EUR 850.00 For Business Accounts Only

Morningstar | Although We Expect Hydro's Production Embargo in Brazil To End Soon, Weak Margins Will Persist. See Updated Analyst Note from 07 Feb 2019

Hydro struggled in late-2018 as its vertically-integrated business model was challenged by a production embargo at its Alunorte alumina refinery. Having updated our valuation model, we now forecast lower near-term profits. The government-imposed Alunorte curtailment has remained in place longer than we previously expected and the negative impact on companywide profits has been larger than we anticipated. This represents a major missed opportunity for Hydro from a profit perspective, as alumina prices remain elevated. Our fair value estimate falls to $34 per share from $37. Our no-moat rating is unchanged.

We expect the Alunorte curtailment to be lifted by the end of the second quarter. IBAMA and SEMAS, which are effectively government-backed environmental protection agencies, have each lifted their own production restrictions in recent months. The only remaining step before full production can resume is an overturn of the Federal Court's embargoes (civil and criminal). In the meantime, Hydro's cost structure will remain bloated as the company continues to digest higher-cost alumina sourced externally.

Even after full production resumes, however, we expect deteriorating industry conditions to prevent margin expansion. We forecast that alumina and aluminum prices will fall materially over our explicit five-year forecast period. Additionally, we maintain a below-consensus global aluminum consumption outlook. As a result, we don't expect profits for the company's downstream rolled products and extruded solutions segments to improve materially.