Norsk Hydro reported sharply higher third-quarter earnings Friday but warned that rising smelting costs and weaker realized aluminium prices could pressure results during the fourth quarter.
Adjusted EBITDA increased approximately 50% from a year earlier to 9.09 billion Norwegian crowns, but fell short of analysts’ average forecast of 9.53 billion crowns.
Hydro shares dropped more than 6% following the results.
The company’s outlook illustrates the complicated economics confronting aluminium producers.
Supply disruptions in the Gulf have increased premiums paid by European aluminium buyers, while expanding alumina production in China and Indonesia has pressured prices for the raw material used to produce aluminium.
Hydro expects the premium it realizes above benchmark aluminium prices to fall to between $550 and $600 per metric ton during the fourth quarter, compared with $673 during the third quarter.
Costs are simultaneously moving higher.
The company’s smelting operation expects carbon costs to increase by 250 million to 350 million crowns from the third quarter. Alumina costs are expected to rise by another 100 million to 200 million crowns, while fixed costs could increase by 150 million to 250 million crowns.
Operational pressure has also emerged at Hydro’s Alunorte alumina refinery in Brazil.
The refinery has returned to full production, but disruptions involving contracted natural-gas supplies forced Hydro to purchase replacement gas at market prices.
The company expects the problem to reduce fourth-quarter results by approximately $90 million to $110 million after an estimated $85 million impact during the third quarter.
For commodity markets, Hydro’s results demonstrate that high aluminium prices do not automatically translate into expanding producer margins.
Energy, carbon, alumina and regional premiums can materially change profitability even when headline metal prices remain elevated.
The next signals will come from European aluminium premiums, smelting costs and normalization of gas supplies to Alunorte.
