Norsk Hydro flags downstream weakness, shares fall

By Jesus Calero

Feb 13 (Reuters) - Aluminium producer Norsk Hydro NHY.OL highlighted continued weakness in downstream markets as it reported fourth-quarter core-earnings which beat market forecasts, sending its shares down 6% on Friday.

Hydro faces a shifting outlook as the EU prepares to impose carbon costs on aluminium imports, a move that could favour its lower-emission metal, even as rising global supply and falling production costs point to more balanced markets.

Adjusted earnings before interest, taxes, depreciation and amortisation came in at 5.59 billion Norwegian crowns ($585.23 million) in the October-December period, down from 7.7 billion a year earlier.

Analysts on average had expected it to report a core profit of 5.2 billion crowns, according to a company-compiled consensus.

WEAKER DOWNSTREAM TRENDS

JPMorgan and RBC analysts said stronger upstream performance and cash generation were partly offset by weaker downstream trends in the company's first-quarter guidance, suggesting limited scope for broad earnings upgrades near term.

Higher metal prices and steady upstream output lifted results in its aluminium metal and bauxite and alumina divisions, providing the main support despite a stronger Norwegian crown.

Further downstream, performance softened. The extrusion business slipped into a loss on weaker margins and volumes, while metal markets also turned negative amid subdued trading activity and inventory effects.

Alumina prices in the quarter were about 55% lower than a year earlier, as increased supply from China pushed prices closer to production costs.

Hydro has booked about 42% of its first-quarter primary aluminium volumes at premiums of roughly $478 per tonne, with the overall quarterly average expected to land between $380 and $430, CEO Eivind Kallevik told Reuters.

Kallevik said U.S. Midwest premiums — a key component of aluminium pricing — would fall if import tariffs were reduced.

The company also sold its first low-carbon aluminium volumes in the U.S. at premiums comparable to Europe, a sign that customers are still willing to pay more for cleaner metal.

Extrusion order books are typically short-term and it is "too early to draw conclusions" about a recovery in the second half, with demand dependent on broader economic growth, Kallevik said in an analyst call.

($1 = 9.5518 Norwegian crowns)