Norsk Hydro - Strong Operational Performance

Hydro's underlying income from continuing operations amounted to NOK 1,442 million in the first quarter of 2008, up from NOK 1,402 million in the previous quarter and down from NOK 2,345 million in the first quarter last year. Solid operational performance in all business areas combined with higher sales volumes and margins for Hydro's downstream business lifted results, while weaker realised aluminium prices in Norwegian kroner had a negative impact.

Global aluminium prices remained strong, but Hydro realised lower prices in Norwegian kroner during the quarter compared with the previous quarter and the same period last year, due to a weaker US dollar against the NOK.

'Hydro's performance during the first quarter underpins our operational and financial strength, and we are continuously evaluating a range of growth opportunities,' says Hydro President and CEO Eivind Reiten.

'Aluminium Metal is posting satisfactory results after a dynamic first quarter, marked by a significant upward shift in aluminium prices which will start to impact our results from the second quarter,' Reiten says, adding: 'I'm also pleased to see our Aluminium Products area showing strong performance, demonstrating that recent restructuring efforts are taking effect.'

During the first quarter, Hydro completed the sale of its polymer business to UK-based Ineos. Hydro also signed an agreement to sell its maintenance, project and service providers Hydro Production Partner and Hydro Production Services to German Bilfinger Berger Industrial Services AG.

Underlying EBIT in the first quarter was NOK 2,032 million, up from NOK 1,697 million in the previous quarter but lower than the strong performance in the first quarter of 2007.

Underlying results for Aluminium Metal, Hydro's upstream aluminium business, declined from the previous three-month period and the first quarter of 2007, mainly due to lower realised aluminium prices measured in Norwegian kroner. Hydro's joint venture with Qatar Petroleum on the 585,000-tonne Qatalum smelter project, in which Hydro owns 50 percent, was about 17 percent complete by the end of the first quarter and on track for start-up around the end of 2009.

For Aluminium Products, Hydro's downstream operations, underlying results rose in the first quarter from a seasonally weak fourth quarter, along with higher volumes and improved margins. First-quarter results for Aluminium Products were somewhat weaker than the same year-earlier period, which benefited from favorable market conditions. Hydro's European Extrusion operations continued to deliver strong results.

Hydro's Energy business, which includes power production and solar power investments, delivered higher underlying results in the first quarter than both the first and fourth quarters of 2007, mainly due to higher power production in Norway. Hydro increased its investment in US-based thin-film company Ascent Solar Technologies Inc. and Norwegian wafer producer NorSun AS, contributing to an enhanced position in the solar industry and confirming Hydro's commitment in the area.

Reported EBIT and Income from Continuing Operations
EBIT for Hydro amounted to NOK 1,179 million in the first quarter, up from NOK 338 million in the previous quarter. EBIT was impacted by significant net unrealised losses on power and LME derivative contracts as a result of a significant upward shift in LME forward prices during the quarter, combined with developments in the forward prices for coal and power. EBIT in the fourth quarter of 2007 was also impacted by significant unrealised losses on derivative contracts, as well as higher negative metal effects and other negative non-recurring effects.

Income from continuing operations amounted to NOK 1,443 million in the first quarter, up from NOK 527 million in the previous quarter. Income from continuing operations included net foreign exchange gains amounting to NOK 854 million compared to net foreign exchange gains of NOK 74 million in the previous quarter.

Summary market developments and outlook
Aluminium prices on the LME increased significantly throughout the quarter in a volatile market impacted by production curtailments in China and South Africa, the weakening US dollar and increased activity from financial investors. Aluminium inventories are currently low compared to consumption, reflecting a favourable market balance. Hydro expects the production disruptions to reduce supply by about 600,000 mt in 2008.

Continued cost pressures on primary production relating to higher energy and raw material prices, together with the expectation of a potential tighter market balance in 2009 and a continued weak US dollar, are expected to support high LME price levels throughout 2008. Total demand for primary aluminium in 2008 is expected to grow by 8-9 percent, driven mainly by strong growth in China.

Hydro expects a moderate market slowdown for semi-fabricated products in Europe, mainly impacting business in the second half of the year. In the US, Hydro expects the market for semi-fabricated products to remain at the current depressed levels. The development of the US economy and its potential global impact represents a major uncertainty in Hydro's market outlook.

Aluminium Metal
Underlying EBIT for Aluminium Metal amounted to NOK 1,255 million in the first quarter of 2008, down 6 percent compared with fourth quarter of 2007 and 47 percent from the very strong first quarter of 2007. Developments for the quarter were mainly driven by lower realised aluminium prices measured in Norwegian kroner. Primary aluminium production volume was relatively stable compared to previous quarters.

Results from our Bauxite and Alumina operations declined somewhat compared with fourth quarter and were substantially lower than the first quarter of 2007. Lower volumes due to planned maintenance impacted results compared with the fourth quarter, while higher LME linked bauxite prices influenced the decline compared with the first quarter of 2007. Higher energy costs contributed to the weak results compared to both the fourth and first quarters of 2007. Underlying EBIT for Commercial operations increased substantially in the quarter, compared with the fourth quarter of 2007 which was negatively impacted by losses in our North American remelt operations.

Aluminium Products
Underlying EBIT for Aluminium Products amounted to NOK 370 million for the first quarter, up by NOK 300 million from the seasonally weak fourth quarter results in 2007. Shipments increased mainly in the high added-value foil and lithographic segments, also contributing to improved margins for our rolled products operations, while our extrusion volumes increased 11 percent mainly driven by a 15 percent increase from our European extrusion business. Margins remained strong within our extrusion market segment. Results for our US extrusion operations improved but the market remains at depressed levels. Operating results for our automotive structures activities improved but remain challenging.

Underlying EBIT declined by NOK 128 million or 26 percent compared to the first quarter of 2007 which included net operating profits from divested operations of around NOK 50 million. Volumes for our rolled products business declined somewhat in the first quarter of 2008. Slightly higher operating costs had a negative impact on the underlying results for our European extrusion operations. Lower costs from measures implemented at our US operations combined with improved results from our South American business more than offset a volume decline of 15 percent for our North American operations.

Outlook

Aluminium Metal
Several factors indicate a positive outlook for aluminium price developments in US dollars in the coming quarters. There are uncertainties, however, linked to the developments of the US economy and the potential global impact.

China's apparent consumption of primary metal is forecast to increase by 22 percent for the full year of 2008, down from an annual growth of 38 percent in 2007, due to lower growth in the production of semi-finished products for export. Growth in Chinese production of primary metal is expected to reach 18 percent in 2008, compared with a growth rate of 35 percent last year.

Primary aluminium consumption and production in the rest of the world is expected to grow by about 2 percent and 6 percent, respectively, from 2007 to 2008.

Market conditions for extrusion ingot in Europe are expected to remain at the same level in the coming months, with a slightly weaker demand especially from the building and construction sector. The US market for extrusion ingot in 2008 is expected to be slightly below the 2007 level mainly due to a continued weak demand from the residential building and construction sector. For sheet ingot in Europe the expected demand outlook remains positive with some slowing possible in the second half of 2008. Demand for foundry alloys in Europe is expected to stabilise for the rest of the year with a slight trend towards increased market demand.

Aluminium Products
Market demand for flat rolled products in Europe is expected to be stable for the coming months. US market demand is expected to remain depressed. Combined with a weak US dollar, this could lead to increased imports and put pressure on European margins for rolled products.

The overall outlook for the European extrusion market indicates a softer demand in 2008, driven by the weakening construction market segment in Europe. The market outlook in Germany continues to be strong, in particular within the engineering and transportation market segments. The general softer demand combined with a volatile LME could put further downward pressure on margins in the months to come.

The outlook for the US extrusion market shows no signs of recovery. South American markets are expected to post another strong year, with consumption in Brazil and Argentina expected to grow around 6-7 percent.

The outlook for the automotive market is mixed with a stable to strong European market while the North American market is expected to remain weak for 2008. Automotive markets in Asia and South America are expected to continue growing.

Web: http://www.hydro.com