Elkem ASA

OSE:ELK

Earnings Call Transcript 2022-Q3

[Odd-Geir Lyngstad, executive]

Good morning. My name is Odd-Geir Lyngstad, and I'm responsible for Investor Relations in Elkem. It's a pleasure welcoming you to the combined results presentation and capital markets update. We will start with the results presentation for the third quarter. And the presenters are CEO, Helge

[Audio Gap]

through the business update and the outlook for the fourth quarter. And I also have CFO, Morten

[Audio Gap]

We will have a brief Q&A session after the third quarter presentation.

After the presentation, we will continue with the capital markets update. CEO, Helge Aasen, will give an introduction and present Elkem's updated business strategy. Inge Grubben-Stromnes and Sophie Schneider will then give insights into their respective divisions, Silicon Products and Silicones. Before Asbjorn Sovik will present Elkem's Green Ventures within Battery Materials and Biocarbon. We will open for Q&A after these presentations. And we expect to conclude the meeting by 12:00.

And with that, I hand it over to CEO, Helge Aasen.

[Helge Aasen, executive]

Thank you, Odd-Geir, and good morning, everyone. It's a pleasure to be here presenting another strong quarter for Elkem. The market conditions are weaker, but Elkem is delivering yet another strong result. The EBITDA for the third quarter was NOK 3.3 billion, giving an EBITDA margin of 29%. The energy markets, particularly in the EU, have been challenging and we have seen capacity reductions within steel and aluminium. This has also affected Elkem's markets, but we continue to operate at full capacity. Again, this is demonstrating Elkem's robust and integrated business model and our favorable energy positions.

The strong performance gave earnings per share of NOK 4.81 for the quarter and NOK 13.68 year-to-date. So that should provide for an attractive dividend yield for the year. In the third quarter, we finally closed the Vianode agreement with Hydro and the Swedish firm Altor. So that gives Elkem remaining shareholding of 40%, while Hydro and Altor each will hold 30%. And Vianode also announced the decision to build the Phase 1 production line at Heroya. And this is something we'll come back to in more detail during our CMU update presented by Asbjorn Sovik.

ESG, a key priority for Elkem. And we have a very broad approach in the area. In 2022, we received a Platinum rating from EcoVadis, which puts us among the top 1% performers in their portfolio. Elkem was also ranked A for ESG reporting by Position Green's assessment on the top list in Norwegian, Danish and Swedish companies. In addition, we have been ranked in the 90% percentile by S&P Global in their Corporate Sustainability Assessment for 2022. So these strong results show Elkem's commitment to improving its performance and providing transparent information.

We are well positioned for the green transition, both with our product range, delivering key materials needed in electrical vehicles, electronics, renewable energy, et cetera, with -- okay, that's made the difference, with an already low carbon footprint. But the bar is raised high and we maintain our target to reduce CO2 emissions with 39% by the end of 2031 and with a further target of zero emissions by 2050. We are working on several initiatives within environment, social and government -- and governance, sorry, and always with a strong focus on safety.

We continue on our specialization journey. And in September, we celebrated the opening of a new specialized silicones facility in York, South Carolina in the U.S. This facility will increase our capacity for high-purity medical-grade silicones, which is used in body implants, contact lenses, wound care and several pharmaceutical applications. This is something Sophie Schneider will talk more about later today.

Here, we have very high entry barriers with the strictest quality requirements in the silicones industry. Our goal is to be a leading supplier in healthcare applications. And with this facility, we will gain access to a high margin market of more than NOK 3 billion. Elkem is the only fully integrated supplier in the medical silicones market. And we think we will benefit from our strong platform based on technology and stable access to high-quality raw materials.

Then moving on, the global automotive market was weak in 2021. Total production was around 80 million units of light vehicles, which is down 13% if you compare with pre-COVID levels. We have started to see some recovery. Sales in the EU were up in September for the second consecutive month. However, globally, the market is expected to remain flat this year. And we've done a 5% growth projection for next year.

Electrical vehicles and hybrids, on the other hand, are showing very strong growth. Sales of EVs and hybrids are significantly up, growing more than 40% this year compared to previously or the previous year and with a very strong forward projection, as illustrated on the graph here. And as we talked about previously, this is very good for Elkem, and electrical vehicle contains approximately 4x more silicones than a conventional car with a combustion engine. And hybrids are actually even better for us since we here have a combination of high content of silicones and also high content of foundry alloys.

The third quarter has been mixed in the silicones market. Good demand in specialties. And this is particularly the case in the EU and the U.S. and mainly driven by electrical vehicles, healthcare and consumer products. Commodity markets, on the other hand, have deteriorated, especially towards construction. And in China, continued COVID restrictions combined with new capacity additions have kept the DMA -- the DMC, I'm sorry, reference price stable at around RMB 20,000 per tonne during the quarter. At the same time, silicon prices have remained high, which has resulted in significant margin squeeze for the non-integrated producers of silicones.

In silicon and ferrosilicon, market prices are down from the peak levels we have seen earlier during the year, but still at attractive levels historically. High energy costs have resulted in capacity closures in steel and aluminium, which in turn is having an impact on demand, of course, for silicon and ferrosilicon. And the current price levels are not supported or is not supporting production based on electricity spot prices. So we have therefore seen quite a significant capacity closure also in our industry. And as a consequence, the markets have been quite balanced during the quarter. The recent price decline in Europe has largely been driven by imports from China and Brazil, but we continue to see a balanced supply-demand situation. And we are expecting to be able to maintain full capacity utilization also during the fourth quarter.

The steel and ferroalloy markets are important drivers for carbon solutions, both directly and indirectly. So estimates show that the global steel production will be down about 8% compared to the second quarter this year. In China and in the EU, the decline is estimated to be around 11%. And in these markets, the demand for carbon products consequently is down. In other regions, including the U.S., demand has held up well and sales are still on a good level. We have managed to keep stable production during the quarter. Higher raw material costs are reflected in higher sales prices.

So that sums up my business update. And with this, I'll give the word to Morten Viga, who will take us through the financials for the third quarter.

[Morten Viga, executive]

Thank you very much, Helge, and good morning, everybody. It is purely a pleasure to once again present strong results for Elkem, although we are not at record levels this quarter. But as you know, records cannot happen every quarter. But Elkem was delivering yet another strong result in Q3 with revenues of NOK 11.3 billion, which is up 28% compared to the same quarter in 2021.

The EBITDA amounted to NOK 3.3 billion, which gives an EBITDA margin of 29% for the quarter. And I think this result once again demonstrates Elkem's very robust business model and superior cost positions. Particularly, silicon products delivered a very strong quarter and also carbon solutions reached an all-time high EBITDA. On Group level, the EBITDA was 55% higher than Q3 2021. High sales prices have clearly been a key driver for both silicon products and carbon solutions, but the results are also due to, as I said, superior cost positions and excellent market positions where Elkem has had a clear competitive advantage versus all main competitors.

As always, we have for your benefit included a slide with all the key financial numbers for Elkem. As mentioned, the EBITDA for the quarter was NOK 3.3 billion with an EBITDA margin of 29%. The EBITDA included a realized currency hedging loss of NOK 9 million, quite insignificant. As we have previously communicated, we had a strike earlier in the quarter and that gave also a rather moderate impact, minus NOK 50 million for the quarter. And except for that, there were no particular one-off items impacting the EBITDA.

In other items, however, we have a significant gain of NOK 1,075 million, mainly due to a positive accounting effect related to a particular power contract, and this effect is NOK 650 million. And this effect is explained by accounting or IFRS ineffectiveness related to our hedging program. As you know, extreme power prices and extreme differences in area prices in Norway has also given an extraordinary non-realized impact this quarter. In addition, we also have an unrealized currency gain of NOK 320 million on working capital items. This is due to weaker NOK , which gives a higher value of the receivables and bank deposits in international currencies then being translated back to NOK .

The net finance income was NOK 5 million, mainly due to currency gains of NOK 65 million, which again is mainly explained by unrealized gains on shareholder loans in China. And the net interest expenses were NOK 57 million, which is somewhat lower than Q3 last year, and this is of course then due to the improved cash balance situation. Tax costs for the quarter amounted to NOK 818 million, and that gives a tax rate of 21%. This is very much in line with our previous guiding.

Let's then look at the divisional results and start with silicones. And clearly, the results for the silicones division were down in the third quarter compared to the corresponding quarter last year. As Helge mentioned, the market for silicones product has weakened, particularly in China and particularly for commodity products. And this has impacted sales volumes and also sales prices, as we illustrated, by the DMC price development.

The division had operating income of NOK 4.7 billion, which was down 3% from third quarter last year. And the reduction was mainly due to lower sales volumes and lower sales prices in China. The EBITDA amounted to NOK 511 million, which was down 56% from the same quarter last year. And this is mainly explained by higher raw material costs, particularly silicon metal, and as we said, negative price effects from commodities. The demand for specialty products was still good in the third quarter, but clearly the market for commodities products has developed negatively, and this has also caused lower sales volumes.

Now if we move to silicon products, we see still a very strong result and still benefiting from high prices, although prices have come down. But I think the main reason for this good result is our very good business model and our superior cost position versus competitors. Prices are still at attractive levels, but have clearly come down from the high peak levels that we saw late 2021 and early 2022.

The operating income amounted to NOK 5.9 billion for the quarter and this was up 67% compared to the third quarter last year. The EBITDA was almost NOK 2.4 billion and that is up 175% from the third quarter last year, again explained by higher sales prices, but also excellent operations in our plants. The EBITDA margin was 40% and this clearly represents a very good level compared to all competitors in the industry.

Raw materials are however increasing, particularly for reduction agents such as coal and coke. As we said, the result was impacted by the strike in Norway, approximately NOK 50 million for the quarter. Silicon products continue to see good demand and we have seen good demand in Q3, but sales volumes were negatively impacted by the strike, as I mentioned.

Let's then move on to carbon solutions. Yet another quarter with all-time high results where the total operating income amounted to NOK 1,072 million. That was almost double the revenues or income from last year. And the increase is mainly explained by higher sales prices. EBITDA amounted to NOK 376 million. That was up 170% from third quarter last year. And the EBITDA margin was 35%, all-time high and a significant improvement versus previous quarters.

Sales volumes were quite stable and we are basically producing at almost full capacity and marginally higher than the corresponding quarter last year. And also here, I think the very good results. They clearly demonstrate Elkem's strong and geographically diverse market position and business model. Despite the very strong third quarter, the markets ended weaker. We see the negative macroeconomic sentiment also into this business. But we -- as I said, we have very strong market positions.

Strong results continue to drive improvements in Elkem's financial KPIs, also particularly the earnings per share. And the EPS for the quarter amounted to NOK 4.81 per share, and that was all-time high. And this has taken the year-to-date EPS to NOK 13.68 per share as per the end of September. And as you know, Elkem's dividend policy is to pay 30% to 50% of the net profit as dividend. And clearly, based on the performance so far and the current share price, the dividend yield should be pretty attractive for 2022. And of course, there is still one more quarter to go.

The total equity amounted to NOK 29.2 billion as per end of September, and this gives an even higher equity ratio now at 54%. So as you can see, the financial position is very good. And this rock-solid position can also be seen when it comes to financing. The net interest-bearing debt was further reduced to NOK 2.8 billion by the end of Q3. And this is a reduction from the previous quarter due to strong results, underlying EBITDA, but also due to very good cash flow generation.

And based on last 12 months' EBITDA, we now have a leverage ratio of 0.2x. As you know, this is clearly below the long-term target of being between 1x to 2x last 12-month EBITDA, but we think this is an excellent position to be in when the macroeconomic sentiment is a bit uncertain. Our priority going forward is clearly to retain a strong capital structure to both ensure financial flexibility, but also to have the capacity to pursue growth, both organically and M&A when the right opportunities occur.

When it comes to debt financing, our target is to have a well distributed maturity profile on the loan portfolio. In Q2, we refinanced and increased our bank facilities with a new maturity date in 2027 and at very attractive terms and conditions. The debt maturities now -- the remaining debt maturities now in 2022 mainly consists of Chinese working capital financing, which is regularly rolled over.

And in addition, we have EUR 125 million of Schuldschein in the European market, which is falling due in December. And every financing of these loans is under evaluation. The large silicones expansion project in China with a total CapEx of NOK 3.8 billion is partly funded with equity and partly with new loans in China. And here, we have attracted very attractive or attracted very favorable loans with up to 10-year installment profile, and we think this is a very good solution for this project.

As I said, the cash flow generation for the quarter was very good, and we had a cash flow from operations amounting to NOK 2.3 billion. And the main driver for this is of course a very good underlying operating profit, but we also have a good development in working capital, although it has increased somewhat during the quarter. This is mainly explained by higher inventories, somewhat longer supply lead times, clearly currency effects, a weaker NOK , higher raw material prices and also in some areas, higher safety raw material stocks, which has proved to be a very good decision given the constraints that we see in the supply chain.

The investments for the quarter amounted to NOK 817 million and re-investments were NOK 276 million. That equals 56% of depreciation and amortization. And our long-term target is to keep this between 80% to 90% of depreciation. So you should expect a higher number here going forward. Strategic investments amounted to NOK 540 million for the quarter, and this is mainly related to our big expansion projects in silicones, one in China and also one in France. We will probably see somewhat higher CapEx going forward already in Q4, but we will clearly focus still on a very disciplined capital spending. And although our financial position is rock-solid, we will not compromise on the requirements for return and robustness in our CapEx spending.

So with that, I would like to give the word back to Helge who will then take us through the outlook for a Q4.

[Helge Aasen, executive]

Thank you, Morten. So for the fourth quarter, the market sentiment is impacted by high energy prices in Europe and macroeconomic uncertainty and lower growth. The silicones market in China is weak when we now go into the fourth quarter, while demand and prices are holding up in specialties in both EMEA and in the U.S. Demand for silicon and ferrosilicon have been negatively impacted by the closures in the aluminium and steel industries, but Elkem is able to capitalize on superior cost positions in carbon solutions. We will likely see lower demand and possibly margin pressure due to the closures in steel in particular, however, coming from an all-time high level in the third quarter. So to sum up, the fourth quarter will be lower than the third quarter, but still on, what I would say, a relatively good level.

So with that, I'll give the word back to you, Odd-Geir.

[Odd-Geir Lyngstad, executive]

Thanks. I think I need to have 2 microphones for the Q&A session. So we will send this back and forth a little. We will now open for questions, and I think it's nice to start with the people from the audience. So if there are anyone with questions, please?

[Unknown Analyst]

Can you give us some color on the EBITDA split between China and the rest of the world for silicones?

[Odd-Geir Lyngstad, executive]

The question is to give more flavor on the split of EBITDA between -- in silicones between China and the rest of the world.

[Morten Viga, executive]

I guess, we don't disclose specific numbers per region. But as we have previously communicated, approximately 2/3 of our silicones business, when it comes to revenues, is from Asia Pacific and then predominantly in China. So that gives you a flavor of the split.

[Unknown Analyst]

And to continue to China, your market share within silicones, is that comparable with the Group level?

[Helge Aasen, executive]

Our market share in China?

[Unknown Analyst]

Yes, for electric vehicles.

[Helge Aasen, executive]

Well, our market share for electric -- for silicones to electric vehicles is very strong in some segments, it's particularly in cabling and it's in battery insulation. Sophie Schneider will come back with some examples of our unique products in this area. But clearly, this does not only go to China. We also, as you know, we have excellent EV players in the Western world who are global players. So here we have sales in the global market.

[Unknown Analyst]

[indiscernible]

[Helge Aasen, executive]

No, the question was then regarding the working capital. We've had an increase and how should we think about this going forward. As I said, the main driver for the increase that we have seen now in Q3 is on the inventory side. We do follow this closely, but we are not too concerned because there are quite easily explainable factors behind it. First of all, it's FX, and of course, that could go any way going forward. Then we have clearly an inflationary effect in the numbers, constantly higher raw materials. I think it's fair to say that we have seen the peak here now as, at least so far, and I also believe going forward. And that should give a more stable situation and maybe also a decreasing value of the raw material stock.

And then we have also built up some inventories for critical raw materials. I think also here, we are very well positioned and we will not see any further increase. And this has clearly been a very wise move because we have had a major competitive advantage as we see it in the market versus competitors who have not been able to produce due to lack of high-quality raw materials. So I would not expect any further increase in working capital with the picture that we see now.

[Unknown Analyst]

[indiscernible]

[Helge Aasen, executive]

Is it fair to see a relief? That is clearly our goal to further optimize this, but it clearly will depend on the market development and also on the inflationary pressure on raw materials in particular.

[Odd-Geir Lyngstad, executive]

We have a couple of questions on the web from Charlie Webb in Morgan Stanley. He says that this market -- obviously, the share price was down this morning, so this is what he refers to. This morning, the market was a little spooked by a forward-looking quality comments on fourth quarter. Can you help us [ gauge ] the expectation in EBITDA terms with fourth quarter EBITDA range of 2.3 to 2.4 be aligned with your comments?

[Helge Aasen, executive]

That's a good question. I think we have given a good outlook on what we see in the market, and I think we have a balanced view on this. We are also -- we are humble about, let's say, the macroeconomic situation, like everybody else. I think what is clear is that we believe we are very well positioned to handle the market conditions, either if it's going to go further down or if it's going to flatten out or if it's going to be volatile. But I cannot give any, let's say, specific financial guidance. That's not how we do this.

[Odd-Geir Lyngstad, executive]

And the second question from Charlie Webb. What do you believe is a sustainable level of quarterly profitability in products at the current silicon and ferrosilicon prices? China export appear to be declining sequentially. Do you expect this to lead to higher prices in near-term?

[Morten Viga, executive]

I think the development if you talk about -- shall we repeat the question again or no? No, I think in China, we reduced the economical activity level. And also there are 4 or 5 projects coming onstream this year and we're ramping up next year. So we have a combination of lower demand and higher supply. So I don't really see price levels in China improving, but stay at a rather stable level going forward, and we're talking about commodities. But of course, this dynamic can also lead to close our capacity depending on how it develops.

[Helge Aasen, executive]

Maybe if I may add. If I understood correctly, the question was also particularly about silicon products. And I think we have seen a shift in the role of China, and Inge Grubben-Stromnes will come back to that, we have seen a shift in the cost curve in China where clearly there is not any, let's say, unlimited availability of power and raw materials anymore. And the power and raw materials is coming at a significantly higher cost than previously. And this has caused a shift in the cost curve in China and the price curve. And we believe that that is more of a permanent effect, which also over time, and it has already proven that, will give higher global prices for silicon and ferrosilicon. And of course, with Elkem's cost base where we have very good power and raw material positions, that should support very healthy margins for Elkem going forward.

[Odd-Geir Lyngstad, executive]

A couple of questions from [ Andreas Lee ]. It has been asked during the second quarter webcast, which was the previous one obviously and we have touched upon in this presentation, but the question is if there will be an extraordinary dividend plan this year or does the macroeconomic picture affecting this and pushing dividend into 2023?

[Morten Viga, executive]

I think this is obviously a topic being discussed in the board at the moment. We will wait and see how the macroeconomic development will be moving into first quarter. So there is no plan for an extraordinary dividend today, but this may change.

[Odd-Geir Lyngstad, executive]

And the next question is how much of the fourth quarter production is sold out? I don't know if you have a clear answer to that, but nevertheless.

[Helge Aasen, executive]

I think in the commodity space, this is more uncertain at the moment. We don't have long-term contracts to the same extent as we have in specialties. In specialties, we continue to see very good markets, more uncertainty on commodities. But we have no reason to believe that we should not be able to run full capacity utilization with the visibility we have and Morten already commented on the working capital.

[Odd-Geir Lyngstad, executive]

Any questions from the audience?

[Unknown Analyst]

A question on China and this working capital financing. Given that you have quite big macro uncertainty in China, how comfortable are you with that capital being available on a [ rolling ] basis for the quarter?

[Odd-Geir Lyngstad, executive]

The question relates to the working capital financing in China and how comfortable we are in being able to roll that over.

[Helge Aasen, executive]

I think the short answer to that is that we are very comfortable. That's the nature of working capital financing in China is that it is short-term. We have seen through ups and downs previously and there have clearly been situations in China with very tight liquidity in the market. It has never been a problem to roll these working capital facilities over. And we are confident that that will also be very doable going forward. We clearly also see that the Chinese government is very focused, let's say, on keeping the activity level as stable as possible even during the pandemic. And that should also be a support for adequate financing.

[Odd-Geir Lyngstad, executive]

We have to somehow limit a little bit the number of questions to move on with the Capital Markets Update to allow for sufficient time. Sorry, we have to round off the questions here. So I'm happy to take questions on e-mail or call after this presentation, but we have to move now on and continue with the Capital Markets Update.

And I will then give the word back to you, Helge Aasen, to take us through an introduction and an update on Elkem's updated strategy.

[Helge Aasen, executive]

Thank you, Odd-Geir, and thank you for also joining this Capital Markets Update. We wanted to spend some time with you today and give a broader overview of what we do, who we are in Elkem and why we think that matters. And we will do this in 4 parts. First, an introduction and a strategy update from me. Then an update on the silicon products division from our Senior Vice President, Inge Grubben-Stromnes. Then you will learn more about the silicones division, represented today with Sophie Schneider, who is the Vice President for Silicones in the EMEA region. Our Senior Vice President, Larry Zhang, based in Shanghai, was not able to join us today, but he sends his best regards. And then finally, Asbjorn Sovik will present 2 of our green venture projects. Asbjorn is also the Chairman of the Board of the Vianode project, our battery materials company. And then we'll round this off with a Q&A session. So please feel free to prepare as we go through the presentations. But let's start with a quick video about Elkem.

[Presentation]

[Helge Aasen, executive]

Our main message to you today is that Elkem is well positioned. And that means well positioned across a range of different future scenarios. We based this on taking a green leadership position with what we like to call a dual-play growth strategy. And by developing a business model where we can produce and serve our customers quite independently across geographies in both the Eastern and the Western part of the world and also across a product range with strong positions in certain commodity markets and highly specialized product positions, and this is particularly the case within silicones.

We are continuously developing Elkem's integrated value chain to reduce risk in a business context with significant uncertainties on growth and trade. We're also creating opportunities to capture market share and new market segments. We think this strategy already has delivered strong financial performance. And that in a period with serious global supply chain problems following the pandemic and now recently with record high energy prices and also trade restrictions. Our current solid balance sheet will enable attractive dividend to the shareholders and also give us a position to invest in growth. So you will see all these elements reflected in the presentation today by Inge, Sophie and Asbjorn.

We are proud of our 117-year-old long history in Elkem, but we have to keep our eyes on the future and a strategy oriented towards capitalizing on future global megatrends. The development of the global economy is one example where Asia Pacific with China in the lead has been growing faster than the Western world. We expect this to continue. At the same time, we see signs of re-industrialization in the West, driven by the U.S. Inflation Reduction Act and the EU European Green Deal, which are a strong industrial policy packages, clearly with an objective to secure competitive and sustainable access to energy, to essential raw materials and the world will need more of what companies like Elkem produce going forward, not less.

The green transition is another megatrend with a particular focus on sustainability with electrification of transportation really accelerating. You probably know that silicones are critical for cabling and battery insulation and protection in EVs. And in an electrical vehicle, generally, as I already talked about in my previous presentation, it contains significantly more silicones than a conventional car. That is just the beginning. There are many opportunities in this green space.

Geopolitical polarization is another side of this where trade barriers create risks but also opportunities. Elkem is among very few companies with a complete integrated value chain in different regions. And finally, industry dynamics where we believe that the current industry maturity and innovation supports our underlying long-term growth. And we believe that Elkem's various positions are well balanced for different scenarios and across multiple dimensions. We have a good balance between Eastern and Western markets with around 60% of our revenues in the West and 40% in the East. We have a good distribution of revenues in 2022 by division, about 43% in silicones, 50% in silicon products and 7% in carbon solutions.

Typically, you can see this creating more stability in earnings. As we have seen during COVID, the weakness in one region has largely been offset by more positive development in another region. In addition, COVID showed the vulnerability of global supply chains. We have our independent and integrated value chain, both in the East and in the West. And have -- this has given us a very robust situation. And we have actually been able to maintain full production during this period, which is not the case for many of our peers.

We also see that our integrated value chain is creating significant advantages. Value can be extracted at various levels in the value chain. Our natural hedge on silicon metal is the most -- which is the most important input factor in producing silicones, gives us a significant competitive advantage, and of course also protection of margins.

Another key to being well positioned for multiple scenarios is to contribute to a better climate and a more sustainable future. Elkem aims to be part of the solution to combat climate change and to be one of the winners in the green transition. We do this through 3 key levers. Reducing emissions, obviously; supplying products to the -- that are essential for the transition; and focus on circular economy.

Asbjorn Sovik will touch upon the last 2 later, so let me focus on the first point. Elkem has a strong position already. 83% of our energy consumption globally is coming from a renewable source. We are ranking among the world's top-rated companies by CDP. But we are also committed to reducing emissions further and to contribute in line with the Paris Agreement with an aim of reducing global warming well below 2 degrees centigrade. We target a reduction in absolute terms of 28%, but we are also going to grow the business. And this means delivering 39% reduction on product carbon footprint by 2031.

Our long-term goal is to achieve fully carbon-neutral production. Like many other companies, this is easy to say, but we are developing technologies and the roadmap today, we are investing in it today, where we already are looking at innovative process technology combined with evaluating CCS carbon capture, both storage and utilization options.

So let me summarize our corporate strategy on this last slide. For us in Elkem and our entire global team across geographies, divisional lines and from top management and all the way to frontline workers, we are aligned around a clear mission, and that is to provide advanced silicon-based materials, shaping a better and more sustainable future. This describes what we do, but also why we do it and why it's so important. And we have set out specific growth ambitions to do so. We aim to be among the top 3 players in the silicones industry worldwide and to be a #1 player in silicon products and carbon solutions in the Western part of the world. And that means not just growing with the market, but faster. And we plan to do this through a dual-play growth strategy and taking a green leadership.

Dual-play is about being balanced geographically and balanced across the value chain, upstream and downstream. We aim to grow with more than 5% per year, but also to do so profitably with an EBITDA margin of at least 15% per year. Green leadership is about being in the forefront, reducing emissions and increasing recycling in our industry. Focused growth on markets and products that are essential for the green transition.

And let me leave you with one last reflection for this Capital Markets Update. I have been in Elkem's top management for 22 years and now more than 12 years as CEO. I don't think I have seen such volatility in markets as what we have seen during the last couple of years. And now combined with significant inflationary pressure, higher than what we have seen in decades and a lot of uncertainty about future economic growth and activity level. And you know all of this from papers and from the media, but I also have to say, at the same time, I see an unprecedented opportunity space for Elkem as a company given our diversity geographically and culturally, a very broad product range and very good positions that are really driven by these megatrends that I've talked about. I mean, think about it. Elkem was when it was divested from Orkla, the revenue was NOK 9 billion. This year, we are likely to pass NOK 40 billion and with a very clear downstream and specialization strategy.

So I think with that, I will leave the word to Inge Grubben-Stromnes, who will present what we are working on in silicon products.

[Inge Grubben-Stromnes, executive]

Thank you, Helge, and good morning, everyone. We are a global leader in silicon-based materials and solutions. And in the Elkem Silicon Products division, we cover 4 different business lines; silicon, ferrosilicon, foundry alloys and microsilica. And as Helge touched upon, underlying demand in all these 4 segments are supported by strong trends related to electrification, especially in transportation, renewable energy production, digitalization and growth in electronics and also growth in standard of living across the world, especially in Asia.

Our businesses can be valued into 2 main categories. The commodities, silicon and ferrosilicon where we have a strong underlying cost position and the industries are seeing a renaissance driven by the energy transformation and the developments in China. Then we have the specialties, foundry alloys and microsilica where we also have a good cost position. And of course, partly a joke, but mainly a truth, low cost is never a problem. But in these specialty areas, what is even more important than the cost position is our product quality, it's our application knowledge and our long-term customer relationships.

If we start with the first one, silicon, 2 key words, low cost and integration. Integration, both upstream into raw materials, but also downstream into silicones, which Sophie will cover afterwards. In the silicon products division, silicon, it's easy to believe that this is all about silicon, but silicon actually only constitutes about 30% of our revenues. The way to produce the silicon is quite simple. You start with quartz, basically rocks, which you reduce biocarbon using a lot of electricity. For every ton of silicon we produce, we use more than 10 megawatt hours of electricity. In Elkem, we have a total silicon capacity exceeding 200,000 tons. We have in-house consumption in the silicones division of about 160,000 tons, which means that we have an underlying long silicon position.

Outside of China, we are the second largest producer of silicon with a global market share of approximately 16%. As I said upfront, silicon is a commodity, and of course, we sell it as such. So our contract portfolio of silicon typically consists of annual contracts with volume commitments and then we adjust prices mainly on a quarterly basis based on the previous quarter index development.

As a material, silicon is a semiconductor and it's also defined by the EU as a critical role material. There are 3 main application areas, the biggest one is silicones, where it's used as a raw material, making up approximately 50% of our silicon sales. Then silicon is also an alloy, increasing the strength of aluminium into products such as wheels and automotive structures. This makes up about 30% of our silicon sales. And then silicon is a raw material for polysilicon being used in electronics and solar and also a raw material for different specialty niches, such as electronic failures, refractory materials, body armor and in the future maybe also batteries. And these segments make up the remaining 20% of our silicon sales.

We have between 250 and 300 customers all around the world. About 70% of our sales is in Europe, and this is primarily the commodity part of silicon. Then we sell about 15% in North America and the remaining 15% in Asia. And the sale in Asia is primarily tailor-made silicon into various specialty applications. I said one of the key words in silicon is integration, downstream into silicones. And about 15% to 20% of our silicon sales goes into the division that Sophie will cover afterwards, making up between 4% and 5% of our divisional revenues.

If you look at the end markets and the underlying market development, there is quite a good underlying growth in silicon, approximately 7% per year, primarily in China, driven by strong growth in solar energy and silicones, of course driven by consumer goods, by healthcare, by automotive, especially electric vehicles and electronics, et cetera.

Ferrosilicon shares a lot of similarities with silicon, also from a financial perspective, as ferrosilicon makes up the same 30% of our sales as silicon. The production process is also very similar with the main difference that we add iron. And this of course means that there is a lot of synergies between silicon and ferrosilicon related to production, raw materials, technology and logistics. We have a total ferrosilicon capacity of about 185,000 tons split between the plants in Norway and at Iceland.

And when you make ferrosilicon, you can choose to make different grades. About 25% of our production is what we call standard ferrosilicon. Then we make about 35% refined products and 40% high-purity. And of course, the more specialized the grades are, the more difficult they are to make, but the more profitable they are. And this comes down to flexibility related to raw materials, process stability and equipment.

Ferrosilicon is, as I said, also a commodity and we sell it pretty much in the same way as we sell silicon on annual volume commitments, but then with short-term price adjustments depending on the index. And then the key difference between ferrosilicon and silicon is that in the specialty grades then we have premiums. And of course, the more specialized, the higher the premiums are.

Underlying ferrosilicon is used as a deoxidizer goes into steel production. And globally speaking, the largest steel segment is commodity steels going into automotive and construction. But we have a more specialized mix. We have more of our products, it's going into segments such as electrical steel, stainless steel and other specialty steels. And because of this, our geographical split is a little bit different compared to silicon. About 1/3 of our sales of ferrosilicon is into Asia, primarily Japan, Korea, Taiwan and India, whereas 60% is in the EU and only between 5% and 10% in the U.S.

Same number of customers as for silicon, 250 to 300 customers. Underlying demand growth of ferrosilicon though is more moderate. In general, this follows steel production. But as I said, we are more exposed into electrical steel and stainless steel, where growth is much stronger there. Electrical steel is driven by electrification and increased electricity production, whereas stainless steel is driven by increased standard of living.

Then we move on to foundry alloys, which is one of our most attractive business lines where we are a global leader into supplying metal treatment solutions to iron foundries. The foundry alloys -- the products we sell, the foundry alloys, they constitute a very small share of our customers' cost, but are crucial for the properties and performance of their products. Furthermore, the supply side of foundry alloys is very consolidated. There are only a few players in the main markets, whereas the customer side is quite fragmented with strong needs for technical customer support. And of course, this gives a very -- this provides very high barriers. It gives very good opportunities for close cooperation with the customers over long-term. And it of course also gives a very good opportunity to price the products according to the value they contribute to the customers.

In our silicon products division, foundry alloys constitute about 25% of sales. Production process shares a lot of similarities with silicon and ferrosilicon. At the starting point is ferrosilicon, which we then process, which means that we [ alloy ] with various elements such as magnesium or rare earth minerals. And then with tailor-make sizing, which is very important, depending on the individual customer needs.

We have production capacity of approximately 190,000 tonnes across Norway, Canada, Paraguay, India and China. And we are the only global player serving Ireland foundries, and we are serving more than 1,200 customers across the world. Due to our geographical presence, sales cuts differently across different regions compared to silicon and ferrosilicon. Only 30% of the sales of foundry alloys is in Europe. Then we have little bit less around 25% in the US, 15% of our sales is in India, 15% in China and the remaining 50% equally split between South America, primarily Brazil and rest of Asia. We have strong market shares in most of these markets. In Europe, in North America, in India, we have approximately 50% market share whereas in China, we are quite a bit smaller but with a good potential to grow.

Foundry alloys are true specialties, and prices are not based on index price developments. They are typically negotiated customer by customer, either quarter-by-quarter or half year by half year. But even though contracts and prices are being negotiated quite frequently, they are all based on or most based on very long-term customer relationships, offering stability. I must admit that underlying demand development for foundry alloys is not great. It's pretty stable in the Western world, whereas it's growing in China. And as you see in China and maybe even more in India and as you see towards the right-hand side, automotive is by far the major segment, making up 50% of the market. And this is a market in decline, but this is compensated by engineered products and especially windmill, where we see very strong underlying growth. And maybe what's more important is that the quality requirements of the foundry alloys in these segments are even stricter than in the automotive space.

Then we move on to Microsilica, which is the smallest business line, making up about 15% of divisional takes. This is quite a fascinating story. And this is a story that started long before sustainability became important. Microsilica is pollution. It's pollution emitted from silicon and ferrosilicon furnaces. But when environmental permits became stricter, we were required to collect Microsilica and deposit it. But Elkem has pioneered the development of using Microsilica into different industries, making it now an important business line for us. And the base of microsilica being a pollution is way gone.

We deal with about 300,000 tonnes of -- we deal with about 300,000 tonnes of Microsilica a year, of which half is sourced internally from our smelters and the remaining half sourced externally from other silicon and there ferrosilicon producers. Microsilica is used in 3 main segments; in construction to strengthen concrete, in factories and ceramics for heat resistance and strength and in oilfield applications, either for cementing webs, for drilling fluids or for simulation.

And these 3 segments are approximately equal when it comes to revenues. But from a profitability point of view, refractories and oilfield are the most important segments. And as for foundry alloys, microsilica is specialties where we negotiate pricing customer by customer with prices reflecting the underlying value of the product and again, typically based on long-term customer relationships.

Across all our businesses, whether commodities or specialties, we are among the leaders based on the combination of 2 base; low-cost production platform and strong market positions. And when it comes to the cost side and the raw material side, you see a typical split for our competitors in silicon and ferrosilicon on the left-hand side with electricity making up typically 35% of their costs. Our plants are located at locations where we have long-term access to clean, cheap hydropower.

And in Norway, we have CO2 compensation, and we have free quotas, compensating for additional ETS costs. We have captive courts covering 70% to 80% of our needs. And as Aasen will come back to afterwards, we have our in-house biocarbon development, ensuring sustainable reduction materials going forward. And where we do not have captive raw material positions, we have long-term relationships and a broad supplier base, ensuring supplies if there is scarcity of raw materials.

And an example of that is our sourcing base in China, where we are sourcing a lot of the alloying materials for foundry alloys from where we have been able to operate at full capacity, whereas some of our competitors have had to declare force majeure due to lack of, for instance, Magnesita.

Our plants are well invested. They are well operated based on Elkem business system, and we have economies of scale, both individually at the plants, but also as part of a larger system. We have invested in energy recovery at 4 of our smelters, reducing energy consumption and improving cost and we also have the ability to switch product mix depending on what is the most profitable, whether it is moving from silicon to high-value microsilica or moving from standard ferrosilicon to high-purity ferrosilicon.

And it is a flexibility that we have due to the raw material access we have, due to the process stability we have and the equipment setup we have. And our plants are located at strategic locations typically at the harbor, allowing smooth logistics and low logistic costs, both for incoming raw materials and for outgoing finished goods. And this is also important because the location ensures us market access. We are not covered by anti-dumping duties, and it also allows us market proximity and short lead times, which has become even more important over the last few years with all the logistic problems with this.

But mainly the most important part when it comes to our plants are our people. We have the best teams in the world when it comes to operating silicon and ferrosilicon. Elkem is a strong brand among our customers. And as Helge said, we have 117 years of long-term customer relationships. Individual customers might change over-time, but we have a very robust standing in the market. We know the customers, we know their processes, we know how to help them and they know that they can depend on us. And this is also appreciated by the end markets, especially our sustainability profile, our quality, reliability and our relationships. And we see several examples of the customers of our customers, prescribing them to source materials and work with Elkem.

As a consequence of our raw material positions, our operational excellence and economies of scale, we have among the lowest cost, both when it comes to silicon and ferrosilicon, in this case, serving the European market. Of course, this is the most important on the commodity side, but we are also benefiting from this on foundry alloys.

Our production process is very energy intensive and access to low-cost renewable energy is a key success factor.

We have witnessed an energy transition over time, but of course, the development has accelerated over the last year with a war in Ukraine with increasing closure of nuclear plants in Germany with the problems of nuclear plants in France and other issues. And if you consider forward electricity prices in Europe for next year, and I'm not talking about this winter, I'm talking for the full next year, you will see that all the silicon smelters in Norway and Iceland should produce.

The other smelters have energy costs, which are prohibitively high. And to put this into perspective, if you are trying to produce silicon with an electricity price of EUR 500 per megawatt hour, it means that you have more than EUR 5,000 cost per ton of silicon. And when the price is EUR 4,000 or maybe a little bit less, that doesn't add up. And then you have to add quite a bit of raw materials on top of that.

So if these red and yellow smelters are to produce, we will have to see significantly higher prices than what we see today. But of course, this is based on how the market perceives the electricity market into next year. Energy and electricity is politics. So let's see how this plays out. But this is how the fundamentals look. We at Elkem are to a large extent, protected products. We have hedged more than 85% of our electricity needs in Norway for the next few years. We have CO2 compensation, and we have equally robust situations at Iceland, in Canada and in Paraguay.

In addition to the energy transition, China is the most important factor explaining the underlying attractiveness of silicon and ferrosilicon going forward. China is balancing all global markets, ensuring sufficient amount of materials in the EU, in North America and in the rest of Asia. While this is the case, the EU and the US have long ago established anti-dumping duties on China to ensure level playing ground. But what we see more and more is that countries, industries and companies are becoming more and more concerned with dependency on China, focusing on regionalization of supply chains.

But China is going to continue to balance the global markets of silicon and ferrosilicon, but the importance is likely to change. When China started exporting silicon, for instance, it was based on 3 things; low-cost, low or no environmental requirements and heavy subsidies. They did not have a domestic market, it was all for exports. But what we see on the right-hand side is that the grey part, the share of domestic consumption has increased a lot and is expected to continue to increase. This was initially driven by aluminum then and still by silicones and even more by solar energy.

In parallel to this, we see that costs are increasing in China. China is not an energy-rich country. Electricity prices are increasing due to underlying demand growth, due to scarcity and to cost increases. We also see stricter environmental regulations, both related to local emissions to water and air and also CO2 increasing their costs. And then last but not least, the cost of everything in China is increasing, whether it's raw materials, consumables, logistics or salaries, it's all increasing steeply.

From a Chinese point of view, it doesn't make any sense to use the energy to export energy intensive commodities with a low price, especially when there is an increasing need for these materials domestically. So what we expect going forward is reduced availability of silicon and ferrosilicon for exports at a higher cost. And of course, this is increasing the attractiveness of producing these materials outside of China.

And I guess that is quite a good note to end on. We are supplying silicon-based materials and solutions globally based on strong underlying demand drivers. In commodities, we have a leading cost position based on operational excellence, raw materials and the new access to low-cost renewable electricity. In Specialties, on top of the low-cost position, we benefit from high product quality, application know-how and strong customer relationships.

Our strategy and focus going forward is quite simple. It's to do more of the same. It is to maintain a leading cost position. It is to improve our carbon footprint as Helge presented. It's to optimize our product mix, which ensures that we always make the most profitable products based on our production platform. And it is to open to grow further where we find attractive opportunities to continue to improve profitability. And we are well positioned to do that, both through M&A and organically based on brownfield expansions.

So thank you. And then we move downstream into silicones. So please, Sophie.

[Sophie Schneider, executive]

Thank you. So in case you will not recognize my French accent, I am coming from France and very happy to be here with you today. So before jumping into the silicon world, I would like to remind the link between silicon products from Inge and silicones. So I just brought some samples here.

So the raw material for Inge is the quartz rock, which it transforms into silicon metal and this is what we received to produce our silicon liquid silicon that enters in many, many applications. So this setup is with the integration enabled Elkem to have a certain competitive advantages versus other silicon players. We have a security of supply and with all the uncertainty that we have described on the market today, this is a key asset for us. The security of supply of high-quality silicon metal and also with low carbon footprint, thanks to the unique energy setup just described before by Inge.

So unique chemistry silicon. So first, may I remind you that this chemistry is not an oil-based chemistry, it's a silicon-based chemistry, which is just after oxygen, the second most important element on earth. And with this, we are making a lot of silicon solutions that bring unparalleled properties and performances to materials, which are essential in multiple industries for application as vital as health care. So here also, I try to bring some examples because there are many, many applications in silicon.

So here I bring with me one example, which is a one cure application, which is used in very celebrant to enable to remove it with no trauma to your pain when it's done. And the silicon is the adhesive, so the major part of this, which is on this product. In health care application, we also talked before about implantable. So here, I just bring something that we printed out in our life. It's a 3D really printed silicon nodes, that's for the future, but I wanted to show you also some examples of what we are doing with 3D.

Other applications where silicon essential, we mentioned this several times this morning. It's on electric mobility. So I bring here just one example of a cable, so that you understand that the silicon part here is very important to ensure the insulation for this kind of cable. And this cable are also used in construction, where you need to have a safety fire resistance when there is a burn in any kind of building. So I can go with many, many other examples. Just for information, where we trained newcomer at Elkem silicons, they have 4 days training about all the application and the chemistry in to the silicon as I don't have that much time today to go in all those examples.

So about the silicon industry. Today, we have 5 global integrated players included Elkem in the world. So integrated is starting from this quartz material. And we have so 5 global players and also some local players, mainly in China and Asia, who emerged over the past couple of years. So the total global silicon market size today is $16 billion, with the market share for Elkem of roughly 8%, and we hold a number 4 position in Europe and number 4 position in APAC. The silicon demand annual growth rate is expected to be around 7% on the next couple of years, with a strong growth anticipated in China and in Europe. Some markets will grow faster than others, including transportation. We discussed this point several times this morning; electronics, medical and health care. I understand what you were dealing with before.

So an additional driver that I would like to mention here is the continuous expansion of the middle class rates around the world and it has been and will remain the main and strong driver of silicon demand growth over the next decade. And this could be illustrating on the graph here in the middle, where we see that the consumption of silicon per person grows rapidly as the GDP by capital raises. And this is a good illustration of the benefits of silicon that they bring in advanced consumer society.

So the demand increase combined with the additional demand driven by the green transition that we talked about this morning also is linked to the fact that silicon will bring unmatched performances towards more energy-efficient technologies. And we have here also a study on the right side of this slide that have been demonstrating that silicon enable 9 times reduction of the green gas house emission during their life cycle versus the level of CO2 needed during the production. And also to come back on a previous commitment done by the Elkem company at Elkem Silicon, we also strive to continuously reduce our emission associated to the production of our silicon and we have plans and commitments to reduce by 28% by 2031 as aligned on the Elkem's carbon road map.

So a few examples of the solution brought by silicons towards the megatrends. Just one example, which is not here, but silicon, I think that all of you, the most famous one that you know is the sealing that you can see in your bathroom. I just want like to share with you that this one has been invented in our labs in the -- I was not there in the early '50 in Lyon. So that's just to show you how this technology is evolving over the years. And here today linked to the megatrends, starting with the rising middle class. Of course, here silicon brings solution to different player in the personal care industry like L'Oreal or Beiersdorf.

Silicon brings also a solution for digitalization, where they are essential to semiconductor assembly or moisture protection in different electronic devices, and those are used by players such as ABB, Samsung or LG. On the health care and aging of population, silicon brings medical grades for key players such as Freudenberg and HARTMANN. On the mobility side, we discussed it a lot this morning.

So silicon brings a lot of technology for management of the thermal management in the battery pack, vehicle lightening weight and also all the cable that we discuss. And here, we are serving a big player like BYD in Asia and Stellantis in EMEA. And last but not least, silicon play a key role for the decarbonization of our societies, including in solar panel assembly where silicon deliver technology for top players such as First Solar.

Okay. So another way to show you the silicon solution is to look at it through our end markets.

So on this slide, we see our 5 main markets that Elkem is serving today. Starting on the right side, we are serving a chemicals company with what we call commodity or intermediate standard silicon polymers. And here that represents 25% of our total sales at Elkem silicones. The seller end market that we're serving, which is the largest one is construction. And here, as you can see, with 30%, we have partly what we call a commodity business there with high-volume silicon polymers, but we start also to have some businesses in specialties.

For example, in green sealant, where we have leading position in this kind of technology. The consumer packaging end market represents 15% of our sales and we have for this market leading position in release coating application for food and labor industry and we are here very strong assets in terms of technology because here we are developing [indiscernible] technology, which are solventless and UV curable technologies.

On the Energy & Mobility, which represents also 18% of our sales, we have leading position of our silicon solution for battery pack and cable. And here, again, we have a strong asset in terms of our technology in phones and internal management. The last end market that I will highlight here is the health care and personal care, which represents 15% of our sales today. And here again, we have a leading position in orthosis and prothosis market. And we have here also a broad range of technology to deliver solutions to this kind of market.

So here, you understand that moving from the right side to the left side, you do not have at all the same key success factor for those markets. On the full right side on the chemical part, you are mainly on commodity. And here, the cost is a key driver for this volume market. And the more you move starting in the construction part and more you move on the left part of this slide, you are on specialty market where the key success factors are directly linked to research and development, application capability, formulation expertise. On this part, we are no more selling chemical products. We are selling a silicon solution that fits the needs of our customers.

So on this slide, you can also see the direct impact of our specialization strategy, and I will highlight the 2 last markets on health care and on mobility, where you can see that our annual growth rate over the last 3 years is 18%, which is 2 times faster than the market growth over those periods. So our main lever for specialization is innovation. And here, as I'm not sure we said it before, but until June 2022, I was in-charge of the research and innovation for the full Elkem Silicon division, leading our 450 researchers worldwide with a unique setup because here also, we have a real dual setup.

Half of researchers are based in China and half are based in the western part of the world. So today, I'm very proud to be here to share with you our achievement in terms of research and innovation, and I will point out a few data, here are few figures. In 2021, more than 25% of our sales have been generated with products of less than 5 years and we deliver specialty innovation year-on-year, up to 17 last year, mainly focusing on markets like health care, power and mobility. So on the example of the mobility, I put here on the slide, the example of the 4 product range that we have launched over the last 3 years. So as you can see, products for EV battery packaging solution, products for connecting sealing, products for battery cables and products for electronic modules putting all of them entering in EV cars.

So our innovation are also recognized by international communities. In 2021, we get the award with the 100 award R&D award with our 3D printing and Healthcare range which has been recognized there. And in 2022, we won again this award this time for our phone technology where you can have silicon form with very low density and which is used for also thermal properties in battery pack assembly. So to achieve such results, Elkem is investing year-on-year several hundred millions of NOK in research and innovation.

And I would like here to highlight 2 major investments over the last year and one is coming. The first one is our new research and innovation center in Lyon that has been inaugurated in 2021. And we will inaugurate next year our new center for the research and innovation in Shanghai. And today, what we can share also is that we aim to further accelerate investment in research and innovation by expanding application capability with pilot tools as well as increasing the number of researchers.

So I would like to talk a little bit more also about our job in research and innovation. So our main objective is to understand our customer needs. And this is then thanks to a solid expertise on their application. And developing a new product is a long-lasting process from several months up to several years. And during this process, we have several iterations. First, we are stimulating the customer process in our own lab, making formulation adaptation.

Then we go to the customer to make trials on-site to see if what we have understood in the lab fits with what we can see in their facilities and this is run through several iterations until we get the final product validated. In those lab, we are not only working directly for customer focus, we are also preparing technology for the future. And here, I put one example where we leverage also collaborative open innovation to work on the technology of the future, which is the silicon chemical recycling, which aims to bring more circularity in our economy on the silicon economy. So all our now in application, formulation, technology puts our patents, I didn't mention it, but we have a portfolio of 1,200 patents at silicon. So all those facts create entry-barrier to competition on specialty market.

So specialization is aiming to grow in value faster. And to produce specialty products, we need to invest in very specific industrial capacities. And today, in our industrial investment road-map, we have more than 20 projects in our portfolio, and I will comment here 2 of them. One of them has been commented already earlier about the medical-grade silicon plant that just has been inaugurated in North America and I would like to highlight here a second one, which is the new capacity of green silicone sealant will open in 2023 in China for the construction market.

Beside those investments on a specific industrial tool, we are also accelerating our specialization journey, thanks to merge and acquisition. And I will here highlight 2 of them, the first one based in France where we acquired last year the organo-functional silicon plant and we will use those very, very specific polymers to bring additional and new properties to our products. And also mentioning here the modern acquisition with POLYSIL and BASEL in Asia, where we definitely bought those companies for very specific expertise and knowledge in some technology that we're missing or weaker in our portfolio.

So we talked a lot this morning about dual strategies, so for silicon dual strategy is there as well. So we in parallel to our specialization journey, our strategy is to grow our capacity to cover both Eastern and Western needs and we have currently 2 parallel projects ongoing, one project in China in our Xingu operation site, where by early 2024, we expect to release additional 170 Kt of silos. And in parallel in France, where we expect to have 20 Kt additional in our plants in Russian by 2023. So all those additional volumes have to be consumed internally through our downstream specialization and expansion project and they will all generate in 2023 and 2024, significant revenue increase and while also enabling cost competitiveness for the commodities and improving environmental performances.

So through this speech, I hope I did convince you that silicons are essential to sustainable global growth. And that's because we are convinced of that, that at Elkem, we pursue our specialization strategy, where innovation plays a key and central role. So we invest in research and innovation, and we will further accelerate such investment in talent, in equipment and in infrastructure to deliver even more new products in the coming year. So we will continuously build on [indiscernible], also thanks to our strong patents. And with such specialization strategy, we will create value to the world and capture part of it for Elkem. As part of our dual strategy, we expand, as I mentioned just before, our capacity, both in China and in France to fuel our downstream specialization strategy with competitive and high-quality silicon intermitted.

So turning back, now I will leave the floor to Asbjorn for the Vianode presentation. Thank you.

[Asbjorn Sovik, executive]

Okay. Thank you, Sophie. I will present 2 exciting project; Vianode, a project that we do together now with Hydro and Altor and Elkem Biocarbon. I will start with Vianode. In Vianode, we target to build a leading position as a sustainable supplier of battery materials. And before we go through the business case as such, I will go through what do we do and where we are in the value chain. Vianode produces an anode graphite, which is one of the most advanced products that we produce is in Elkem today. This material is supplied to battery cell producers like Panasonic, LG, North Walt, Triad in the future. The battery results are then assembled into packs and modules, and then they are integrated into the electric vehicles. The battery materials can be recycled into the future and we expect that this will increase over-time and Vianode has already done promising test of recycling the anode graphite.

The business case for Vianode can be summarized as follows. The growth is very high, double-digit growth, and we expect this to continue into the future. There is a significant undersupply of this material, especially in Europe and in North America. There is a regulation also supporting that direction. Vianode has developed a very efficient technology that makes the company very competitive going forward.

The process is close to zero emissions, supporting the green shift and Vianode will be located close to customers, both in Europe and in North America going forward. So we'll provide an efficient supply chain and guarantee a stable supply of material. We plan to enter into long-term contracts, which is the standard in the business, and we have a very good backing from 3 strong partners in Elkem, Hydro and Altor that has both industrial and financial experience to support the growth of the company going forward.

The global market is expected to continue with double-digit growth in the foreseeable future, driven by the demand for EVs and the need for more energy storage. China is by far the biggest market in absolute terms, and we expect that this will also continue for the foreseeable future. However, Vianode is going to target the markets with the biggest growth, Europe and North America and the annual growth in this market is above 30% on an annual basis for the next 5 to 10 years.

In 2030, the estimated demand for cell capacity will be around 2 terawatt hours under cell capacity of around 2 terawatt correspond to close to 2 million tonnes of anode graphite in 2030 for Europe and North America alone. There is a significant undersupply of anode graphite in these markets and the need for the local supply and the need for the sustainable supply with low CO2 footprint. Beside Vianode, there is limited capacity in this market announced for the next 5 to 10 years.

So there is a big opportunity for Vianode to get into these markets.

If you go to the right, this is just an illustration, but it shows that the market and the partnership in the industry are developing. There are several partnerships being formed. We expect this to be developing going forward and new partnership will be established. As I said, the standard is long-term contracts in the industry due to the criticality of the materials and the cost of change if something would go wrong by being in the shorter-term market. In this market, Vianode is well positioned because we're quite early in the development in the Western market, so we can be well positioned to play both in new industry structures, take part in partnerships and develop this going forward.

From the authorities in the EU and North America, there is a strong push to develop this industry. There's critical materials, and they want to secure these critical materials and develop the value chain through regulations and incentives. So for example, in the EU, the critical raw materials sect and in the US, the Inflation Reduction Act. From customers, it's a strong pool for a regional supply of anode graphite with a low CO2 footprint and guaranteeing stable secured supplies. We expect that this new changes in the regulations will result in price premiums for companies like Vianode that are local-based, but also produced with a low CO2 footprint.

For the markets, Vianode has developed a wide range of products and have achieved very good results in customer test as of today. This includes materials that support fast charging, increased range, long service life and materials that can be circulated and increased safety. And anode graphite close to zero emissions, making batteries greener. This is achieved due to a combination of technology developed internally in Elkem, use of renewable power and a clean processing. The graphite as such is produced in a closed process, providing high yields, low energy consumption and low emissions and compared to conventional technology, Vianode expect to reduce the emission with close to 90% when producing this material.

So the company backed by Elkem, Hydro and Altor, Vianode is on track to achieve industrial scale production in 2024 and we are planning for several sites by 2030. Vianode started the development in Elkem approximately 5 years ago with a small pilot. Later, we followed up with an industrial scale pilot, which is now in operation with good performance. And last month, Vianode decided to invest in a full-scale production line that will be operational through 2024. With this investment, we will achieve the acceleration into the market.

We will qualify the product to several customers. This will prepare the basis for long-term contracts and bankable financing for the full scale plants. We will gain production experience in full scale, and this experience will be used to establish operating standards to ramp-up the large scale plant in an efficient way. A decision for the large good plan is planned in 2024, and the plant will be operational in 2026. The capacity of the first plant will be above 50,000 tonnes with an estimate of CapEx between NOK 15 billion to NOK 20 billion. And by 2030, Vianode expect of capacity above 150,000 tonnes per year and an annual revenue between NOK 15 billion to NOK 20 billion.

So going to Elkem Biocarbon. We are developing Biocarbon to replace fossil coal at a competitive cost. We will use waste materials from forest operation and sawmills. These residues will be converted into a high-quality biocarbon through a new process developed in Elkem. The Biocarbon will initially be supplied to customers like Elkem and will help Inge to reduce the CO2 emissions when producing silicon. The silicon is then supplied to markets like silicones, as Sophie presented, aluminum, electronic and the solar markets. The business case in brief is fossil carbons with the higher CO2 emissions need to be replaced. The [indiscernible] for biocarbon is high, but supply is extremely limited as so today.

Elkem is developing the technology, and we have decades of experience from operating smelters that use this product. The Biocarbon is close to zero emissions based on forest residues and the cost will be competitive with fossil carbon sources, adjusted for CO2 pricing. Elkem will supply the internal customer first to gain economy of scale, and then we will target other markets. We will evaluate it to corporate partners to develop and scale this business further.

So in total, CO2 from coal constitute approximately 40% of total CO2 emissions globally today. So in other words, Biocarbon and all these solutions is needed to replace coal in several areas to get those emissions down. But as I said, there is a significant under-supply, so multiple projects are needed. And this poses of course, a big opportunity for those with new technology that works. As an example, demand of coal for metallurgical purposes in Europe only is above 50 million tonne per year now, but the current European supply of biocarbon is estimated today around 20,000 tonnes only. So in Elkem, what do we do in order to cope with this challenge. We pursue parallel tracks. On one side, we are cooperating with suppliers globally and continue to develop and evaluate new suppliers and partnerships. On the other side, we are developing our own biocarbon technology, and we are now starting up an industrial pilot in Canada, close to our plant. And with this development, we will initially target internal customers.

So as I said, the Biocarbon pilot is now starting up in Chicoutimi, Canada, and we are planning that the first large-scale plant will be operational in 2025. And the main targets with the pilot is to qualify the product, verify technology and to gain the production experience so that we get an efficient startup of the large-scale plant, very much similar to Vianode. The large-scale plant will have capacity around 55,000 tonnes and a CapEx of $120 million before incentives. And by 2030, we anticipate the need for several plans and we need to evaluate to develop those in partnerships.

So to summarize, similarities between Vianode, Biocarbon but also other Green Ventures that we'll focus on in the future. As Helge said in his introduction, we will focus on projects with solid value creation, but also projects that support the green transition and that these projects should be connected to Elkem core competencies in technology, R&D and process. We will work with partners to achieve scale, to achieve synergies and to mitigate potential risk. And when timing is right, we will evaluate to reduce our ownership or other alternatives in order to realize the value from these projects.

So thank you for the attention. I hand it over to you, Odd-Geir.

[Odd-Geir Lyngstad, executive]

Okay. Thank you. Thank you to Helge. Thank you to Inge, Sophie and Asbjorn for good presentations. I hope that they have provided some insights into Elkem's strong and exciting businesses.

We are running a little bit behind schedule, but we will still try to open for some questions. So first, let me ask if there are any questions from the audience and there is.

[indiscernible]

There are 2 questions related to note. One is on the cost side, what it actually costs to produce. And the second is regarding the sell-down and referring that Elkem has sold 60% in Vianode and what value that has created.

[Morten Viga, executive]

First, on the cost side, as we are in the developing phase and also negotiating with customers, I would not like to go into details on the cost side, and I hope I get understanding for that. But what I can say is that we will have a competitive position. On the sell-down in Vianode, this was our first step and the main purpose of the first step in getting 2 partners in was to get both more industrial experience into the company, financial experience and a strong partnership that could develop this further. So we expect that the main valuation will come in the next rounds when we develop this company further.

[Odd-Geir Lyngstad, executive]

Yes, Kenneth. [indiscernible] The question is related to risk and Elkem's kind of global business model and shareholder distribution with the large Chinese shareholder and how do we see the kind of risk globally, if I understand correctly. [indiscernible]

[Helge Aasen, executive]

Yes, understandable question. Obviously, like all global companies, we have to live with the increased geopolitical tension with the presence in different geographies. I think in our case, if we had been very dependent on having to ship intermediates between geographies, it would have been a more challenging situation. But as we have tried to focus on also previously now, having this, let's say, independent integrated business models, both in EMEA, Americas, on the one hand and then Asia-Pacific on the other. I'm not too concerned that we will be hit hard by trade sanctions like that and we are also then well positioned in markets that are going to continue to grow even with geopolitical tension. So I think that's my short answer to it.

[Unknown Analyst]

[indiscernible]

[Helge Aasen, executive]

18% was a historical number. We are growing with the market, definitely. And more than that, I mean, quite interesting fact is that our largest single customer today is an EV company and that was not on our customer list 5 years ago.

[Unknown Analyst]

[indiscernible]

[Helge Aasen, executive]

I think we have, especially in Norway 2 plants without energy recovery, Rana and Bremanger. With the current electricity prices in that area of Norway, that's still not very attractive without support schemes. For Salten, the latest one we did, we received about 30% grant from Enova. That option is not there anymore. So I think that has to come back in order to realize those projects.

[Unknown Analyst]

[indiscernible]

[Odd-Geir Lyngstad, executive]

But for the benefit of those on the webcast, the question is, why no plans to build any plant in North America.

[Helge Aasen, executive]

Europe first, America, maybe second.

[Odd-Geir Lyngstad, executive]

Sorry to interrupt. But in the interest of time, I'm trying to merge a couple of questions here, and it's for you, Helge, on the shareholder coming from Charlie Webb in Morgan Stanley. Can you update us on Elkem's largest shareholders thought on the company's strategy as well as the medium-term intentions as it relates to their holding.

And also if they have an opinion on the Elkem's capital allocation priorities and furthermore, update on Elkem's capital allocation priorities.

[Helge Aasen, executive]

Four questions in one. So China National [indiscernible] 51.8% of Elkem share. Signal I get is that they're happy with that position, and they have no intention of increasing or decreasing their shareholding. Their main plan, we had a 2-day strategy meeting with our Board [indiscernible] shareholder. They are mainly focusing on us delivering on growth and on profitability and they have a very long-term view on their shareholding. So I think that in a way also answers the question around the current share price. In other words, that's not the main focus.

[Odd-Geir Lyngstad, executive]

And then a last question, and it goes to you, Sophie. It's a little bit related to the expansion in EVs and batteries. The question is, are we seeing any real market share gains in specialty silicones and what percentage of the business today is specialty versus standard grades.

[Sophie Schneider, executive]

So here also several questions in one. So on the EV part, what we have shown before is that we are growing faster than the market in terms of silicon application for EV. So the 18% that we mentioned before is the silicon market delivering solution to EV technology. So this one is growing at Elkem 2 times faster versus the equivalent silicon market for EV. That's the first point. And on the specialty ratio, here, as you have seen on my slide in the middle of the presentation, there is not a clear cut between the different markets. The more you move on the left side of the slide, the more you are specialized. So what we see here is that when we invest in innovation in high-end specialty market, we grow faster and that's what we want to see here. So I am not able to give one official number about the ratio. I don't know how you communicate it usually, but clearly, as you see the trends here, we are growing faster and faster on the left part of our journey where we have the specialization and we want even to accelerate this, thanks to further investment in research and innovation.

[Odd-Geir Lyngstad, executive]

Thank you, Sophie. We are a bit, as I said, over time. So I think we have to say and conclude today's presentations now. Thank you very much for attending, and have a good day.