© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone, and welcome to Hydro's Presentation of Fourth Quarter Results for 2017, and welcome also to all of you following us on webcast today. The results will, as usual, be presented by our CEO, Svein Richard Brandtzæg; and CFO, Eivind Kallevik. And we will have time afterwards for a Q&A. So let's start then, Svein Richard.
Thank you, Inger. Safety is always first priority here in Hydro. And in spite of that, we had 2 fatalities in 2017, which means that we have to work even harder to make sure that each and every one in Hydro come home safe every day. From the financial -- on the financial side, 2017 was the best result since Hydro became a streamlined aluminum company in 2007, so best results in a decade.If you move over to the quarterly results, we had underlying EBIT of NOK 3.6 billion, up from NOK 2.4 billion in the third quarter 2017. The result was supported by higher prices in alumina and aluminum but partly offset by higher cost, both variable cost and also fixed costs.As we had a normal seasonal variation also in this quarter, with the lower demand as normal in the fourth quarter, so that was what we also experienced in the downstream area. And that this is also the first quarter where Extruded Solutions is consolidated into our accounts. Energy delivered better results due to higher production and also somewhat higher prices. The improvement program, the Better program, is moving according to plan with regard to the 2019 target despite setback in 2017.I'm happy that we have now started the Karmøy Technology Pilot, and we will spend first half 2018 to ramp up this technology pilot, where we are producing aluminum with the lowest energy consumption in the world. The board are proposing a dividend for 2017 of NOK 1.75 per share, up from NOK 1.25 per share in the previous year. And with regard to the market, we see 2018 as a largely balanced market. We expect growth in demand of about 4% to 5%.If you take a closer look at the market situation in 2017, we had 5.8% growth globally in demand but also 7.7% growth in supply. So if you add this up, and as we see on the right-hand side of this slide, we had a largely balanced market also in 2017. If you compare the fourth quarter 2017 with the fourth quarter of 2016, the growth was 5.6%. And we saw almost 7% growth in China and a bit above 4% outside China. And looking into the details of the quarter, we saw in the fourth quarter 0.8% higher demand in China and 0.7% lower growth outside China -- or negative growth outside China.With regard to inventories, due to the fact that we saw largely a balanced market in 2017, the market -- -- the inventories were quite stable, but we saw some buildup in China and some reduction on -- of inventories outside China.If we then take a look into the market situation as we expect for 2018, we expect demand development outside China of 3% to 4%; and in China, 4% to 6% growth in 2018; but also a similar development on the supply side. So all in all, largely balanced market is expected also for 2018.If we then move over to LME and development in the quarter. We had LME in the third quarter of $1,921 per tonne as a realized price. The realized price increased with $171 per tonne in the quarter to $2,098 -- $2,089 -- $2,092 per tonne. And the market price in the third -- in the fourth quarter increased with 4.5% from the third to the fourth quarter.The all-in metal price increased due to the price increases of LME but also due to the higher standard ingot premiums. And in European market, we saw standard ingot premiums increasing from $141 per tonne to $159 and now trading around $168 per tonne. In the U.S. market, the Midwest premium increased from $173 per tonne to about $209 per tonne in the fourth quarter and now trading at $287 per tonne. So quite some increases in the standard ingot premiums.With regard to export of semi-fabricated products from China, if you compare 2017 with 2016, it was about 5% higher export of semi-fabricated products out of China. And if you take a look -- a closer look at the percentage of the volume -- exported volume compared to the production of semi-fabricated products in China, it has been quite stable previously, but it went down in 2017. The arbitrage window is open due to the fact that the Chinese prices is -- has not developed in the same way as the LME. So also, in a situation where China is producing more metal than what they consume, and there is a deficit outside China, it is not a big surprise that there is export of volumes from China into the market elsewhere.If we then move over to alumina. And the alumina price went up $101 per tonne from the third to the fourth quarter. We had a peak in October at about $480 per tonne. It was a very tight Chinese market. And in that situation, it was expectations of logistical constraints as we had in 2016, it was a restocking among consumers, smelters -- alumina smelters build up their inventories and also traders holding back alumina, so the prices went up. But the situation became less tight in November and December, and the prices came down again and ended up at around $380 per tonne and now trading -- the alumina prices trading around $360 -- $365 per tonne.If you look at the import of bauxite to China. We see clearly the effect of bauxite from Guinea now. If you add up Guinea with the rest of the Atlantic volumes, the Atlantic region now correspond to 48% of the total imported bauxite to China. It was 35% in the year before and only 7% in 2015. So Guinea comes up as one of the main source beside Australia. The Indonesia has lifted the ban -- the export ban, but there are small volumes coming out of Indonesia. Malaysia has prolonged the moratorium, but we still see some volumes also coming from Malaysia into the Chinese market.With regard to the total export-import balance in China, to and from China, we see higher levels of aluminum unit inputs to China in 2017 compared to 2016; quite stable on scrap, primarily aluminum at low levels; some higher export of semis. But it's really the higher imported bauxites, and especially from Guinea, that is the main difference between 2017 and 2016.On the operational side, we are on track with regard to the Better program, where we have lifted the target to NOK 3 billion in -- as improvements. That should be delivered until the end of 2019. We are ahead of plan in Bauxite & Alumina. Strong operations delivered altogether NOK 1.1 billion in improvements until the end of 2017. And we have lifted the bar now to NOK 1.3 billion as a target for 2019 for Bauxite & Alumina. There are contribution, of course, from the good operation but also from commercial and procurement in this business area.In Primary Metal, we did not achieve the target last year with very good operations in the old smelters except one, that is Albras in Brazil, where we are upgrading. We have some maintenance activities ongoing there to lift the performance of the Albras smelter going forward. But Primary Metal is on track with regard to the 2019 target.In Rolled Products, the target has been reduced from NOK 0.9 billion to NOK 0.7 billion in 2019. It is a delay of the ramp-up of the used beverage can line and also the Automotive line 3 that is the main reasons for this. But we expect to reach the NOK 0.9 billion target with 1-year delay in Rolled Products.This slide shows the production development in Paragominas, the bauxite mine in Brazil; and also the alumina refinery, Alunorte. Alunorte is the world's largest alumina refinery. And we have very positive development in both of these assets. Record production in 2017 both in Paragominas and Alunorte. And if you take the fourth quarter production in Alunorte, we had a speed of 6.7 million tonnes. And the speed of bauxite production in the fourth quarter in Paragominas was 12.1 million tonnes. So good production, a good stability, this is a result of solid and efficient implementation of the Bauxite & Alumina Business System, which is very similar to the business system and production system we have implemented in Primary Metal.Looking into the margins and the cost development in alumina. We had, as I said, $101 per tonne higher prices -- the realized prices from $297 to $398 per tonne in the quarter from the third to the fourth quarter. But also some higher cost, this is due to higher input cost of sodium hydroxide or caustic soda. Energy cost was up. And it was also some effect of higher sourcing cost. But we also had some benefits from consumption factors and also some currencies. The margin was $133 per tonne as average in the quarter.On the metal side, we had a realized price that went up $171 per tonne from the third to the fourth quarter, $500 per tonne in margins in average. The cost also here went up from $1,425 to $1,575 due to higher alumina costs; higher petrol cost; and also, coal tar pitch cost went up during the quarter; and also some increased fixed costs.If you look at the situation for Rolled Products in the market development and sales, seasonal variation was 5% in the quarter, which is not unexpected. If you look at fourth quarter 2017, compared to the fourth quarter 2016, we had 5% higher sales altogether; flat on foil; higher can; down on litho. And if you look at the body-in-white sheet for automotive, it increased with 17% from the quarter -- same quarter in 2016. If you look at year-on-year, 3% higher sales; similar development between the product areas, product mix as we had in the -- when we compare the quarter-by-quarter.In the extrusion, the market variation here, the seasonal variation was 7% down in the U.S. market and similar in the European market. If you look at -- on the demand year-on-year, it increased with 7% in the U.S. market and 3% in the European market, very much driven by automotive and transport, building and construction. In the U.S. market, we also saw some development in the commercial transport market that was weak in the beginning but improved in the end of the year. We expect that the first quarter will be stronger than the fourth quarter last year as normal seasonal variation.Innovation, product development, application development is very important for us, and we have several good examples. And there -- some recent examples from Extruded Solutions is, for example, acoustic windows, which is a built -- where we -- there is built-in noise reduction, so we can sleep with the open windows in a city with a lot of traffic. We have a long cooperation with IKEA, where we have developed a new sofa that was launched last week. And we're also now delivering aluminum to the London Electric Vehicle Company that are going to build the new taxis for London and U.K. So interesting developments on the innovation side, and that continues, of course, going forward.Energy had higher prices, as I mentioned, supported by higher consumption but also lower availability of nuclear power plants in Sweden and also some higher prices on the continent, which led to exports. We all know that electrons are moving in direction where the prices are highest. On the hydrological side, we had higher and better hydrological balance in the end of the fourth quarter compared to the third quarter. It ended up 14 terawatt hour above normal, while the end of the third quarter was 9 terawatt hour below normal. So there has been enough snow and rain in this Nordic market lately.We are happy that we are now ramping up the Karmøy Technology Pilot. We have now sales and operation, and it looks very promising. The ramp-up will take the next months, and we expect to be finished within the first half this year. And of course, here, we are now testing out technology elements that we are also planning to benefit from in the other smelters that can strengthen the competitiveness of the other smelters in Hydro. The total CapEx is, as communicated previously, NOK 4.3 billion, with support from Enova of NOK 1.6 billion. Until the end of the year, we have spent NOK 4.1 billion altogether; and with support from Enova, NOK 1.2 billion.We have also announced that we have made the investment decision to upgrade and restart the Husnes smelter in the West Coast of Norway. That will add 95,000 tonnes to the volumes. This is a plant producing extrusion ingots. We are planning to start the production in 2020, which allows us to implement new technology elements from the pilot that we are testing out. The investment of this restart will -- to finance this restart will be NOK 1.3 billion.We have also announced that we have acquired 2 extruders in Brazil. We had the 1 extruder in Itu previously, and now we have added another 2. We expect the deal to be closed within the next weeks and months. This is according to the strategy of extrusion to grow with -- at -- with low investments, and it will give us a leading position in the Brazilian market of the extrusion market. And these extruders has, together, 7 presses, 1 casthouse and 600 employees that we are going to welcome to the Hydro after closing. And as you see it, location of these extruders are close to the market in Brazil, while we have our upstream assets in the Northeast, which is quite far away from the extruders. But with these extruders, we, of course, have a full value chain in the Brazilian market.The board has proposed a dividend of NOK 1.75 per share, which shows also the commitment for -- from Hydro to deliver cash return to shareholders. NOK 1.75 in itself means about 41% of the net income. If we take the dividend over the last 5 years, we have a payout ratio of 50 -- 70%, while the policy for us is to have 40% dividend over the cycle. We are still maintaining NOK 1.25 as a floor. This is subject to approval of the general meeting in May. And subject to approval, it will -- the concept consists a cash payout of NOK 3.6 billion.Please, Eivind?
Thank you, Svein Richard. Good morning, everyone, and warm welcome from me as well. I will then take you through the financial results for the quarter.This quarter, we've delivered an underlying result before financial items and tax of roughly NOK 3.6 billion, up NOK 1.1 billion compared to the previous quarter and a doubling compared to the same quarter last year. The main factors contributing positively this quarter is the higher realized aluminum as well as the alumina prices. The realized alumina prices increased just $100 and -- or $101, up from $297 to $398 per tonne, the reason realized aluminum price then increased from $1,921 to $2,092 per tonne. Also, as explained and guided for last quarter, both Hydro and the industry in general has also experienced higher input cost in this quarter. This quarter, raw material costs took down the result by approximately NOK 600 million, and majority of this is coming from the primary business area, with especially a cost push on alumina as well as power.We also experienced some higher fixed costs in Q4, and this is primarily driven by higher maintenance cost, which is a normal seasonal variation for the fourth quarter and, again, particularly within Primary Metal. Altogether, this reduced the results with roughly NOK 400 million.The other box of NOK 100 million consists of several items. We have margins, foreign exchange, energy results pushing the results up. And this has, for the most part, been offset by higher effects from Other and eliminations, bringing the totality down to a positive effect of NOK 100 million. And I will get back to Other and eliminations in some more detail later on in the presentation.If we then take a quick look on the key financials. Revenues in this quarter is, of course, impacted from the fact that we consolidate Sapa for the first full quarter, adding roughly NOK 14 billion to the revenue side. The rest of the increase on the revenues is explained by higher alumina and aluminum prices. This quarter, we've excluded from reported EBIT of NOK 4.5 billion roughly NOK 1 billion in items excluded, which I will get back to in more detail in the next slide. Financial expenses amounted to NOK 0.8 billion for this quarter, and this is predominantly driven by unrealized FX, partly from the strengthening of the euro versus NOK having an impact on the embedded derivatives in the euro-denominated power contracts; but also the weakening of the BRL versus dollar having an impact on the dollar debt that we carry in Brazil. Financial or interest expense in this quarter is somewhat up compared to Q3, and that, of course, is explained by the higher debt level that we carry as a consequence of the Sapa transaction. If we look forward for 2018, we expect that this level that we see in Q4 is what we will also realize per quarter during 2018, everything else being equal, roughly NOK 500 million on an annual basis. As a result of this, income before tax was NOK 3.7 billion, up from NOK 2.8 billion in Q3. Now if we look at income taxes this quarter, it is very low. It is roughly 4%, so it's far below what we guide on, on a going basis of roughly 30%. The largest effect this quarter is related to the Sapa transaction, where we had a nontaxable holding gain for Sapa shares of roughly NOK 2.2 billion. But there is also a positive effect from the U.S. tax reform of a few hundred million hitting this quarter. This gives us a net income of NOK 3.6 billion, up from NOK 2.2 billion in the third quarter. Underlying net income is also up from NOK 1.8 billion in the third quarter to NOK 2.8 billion in this quarter. And as a consequence, the earnings per share is also up to NOK 1.33.As mentioned, this quarter, we've excluded NOK 956 million from reported EBIT as items excluded. This is, of course, related to ordinary items that we normally do every quarter, for instance, the metal effect in Rolled Products, where the increasing LME is reflected in revenues faster than in cost of goods sold, timing effects and unrealized derivative effects on LME and power contracts. It also includes rationalization and environmental accruals this quarter, primarily related to an updated environmental accrual in Kurri Kurri of roughly NOK 180 million. But the main effect, as I mentioned, is the Sapa transaction. The net amount was roughly NOK 1.5 billion. It includes 2 factors. First, it's the NOK 2.2 billion gain related to the reevaluation of the shares we've previously had in Sapa. That is partly offset by NOK 700 million related to a fair value adjustment of inventory which we are obliged to do when we create the opening balance.So if we then move on in -- to the business area and start with Bauxite & Alumina. The underlying EBIT for B&A saw a significant improvement between the 2 quarters, up from NOK 413 million in Q3 to roughly NOK 1.9 billion in the fourth quarter, a good and strong quarterly performance for this business area. As guided for in Q3, the realized alumina prices increased significantly, roughly $100 per tonne to close to $400 per tonne. This, of course, is primarily driven by the increase in the PAX index prices but it's also helped by the increase in LME, which impacts the LME-linked sales contracts that we do have.The -- from a production perspective, there was good performance in Brazil this quarter, both for Alunorte and Paragominas, producing 6.7 million and 12 million tonnes, respectively, well above the nameplate capacities of both plants.Raw material costs for Alunorte increased this quarter, mainly due to an approximate 10% increase in fuel as well as caustic costs; also some increases for bauxite. This was partly offset by better consumption factors this quarter based on the higher-quality bauxite we got delivered to the plant.Now if we look into the next quarter, we estimate that both Alunorte and Paragominas will have somewhat lower production for Q1. That is partly related to the fact that we will take the plants down for maintenance for some days during the quarter, old plant maintenance. We'll also see a continued increase in raw material costs for Q1. We expect caustic soda to increase a further 20%, coal prices to come up some 10% as well as energy costs to come up roughly 10%.We also expect some increased depreciation for Q1, roughly NOK 70 million. That is partly driven by capitalizing the investments that we've done during 2017 but also due to a reevaluation of useful life of some of our assets. Worth noting also for 2018 is that we will again increase the amount of alumina sales on the index price for 2018 as a whole. This will be roughly 75%, up from the 65% that we realized in '17.When we take all of this into account and the roughly 1 month delay we have on both the index and the LME-linked prices that we have, you should expect somewhat lower alumina price being realized in the first quarter compared to the fourth quarter.Turning to primary. The underlying EBIT for Primary Metal increased from NOK 1.3 billion in Q3 up to NOK 1.4 billion in the fourth quarter. And this increase is primarily driven by 10% increase in the realized LME. On the other side, the positive price effect is also, to a large extent, offset by an increase in raw material costs, in particular, due to alumina and higher power costs; and this quarter, lesser extent to -- related to carbon costs. Fixed costs, from a seasonal perspective, also increased somewhat in Q4.Looking into Q4 -- Q1, on the pricing side, we have sold roughly 40% -- or 50% of the production at the end of Q1 at the price of approximately $2,100 per tonne. We also booked 65% of the premiums for the first quarter at approximately $325 a tonne, which means that we -- for totality for the quarter, we will realize premiums in the range of $275 to $325 per tonne. On the raw material side, we do expect a continued cost push into Q1. And given the time line for alumina costs, these prices will go up quite significantly in the first quarter, roughly 10% to 15%. We also expect to realize more increases in carbon costs in the first quarter, and they are expected to go up roughly 15%. We also expect some higher energy costs in Q1, partly driven by higher grade tariffs in Norway but also with a full quarter effect of the new power contract in Tomago that started towards the end of '17.Turning to Metal Markets. They delivered an underlying EBIT of NOK 185 million, up from NOK 91 million in the previous quarter. Now if we exclude the currency and inventory valuation effects, the results increased from NOK 107 billion (sic) [ NOK 107 million ] up to NOK 157 billion (sic) [ NOK 157 million ] this quarter. This is driven by strong contributions from our metal sourcing and trading activities but also good profitabilities in the remelters, driven by higher contribution margins both within the European as well as the U.S. system.If you look into the first quarter, we do expect increased sales out of the remelters as, seasonally, demand typically picks up early Q1. And at the same time, let me just, again and as always, remind you that currency and derivative effects within Metal Markets, the nature are volatile.If we then turn to downstream and start with Rolled Products. The Q4 results were very much on line with what we realized in Q3 at NOK 95 million from an EBIT perspective. As normal in rolled, we had negative seasonal effects reducing volumes as well as higher maintenance costs within the quarter. However, for Q4, this was partly offset by improved margins driven by the product mix that we realized in the quarter. But let me also mention that in Q4, we had a positive onetime effect on inventory reevaluation at one of the plants, adding NOK 45 million positive into this result. Higher raw material costs, mainly alumina and carbon, more than offset the increased all-in aluminum price for the Neuss smelter. If we look at 2017 as a whole for rolled, they delivered significantly roughly 46% lower result for 2017 compared to 2016. As you know, 2017 was significantly and substantially impacted by the operational challenges that we had in rolled, in particular, for the first 6 months of 2017 but also in the delays of the ramp-up of the Automotive line 3 as well as the used beverage can facility in Germany. Operating margins, as a consequence, was also negatively impacted in 2017 given the product mix development as a consequence of the operational challenges.If you look into Q1, you should expect higher volumes, very much in line with the normal seasonal development. But you should also be aware and remember that there is strong margin pressure in some of our key market segments. Let me also remind you on the positive effect that we will start realizing in 2018 of the new power contract that we have enrolled, adding roughly NOK 400 million on an annual basis for this business area.As Svein Richard mentioned, this is the first quarter that we fully consolidated the Extruded Solution business area. And to make previous quarter's numbers comparable, I will then discuss the quarterly figures on a pro forma basis. This means that the figures that we show you here will not be comparable, and you will not find them like-for-like in previous reporting from the Sapa segment.The major difference is, of course, the excess value depreciation that comes after we created the opening balance and implemented this as a business area in Hydro. The annual effect of the excess value depreciation is estimated to be around NOK 300 million, slightly below what we guided on in the information memorandum. As such, the historical underlying EBIT here for Q1 to Q3 '17 as well as Q4 '16 is all pro forma figures, including the excess value depreciation effects.If we then move to the results, I think first and foremost, we're all very happy to see that the underlying performance improvements in Sapa or Extruded Solutions is continuing. This quarter versus the same quarter last year, we see a 10% improvement in the underlying EBIT. So the performance track record continues. For Q4, the business area delivered an underlying EBIT of NOK 283 million (sic) [ NOK 284 million ], down from NOK 510 million in Q3 and, again, reflecting the normal seasonal decline from a volume perspective. Margins, as we know them as net added value per kilo, continues to improve, very much still proving that the implementation of a value-over-volume strategy continues to be a success in Extruded Solutions. If you look into Q1 '18, you should expect a normal seasonal uptick in terms of volumes when we close up Q1 in some months.If we look to Energy, we saw a good result improvement in Energy, up from NOK 368 million in Q3 to NOK 457 million in Q4. The main result driver this quarter is higher production. We're up by roughly 0.6 terawatt hours, driven by higher [ net spot ] levels and good inflow, but also preparing for maintenance outages that we will have now in Q1. Prices were also somewhat up in the quarter, driven by higher consumption as well as increasing prices in Continental Europe. Production costs, somewhat up in Q4, partly driven by higher maintenance activity and higher transmission cost, only partly offset by lower property tax for this quarter.As always, let's just remind ourselves that price and volume development is uncertain for the next quarters for Energy. But as I said, there will be fundamentally somewhat lower production capacity given the maintenance project that I just mentioned.Also here, let me remind you of the parts of the offsetting effect of the positive effect we have enrolled on the Energy contract. In Energy, we expect NOK 250 million negative annual effect partly offsetting the NOK 400 million that we realized in rolled.Then turning to Other and eliminations. This has now a negative contribution of NOK 715 million compared to a positive NOK 181 million in Q3. One factor reducing the result is, of course, now that Sapa is reported as a separate business area, it's no longer reported as an equity accounted investment under Other and eliminations. That's part of the explanation. The Other line then contains other corporate costs and earnings from industrial insurance. It is negative this quarter with NOK 297 million (sic) [ NOK 279 million ], so quite above the normal quarterly guidance that we give for NOK 150 million. But we have to remember that this line varies as we go throughout the year. And we're still in line with the annual guidance of NOK 600 million as the total cost and charges this year is NOK 586 million.Finally, when you look at eliminations, which in this quarter was NOK 436 million versus a positive NOK 98 million (sic) [ NOK 68 million ] in the fourth -- in the third quarter. Fundamentally, the way we see this, if you have negative illuminations, it's actually a good indicator that the business is going well. The negative eliminations reflect the higher margins that we have in Bauxite & Alumina, and it reflects the part -- or the portion of the B&A volumes that's been sold to primary and either sits in the silos or in the metal production, haven't been released [ extensively ] yet. This, of course, will be realized as we go forward. So the typical rule of thumb, negative eliminations indicates a positive earnings development in B&A and the flip side if it was positive.If we look further into 2018, we do expect the somewhat higher cost level going forward. It's partly driven by IS/IT projects, digitalization efforts but also the inclusion of certain -- a certain amount of Sapa employees into the corporate center. So we do lift the quarterly guidance for corporate costs in the other line from NOK 150 million to roughly NOK 175 million to NOK 200 million per quarter. Also, when it comes to reporting formats going forward, so far, we've always focused on this quarter versus the previous quarter. Starting in Q1, we will focus on Q1 versus first quarter in the previous year. That will give us, we believe, more ability to focus on the real underlying improvements in the business and spend less time on focusing on seasonal changes between the quarters.As we already mentioned several times in this presentation as well as the Capital Markets Day and the last quarterly presentation, both Hydro and the industry in general are experiencing a significant cost push coming from raw materials needed both for primary production as well as for our alumina production. Now before going into the details here, it's just important to note that this slide reflects the market prices. They may differ from what’s realized in our books, in particular, due to the time lag between the acquisition of the raw material until it's actually consumed and sold out of our business. If we start with primary alumina, pet coke is one of the most important factors when we produce carbon anodes. We produce or use roughly 0.4 tonne of carbon per a tonne of aluminum produced. Here, we have seen strong price increases in 2017, giving -- given the fairly tight market that's been around and also the shutdown stuff we've seen in China during the winter heating season. Here, we typically carry 1-quarter lag between market prices and what we realize in our books, so again, we expect a significant increase in costs in Q1. Pitch is the other factor that's used in carbon anode production. Here, we use roughly 0.08 per tonne of aluminum produced. And we also see, and for the same reason, also here a strong price increase in '17.If you look at primary and primary production isolation, the alumina cost, of course, is a significant part of the cost basis for producing primary. We saw a significant price increase in Q3 and in start of the Q4 before it came off again towards the end of the quarter. This will also lead then, due to the time lag, to a significant cost increase for primary and isolation for Q4 -- for Q1. But remember, as a company, we are not long, so increasing alumina cost may be a negative for primary; but for the company, it is actually a very good thing.If we move to alumina production and starting with the -- one of the most important input factors that we have, which is caustic soda. We use roughly 0.1 tonnes of caustic soda per a tonne of alumina produced. This price is more than doubled in the last 2 years, and it's driven by strong demand. But it's also driven by not so much new capacity coming onstream and also due to environmental restrictions in Europe, wherein some of the producers have used mercury in their production process, they've had to shut that production down in the beginning of 2018, at the latest. And these should also, in our view, lead to a relatively tight market as we go during the year.Fuel oil gone up, driven by global oil prices. We use 0.11 tonnes of fuel oil per tonne of aluminum used. And also for coal, we saw a significant price hike in the summer of 2016 when Chinese government reduced the number of working days for Chinese mines. And the coal prices has held up pretty strongly since then. And we use 0.12 tonnes of coal per tonne of alumina produced.All in all, it's quite clear that there is a cost push for us. But more importantly, there is a cost push for the whole industry, lifting the costs -- cash costs for all producers.If we then turn to the net cash developments, and not surprisingly, we trend from a net cash position of NOK 7.7 billion in the beginning of the quarter to a net debt position of NOK 4.1 billion at the end of the quarter. And this, of course, is primarily driven by the Sapa transaction. We had then a positive contributing factor of NOK 5.5 billion in underlying EBITDA. We released NOK 1.8 billion in working capital, for the most part, driven by seasonality as is normal in the fourth quarter, giving us an operating cash flow of NOK 6.3 billion for the quarter. Taxes and other, it is primarily related to tax payments of NOK 0.5 billion reversal of results in equity accounted [ in as this ] and the receipt of Qatalum dividends of roughly NOK 300 million. Investments include then the payment for Sapa shares as well as roughly NOK 3.2 billion in what we can call normal CapEx investments in our operations. The other box then includes the consolidation of the debt that was carried in Sapa at the day of the acquisition.Then finally, just a quick look on adjusted net debt. As explained on the previous slide, we end the quarter with a net debt of NOK 4.1 billion. If we look at the lines below the net debt, these are also, for the most part, impacted from effects from the Sapa transactions. Pensions and other adjustments, which is typically leases and asset retirement obligations, respectively, increased with NOK 1.4 billion and NOK 1.9 billion post the transaction. The net debt and equity accounted [ in as this ] is now purely debt carried within Qatalum. Now as a result of these developments, the net adjusted debt then ends at NOK 23.8 billion at the end of the year. If you look at this from an overall perspective, 2017 has been, in all respect, a good year for Hydro, not at least evident when you look at the cash flow from operations for the whole year as well as the quarter that I've just been through. And even after acquiring the outstanding 50% shares of Sapa and paying NOK 11.8 billion for this, we are in a very comfortable financial position and well within the rating targets that we have, funds from operations to net adjusted debt and net adjusted debt to equity.And with that, Svein Richard?
Thank you, Eivind. 2017 was a year with the increases in prices and both for our products and raw materials and also positive sentiment, driven by the Chinese supply side reform. But all of these are factors that we cannot control ourselves. So with regard to accomplishments that we like to highlight for 2017 was, first of all, the acquisition of Sapa that created Hydro as the leading global integrated aluminum company. We have record production in Brazil, in Paragominas and Alunorte, that has been quite important for us for over the last years. And also, the development in the Better program, improvements of NOK 350 million. And we have also addressed the ramp-up situation in Germany with regard to the used beverage can line and also the Automotive line 3, which is now moving in the right direction.For 2018, there are also a lot of uncertainties with regard to supply-demand balance, currencies and other factors that we cannot influence on, but we will continue to have safety first as the main priority. We will continue the value integration -- value-creating integration of Sapa. We will ramp up the technology pilot, the Automotive line 3 and used beverage can line that we have talked about and also deliver on the Better program. And we will also have a high focus on innovation and technology to improve the competitiveness of the company going forward.Thank you very much for your attention.
Thank you. Thank you, Svein Richard and Eivind. And we open for questions from the audience here in Oslo or from webcasts. Any questions from you here? Then I'll leave it -- yes, we have one here. We're getting a microphone behind you.
Bengt Jonassen from ABG. On the Bauxite & Alumina side, on the current production levels, we see -- and we also see last year -- Q4 last year, I think we set new record-high production at that time, so obviously, Q4 is obviously a strong quarter on production. What do you think about nameplate capacity both on Paragominas and Alunorte in that respect? On the Energy side, how long will the maintenance shutdown be, and how will that impact the production compared to Q1 2017? And finally -- yes, I think I'll leave it at that. I don't remember my third question.
Regarding the Bauxite & Alumina production in Brazil, as I mentioned, we had 6.7 million tonnes speed in the fourth quarter in Alunorte and 12.1 million tonnes speed in Paragominas. These are definitely above nameplate capacity. So the nameplate capacity is 6.3 million in Alunorte and 9.9 million in Paragominas, that it seems that we are now stabilizing our production at higher levels, and I think we should be able to run also in 2018 with the production levels above the nameplate capacity in both Alunorte and Paragominas.
When it comes to the Energy side, we expect the maintenance to be completed within the first half year of 2018. And then, of course, production in Energy fluctuates with hydrology and prices and demand. But if you look at the absolute production of this line that's out, that was roughly 360 GVH into Q4, which is then taken off.
Do you remember it now?
I remember my third question now. If you look at the internal projects, you have the Husnes that's going to be restarted. And you also -- so are there -- and the Karmøy pilot that is now in ramp-up. Are there any other things that you look at internally on the upstream segments that we can look at or could you expect going into '18 and '19? Or are you now looking more externally on the upstream side?
Well, I mentioned already what we are doing in Albras. Albras need an upgrade on maintenance, so that is ongoing. But with regard to new project, it's -- we have mentioned the press filter in Brazil previously. That is also on the way to be ramped up. But it's really the technology pilot that Karmøy and Automotive line in Germany and the UBC line in Rheinwerk that is the most important now going forward. And then Husnes is something that comes later.
Well, I think when you -- you should also remember the projects we have within B&A, where we are working on the projects debottleneck Alunorte to annual capacity of 7 million tonnes, but that will come closer to the end of this decade, not necessarily in 2018.
Yes.
Okay. Then we have some questions from webcast, Stian.
Yes, we do. First question from Jason Fairclough, Bank of America Merrill Lynch. How should we think about the ramp-up of Karmøy and its impact on cost in Primary Metal portfolio in total?
Okay. With regard to ramp-up, as I mentioned, we are spending the first half 2018 to ramp up the line, and then it will be stabilized and then, going forward, produce 75,000 tonnes. Maybe you can elaborate on that, Eivind.
Yes, I think most of the investments and project cost has been taken, so this is basically what you can call a normal ramp-up phase. And then as we produce more, you will also get contribution margins in place to cover the cost.
Question from Menno Sanderse in Morgan Stanley. You mentioned higher fixed costs in 4Q during the remarks. Can you please elaborate on what these are and how sticky they will be in 2018 and beyond?
Sure. In general for primary or...
No, in total.
In total. I think you have to split this. In many of the business area, we have a significant portion of the maintenance programs done in Q4. That also normally relates into -- translates into what we define as fixed cost. This will come down as maintenance periods are lower in Q1 and Q2. We do see somewhat increased fixed cost on the corporate level. It's partly driven by, as I mentioned, the IS/IT projects that we're running, digitalization efforts, but also from the inclusion of certain parts of the corporate structure in -- from Sapa into the corporate structure in Hydro.
ROaCE in rolling remains poor. This is the sixth year in a row that it's far below 10%. How much patience will Norsk Hydro have with this business until it explores alternative options to achieve a reasonable return?
Well, we are not happy with the profitability in Rolled Products, and it is right, over several years, it has been below cost of capital. Of course, we are now going to see the benefits of the investments that we have done. But I think going forward, we also will look at how we can, for long -- on long term, improve the total profitability in this business area going forward. We see it's a general issue for the industry, it's low margins, but we also see that we have been able to successfully move volumes into high-graded products that gives better profits. But that is something we are, of course, focusing on going forward.
A question from Dan Major, UBS. The tax rate was very low in Q4. What's the guiding going forward?
We continue to keep the guiding of 30% on an overall group level. Again, Q4 was, and particularly impacted from the fact that we had a U.S. tax reform, from 35% to 21%, having impact on our deferred taxes. And then it was the nontaxable hold again from Sapa.
Then we have one from Jatinder Goel in Citi. While deciding the 2017 dividend of NOK 1.75, was there some discussion with the board about revisiting the dividend policy and potentially committing to a higher future floor payout?
The board has decided they have NOK 1.75 per share this year and also have decided to keep the floor of NOK 1.25 and also maintaining the dividend policy of 40% over the cycle.
And then one from Daniel Lurch, Exane BNP. Could you provide an update on the integration of Sapa and what are the key initiatives for 2018 and also an update on synergies?
Well, the integration is continuing. It has been a successful integration so far, and we expect that also to be the case going forward. There are synergies that have been identified that is mainly beyond -- within the remelting and recycling area that we see clear synergies. And we are confirming that the synergies are NOK 200 million. Maybe you can comment further on this, Eivind.
Well, I think, Svein Richard, as you said, the NOK 200 million has been confirmed. We have working plans on how to get there. Not all of that will be realized in 25th -- 2018, but a portion of it will be. But we should come back to a more detailed granularity on the synergy time line.
Then we have one from James Gurry, Crédit Suisse. Rolling appears to be making the first signs of recovery in operational performance. Has any of the lower power contract benefited results already? Or is it just better performance in ramp-up of volumes? And can we look -- how do we look at this into 2018?
The power contract is from 2018, but we have also seen improvements in operation performance. I mentioned earlier that it was operational issues related to Hamburg and also to Alunorf. And there, we have solved the issues. But we still have slower ramp-up on the investments we did on the recycling line, as I mentioned, and also the Automotive line that we are now focusing on and now also what we see is moving in the right direction but behind schedule.
Then we have final question here from Fraser Jamieson in JPMorgan. Cost control in both B&A and primary looked quite strong during Q4 relative to what peers have reported. What do you see in terms of 2018? Will cost inflation continue? Or have you seen the most of the raw material price increase now?
We will see quite a bit of cost inflation coming in into Q1. Both when we look at the alumina side or alumina production, when it comes to caustic costs, costs should come up. When you look to the primary side, the primary or biggest cost driver for Q1 will be on the alumina side, probably adding some NOK 300 million to NOK 400 million in increased costs, but also on the Energy side and on the carbon, on the black material side.
Okay, thank you very much. No further questions, then we would like to say thank you very much for joining us here this morning, and have a wonderful day. Bye.