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Morningstar | Norsk Hydro Temporarily Shuts Down Alunorte Alumina Production; Our Long-Term Outlook Is Unchanged

On Oct. 3, Norsk Hydro announced plans to fully curtail the Alunorte alumina production facility in Brazil. Alunorte, which is the world's largest alumina refinery, had been running at 50% of capacity since March 2018 due to an environmental dispute with the Brazilian government. Additionally, Hydro will shut down the nearby Paragominas bauxite mine, which supplied bauxite to Alunorte. Although management did not provide a timeline for when production may resume, we expect the situation to be fully resolved by the end of 2019. We based our view on the negotiating progress Norsk Hydro has already made with relevant parties in Brazil and expect the company will eventually be able to reach an agreement with all parties and bring the capacity back online.

As a result of lower alumina supply, we raise our near-term alumina price forecasts. We now forecast 2018 and 2019 alumina prices of $450 and $375 per metric ton, respectively, up from our previous forecast of $425 and $350, respectively. Since we view the supply shutdown as temporary, our long-term alumina price remains at $270 per metric ton.

Our near-term aluminum price forecast also increases to $2,150 per metric ton up from $2,100 due to higher alumina prices. However, our nominal long-term aluminum price forecast of $1,700 per metric ton is unchanged as we continue to forecast slower demand growth weighing on prices.

Having updated our model to reflect these changes, we are lowering our fair value estimate for Norsk Hydro to NOK 36 per share from NOK 37, as lower alumina and bauxite production is partially offset by higher alumina and aluminum prices. As a result of higher near-term alumina prices, our fair value estimate for Alcoa increases to $31 per share from $29. Higher near-term alumina prices do not have a material impact on our fair value estimate for Alumina Limited, and as such, we maintain our AUD 1.70 per share. Our no-moat rating for all three companies is unchanged.

For Norsk Hydro, we had previously expected Alunorte to run at reduced capacity through the end of the 2018, but we now expect the facility to remain closed in some of 2019. However, once the situation is fully resolved, we expect full production to resume in 2020. With capacity in the Alunorte facility totaling 6.4 million metric tons of alumina, we expect 2018 shipments to decrease by around 900 thousand metric tons in 2018 and 1.6 million tons in 2019. In 2020, we forecast total company alumina shipments of 8.7 million metric tons of.