Norway's Hydro eyes costs, limits stock build

LONDON, (Reuters) - Norwegian aluminium producer Hydro is gearing up for tougher times ahead by looking at production costs while limiting inventory build-up, a senior executive told Reuters on Wednesday. "We have already taken measures during the few last years closing down high cost operations, so we feel pretty well prepared for a period of lower aluminium prices," said Jan Arve Haugan, acting executive vice president and head of aluminium metal at Hydro. "Our focus now is to try to temper our internal inventory build-up," he said, referring to the use of primary and secondary feed from other producers. "We are telling third parties that are selling to us to slow down a little," he added. Rising inventories on the London Metal Exchange and a worsening demand outlook have forced aluminium producers worldwide to scrutinise high cost operations. "We do have some smelters that are exposed ... and we are prepared for a bumpy road for a few years," Haugan said. In general, Hydro is producing at just below the average marginal cost of production for aluminium, but one 230,000 tonne per year smelter Neuss in Germany, has a higher cost profile. "As long as we are still making money we will operate the smelter but we are looking at it on a year-to-year basis, depending on the energy contracts we manage to secure," he said. The current power contracts at Neuss secure the operation until the end of 2009. Hydro's total aluminium output is 1.7 million tonnes a year. The current financial turmoil has caused extra concerns. "We are looking at the health of our suppliers, our third party suppliers and our customers as we focus on counterparty risk ... we have to be an active player in the market just in case one of them defaults," Haugan said. Hydro has full exposure to aluminium price volatility, and only has hedges through some of its power and alumina contracts. In the longer term, Hydro aimed to become a more integrated producer all the way from mining bauxite, the raw material used when producing alumina which is turned into aluminium metal, to complex aluminium structures for construction. "We are slowly building up our experience in the mining sphere," he said. Hydro forecasts demand for the primary aluminium market to grow from around 40 million tonnes per year in 2008 to 60 million at around 2015 and new smelting capacity to be needed. "There is likelihood due to this financial crisis that we are seeing that the surge in demand might be a bit delayed perhaps another couple of years," Haugan added.