NOK 500 million at current market prices. To debt cash position, it's also important to consider a few other elements. Working capital will increase on higher prices and volume. If we take the change in all-in price from Q4 to Q2, we multiply it by around 0.6 million tonnes of inventory equivalent, times to NOK USD currency rates. You see an approximate change of NOK 2.8 billion, a bit lower than realized but also supported by stronger volumes. If you do the same analysis for Q4 and Q2, based on LME 2,400 and [indiscernible] plus increased receivables for the CO2 compensation, this could amount to around NOK 4.5 billion for the year as a whole, in operating capital build. Current strong sales volumes are partly offset by unusually low inventories, which we expect to normalize over time, but of course, these figures are volatile and uncertain. Since the last quarter presentation, we have also extended Dollar BRL hedge by 375 million to cover 60% of Albras BRL exposure to 2023 giving a total average rate for B&A and Albras of BRL 5.68 per dollar from BRL 5.45 in '21 to BRL 6.03 in '23. In addition, we have placed aluminum hedges of 240,000 tonnes and 210,000 tonnes for '22 and '23 as market prices experienced in the second quarter leaving 2021 hedge prices at around NOK 2,000 and 2022 and 2023 at around NOK 2,200. Pricing is mainly done in NOK, with dollar hedges converted to NOK via USD NOK derivatives. I will then give some more updates on CapEx. Please move to Slide 16. In Q1, we updated our CapEx guidance for 2021 following the sale of Rolling to NOK 8.5 billion, and this remains our full year estimate. Year-to-date, we have spent not NOK 2.7 billion in CapEx, and seasonally, we tend to spend around 40% of CapEx in the fourth quarter, with the remaining being increasingly spread over 3 first quarters. The growth in return breaking CapEx of NOK 2.5 billion in 2021 includes funds allocated to both our improvement program and commercial ambitions, including recycling growth profit, so that is quite limited in 2021. Looking towards 2025, we expect a total annual average CapEx of NOK 9 billion to NOK 10 billion in cash effective capital expenditures. And this is including our strategic growth ambitions in line with the guidance that we gave at our Capital Markets Day, but now excluding rolling. The CapEx outlook can be more or less divided into 3 distinct categories. First, we have our sustaining return-seeking and growth CapEx forecasted to be around NOK 8 billion to NOK 8.5 billion annually. These are sustaining investments in the current Hydro portfolio of business areas and investment needs are covered from operating assets. The undertaking of return-seeking and growth initiatives is evaluated in terms of return requirements, cash generation and an overall credit rating. In this guiding, we have included the investments which are necessary to deliver the improvement program and also commercial ambitions in aluminum metal and extrusion. In the next level, you have growth initiatives in batteries and recycling, which are expected in total to be around NOK 1 billion to NOK 1.5 billion in average per year or in total for the period NOK 3 billion to NOK 4.5 billion for recycling and NOK 2.5 billion to NOK 3 billion for batteries, in line with earlier communications. These investments are funded by Hydro cash flow and undertaken based on a strong business case and expected competitive returns in a portfolio context. If all of these investments are pursued, you should also expect an annual EBITDA uplift of around NOK 1.3 billion to NOK 1.8 billion, and that uplift is not reflected in the improvement program or commercial ambitions. Investments in batteries are so far been done in partnerships with other industrials where investment amount will reflect our ownership share. Finally, we have the investment undertaken in Hydro REIN and hydrogen. Our strategy for these investments requires limited Hydro cash. The external equity injections based on capital raise in the respective companies, allocated to the specific project special purpose vehicles will impact Hydro's consolidated CapEx but not our cash flow. Nonrecourse project financing at SPV level, which will cover the majority of investments in the REIN and hydrogen is targeted to not impact Hydro's balance sheet. Let's then move to Slide 17, where we can conclude and summarize the quarter. At the end of Q2, we ended at NOK 88 billion capital employed and delivered an underlying 12-month rolling ROACE of 9%. We have recorded a strong improvement in our ROACE in Q2, But some of the weaker markets and market uncertainty in 2020 due to COVID are still impacting this metric. But for 2021 as a whole, we should deliver well above our targets given current market prices. Looking at our balance sheet and the key ratio of adjusted net debt to EBITDA, and we are at a ratio of 1 well within our goal of below 2 over the cycle. In Q2, we also saw a return to positive free cash flow and our overall free cash flow positive for the first half of '21 despite NOK build of NOK 3.8 billion over the same period. In addition, we received above NOK 4 billion in cash from the rolling transaction. Finally, improvements are delivering well above expectations, making us more robust irrespective of the strong market. And on that note, I would like to thank you all for joining the presentation and open the session for questions.
Operator, we're now ready for questions.
[Operator Instructions] We will now take our first question.
It's Jack O'Brien at Goldman Sachs. First question is just on your renewables and hydrogen intentions. Clearly, a significant opportunity ahead, but also a frequent conversation I have with investors relates to sort of future returns given that this is such a competitive area at the moment. Just trying to understand how you think about returns in these nascent areas.
Thank you, Jack, good to speak to you again. As you know, what we're currently doing is that we're building substance in the 2 relevant companies going through the potential projects that will contribute both to delivering renewable energy and hydrogen to the Hydro portfolio. But what will also contribute to the profitability in the respective company. And return on the specific projects, we will have to get back at a later stage as these projects are sufficiently mature. But we do expect all projects or we do require that all projects meet the respective cost of capital in this particular venture. And as we have discussed earlier, cost of capital is somewhat lower in the renewables market and what we experienced in our primary aluminum market, for example, and that is one of the main reasons why we're establishing this as a separate entities with their respective return requirements. So from our perspective as an owner, there's a focus on return on equity. And then in the specific ventures, there's, of course, a focus on return on capital employed, but with a different hurdle rate than what we have in the rest of Hydro.
And can I just ask a question on your sort of existing aluminum business? Clearly, we're seeing very strong alu prices at the moment and, therefore, implied sort of returns. You're running Alunorte at nameplate. I know you've increased capacity at the Husnes Line B but just interested whether you'd be looking to invest at all in either B&A and also your primary alu production just given the price level and premium we can see today.
Yes, firstly, we are extremely happy with the current earnings level. And there's many positive signs in the market these days, which could also bode well for the future years. And there's also some elements which are more uncertain. And we content or we've consistently achieved this market insight and back into our strategic evaluations. Currently, we have bauxite and alumina and aluminum metal in what we call sustained and improved mode where the focus is to remain as low on the cost curve as possible and to also move in a sustainable direction reducing carbon emissions and also other metrics. So we have no concrete plans to increase production upstream, more than pushing our facilities to nameplate capacity and smaller debottlenecking, et cetera, with that disposal. Where we are allocating capital to benefit from the strong growth in demand for aluminum is within the recycling space. We see more scrap coming back, and we see good historical returns over the cycle, and this is where you should expect us to be placing the most aluminum CapEx going forward.
We will now take our next question.
It's Jason Fairclough at Bank of America here. Two quick questions for me, if that's okay. One on the Qatalum tax and the other one Fit for 55. On Qatalum, I just want to make sure I understand. So is it correct to say that you're a JV partner, so Qatar Aluminum Manufacturing Corporation, which is controlled by Qatar Petroleum, which is essentially the government, is insisting on paying 35% tax, and you think it should be 10%. Is that a correct characterization?
Well, the different partners here have a different viewpoint on how to understand the tax regulations locally. And of course, our view point is 10% as we've communicated consistently, and the other partner, which you refer that to be 35% and Qatalum as an entity has filed for 35%.
Okay. And -- all right. And again, is it correct to say that the partners essentially are government-controlled entities?
Well, I guess most Qatarian ventures are state-owned.
Okay. All right. Just second and on the announced...
As you know as in [ QAMCO ], is partly owned by QP and partly listed on the Qatari Stock Exchange.
Yes, yes, so there are some minority investors in there. Just in terms of the announced Fit for 55 in the current border adjustment mechanism, just wondering, do you have any thoughts, any color on potential impact on your business, positive or negative?
Well, on a high strategic level, this is positive -- very positive for a company like Hydro that this becomes a global focus. This has been one of our key differentiators, which we're really starting to get paid for in the currency environment and we support the movement in a direction where you have a level playing field based on a global assumptions and rules and regulations. But the current proposal is not impacting us to a large extent as it is focused mostly on direct emissions and not the indirect emissions where the largest differences are. However, with a phaseout of compensation of reports of direct emissions, it will make it more costly for example, downstream producers, which will have to pay a somewhat higher level for aluminum within the EU, whereas nations outside the EU that do not have the same metrics would potentially pay less for aluminum. And for our primary aluminum system, getting less in compensation for direct emissions would also increase the cost. So as we've discussed several times, this is a very positive development. But it needs to be probably talked through and it needs to cover the whole value chain to ensure that we don't get unintended effects that further allow for carbon leakage or where players outside Europe are able to circumvent from any, for example, only exporting their greener material into Europe and then sitting with less green material outside there. So a long answer, Jason, I'm sorry about the in the short of things, positive that this is being focused on. We believe it will benefit the company like Hydro during the long term and then a small term negative with the fact that it's only covering parts of the aluminium value chain at current...
We will now take the next question.
It's Liam Fitzpatrick from Deutsche Bank. Two or 3 questions for you. Firstly, on batteries and recycling. You've given us more detailed CapEx guidance, which is good. When should we start to see EBITDA contribution from these areas kicking in? Could it be as early as 2023? And then on batteries, could you consider external capital and partners further down the line and similar to what you're planning in renewables? And then next question, just on, so you've given us some useful sensitivities there. Can you clarify the sort of range for the primary business in terms of cost uplift Q3 versus Q2? And final question on renewables and hydrogen. What is your latest thinking in terms of timing and when we could hear a bit more in terms of structures and investment figures?
Thank you, Liam. Good and relevant questions. I'll try to cover them as best I can. If we start with the contribution from batteries and recycling, of course, existing battery investments are contributing already from a valuation perspective. investments we've done so far in batteries have been very value accretive. And as you've probably seen through some of the pricing of battery ventures lately where we have an ownership stake. If you look more towards how this will impact EBITDA going forward, then that will be based on a project by project level. If we were to move ahead with the contact initiative, cash flow hit further out. If there are other battery opportunities that are more in M&A or a shorter-term context, like, for example, faster recycling, then you can see cash flows coming in already next year. And we will announce that on a project basis. We're very happy that Hydro Volt will be produced or recycling batteries already at the end of this year. Recycling is, of course, more mature to progress quite significantly on several of these. And for the ones I announced today, at least the ones in Europe, you should be seeing effects of that already in 2022. Some of these recycling investments are brownfield upgrades to equipment from debottlenecking, et cetera, and that doesn't take long to complete. So you will see a ramp-up. Of course, extrusion cash flows -- recycling cash flows and also exclusion cash flow in 2022 from today's announcement, but then still find effects are coming in some years later. When it comes to battery partners and the test and further down the line, as you've seen so far, we do invest quite similarly to what you see in Hydro REIN and also hydrogen. The projects that we have participated in and the projects that we have on the drawing board, we are either a minority partner or close to joint operator. And this is the approach that we've seen uptaking for most of the projects. So yes, we will be contributing our respective share of cash flow in, but also several of these ventures with be funded by debt on a project level also. So I guess the biggest difference there between batteries and REIN and hydrogen is the fact that we're not putting everything into 1 company at current stage and raising capital. Further down the line things may look differently, but that's how we're thinking today. If we move into aluminum metal and cost uplift from the second to the third quarter, then I guess I first said around 700 million or so in increase. And that is driven primarily by 2 areas. It's carbon and other raw materials and its energy costs. And -- the biggest impact on energy cost or price sizable impact, at least is the indication towards LME. And as you probably remember, our [indiscernible] and some other cost elements have LME indexation on the energy side, which cut some of the pure LME offsite. Renewables in hydrogen, there is not that much news since the last quarter. We have signed some agreements and we are maturing the different MOUs that have been announced towards the final investment decision. We're also preparing for capital raise. And I guess for raise, we've said that we plan for capital raise within 2021. And in combination with that, we will, of course, provide a lot more detail to the market. The same goes for hydrogen projects are being and we haven't set a concrete capital raise date yet but are working as fast as we can.
We will now take our next question.
It's Amos Fletcher from Barclays here. I just had a couple of questions. First one, following up on Jason's question about accounting at Qatalum, so can you just explain what tax rate are you using in your accounts? And what cash tax rate are you currently paying in country there?
We're currently using 35%. We have since September 2020. That is in line with what Qatalum are using locally, and we just pull it up at a the level. And they have paid their first tax, yes, but they have accrued for it and they have filed now, as mentioned in June at a rate of 35%, which will then be the cash effective tax until further notice.
Okay, and then I just wanted to ask about further increases in the hedge book. Why are you doing that when the company survived the COVID downturn unscathed and presumably shareholders would like to maximize their exposure to the metal price?
Yes. No, when markets are good, hedge positions become a bit heavy, and we have a big respect for that comment and a question. We are taking an over-the-cycle perspective, improving the likelihood of us being able to deliver satisfactory returns in the tougher year and then a bit lower in the better years. Our policy is to enter these hedges when returns are at levels and margins are at levels which are seem to be very competitive in a historical context. So if we take a 10-year perspective of that, you should be entering more positive positions and not entering those when the markets are bit poorer. But of course, I understand that in a market upturn, this limits some of the cash flow potential. But the rationale is to secure a more stable level of earnings and a more return in line with our targets over the cycle.
Okay, understood. And then last one, I just wanted to ask about the extrusions market, obviously, incredibly buoyant market conditions at the moment. Are you seeing any signs of demand destruction as a result of the run-up in premiums and any issues that could cause that move to unwind?
It's a very good question, Amos. And I ask it in every commercial meeting we have with the downstream operations because when you see extrusion ingot premiums approaching $1,100 on top of an already high aluminum, that is a significant cost uptick. But No, we're not seeing demand disruption. They are most likely able to push on that right because there's not many other good alternatives. We've even seen substitution into aluminum as some of the competing materials are moving more I guess if it was only an aluminum issue, then we would maybe having more of that discussion. But we're not having it at all today. The only were not worrying, but the only impact that we have on demand is some reduced expectations in North America on the automotive side for the market as a whole due to the chip shortage, but for us personally or as a company, we still see that the substitution effect is strong and compensating mostly further.
We'll now take our next question.
This is Ioannis Masvoulas from Morgan Stanley. A few questions left from my side. The first one, just on energy, which was surprisingly strong, could you elaborate a bit on the price differentials and the actual benefit you got in the quarter? And how high could that be in Q3 spot and persist? And are there any other drivers in that Q2 EBITDA figure that is worth highlighting? Secondly, in terms of the renewables IPO, you have reiterated the intention to pursue an IPO as soon as this year, as we've seen other ventures in the space that are struggling to go ahead with a similar strategy. Is there a risk that you have to delay the IPO to sometime next year, in which case you may accrue more of this CapEx on your own balance sheet upfront? And then the last question around the operating working capital build that you mentioned at $4.5 billion hypothetically, so is that incremental to what we've seen today? Or does that already include the H1 build?
Thank you, Ioannis. I'll start in the opposite direction. While I think on the operating capital, the 4.5 billion, that is for the year as a whole. So that includes the 3.8 billion we've already seen year-to-date. So incrementally from the second quarter is not that much of a build. But as you know, usually, we see quite some lease in the fourth quarter, but this is being offset now by stronger -- the strong prices and if anything, we are looking to lift the inventories a bit because we're running so low due to the very tight market. There's a comment on IPO, this is a very good question. We are seeing the same picture that you're seeing. And of course, none of these companies are directly comparable, but as an industry theme, and we see it across. So we will evaluate the timing based on what we perceive the valuation to be and we will not go ahead at any cost if the market is not present. And in that respect, you could say that there's a risk of which financing to do a longer expense if we are not lucky or the market is not there. But in general, I would say that our base case is this year, and then we're keeping an eye now on the same elements that you are referring to. When it comes to energy and area price differentials, then I'll be careful to guide on this specifically, but if you see that the market prevails at the same level that we have seen in the current quarter for NO3 and NO2, then you should expect it to come in at a similar level. And I guess that the positive effect this quarter was between the NOK 100 million and NOK 200 million level in area price differentials, but we can get back to the exact level within that range.
Okay, that's great. And maybe just a quick follow-up on the alumina costs that you already mentioned about, but I'd like to confirm, you mentioned, I think, a $5 increase in caustic and energy and $12 increase due to maintenance in the boilers. Is that on a quarter-over-quarter basis?
Yes, this is on a quarter-on-quarter basis. The $5 movement is what you should expect to be brought forward into Q4 if the market remains where it is today. The $12 movement is due to the maintenance and when completed in the quarter would move out again then in Q4.
We will now take our next question.
It's Dan Major from UBS. First question, you provided the details on additional CapEx into batteries and recycling. For recycling specifically, where should we be allocating the EBITDA to in terms of business units? And are you -- or will you separately disclose the EBITDA associated with recycling in the future?
Dan, we have 2 business units. Of course, that benefits from the recycling investments. And of the projects we announced, the North American project, which is the larger of this, that will impact the metal market operations. And the recycling earnings are disclosed as part of our quarterly presentation. They also -- the drop was investment that we've made will also fall on that line within that market. Then you have the other Sjunnen and Navarra. These are extrusion investments, and they are, of course, the part of the value chain of the extruded facilities and the part of the total cost setup. So at current stage, we don't pull those out. What we at least will do is to provide an annual update as we did on last Investor Day on the total earnings from our recycling. And then let's see when we build and move forward if we should think about doing this a bit more frequently also if it's hard to model up.
Okay, thanks, so it's basically allocated between metal markets and extruded is the way to think about it.
And we can provide you the project specific information, so you can allocate between them.
Okay. Second question is on extruded, you mentioned a sequentially lower margin in Q3 or the expectations versus Q2. Can you give us any color on EBITDA per tonne kind of basis? What the delta might be? I think you did about $640 a tonne in Q2 and about $560 in Q3 last year. Can you give us any sense of on a sort of margin basis, what the magnitude of sort of reduction would be as we go into Q3 in extruded?
Of course, last year, we had a quite strong third quarter and the product mix was good and the people were quite desperate to get their hands on material as everything ramps up much better. So you have a product mix and an interested buy because we very high. We don't give a dollar per comp guidance. And if I should say something on a very high level basis, as we see the market today, but that could change. We're probably looking at some NOK 100 million in effect from the margin side in a negative direction. But this could very much change during the quarter.
Okay, and then final question on the renewables, you've targeted 1 billion -- sorry, 1 gigawatt of renewables. I think you recently signed was 260. Is there any other commitments you have to getting to the gigawatt? And is the required level of agreements you need to reach before you raise finance through the IPO, et cetera?
Well, we have announced a couple of projects earlier, I guess the 3 MOUs in the Brazilian context. So we have a pipeline which fills that level and above now. And what we're doing is basically maturing these projects towards the final investment decision. If these projects mature returning look at solid prices we were able to offer to our metal operations are competitive then we would most likely look at going towards the market with something that looks like a long-term attractive business case. So we have enough projects we believe to have substance in the company. But now it's about ensuring that they are robust enough and that returns are good enough.
Okay, and then just final 1 on that related subject. When I look at the chart of CapEx, including the sort of dotted bar for additional investments, I guess it implies somewhere in the region of 2 billion per annum investment. Is that how we should be reading it? Or is it very much indicative rather than...
No, it's indicative. What we wanted to say is that cash-effective CapEx is the level you see there. And then just ensure that there is an understanding -- as we spent quite some time on this after last quarter that did renewables on hydrogen. That will come on top of this. It will impact partly from a consolidation perspective, but not so much from a cash perspective.
[Operator Instructions] We will now take the next question.
This is Jatinder from Exane BNP Paribas. A couple of questions on alumina. Patch of your percentage of LME is -- has been consistently depressed? How do you read that alumina disconnect? Is it just supply demand, but would positive aluminum not put alumina along with it? And secondly, how do you see Atlantic versus Pacific spreads converging or diverging going forward would -- and especially after alumina restored, do you think the market becomes more normal.
Jatinder, good questions from your side. And of course, we're now experiencing the lowest percent of LME that we have in a very long time, and our internal reading of it is, of course, that it is very much related to supply-demand dynamics. You have extremely tight primary market, and you're not seeing a lot of capacity ramp up, whereas aluminum markets are better supplied and you've also seen the ramp-up of alumina in China. But we share your view that if we see more capacity coming back on the aluminum metal side, then that needs to be supported by increased alumina capacity. But at the same time, there is some alumina capacity that could be restarted. And so we view this market as largely balanced based on the information we did externally. The Atlantic side looks tighter based on the pricing in the market with a premium and as you referred to, it is probably also impacted by the operational issues that are publicly available from one of our competitors. And longer term, I would be careful to speculate on the exact levels but definitely tighter as we see today.
[Operator Instructions] It appears that there are no further questions at this time. I would like to turn the conference back to our speaker for any additional or closing remarks.
Thank you, operator, and thank you, everyone, for joining us today. Please don't hesitate to contact us in IR, if you have any further questions. And I wish you all a great summer. Thank you.
Thank you.