Norsk Hydro ASA declined in Oslo as Nordea Bank AB cut its rating on Europe’s third-largest aluminum producer amid a subdued recovery in prices for the lightweight metal and as Vale SA prepares to sell its stake.
Hydro fell as much as 1.8 percent and traded 1.3 percent lower at 25.21 kroner as of 11:15 a.m. local time, extending its decline since the start of the year to 9.5 percent. It was the day’s third-worst performer in Oslo’s 25-member OBX Index.
Aluminum producers have cut spending and reduced capacity in an attempt to buoy earnings as falling demand and weaker prices weigh on profit margins. While demand growth is expected to recover, the industry is failing to improve market balance through permanent capacity closures, which “leaves sentiment towards aluminum prices poor,” Nordea analyst Andre Holo Adolfsen said in a note today.
Prices on the London Metal Exchange are “close to average global cash costs,” while a reduced physical supply of the metal has led to high premiums, creating incentives for producers to delay production shut-downs, he said. “We consequently foresee the aluminum price recovering slower than previously expected.”
Hydro, which competes in Europe with United Co. Rusal and Rio Tinto Alcan Inc., has taken about 30 percent of its capacity offline since the start of the financial crisis in 2008, Chief Executive Officer Svein Richard Brandtzaeg said on Feb. 12. The company plans to cut costs at its fully-owned smelters by $300 a metric ton by the end of this year from 2009 levels.
Gains in Hydro’s share price have been curbed by the expected sale by Rio de Janeiro-based Vale of its 22 percent stake in the company, Adolfsen said. Goldman Sachs Group Inc. on Jan. 16 advised selling Hydro’s shares amid weak metal demand and on concern that a failure to find a buyer could force Vale to sell its stake in the open market, flooding it with liquidity.
Nordea cut its recommendation on Hydro, which has plants from Qatar to Canada, to hold from buy and reduced its 12-month price target to 27 kroner from 33 kroner, Adolfsen said.
Hydro sees world aluminum demand growth excluding China of 3 percent to 4 percent this year, Chief Financial Officer Joergen Arentz Rostrup said in an interview on Jan 9. Alcoa Inc., the largest U.S. aluminum producer, expects global demand growth will accelerate to 7 percent this year as China’s economic rebound drives demand for cans, cars and office buildings, it said on Jan. 8.