Norsk Hydro Earnings Drop Due to High Metals Prices

Norwegian aluminium group Norsk Hydro warned on Monday that earnings for the second quarter would be 20% below the first-quarter level, hit by a significant increase in costs in its metal business.

Norsk Hydro shares traded down 11.5% at Nkr66.50 by 07.11 GMT, making it the weakest performer on a flat Oslo bourse.

"Norsk Hydro ASA expects to report an underlying EBIT of approximately Nkr1.6bn ($314m) for the second quarter compared to an underlying EBIT of Nkr2bn in the first quarter," the company said.

"While Hydro is realising a higher aluminium price during the quarter, Hydro is experiencing significant cost increases in the aluminium metal business," it said in a statement.

Investor relations chief Stefan Solberg told Reuters some of the cost increases would continue to affect the quarters ahead as they represent a "step up" in the cost level.

The profit warning came ahead of second-quarter results due on 22 July.

The cost increases are mainly related to alumina prices, alumina freight, petroleum coke and other costs, it said. "The aluminium products business area will deliver a strong result well above the first quarter, while a lower spot price for electricity in Norway will have a negative impact on the results in the Energy business area," it said.

A company spokesman declined to quantify the result for the aluminium products division.

Reported EBIT will be hit significantly by unrealised derivative effects related to Norsk Hydro's long-term power sourcing contracts, the company said.

"The negative effects are a result of increased forward prices for coal and aluminium," it said. "Unrealised effects on LME derivatives are positive for the quarter."

"Part of this is a step up of costs that have a relationship to the oil price and the aluminium price, so these are not necessarily one-offs that will come down again," investor relations chief Solberg said.

"If oil, alumina, and freight costs stay high, there will be an ongoing effect," he told Reuters .

"This is a step up to a new cost level as we have earlier benefited from lower costs due to long-term contracts, for instance," Solberg said.

By John Acher, Reuters