INTERVIEW-Hydro sees more aluminium cutback, power prices key

* Qatar smelter ramp up, German plant decision within months

* Aluminium output to hit 1.5 million tonnes in 2011

By Michael Taylor

LONDON, Feb 17 (Reuters) - Uncertain power prices will lead to further aluminium production cutbacks and volatile prices, Norwegian producer Norsk Hydro  said on Wednesday.

But Hydro will increase its primary aluminium production by 175,000 tonnes this year to 1.425 million tonnes and to about 1.55 million in 2011, its chief executive said.

"I would expect that there could be more cutbacks this year because there are smelters renegotiating their energy contracts -- in Italy and Spain," Svein Richard Brandtzaeg told Reuters in an interview in London.

"With the CO2 cost element in the energy prices in Europe, it is very challenging to get a competitive energy contract.

"If you look at the market balance, there is over supply, so in general there is no reason to restart capacity so far this year."

Analysts warn of multiple closures in western Europe, which produces around 4.0 million tonnes of the metal.

Plants here struggle with the highest power charges in the world, part of which comes from high carbon dioxide (CO2) costs.

A number of European smelters -- in Switzerland, France and the United Kingdom -- have already been forced to close in recent years after their long term energy contracts ended.

Hydro expects to reach full production at Qatalum, its major smelter project in Qatar, by the fourth quarter of 2010.

"There will be less and less smelting activities in the European region," said Brandtzaeg. "We intend to operate our Norwegian smelters for the next decade and into the future, but we see it will be challenging to continue with the smelter in Germany under the current energy cost regime."

Hydro runs Germany's biggest aluminium smelter plant in Neuss, which has been the subject of  media speculation concerning its future. 

"This is one of the most efficient smelters in Europe, but with energy costs it is not competitive," Brandtzaeg said. "We are evaluating the future of this plant in the coming months."

He added that the company currently has energy agreements in place in Norway, until 2020.

PRICES BEAT FUNDAMENTALS

Prices for aluminium , used in power and construction, were at about $2,110 a tonne at 1628 GMT, but Brandtzaeg said they were currently higher than the fundamentals.

He added that aluminium inventories in London Metal Exchange warehouses, at near record levels above 4.5 million tonnes, faced an uncertain outlook.

"We have seen inventories levelling off at the end of 2009," Brandtzaeg said. "We are also seeing analyst reports about unregistered inventories.

"It is difficult to say but the base case as we see it, is that we are starting up in 2010 with an oversupply situation."

A large portion of those aluminium stocks are tied up in finance deals, to release cash for producers and to earn banks higher returns than they would get in money markets.

Earlier on Wednesday, Hydro posted a wider than expected fourth-quarter loss on the back of lower metals prices, hitting its shares, and said production and cost cuts were putting it on the right track. 

"We had a better fourth quarter than third quarter in rolled products -- meaning there is a positive development in some markets," Brandtzaeg said. "We saw improved development in volumes in automotive, tubing and building systems."

"We are seeing a lot of activity in (building) refurbishments," he added.

(Editing by James Jukwey)