The board of directors of Norsk Hydro, the Norwegian oil and energy, light metals and plant nutrition group, has approved an investment in a thorough modernization and expansion of Hydro Aluminium Sunndal in western Norway. The project will raise the site’s electrolytic capacity to 321,000 metric tons per year, making Sunndal the largest aluminium smelter in Europe.
New production capacity of 234,000 tons will be built at Sunndal, while the plant’s 66,000-ton Søderberg facility, which started operation in 1954, will be closed.
The project will cost approximately NOK 5.4 billion (USD 600 million at today's exchange rate) and is expected to be completed in 2004. New anode capacity will require an additional investment of around NOK 600 million.
"The Sunndal expansion is an important part of our effort to realize the growth strategy that we presented for our aluminium operations in the autumn of 1999," says Egil Myklebust, Hydro's president and chief executive officer. "Including this project, which will be very profitable, Hydro has approved investments and made acquisitions in the Light Metals business area for more than NOK 9 billion since last October. These projects are valuable steps on the way to achieving the ambitious profitability and growth targets we set in this area."
MEETING MARKET GROWTH
From its base in Norway, Hydro is aiming to achieve global positions in its three core business areas: Oil and Energy, Light Metals, and Agri. In Light Metals, the company's ambition is to strengthen its position as one of the world's largest integrated aluminium companies. An important part of this goal is to secure Hydro's position as the market leader in Europe for aluminium.
The market for primary aluminium is growing at a rate of around 2.5 per cent per year. The growth is being spurred by the increasing use of aluminium in the transportation and building system sectors, two sectors where Hydro has strong downstream positions.
Hydro has a global business volume of 2.1 million tons, making the company one of the international leaders in the supply of aluminium. Hydro's most important products - extrusion ingots and primary foundry alloys - are primarily used in the automotive and construction industries. Production capacity at the "new" Sunndal site will total about 350,000 tons of extrusion ingots and foundry alloys, based on primary and remelted metal.
Hydro also intends to increase its aluminium semi-fabrication and recycling activities. Hydro's board of directors has today also approved an investment of approximately NOK 500 million to raise the production capacity of automotive components at plants in France, Norway and Sweden.
At the core of Hydro's strategy is a focus on its three business areas. As part of this, the company has sold other activities, including its interest in the Norwegian chemicals group Dyno, the wholly owned fish-farming subsidiary Hydro Seafood, and oil and gas licenses on the British continental shelf. In all, Hydro’s divestments in 1999 and 2000 have amounted to some NOK 14 billion, thus bolstering the company’s ability to take advantage of opportunities for profitable growth in its core areas.
MORE THAN DOUBLING OF PRODUCTIVITY, SOLID PROFITABILITY AND UNIQUE ENVIRONMENTAL SOLUTIONS
The Sunndal project will build a pot room consisting of 336 new cells for the production of primary aluminium, based on Hydro’s HAL250 technology. This technology was developed from the HAL230 technology that is being used successfully at several metal plants, including the partly owned Slovakian company Slovalco. HAL250 achieves a low investment cost per ton of production capacity, as well as high productivity and energy efficiency - and possibly the lowest emissions per produced unit in the world. The new facility will be brought into operation at the same time as the oldest potrooms of the Sunndal smelter are closed and demolished. As a result, no loss of production will occur in the construction period.
The NOK 5.4 billion investment includes interest costs and inflation over the construction period. The additional investment of NOK 600 million will secure adequate anode supply for the increased metal production at Sunndal.
The investments will turn Hydro Aluminium Sunndal into one of the world’s most efficient metal plants in terms of annual production per employee, with productivity increasing from 236 tons this year to 570 tons when the new plant is in full operation. The Sunndal revamp will also reduce by 100 the number of plant employees. Hydro Aluminium is committed to continued productivity improvements at its Norwegian metal plants.
The investment is financially attractive and will provide Hydro with an internal rate of return, after taxes, of more than 15 percent in real terms. This compares favorably to the company’s minimum requirement of 10 percent. Independent of Hydro’s energy portfolio, the profitability calculation has been based on an average price of 0.18 kroner per kilowatt hour. The calculation also takes into account an average three-month price of USD 1,550 per ton on the London Metal Exchange, and an exchange rate of NOK 7.50 to USD 1.
Using this exchange rate, the Sunndal investment represents a cost below USD 3,100 dollar per ton of production capacity. This is clearly lower than 1999 cost estimates for similar "brownfield" projects, which international analysts put at around USD 3,350 per ton. Investment costs for new plants have by the same analysts been estimated at USD 4,250 per ton.
Hydro will achieve this competitive investment by using the existing infrastructure at Sunndal. Furthermore, the HAL250 technology enables Hydro to build a plant that is physically more compact than sites with similarly sized production capacity. The technology is therefore well-suited for the modernization of plants in small areas. Construction of the new Sunndal plant will occur in three stages, with each stage to start operation immediately upon completion.
In terms of project execution and future plant operations, Hydro considers it extremely valuable to be able to utilize and grow the expertise that has been developed in Sunndal and in the entire aluminium community in Norway.
Hydro’s HAL250 technology includes unique environmental solutions that are designed to significantly improve the internal working environment while reducing the amount of emissions and noise. The project meets all known environmental requirements on the Norwegian and international levels.
The specific emission of greenhouse gases will be sharply reduced. The plant’s total emission of greenhouse gases will also decrease, despite the fact that aluminium production will be more than doubled. The Sunndal project will also enable the Norwegian aluminium industry to fulfill the Environmental Ministry’s goal to reduce the specific emission of greenhouse gases by 55 percent from 1990 to 2005. All emissions will be well within the range of the Norwegian environmental effect analysis that was drawn up in 1992 and approved in 1997.
Moreover, the facility will be able to recover low-grade energy and supply this as a heating source for the surrounding community. This capability could create a new activity in terms of utilizing larger amounts of low-grade heating.
MAJOR RIPPLE EFFECTS
Hydro is evaluating various ways to cover Sunndal’s future requirements for anodes. One alternative is to expand the Årdal Karbon plant in Norway at a cost of about NOK 600 million. Hydro will make its decision by the end of this year.
The investment will build a foundation for competitive industry in Sunndal. In addition, Norwegian suppliers will account for about half the investment sum of NOK 5.4 billion, while the project is estimated to require up to 2,000 man-years over the four-year construction period. Ripple effects will also be created in the form of added supplier activity to the company in the future, such as the technological community that deliver equipment and know-how to the process industry. This includes Hydro Aluminium's technology center in Årdal, which has developed the electrolysis technology.
HIGHER RAW MATERIAL COVERAGE
Hydro Aluminium Sunndal will cover its need for additional raw materials partly through Hydro's investments in Brazil, where earlier this year, the company purchased a 25.3 percent interest in the alumina refinery Alunorte. An 800,000 ton expansion of Alunorte is being planned, and Hydro will own 50 percent of the additional capacity. Combined with other alumina supplies, and including the requirements for the new Sunndal plant, this will raise Hydro's equity alumina coverage from 40 percent to 75 percent.
Hydro will cover its energy needs through a long-term contract with the Norwegian power company Statkraft and in the long term energy market at large. In order to achieve a satisfactory supply situation, the surrounding energy grid will have to be strengthened.
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Hydro has long evaluated further developing its Norwegian metal plants. However, a realistic expansion in Norway will not be sufficient to cover the long-term increase in demand from Hydro's aluminium customers. Consequently, Hydro is also considering metal projects outside Norway, including a project in Reydaral, Iceland.
Approval of the Hydro Aluminium Sunndal investment concludes a long process that targeted the modernization of the Sunndal plant, which started production in 1954. Hydro's 970 employees in Sunndal are divided among the metal plant, a research and development center, support services and Hycast, an equipment supplier.
Hydro's board has put one condition on its approval of the investment, which is that the project's main study does not show any significant negative deviations, when it is completed in the second quarter of 2001. The investment is also subject to approval by Norsk Hydro's corporate assembly and from Norwegian authorities