Norsk Hydro ASA

OSE:NHY

Earnings Call Analysis

Hydro REIN's Progress and Ambitions

Hydro REIN, targeting to be a leading renewable energy provider, has 1.7 gigawatts in operation and construction, with 2.6 gigawatts gross including a Brazilian project. With an expanded renewable and energy solutions portfolio, Hydro REIN is progressing towards its 2026 target of a 3-gigawatt portfolio. The four wind and solar projects in construction are expected to contribute around NOK 410 million annually in EBITDA. Aiming for a 10%-20% equity interim rate of return, Hydro REIN is positioning for long-term growth and value creation, with Macquarie Asset Management as a co-owner enhancing its strength in the renewable sector.

A Strategic Overview with Community Commitment at the Forefront

Hydro’s earnings call opened with a solemn reminder of the company's commitment to health and safety following tragic incidents within their operations, reinforcing the imperative of zero incidents. In addition to financial performance, with the CEO Hilde Merete Aasheim underscoring the challenges faced amidst geopolitical upheaval and market unpredictability affecting the aluminum industry.

Pressured Financials Showing Resilience Amidst a Macro Environment

The macro environment exerted notable pressure on Hydro's financials, leading to an EBITDA of NOK 3.9 billion and a negative free cash flow of NOK 1.4 billion for the third quarter. Aasheim pointed to lower sales prices and volumes as culprits but also attributed some one-off effects to the weaker results. Despite these setbacks, the company is on course with their improvement efforts, which are already ahead of plan.

Hydro REIN's Leap Forward with Macquarie Partnership and Ambitious Growth

A significant development was the joint venture with Macquarie Asset Management for Hydro REIN that involves an injection of USD 332 million by Macquarie, buying a 49.9% stake. This partnership marks a strategic advancement in the company's renewable energy endeavors, bringing Hydro REIN’s growth journey to the forefront. The deal estimates Hydro REIN's value at USD 333 million and expects to achieve self-funding status in the medium term without further equity injections from Hydro. The transaction includes all of Hydro REIN’s assets, except for certain onshore wind projects in Norway.

REIN's Robust Portfolio and Targeted Returns Inspiring Confidence

The growth in Hydro REIN is tangible, with 1.7 gigawatts of wind and solar projects in construction. There's a clear strategic focus on becoming a preferred supplier of renewable solutions in Brazil and the Nordics, with an aspiration to achieve an equity internal rate of return of 10% to 20% annually for REIN's entire platform. This ambition is underpinned by the success in construction projects, a strong pipeline, and an estimated annual EBITDA contribution of around NOK 410 million from four major projects.

Expansion and Decarbonization in the Automotive Segment

Aasheim also shone a light on the green transition within the automotive sector, where there's an expected boom in demand for aluminum due to the switch to electric vehicles. Hydro's expansion includes three new extrusion plants to cater to this growing segment. The company has also forged strategic partnerships with leading car manufacturers like Mercedes-Benz and Porsche to pioneer low-carbon aluminum solutions, such as the development of REDUXA 3.0, aimed at reducing carbon content significantly below industry averages.

Firm Stance on Social Responsibility and Environmental Regulations

Hydro highlighted a strong commitment to social responsibility, with a notable investment in community programs in Brazil and a critical perspective on regulatory developments, particularly the EU policies accelerating the transition to low carbon aluminum. However, there was concern expressed regarding the new implementation regulation for CBAM, perceived as creating a loophole detrimental to European low-carbon aluminum producers.

Financial Stability Reflects Strategic Foresight and Market Resilience

The call concluded with CFO Pål Kildemo providing insights into the company's expectations of operating capital, the dynamic nature of the REIN pipeline, and the forward-looking attitude towards long-term contractual relationships to support their growth and resilience strategy.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to Hydro's Third Quarter 2023 Presentation and Q&A. Our CEO, Hilde Merete Aasheim, will start off presenting key highlights for the quarter, together with the strategic update. We will also be joined today by our Executive Vice President of Energy, Arvid Moss, who will have a walk-through of the recently announced transaction with Macquarie Asset Management.

Lastly, our CFO, Pal Kildemo, will take you through the financials for the quarter. After the presentations, we will run a Q&A session. As normal, you will be able to ask questions directly to Hilde, Arvid and Pal. [Operator Instructions].

And with that, I leave the floor to you, Hilde.

[Hilde Aasheim, executive]

Thank you, Martina, and good morning, and welcome from me as well. Let me begin with what is the most important in Hydro. The health and safety of our people and everybody who works for Hydro is always our top priority. Nothing is more important than that. Last week, we experienced a painful reminder of why this is so important to us. And I got the phone call, I fear the most twice in one week. Two young men working within our fences lost their lives, one in our joint venture in Qatar, Qatalum, the other in Alunorte, Brazil.

I am deeply saddened that these 2 young men who came to work in our plants did not come home to their loved ones. Our heartfelt condolences go to the family, friends and effective colleagues. We are now ensuring thorough investigations of the incident to find the root causes and to learn from them. Fatalities are a stark reminder of how immensely important it is to keep health and safety at the top of our agenda in everything we do always. Our target is zero incidents, and we will continue to work throughout the whole Hydro organization to avoid any incidents to happen.

The role around us is in a state of upheaval with increased rivalry, increased conflicts, and increasing unpredictability affecting all parts of the economy. This unpredictability combined with rapid monetary tightening, precious household spending and consumer behavior and interim demand for aluminum. For the third quarter, we report an EBITDA of NOK 3.9 billion, while free cash flow came in at negative NOK 1.4 billion. We have had a strong release in operating capital in the quarter, offset by higher investments.

Weaker results this quarter are much driven by lower sales prices and volumes, but also from some one-off effects related to reduced CO2 compensation and provisions for the nations supporting our long-term social ambitions accounted for this quarter. Demand for primary aluminum in the world outside China continued to decline throughout the third quarter. In Downstream, we observed consistent weakness in residential building and construction as well as in the industrial segment. However, demand towards segments supporting the green transition continued to be robust.

This macro environment requires us to address these challenges by swiftly mitigating where we can, adjusting capacity to market demand and also utilizing our portfolio flexibility. Our efforts to strengthen robustness and competitiveness continues at full force with improvement efforts ahead of plan, freeing up cash where possible.

But while addressing the short-term volatility, we are also positioning ourselves towards expected growth in demand for low carbon aluminum in the longer term. Growing in the recycling is important to serve the market for green aluminum. And we have made good progress here also this quarter. As you will recall, on July 7, the share purchase for Alumetal SA was settled and synergies have been confirmed and under execution with a potential EBITDA uplift ranging from Hydro EUR 10 million to EUR 15 million by 2027.

We continue our strategic growth in exclusions with 3 new places added to our portfolio in China, Austria and Poland. [ Hydro Batteries ] in itself is strengthening demand for low carbon aluminum. The anticipated demand growth is also supported by regulatory developments. The EU Green deal is progressing at high pace with legislation overall supporting aluminum and renewable energy. However, the Norwegian state budget proposal presented on October 6th, introduced disappointing changes to important framework conditions for the industry as well as the power sector in Norway.

Finally, this morning, we were very pleased to announce that we have finalized the capital raise for Hydro REIN signing an agreement with Macquarie Asset Management to further develop and grow Hydro REIN Capital rise. This transaction marks a very important milestone for the execution of our strategy of growing in new renewable energy.

Hydro is responding to the short-term market uncertainties by adjusting to demand development and utilizing the flexibility we have in our portfolio, which we have developed over the last decade. In Aluminum Metals, we are benefiting from our casting flexibility, shifting volumes between product segments in order to avoid building inventories. We're also using the flexibility in our recycling system to mitigate short-term volatility and to keep inventories as low as possible. The same flexibility is also being used in our recycling system in Extrusions. And in Extrusions, we have also shifted extrusion capacity between product segments. This together with reducing production through reducing number of shifts and other manning reductions in Europe, ensures that we are maintaining margins despite large volume decreases.

The strong focus on inventory and capacity management has contributed to a year-to-date release of working capital are more than NOK 4 billion. In the medium term, we are constantly delivering and identifying new improvements, and I'm pleased to report also this quarter that both our improvement program and commercial ambitions are ahead of plan for 2023. Another way to secure robustness is strategic hedging, and we continue to lock in strong aluminum margins for up to 25% of our primary portfolio when the aluminum price allows it. And we currently have 440,000 tonnes hedged for 2024 at a level of USD 2,500 and 300,000 in 2025 at USD 2,400.

Speaking about robustness, this has been one of our main focus during the last year. We have made strong efforts in making Hydro a more robust and resilient company, which includes strong improvement drive, delivering billions on the bottom line and driving down our position on the cost curve. Locking in low-cost renewable energy for a large part of our portfolio until 2030 and even into 2040. Also improving our carbon footprint and increasing premiums through greener products, but then also allocating capital to strategic growth areas like high return, margin-based recycling and extrusion.

This increased resilience give us the room to maneuver and to handle the short-term challenges without losing sight of the long-term opportunities, progressing with [ determination ] on our strategic agenda. This quarter has included several milestones in our strategy execution and now also the partnership with Macquarie, which we announced this morning.

And now I will introduce the Executive Vice President of Hydro Energy, Arvid Moss, who shall now run you through the partnership with Macquarie and what it intakes for Hydro REIN's growth journey going forward. Please Arvid.

[Arvid Moss, executive]

Thank you, Hilde, and good morning, everyone. As we said, this transaction marks an important milestone for execution upon our strategy in growing in the new renewal entity. Today, I'm really proud to present a groundbreaking partnership. Hydro is joining forces with one of the largest energy renewable investors in the world Macquarie Asset Management to accelerate the exciting journey of Hydro REIN and the decarbonization that we're going to do in the industry with green power.

We have spent quite some time on this process, and we have spent the time well to find the right partner. Macquarie Asset Management and Hydro have worked together on renewable energy projects back since 2017, so we know each other quite well. And we share the drive to reduce industrial emissions. We need a highly confident Macquarie Asset Management that is focused on performance and profitability, and we believe that Macquarie with their financial and commercial strength and also their leading expertise now in renewables really much very well with Hydro's very confident organization in this area and that together we can accelerate our joint ambitions to decarbonize industries in a profitable way.

So a little bit to the transaction details. Through an investment of USD 332 million of acquired Asset Management will acquire 49.9% of Hydro REIN. Hydro without the remaining 50.1% and we will develop Hydro REIN together as a JV. This transaction values Hydro REIN at USD 333 million per 30th of June this year on an equity basis. With the capital from Macquarie Asset Management, Hydro REIN is expected to be self-funded in the medium term with no further equity injections from Hydro in the coming years.

The transaction is subject to standard regulatory approvals and transaction terms required by both sides. This includes several conditions present on both Hydro and Macquarie Asset Management, which needs to be satisfied, included related to funding of the transaction.

Subject to satisfaction, closing on the transaction is expected to come second quarter 2024. All Hydro REIN's assets are included in this deal with an exception of onshore wind projects located closer to Hydro smelters in Norway. And for example, the [indiscernible] industry craft that we announced in December last year, is the only current project of that time. And it differs also from other renewable projects in several ways. It's really very close to our smelter. It's intended directly to go to the smelter and use there for continuing the green aluminum production and for industrial companies in the region. It's very closely developed with aluminum metal and the local community and it's really something that we do together to really create the basis for a good development of the [indiscernible] going forward.

This project -- the [indiscernible] project is at an early development stage. If we get support from local municipalities, and we decide to move forward with this project, potential capital spending will come towards the end of this decade. Now let's move to where we are with Hydro REIN after 3 years of growth. The ambition of Hydro REIN is to become a preferred supplier of renewable energy solutions through our industrial customer base with Brazil and Nordics as our core markets. We have 2 business segments in REIN renewable energy, which is a big majority, and we have energy solutions. And we have already made significant progress with 4 wind and solar projects in construction for a total of 1.7 gigawatts and if you include the project we started in Brazil, it's actually 2.6 gigawatts gross. This is a significant pipeline, and we see also that we have a long pipeline of projects that we can work on over the next years, particularly in the Nordics.

The 3 projects we have in construction in Brazil, together we have 1 project in Brazil that we actually are doing together with Macquarie and that is the [indiscernible] project. Altogether, in the 4 projects, we have now 4,000 people working on the sites. And when it comes to the Capital Markets Day, we will give more insight on where we are on this project. And in Sweden, actually, in [indiscernible], we have already started production from the first turbines and all turbines are expected to be in operation by year-end. So things are moving forward.

Energy Solutions is gaining pace. This is a less mature market. We have a growing number of energy storage and efficiency projects in construction and operation across Norway, Sweden and Germany, including a total of 8 battery projects. But as we see going forward now, this with energy efficiency and also inside defense solutions will be more important. This is how we are building up Hydro REIN step by step.

Let me also share with you a little bit update compared to what we said on the Capital Markets Day last year and where we are now. Last year, we communicated the 2026 targets as that we should have a 3 gigawatt gross portfolio in operation and construction in 2026. We had an ambition to add more than 500 megawatts annually gross capacity and that the 4 projects that we have in construction should give an estimated EBITDA between NOK 400 million and NOK 450 million when they were in operations.

So where are we now? As of Q3 2023, we have the 1.7 in operation and construction. We have added 1.5 gigawatts total in the pipeline over the last 12 months. We are estimating to spend approximately NOK 3 billion locked in equity. CapEx in these projects that we have in construction. And we have estimated now the contribution from these 4 projects to be between -- around NOK 410 million annually. So we are on track.

So where do we see this business going forward? This is a business where we think we can deliver good returns for our investors. We are targeting an equity interim rate of return of 10% to 20% annually for the whole REIN platform value going forward. And as I said, the value creation starts with thorough screening, identifying attractive assets where we can utilize our core strengths. And both Hydro and Macquarie have strong record from scaling projects and businesses, which is a clear advantage in growing renewable energy markets. And we will capitalize on synergies both across projects and operations. And we will lever on our competence when it comes to also the market side, and I think that we have a special good relation now to really develop industrial partnerships with industrial customers.

And that brings me to the PPAs. I think we have shared this more with you also earlier, but we target with the rate to have 60% to 70% PPA coverage. And here on this page, you can see an overview of the current PPAs and the coverage we have and also going forward, we want to secure that our projects are, let's say, well linked to PPA so that we can take down risk and create a good foundation for also debt financing. But let me also show how this works with Hydro's rest of the activity. Hydro's Captive Power and PPA strategy ensure robustness and contribute to place Hydro at the lower end of the cost curve of primary [ eliminate serves ] as you see on the figure to debt. As important, it enables us to produce aluminum in Norway with a low carbon footprint and less -- 75% less than the global average, but also in Brazil, we have enabled through REIN, the fuel switch [ EL-boilers ] at Alunorte, and that will take down the CO2 emissions substantially.

But as you see to the right there now, we are facing a new round of sourcing for upstream individual, and that is really one of the thoughts behind REIN when we established this 3 years back in time because, one, we saw the value potential in renewables. We also saw that we need to take an active owner road to make things happen at speed and with the right quality throughout the life cycle. And we see that REIN can contribute with risk mitigation for Hydro in a challenging energy market, and we also see that we create a long-term cost advantage for both [indiscernible] and metal. So there are 4 reasons why we think this is really a good value proposition for Hydro.

And it is important to recognize that getting to profitable build decisions have become more challenging in most countries, being able to be a good developer and owner has become more important. Staying in just not flip and sell has become more important. And here, Hydro REIN can really benefit from Hydro's long transition in many local societies around the world.

So these days going out and just pick up PPA is not as easy as before for industrial customers, but with Hydro REIN in the family, we can really build values in both ends, both as a renewable producer and industrial consumer and in between optimizing on an [ older ] basis in the markets. With Hydro as a very large consumer will source some several [ surprise ]. So it will not only be from REIN and vice versa. HYDRO REIN will also support other industrial customers with power supply and other energy solutions. But I think that the strong industrial approach in Hydro REIN makes it a very good match for the rest of the Hydro family.

So to summarize, with Macquarie Asset Management coming in as a co-owner in Hydro REIN, the company is uniquely positioned for long-term value creation. Hydro REIN aim is to become the preferred supplier of renewable energy for industrial clients in its core markets. The company has already shown to be a key enabler for decarbonization of Hydro and more industrial customers will follow. We have established a strong presence in Brazil. But going forward, the company will focus on growing in the Nordics and selected markets in Europe. And with the Hydro's strong industrial presence in Europe and Macquarie as a partner, Hydro REIN is an excellent position to grow further. And with that, we'll have to understand together with Macquarie, we really have got a partner that will help us also to drive performance and profitability through the setup, and I really look forward to deliver also good results going forward from Hydro REIN.

So with that, I'll leave it back to you, Hilde.

[Hilde Aasheim, executive]

Thank you, Arvid, and then I continue my strategic update. The green transition is progressing with full force. Towards 2030, we expect strong growth in demand for aluminum as an enabler for the transition toward electrical vehicles and renewable energy and infrastructure supporting electrification. In the Automotive segment, the shift towards electrical vehicles is accompanied by a new and rapidly growing value chain being established within our core markets.

For solutions, it's exciting to see the average use of aluminum profiles [ had caught ] is expected to increase from 50 kilos in a fossil fuel car to up to 40 kilos in an electrical vehicle. That's an exponential growth. Likewise, broader adoption of new production method for structural components such as [indiscernible] will strengthen demand for [indiscernible]. We are seeing significant deployment of solar capacity in several regions driving demand for aluminum frames and mounting structures.

Looking forward, we anticipate aluminum demand in the solar segment in the EU alone to grow by some 15% to 20% annually towards 2030. However, what is becoming increasingly evident is that the most ambitious players in the market are now looking beyond aluminum's material properties. Carbon content, nature impact and social profile of the manufacturer are becoming increasingly important. The past few years, Hydro has entered into strategic partnerships with a range of ambitious companies. End consumers, society at large and regulators are becoming increasingly focused on the full value chain emissions in the products that enter the market. Customers are turning to the materials market to find providers who not only can deliver aluminum with the lowest possible emission today, but also to have credible pathway towards the ultimate target zero.

We have recently spoken a lot about our automotive partnerships where ambitious players like Mercedes-Benz, Polestar and Porsche are teamed up with Hydro to decarbonize their future vehicle production. These are exciting companies to work with. These partnerships represents a new business model where the traditional supplier purchasing relationship has evolved into a strategic operation on common objectives. However, 3 pioneers do not make a movement. Hydro has also partnered with smaller yet equally pioneering companies who are aiming to transform their markets with low and ultimately zero carbon products. And for Hydro, this results in a growing share of earnings from greener products. All that we sell in terms of REDUXA and [indiscernible], we get the premium.

In extrusion, we are growing with the market. This quarter, we have opened 3 new prices in Suzhou in China, in Trzcianka in Poland and in Nenzing in Austria, strengthening our portfolio of state-of-the-art extrusion capacity supporting important segments like automotive, electrical vehicles and building and construction. The growth agenda in extrusion is focused on growing with high-growth market segments, supported by the green transition like automotive and solar.

We are growing, but also lifting margins on the portfolio as a whole. This is enabled by our product quality and on-time delivery, but also via growing greener product offering as our customers are increasing their demand for low carbon content. To give you one example, this has resulted in an increasing share of long-term contracts with automotive customers. And over the last quarters, we have generated more than 2 billion [indiscernible] multiyear contracts with premium car producers, increasing our marginal business in the coming years.

As industries and application mature, customers are also demand more developed solutions rather than commodities. Here Hydro extrusion is at the forefront with value-added offerings and new R&D-driven solutions developed together with the customers. Lastly, having the size and the geographical coverage and advanced capabilities to be relevant in different segments is key to success and our extrusion business is uniquely positioned here as a global leader. So despite falling markets, Hydro extrusions continued to display margin robustness through portfolio development, dedicated improvement efforts and strong margin management, and we continue to work towards mitigating following short-term market.

Recycling is another important part of our ambition of strengthening our position in low-carbon aluminum. In the current market environment, recycling margins are under pressure. As premiums are falling more than the [ scrap ] price. In response, we will continue to focus on growing the share of post-consumer scrap and turn the PCS into low-carbon, high-quality products sold at a premium pricing making our margins more robust. Our strategy for growth in recycling, therefore, includes increasing PCS usage by around 0.5 million tonnes by 2027 compared to 2020 with an estimated run rate out of 2023 was 60%. This contributes to our NOK 3.5 billion EBITDA target from recycling in 2027 and achievements until end of this year, implies an additional NOK 1.3 billion EBITDA uplift on normalized margins compared to 2020.

This quarter, we opened a New HyForge casting line in Rackwitz in Germany, increasing our capacity to serve the automotive industry with low carbon, recycled aluminum based on post-consumer scrap. This investment is a direct response to the automotive industry's increasing demand for low carbon aluminum components. But we're also growing for our American automotive customers. And our new recycling plants in Cassopolis in Michigan is progressing according to plan. The first metal expected by early November this year. We expect the ramp-up of the plant to extend into Q1, being fully operational by the second quarter next year.

Finally, the acquisition of Alumetal, which was finalized this summer, is an important step in strengthening user's position based on the other recycling space. The acquisition of Alumetal strengthens Hydro's recycling position in the European market and while our product offering in the low carbon and scrap-based from other markets. Alumetal, will add 275,000 tonnes of recycled capacity to our portfolio, of which 150,000 tonnes are based on possible super scrap, strengthening our position as the leading aluminum recycler in Europe.

Very close partnership with the automotive industry, representing 80% of their customer base, combined with their expertise and capacity in scrap sourcing, sorting and recycling is a perfect match for Hydro. Utilizing Alumetal's, metal and casting capabilities we'll expand Hydro's [ green ] product range and capture market volumes and margins. To support these ambitions, we announced an investment of approximately NOK 200 million in modernizing and expanding the Alumetal plant in Kety in Poland.

Adding around 30,000 tonnes of foundry alloys capacity, further enhancing our presence in the automotive market. The integration process is well underway now, and we are addressing 5 main synergy clusters targeting EUR 10 million to EUR 15 million in annual synergies towards 2027. In addition to the investment in the Hydro Kety plant, some of the potentials identified are: first of all, to utilize excess melting and casting capacity, which can be used to produce recycled ingot without additional investments Hydro purchased externally at higher cost today to be used at our Norwegian smelters to improve the carbon footprint and final offering to our customers.

We also see opportunities for Alumetal to replace third-party dross handling, improving metal yield and retaining a margin in the internal value chain. We also see opportunities leveraging user's experience in selling green products to automotive customers willing to pay for a CO2 reduction. And we also see opportunities combining now Alumetal's state-of-the-art sorting line with Hydro's advanced LIBS sorting technology. But moving forward, we will continue to actively identify additional synergy initiatives with this acquisition.

Let me also give an update on our decarbonization road map. I'm happy to report that we are well on track to deliver on our commitment of reducing greenhouse gas emissions by 30% by 2030. Our ultimate target is zero and every step toward zero counts in our long value chain. As we have said before, the most important initiative for the 30% reduction by 2030 is the fuel switch in Alumetal. Replacing heavy fuel load with natural gas, not overly reduced emissions, it also delivers a USD 160 million annual cost improvement effect.

First gas is expected to be delivered by the end of this year, and all assets are expected to be converted by the first half of 2024. Representatives from IBNA team recently visited Singapore to inspect the retrofitting of the FSRU, and they confirm that the ship is on track, the dock in Barcarena at the end of the year. The second key area in the compensation program is to get the carbon out of our electrolysis process. And here, we are pursuing 2 paths. The first is carbon capture and storage, where we are making good progress in our test program for the capture solution supported by our technology partner [ REDUXA ]. The test installation has been built at our plant in [indiscernible] where the work is ongoing now to prepare the off-gas for capture. Hopefully, we should be able to confirm that we are able to capture CO2 from our low CO2 concentration of gases by the end of this year. That will be a major milestone on the path towards industrializing the full process towards 2030.

The second technology part is our [indiscernible] program. I recently visit our technology center in [indiscernible], where they up to now have been testing the technology at large scale. We are now preparing to build a test facility to test the different steps in the process in a combined way. The ambition is to bring the technology to an industrial private stage demonstration within 2030.

Finally, our partner CEO needs to decarbonize all of our cast houses and here, we are testing several alternative fuels. In June, Hydro [indiscernible] and Extrusion casted the first batch of aluminum in the aluminum industry using green hydrogen as a fuel source. In August, aluminum metal started electro-intensive [indiscernible] to collaborate on using Biomethane to replace natural gas at the [indiscernible] and annual production. Having the whole value chain under one roof and being able to go to market with full value transparency also caters for exciting new commercial opportunities, such as REDUXA 3.0 partnership with Mercedes.

In December last year, you will know that we announced that we have entered a long-term strategic partnership with Mercedes-Benz. Together, we aim to develop aluminum solutions approved for the automotive applications with the CO2 footprint below 3-kilo per kilo aluminum. And I should remind that the industry average is between 16 and 17. And to approach the partnership is also to work together to approach new zero solutions within 2030. In April, this first -- this year, the first shipment of the REDUXA 3.0 left [indiscernible] and we are now making regular deliveries of this unique product.

REDUXA 3.0 is an example of how technologies from Hydro together with technologies from Mercedes collaborated to accelerate the reduction in carbon content, while at the same time, meeting the product specifications. However, this partnership also extends [indiscernible] carbon. We entered into the partnership. I've said this very clear that they have high expectation also to have our conduct -- to how we conduct our business. And I was very proud in June analyst invited to [indiscernible] to receive their prestigious Supplier Award in the sustainability category in front of 400 of their most important suppliers. This is an acknowledgment of the effort that we have been doing over years, but also an important reminder that in today's world doing both beyond low carbon.

Leading the way in terms of carbon emissions is only part of the equation. To be a sustainability leader, we need to deliver on the expectations from all stakeholders in terms of climate, nature and social responsibility at the same time. Materials are made with the footprint. Our objective is to eliminate our carbon footprint, minimize our footprint on nature and extend our social footprint. Nature is becoming even more important on the global sustainability agenda. The expectation now is to regenerate rather than just extracting from a planet that is at the tipping point. Minimizing our footprint on nature has been high on agenda for a long time, and we will present updated ambitions on this at our Capital Markets Day in November. But the societal impact becomes more and more important. Being the positive force in the communities where we operate is simply our license to operate.

I would say that Hydro has since -- we were founded, always fostered a close relationship with the communities around our plant. The philosophy was that what happened outside the fence had a strong impact on performance inside events. Investing in society has been a priority for Hydro since day 1. And Hydro is determined to contribute to economic and social development in all communities where we operate with a social ambition to improve the lives and livelihoods where we operate. This goes for all locations in Hydro. But naturally, due to socioeconomic factors, the largest and most visible effort are made in Brazil.

Here, we have more than 10 community development programs in the state of Para. The program range from education and skills to quality of life and biodiversity. And this is an important part of our license to operate in the region. This is also why we have supported and contributed to the type of program. Helps our community centers providing underdeveloped counties a combination of basic health services and services target are providing opportunities for use in the community. We have now decided to support the next phase of this project with a one-off investment of NOK 500 million over the next 3 years.

Bringing the TerPaz to Barcarena, Paragominas and 4 other communities along our low 240 bauxite pipeline. We are convinced that this concept is a good match with our ambition of being a good neighbor and well aligned with our social ambition of improving the lives and livelihood of where we operate. On the regulatory side, the EU policy is contributing favorably to low carbon and ultimately zero carbon aluminum, a space where Hydro is well positioned. EU is now identifying aluminum as a critical raw material, recognizing EU's important import dependency and the criticality of this material in the green transition.

Likewise, the EU is tightening the screw when it comes to sustainability requirements through legislation like the corporate sustainability and due diligence and also green claims. These policies support Hydro's focus on value chain transparency and carbon footprint, positioning Hydro favorably as a front runner among peers. Another regulation is end-of-life vehicle regulation, which is set to shape the market for recycling of cars, again supporting Hydro's recycling agenda.

And finally, increased EU targets for renewable energy production contributes both to secure competitive energy prices for Hydro's operations as well as being a driver on the aluminum demand side from the renewable segment. All this support contributes favorably. But unfortunately, I would also like to mention the current implementation regulation for CBAM which is designed to support European industry's competitiveness against regions with less ambitious climate policies. But this new regulation assigned zero emissions to remelted process scrap when imported to the EU as an aluminum billet or product. And this creates a loophole in the CBAM, where aluminum products made from high-carbon process scrap completely avoid CBAM cost, putting European low-carbon aluminum at a competitive disadvantage. We strongly disagree with this definition because it undermines the intention behind CBAM. And here, we will continue to be vocal and push for closing this screen washing loophole in CBAM.

And with that, I will end my presentation and hand over the Pal Kildemo to our CFO, Pal Kildemo, for the financial update.

[Pål Kildemo, executive]

Thank you, Hilda, and a very good morning from my side also. In the third quarter of 2023, economic growth chased hurdles due to rapid monetary tightening pressuring household spending and also business investments. This also impacts the global aluminum markets where the development has been further deteriorating since we reported our second quarter results, with demand expectations for primary aluminum further declining year-over-year.

For the third quarter, external sources estimate the total surplus for 2023 to be between 0.7 million and 1.2 million tonnes. Harbor estimated surplus in both World ex China and China. While CRU estimates a global surplus in world ex China of 1.3 million, but a deficit in China of 600,000 tonnes. And it is in China, that contrary to the lack of convention, we have seen demand performing stronger than expected, driven by strong demand in the renewables and electrical vehicle segments. While Building & Construction has been struggling for some time now in China, the boom in solar production has led to a strong increase in demand.

China has installed a record number of solar panels this year, 100 gigawatts as applying while at the same time, exporting a lot of panels to other regions, for instance, Europe, which further increases demand within China. Other green transition sectors have also contributed to a fairly strong demand situation like electrical vehicle production, ultra-high voltage cable installations and also higher speed train constructions.

If we then move downstream, then extrusion demand remained challenging in both Europe and North America in the third quarter. European demand for extrusions in the third quarter decreased by 20% compared to the same quarter last year and 21% compared to the second quarter for 2023, but this is largely driven by seasonality. Demand for residential building and construction and industrial segments have remained weak in the third quarter, impacted by macro factors, including weak industrial sentiment and activity. Demand for automotive remains the bright spot supported by increased share of electrical vehicles as share of total auto registrations. CRU estimates that European demand for extruded products will decrease by 17% in 2023 compared to 2022, mainly driven by the continued softness in building and construction and industrial segments. And if we look into 2024, the expectations is for flat year-on-year growth compared to 2023 with the same overarching trends. Year-over-year declines in Q1 and Q2 and then a pickup in Q3 and Q4.

As we move over to North America, extrusion demand is estimated to have decreased 17% during the third quarter compared to the same quarter last year and 6% compared to the second quarter '23. Also here, demand continues to be weak in the residential building and construction and industrial segments, and automotive build rates have also recently slowed and could be further impacted into the fourth quarter by the continuation of the United Auto Workers strike. Moreover, constrained consumer spending may pressure automotive demand going forward. However, total auto sales and productions are still below pre-COVID levels.

CRU estimates that in North American demand for extruded products will decrease 6% in the fourth quarter of '23 compared to the same quarter last year, mainly due to continued weak development in [indiscernible] and industrials. Overall, extrusion demand is estimated to decrease by 13% in '23 compared to '22, and if we look into '24, then the expectation is for a slight increase in demand of around 1% compared to 2023, and we expect demand increase in North America next year across all segments, but with electrical and building and construction being the strongest.

Also here, Q1 and Q2 are expected to decline year-over-year and the pickup to materialize from Q3. If we look at our volumes, then Hydro extrusion saw a 14% decrease in sales volumes compared to the third quarter of '22. Also for us, sales are still weak in building and construction, distribution and industrial segments, but [indiscernible] has shown growth for the third quarter on average. Automotive segment developed side words for extrusions Europe, while extrusions in North America has seen a negative development versus last year.

For the fourth quarter of 2023, we expect slightly lower volume development in our North American extrusion business, than the market in general, but largely in line with the market in Europe. So for total in 2023, we estimate to be roughly in line with overall market in both Europe and North America. For 2024, we are targeting market share growth in both Europe and North America, and this is partly driven by new capacity ramping up, particularly in the EU market.

Let's then dive into the detailed results. When we're looking at the results and developments for Q3 versus Q2, we saw a significant decline in adjusted EBITDA of NOK 3.2 billion. Results are negatively impacted by NOK 1.1 billion in lower realized aluminum and alumina prices and 900 million due to lower executions and recycling volumes and also recycling margins, as well as 400 million due to lower energy prices and volumes.

We had a net negative currency effect of around 300 million compared to the second quarter. Extrusion margins have remained stable during the quarter. And on the positive side, we saw a decline in raw material costs, contributing with 600 million in bauxite and alumina and aluminum metal in total. Furthermore, our results were negatively impacted by the one-off provision for donations supporting our long-term social ambitions in Brazil of around 500 million, as well as reduced CO2 compensation as a result of recently announced Norwegian state budget, amounting to a negative 800 million quarter-over-quarter.

If we then move to the key financials, when compared with the last quarter, we saw a decline in revenue of 15% to NOK 44.7 billion for the third quarter. And compared with the second quarter this year, we saw a 17% decrease driven by overall lower sales prices and volumes and also negative currency effects. For the quarter, there was around NOK 1.9 billion FX adjusted out of EBITDA which includes mainly unrealized derivative effects from the higher LME price at the end of the quarter, impacting our strategic hedging positions of around NOK 2 billion, resulting in an adjusted EBITDA of NOK 3.9 billion.

Moving on, we recorded adjusted depreciation and amortization of around NOK 2.3 billion in the quarter, which ends up in an adjusted EBIT of NOK 1.6 billion. Financial income of NOK 378 million for the third quarter includes NOK 538 million in a ForEx gain, primarily reflecting a gain from a stronger NOK versus euro affecting energy contracts and liabilities, but partly offset by a loss from a weaker BRL versus dollar, negatively impacting dollar borrowing in Brazilian entities.

Then we have an income tax expense for the quarter, amounting to NOK 680 million, which exceeds the period's income before tax and the quarter was mainly impacted by power surtax due to production increase, but also losses in Brazil, where our deferred tax assets are not recognized. Overall, this provides a negative net income of NOK 625 million, down from NOK 6.7 billion in the same quarter last year and down from NOK 5.1 billion in the second quarter. Adjusted net income was NOK 345 million positive, which resulted in an adjusted EPS of NOK 0.27 per share.

Let's then move to the business areas, starting with bauxite alumina. Adjusted EBITDA for Bauxite & Alumina decreased from NOK 633 million in Q3 '22 to NOK 93 million in Q3 '23, which is driven by the provision for donations to build 6 piece houses in the state of Para. This will be done over the next 3 years, but it's recognized as a one-off in the third quarter. The results were also impacted by lower alumina price and stronger BRL against dollars, which was partly offset by lower raw material costs, mainly energy.

Compared to the second quarter of '23, the adjusted EBITDA decreased from NOK 817 million, impacted by the same [ donations ] and in addition, realized alumina sales prices declined 6% compared to last quarter and the stronger BRL contributed negative. This was partly offset by around NOK 250 million lower raw material costs which is slightly less than we guided for as fuel oil prices have increased during the quarter.

Fixed costs also increased compared to the second quarter, but this was lower than what we guided for and in total around 100 million, which was also positively impacted by tax credits in the quarter. Alunorte production came out slightly lower than expected due to the power outage in Brazil earlier this quarter. For the fourth quarter, Alunorte is expected to be around nameplate capacity and we expect continued lower raw material prices, which gives a cost release of around NOK 150 million with caustic contributing positively, both bauxite and energy costs pulling down also much impacted by the higher fuel oil prices, which we are experiencing at the moment.

The current dollar BRL rate should also impact our results positively if it remains at the spot level of today. Fixed and other costs are expected to increase around NOK 300 million in the fourth quarter due to planned and delayed maintenance, which was supposed to come in Q3 and the TerPaz provision will, of course, not impact Q4.

If we move on to aluminum metal, then this quarter's adjusted EBITDA decreased from NOK 6.5 billion in the third quarter last year to NOK 1.4 billion this quarter. The decrease is mainly driven by lower oil and metal prices with both LME and premiums under pressure, reduced CO2 compensation as well as lower contribution from power sales. The decline was partially offset by lower alumina and carbon costs and also positive currency effects.

The CO2 compensation effect year-over-year is amounting to a negative NOK 1.7 billion. Last year, we had a positive catch-up effect following changes then introduced for the 2023 national state budget, given the net CO2 compensation of NOK 1.9 billion for the third quarter in '22 in total, whereof NOK 1.4 billion was driven by the catch-up from introduced changes. This year, as a result of the national state budget proposal for 2024, introducing an increased price low, the negative effect for Q1 through Q3 this year, is recognized in the third quarter, giving a net CO2 compensation in the quarter of NOK 200 million.

Compared to the second quarter of 2023, adjusted EBITDA for Aluminum metal decreased from NOK 3.2 billion due to lower oil and metal prices, reduce CO2 compensation of approximately NOK 750 million, lower contribution from power sales of another NOK 570 million as well as negative currency effects. This was partly offset by lower raw material costs of NOK 350 million, where both alumina and carbon contributed positively. This was also slightly lower than guided, but with the current market development and due to the different inherent lags and contract structures in aluminum metal, we expect a continued cost realization coming into the next quarter.

On the flip side, fixed costs were stable, slightly lower than expected as more activity has been moved into the fourth quarter, resulting in total cost developments being in line with the guidance. Aluminum metal also had around NOK 100 million in provisions at Albras related to the multiyear social donations, which we will not carry with us in EBITDA going forward. And that brings us over to the guiding for the next quarter. We continue to see pressure on both LME and especially value-added premiums for the coming quarter.

For the fourth quarter, aluminum metal has dropped around 69% of primary production at the price of $2,084 per ton. Furthermore, we have booked 49% of the premiums effect in Q3 at $422 per tonne, and we expect the range for Q4 realized premiums between $325 and $375 per tonne.

With respect to the CO2 compensation, our guidance is changing due to the new floor price introduced by the Norwegian government, and we see our quarterly initial guidance decreased by NOK 250 million to a level of NOK 550 million to NOK 650 million per quarter. We also expect further reduction in raw material costs of around NOK 400 million to NOK 500 million. Again, mainly driven by carbon and alumina. However, this is partly offset by increased fixed costs of around NOK 150 million, so overall, we expect a net reduction in costs of around NOK 250 million to NOK 350 million.

We do not foresee any restart of the curtailed volumes coming next quarter. And as the buyback contract between aluminum metal and energy was finalized in Q3, the remaining long power position of aluminum metal of around 400-megawatt hours will be sold in spot. This means that the next quarter power sales will be dependent on the energy price level in NO2 and basing this on the current NO2 price of around NOK 700 per megawatt hour, the power sale is estimated at approximately NOK 300 million for next quarter, which is a relatively flat development Q-o-Q.

Adjusted EBITDA for metal markets increased in the third quarter from NOK 534 million last year to NOK 568 million. And this is mainly driven by positive contributions from sourcing and trading activities, partly offset by lower results from recyclers and negative inventory valuation and currency effects. If we excluded the currency and inventory valuation effects, the results for the quarter was NOK 566 million, up from NOK 398 million in Q3 '22. And if we compare the results to the second quarter of '23, then adjusted EBITDA for Metal Markets increased form NOK 334 million, mainly due to increased results from sourcing and trading activities.

For the business unit recycling, lower sales and weakening sales premiums for fuel price business was partially offset by reduced scrap prices and also lower energy costs. The outlook for the next quarter is, as always, characterized by volatile trading results and also currency effects. We expect challenging markets ahead with potential for further curtailment in the recycler and we also see premiums continue to decline, driven by the softer market and deteriorating economic conditions. We expect a lower, but still positive contribution from sourcing and trading activities for the next quarter. And I would also like to remind you that our guiding for full year EBITDA of NOK 1.3 billion to NOK 1.5 billion does not include the volatile inventory valuation and currency effects. And that previous guidance did not include Alumetal acquisition. So this will come on top of that.

And as of Q3, the year-to-date adjusted EBITDA, excluding currency and inventory valuation effects, is NOK 1.4 billion, and the full year guidance is NOK 1.5 billion to NOK 1.7 billion, depending unlocked on development in sourcing and trading results. In extrusions, the adjusted EBITDA is slightly lower compared to the same quarter last year. Lower sales volumes and higher costs were close to offset by higher sales margin and positive currency effects. Despite weaker markets, we see that extrusions continue to strengthen margins on a favorable product mix. In addition, the results for the third quarter was influenced by positive metal effects and a NOK 80 million one-off effect, which in total gives special effects of NOK 250 million.

If we compare this to the second quarter, the adjusted EBITDA decreased due to lower sales volumes partly compensated by lower fixed costs. When we look into the fourth quarter, we should look towards the same quarter last year to capture the seasonal development in extrusion. And compared to last year, we continue to expect higher extrusion and fabrication margins and positive currency effects. On the other side, we expect continued market uncertainty, soft extrusion markets in Europe and North America, which results in lower sales volumes compared to last year. Destocking, increased price pressure, automotive strikes in U.S. and weak demand in most happening globally are expected to impact added value services and fabrication activities more in Q4 than what we have experienced earlier in the year.

Also here, remelt margins are under increasing pressure. So if we combine this with higher fixed and variable costs, we expect this to more than offset the positive margin development that we're seeing in the fourth quarter. And we also expect around NOK 50 million to NOK 100 million lower year-on-year metal effect than what we had in Q3. So if you sum that all together, we expect a year-over-year development, which is similar to as we saw between Q3 last year and Q3 this year when adjusting for the NOK 250 million [indiscernible].

The final business area is energy, where the adjusted EBITDA for the third quarter increased to NOK 762 million compared to NOK 275 million same quarter last year. The main drivers behind the stronger results were higher production of 900 gigawatt hours, resulting in a slight positive net [indiscernible]. Those effects were offset mainly by lower prices and NOK 2.1 billion lower gain on area price differences. Compared to the second quarter, adjusted EBITDA decreased by NOK 92 million from NOK 854 million, mainly due to lower production, lower prices and NOK 200 million in lower price area differences partly offset by reduced loss on the buyback contracted aluminum metal on lower volume and price, amounting to a positive NOK 330 million quarter-over-quarter.

In the third quarter, external power sourcing models were affected by a disruptive delivery of volume from a long-term power purchase agreement in the northern part of the [ Alunorte ] area, and the nondelivered volumes were 0.2 terawatts in the quarter, amounting to 0.8 terawatt hours a year-to-date. If we then look into Q4, the price and volume uncertainty is, as always, large and production and prices will depend on hydrological conditions. Power prices in Southern Scandinavia are expecting and are increasing with seasonality into the winter. However, the above normal hydrological balance and also some nuclear capacity coming back online from maintenance might limit the upside.

Furthermore, we foresee somewhat lower gains from the NO2, NO3 spread differential. And at current spot prices, the estimate negative delta Q-on-Q is approximately NOK 50 million to NOK 100 million of that will move with spot prices. In addition, there will be no more losses on the aluminum metal buyback contract as the contract was finalized in September. When it comes to the developments in net debt, it increased by NOK 2.6 billion from the second quarter, driven mainly by NOK 7.5 billion in investments. If we based on the starting point of NOK 11.3 billion in net debt from Q2, the positive contributions for third quarters where the NOK 3.9 billion in adjusted EBITDA as well as a total release of net operating capital of NOK 2.3 billion. While investments are increasing from a cash perspective, it is good to be able to free up operating capital, and we see -- have seen continued good improvements in the work being done here during the quarter.

Improvements are mainly coming on the inventory side due to both lower raw material prices and a mix of lower price and volumes in extrusion. Part of the release is also driven by the change in CO2 compensation scheme, reducing accruals by around NOK 0.5 billion. Net investments were NOK 7.5 billion, and the largest share here was related to Alumetal of NOK 3.3 and furthermore, we had further investments of NOK 2.7 billion upstream, NOK 1 billion in recycling and exclusion and NOK 600 million in energy.

As a result, we had a negative free cash flow from operations of NOK 1.4 billion in Q3 and furthermore, we have also finalized last year's share buyback program by repurchasing NOK 700 million worth of shares from the Norwegian state, representing the state's proportional ownership, which have been rebalanced. We have also started our new NOK 2 billion buyback program, which we got approved at our Annual General Meeting in May. We also had a negative NOK 0.5 billion in other, mainly resulting from the acquisition of Alumetal, which impacted net debt by a negative NOK 700 million and also lease expenses, partly offset by currency and NOK 0.4 billion of cash put on escrow accounts, which impacts adjusted net debt for the decarbonization investments in Brazil, which I mentioned last quarter.

If we then move to adjusted net debt, we start by adjusting for the following items. At LME prices increased quite a lot during the quarter. Our collateral increased by around NOK 0.9 billion, and together with cash on escrow accounts just mentioned, this results in NOK 1.6 billion in [indiscernible], up from NOK 1.4 billion from last quarter. With the current market environment, that will have been more than reversed. Pension decreased NOK 0.5 billion, NOK 0.3 billion, driven by long-term adjustments in Norway, partially offset by higher long-term interest in Germany. And finally, we have NOK 5.2 billion in other liabilities which are stable from last quarter. With these adjustments, we end up with an adjusted net debt position of NOK 20.4 billion at the end of the quarter.

And with that, I would like to give the word back to Hilde.

[Hilde Aasheim, executive]

Thank you, Paul. Let me then finish off with some final reflections on our priorities going forward. The health and safety of our people is our utmost priority. Last week's tragic fatalities are a stark reminder of how important this is. We are in the midst of a more unpredictable and volatile macro environment, but we are addressing this forcefully, meeting the weak to market with firm measures and a more robust and resilient portfolio following the strategic measures undertaking the latter years.

At the same time, we are not losing sight of the long-term opportunities for low-carbon aluminum. Every day, we see potential for further value creation in this space as our customers' appetite for green and aluminum at premium prices continues to grow. To meet this demand, we are determined to push forward and deliver on our growth ambitions for recycling and extrusions all while advancing our renewable energy portfolio now also with the investment from Macquarie supporting our decarbonization agenda.

And with that said, thank you, and over to you, Martina.

[Operator]

Thank you so much, Hilde, Paul and Arvid, then we are ready for our Q&A session. I see we already have several questions in the chat, so I will start by reading us these out loud. The first one, we have from [indiscernible] regarding REIN. You indicate no further equity injections from Hydro in REIN. How much have you injected so far?

[Pål Kildemo, executive]

So far, we have injected around NOK 3.1 billion in equity into Hydro REIN as of H1 2023.

[Operator]

And then we have a second question from [indiscernible]. Do you see any risks around possible further changes to Norway's CO2 compensation scheme in coming years?

[Hilde Aasheim, executive]

We obviously have work to do in terms of, let's say, supporting the -- or explaining the [indiscernible] of the CO2 compensation scheme as a way of securing the competitiveness of our industry in Europe, where we don't have a fair level playing field. And that is a dialogue that we now -- will have with the government in terms of avoiding that we get further reductions.

[Operator]

And then we have a question from [indiscernible] regarding [indiscernible]. Can you provide an update on the stake sale and how this will impact the balance sheet from a year-end and capital return perspective, both in cash in and reduction liabilities.

[Pål Kildemo, executive]

Yes. So at the moment, we are awaiting competition approvals to be able to go ahead [Audio Gap] with the transaction. When those are received, we will receive the payment [Audio Gap] which has been announced that will impact our positive balance sheet quite positively around the tune of NOK 8 billion [Audio Gap] with the current currencies. And what we stated is that this goes into the annual dividend discussion, which has a targeted balance sheet structure of NOK 25 billion adjusted net debt at the end of the year when accounting for dividend in a given year.

[Operator]

And then we have a question from [indiscernible] from RBC. Despite aluminum price spiking in the year-end, there was a working capital release of NOK 2.3 billion. Can you please provide some color on this and expectations for quarter 4?

[Pål Kildemo, executive]

Of course, as we have discussed earlier, we had a somewhat too high inventory situation coming out of 2022 and we have been working structurally to try and build this down. Building down inventories is not easier while markets are falling, but there is full focus in both the exclusion and the aluminum metal on this which resulted in a quite significant release for the quarter. And if you look at the year as whole, we started our initial guidance on NOK 4 billion in release. We took it down to NOK 2 billion, given the pricing we saw at the start of the year. Now you will see that we are right north of NOK 4 billion, where around NOK 0.5 billion of it comes from the CO2 changes. And we expect this now to be more flattish towards the end of the year. Given that there is still risk given the uncertain market environment. But that's how we're seeing things now, flat working capital development in Q4.

[Operator]

And then we have another question from [indiscernible]. There were 2 fatalities reported recently. Where are the key safety gaps in your view? And what are the steps taken to fix these gaps.

[Hilde Aasheim, executive]

Well, obviously, we are devastated by the 2 fatalities that we experienced last week. Now our focus is to get the thorough investigations of what happened in order to learn, and we have our best people in the investigation teams ongoing as we speak in Qatar as well as in Brazil, and we'll be happy to report on that when we have the investigations done in order for us to learn and to mitigate that this would not happen again. But it's too early, and I don't want to speculate on the causes of the fatalities at this point.

[Operator]

And then my the last question from [indiscernible]. Aluminum unit costs have remained flat quarter-over-quarter despite realized prices coming down by roughly $130 per ton. Quarter 4 cost reduction guidance looks like as well. Are there any lag effects of lower costs? And what are the key cost pressures?

[Pål Kildemo, executive]

There is definitely a lag effect on the cost side, and we released that a bit less in Q3 than what we had estimated on the raw material side, but then we spent less fixed cost than planned. So in total, our cost release for the quarter was pretty much in line with the guidance. When you look into Q4, we expect around NOK 400 million to NOK 500 million in release in aluminum metal and this is partly driven by alumina, but quite a lot from carbon also. So carbon markets have been coming down quite significantly, both pitch and [ Petco ], but there is some month delay here. And so with the downward trend that we're seeing, we should expect impact in both Q4 and also Q1 to reduce the cost base.

[Operator]

And then we have a question from [indiscernible]. In B&A and aluminum metal, you expect lower raw material costs and higher fixed costs in quarter 4. Can you please quantify this?

[Pål Kildemo, executive]

Yes, that's partly what I did for aluminum metal now. If you look at bauxite and alumina, then there's NOK 150 million estimated release in the fourth quarter. But on the fixed cost side, we see up towards NOK 300 million increase in the fourth quarter for bauxite and alumina. That was driven a lot by a lower cost this quarter than what we had expected. And if you look into aluminum metal, then we expect a fixed cost increase of around NOK 150 million for the quarter.

[Operator]

And then the other question from [indiscernible]. How will the decrease in income Q3 affect the Norwegian factories?

[Hilde Aasheim, executive]

Well, if the question relates to capacity. We have already taken out 130,000 tonnes of the Norwegian capacity from the [indiscernible]. We are using all the measures we have in terms of changing products -- to other product segments to reduce recycling. And at this point, we have the measures in place to adjust for the demand, but that is a continuous evaluation we have to do in terms of how the market is evolving.

[Operator]

And then we have a question from Daniel Mayer. Your estimate of $160 million saving from fuel switch. What Is the base for this run rate on quarter 3?

[Pål Kildemo, executive]

The base for $160 million is the full year 2023. And we can get back to the Q3 run rate in the conference call later today.

[Operator]

And then we have a question from [indiscernible] regarding the REIN sell down. Over what time frame will this [ $338 million ] equity contribution to be made?

[Pål Kildemo, executive]

That is too early to say. First of all, at closing, there will be a payment to cover up for the funding from the 1st of July this year until the closing date. And then the remaining part will then be injected into Hydro REIN when there's a cash need in Hydro REIN to fund the CapEx or development cost in range. So that will be dependent on how the portfolio develops in the coming years. But within a few years time, of course, this will be paid.

[Operator]

And then we have another question from Daniel. What is your updated fiscal year '23 target for working capital change after the working capital release we've seen in quarter 2?

[Pål Kildemo, executive]

Well, to reconfirm, it will be what you've seen year-to-date as we expect flat operating capital development in Q4.

[Operator]

Another question from [indiscernible]. Will REIN be able to deliver the 4.4 gigawatt undeveloped pipeline without Hydro making further equity contributions?

[Pål Kildemo, executive]

This pipeline is dynamic. First of all, early projects, early leads. So it's something that goes into the portfolio [Audio Gap] and we will select those projects that are most profitable and materialize those, then the funding need will be dependent on both the CapEx, the farm-down and also the percentage we want to sit with. So this is something that will optimize now together with our new partner. How much of this is profitable to go out, it is a certain funding frame. So -- so it's a very important metric for us to ensure that, let's say, in some years, REIN will be self-funded be able to turn money around and do farm downs to realize premiums and invest those into new projects.

[Operator]

And then we have a question from Daniel. Can you give us a share on next quarter extrusion EBITDA versus last year, up, down, flat?

[Pål Kildemo, executive]

Good question. I think if we take into account what we see in the marketplace currently, then as you've seen over several quarters now, we are able to mitigate the falling volumes, the higher raw material costs and also the inflation on the fixed cost base with higher margins, not 100%, but to a large extent. And we expect that development to continue into Q4. If you look at Q3 and you take out the special effects relating to metal effect or a tax compensation of around NOK 80 million, then you are a couple of hundred million down year over a year. And if you look at Q4, we expect a similar trend, again, adjusting for these one-off items. I would just like to say that in current market environment, there is quite visible upside and downside if the pickup was to materialize faster than we thought. But that's how we see the world today.

[Operator]

And then another question from Daniel. Based on current carbon price and the new CO2 compensation, what will be the estimated 2024 compensation?

[Pål Kildemo, executive]

Well, you know the estimated '24 compensation is based on the CO2 price for 2023. So let me quickly run that sensitivity and get back to you after the call.

[Operator]

And then we have a question from Kenneth to case smelters. Any thoughts on potential research given current market outlook?

[Hilde Aasheim, executive]

Yes. Well, I think that when we look into the energy market for this coming winter and also the projection for energy prices. So I guess, we believe that there is not a sentiment for ramp-up and -- but not -- I mean the industry has curtailed quite a lot in Europe. So it depends really on the support also from the government to keep the smelters going. It is still a challenging situation for the European aluminum industry. And so we have to follow that carefully.

[Operator]

And then we have a question from [indiscernible]. What is the duration of the new energy contracts between Aluminum Metal and Energy division?

[Pål Kildemo, executive]

Well, I guess it's [ not the new ] contracts now between aluminum metal and [ Energy division ]. I assume you asked about the pricing between the captive products we have in Norway and aluminum metal that was entered into some years ago based on the, let's say, reference to the external pricing we have and the pricing we have agreed last until end of 2030..

[Operator]

And then we have a question from [indiscernible]. Booked loss on internal energy contract in third quarter in the Energy division was NOK 250 million as guided or?

[Pål Kildemo, executive]

Largely as guided.

[Operator]

Another question from [indiscernible]. How much of fixed cost increase quarter-over-quarter in Q4 will be reversed in first quarter '24 due to maintenance and seasonality.

[Pål Kildemo, executive]

Well, we typically do have, as you say, a higher maintenance cost and a seasonal pressure, especially in aluminum, partly after the recyclers and then also sometimes at the extruders using the end of the year period. It swings a bit from year-to-year, but -- it's been between NOK 100 million and NOK 300 million, you could easily expect.

[Operator]

And then we have a question from Mosaic. Can you comment on the aluminum capacity utilization in Europe and your recent changes?

[Pål Kildemo, executive]

Yes, we can comment on it and to follow up [indiscernible] comment. There hasn't been a lot of changes. We're still below that 50% mark. And -- if you look at the spot LME, spot energy, and spot raw material prices with the decline you see on the [indiscernible] side, it doesn't make economically sense to restart as smelter on spot unless you have some support or subsidy.

[Operator]

And then we have another question from [indiscernible]. The realized LME price for quarter 4 looks quite a bit lower than the lagged average spot price and below the hedge price. Can you elaborate on this please?

[Pål Kildemo, executive]

Well, there is no special effect in the LME price. If you see that it deviates a bit from the lag effect, also including the hedge taking into account that we also have hedged currency on that, which contributes a bit negatively in the current environment. Then its timing of shipments and the like. As you know, the price has been very volatile intra-quarter with several hundred dollars range and depending a bit on where you price, you could have a development outside of the pure average with a lag in pricing. But I expected it might be just as much impacted by the fact that we hedge our strategic position in LME and NOK. And with the NOK development we have seen now, we get negative effect on those hedges, which reduces the realized LME price in dollar terms.

[Operator]

And then the other question from [indiscernible]. Will you move more capacity away from Europe?

[Hilde Aasheim, executive]

If you think about moving capacity out of Europe, we had to curtail our Slovakian electrolysis simply because we did not have affordable energy prices as well as no CO2 compensation. And that is why we fight also for the Norwegian capacity, they are well positioned today, well invested and are well positioned on the cost curve based on the fact that we have affordable power prices and also CO2 compensation scheme that support as while we are working to get the CO2 out of the processes.

So that is sort of the basis for the smelter operation in Europe that to have affordable progresses. That's why we work hard to actively develop a more renewable energy and that we have a stable freight conditions. When it comes to extrusion, we are well positioned very close to the customers in Europe, and we see the strong benefit from that today.

[Operator]

And then one last question before we need to round it off. Hydro REIN is targeting equity internal rate of return of 10% to 20% versus 10% to 12% communicated at Capital Markets Day in 2022. What explains this?

[Pål Kildemo, executive]

Two different figures 10% to 12% was on a project-by-project basis that we measure what to invest into. The 10% to 20% here now is the development of the total platform. So the net asset value of the total system in Hydro REIN that we're going to build together with Macquarie. And I really think that, together with Macquaire, we will be able to drive this profitability also in a good way going forward.

[Operator]

So then we need to round it up. It seems to be no further questions as well. So a good timing. So thank you all for joining us today. And if you have any further questions, please reach out to Investor Relations. I wish you all a continuous nice day. Thank you.