Fundamental changes to the global magnesium market necessitate an extensive restructuring of Norsk Hydro's magnesium operation in order to restore profitability. The Board of Directors has decided therefore to submit a recommendation to the corporate assembly that it passes a resolution to reduce magnesium production and proposes that this is effected by terminating the production of primary metal in Porsgrunn, Norway. Three board members elected by he employees opposed the decision.
In particular, it is the steadily increasing export from China of low cost magnesium that has led to the dramatic downturn in magnesium prices, particularly in the European market. In the course of a few years, Chinese exports have gained almost 40 per cent of world markets. Rising magnesium consumption in the automotive industry has not been sufficient to offset the effect of the explosive growth in Chinese production.
" I regret the difficulties closure means for the employees affected, and we will make every effort to ensure that restructuring can be carried out in such a way as to minimize the adverse effects. However, the penetration of the Chinese into the global magnesium market represents a permanent structural change that we simply have to adapt to. Without drastic measures now we shall be looking at heavy losses for many years to come. Profitability in recent years has fallen far short of normal rates of return," says President and CEO Eivind Reiten .
The conclusions reached by Hydro's board, based on an exhaustive analysis of the magnesium business, reveal that the market can not be expected to absorb, in the short or medium term, Hydro's total annual production of 87 000 tonnes at prices that generate the required profitability. Having assessed a number of factors such as production parameters, market conditions in various European and North American markets, transport costs, customs duties and the age of production plants, the board's recommendation is for Hydro to reduce production volume by closing the Porsgrunn plant with its annual capacity of roughly 42 000 tonnes. At the same time, studies are being carried out to look into the possibility of continued operation of the cast house, which could still operate by recovering recycled metal and upgrading metal from other producers. Primary metal production will be wound down in the period up to April 2002.
The termination of primary production will lead directly to the loss of 350 jobs and the resulting reduction in demand for support services from other Hydro units in Porsgrunn. The company estimates that a total of 600 jobs will disappear as a result of the closure. Most of the workforce reductions will take place in the course of the first quarter of 2002, and will come on top of the job cutbacks already being implemented as part of restructuring processes elsewhere in Hydro in the Grenland district. Discussions will now be held with employee representatives regarding the principles to be adopted and measures implemented in connection with the workforce reduction.
"In line with previous Hydro practice in similar situations, we intend to prepare a set of measures that can help to alleviate the problems for those affected as much as possible. We intend to try and find alternative work for as many as possible, and ensure that the downsizing can be achieved by means of voluntary agreements. We can not exclude the possible necessity of temporary lay-offs and dismissals, but they will be the very last resort, as always," adds Reiten.
Hydro will continue to uphold the company's position as the leading global player in the market for alloyed magnesium.
Hydro's most important metal supply source will be its plant in Becancour, Canada, which has a capacity of some 45 000 tonnes per annum. In November of this year the company is to bring on stream a remelt plant in China which will make high quality alloys based on locally produced magnesium. Annual production capacity will initially be approximately 10 000 tonnes. Meanwhile, production at Hydro's remelt plant at Bottrop in Germany will continue unaffected. Hydro's efforts to promote greater use of magnesium will be maintained, both at the Porsgrunn Research Centre and through the magnesium diecaster Meridian, in which Hydro holds a 49 per cent stake.
After the closure of the Porsgrunn magnesium primary plant, Hydro will still remain the biggest industrial presence in the Grenland district with more than 2000 of its employees based there. The competitiveness of many Hydro companies has received a boost in recent years following renewal and restructuring measures. Hydro is also working, alone and in conjunction with other industries, on projects to increase the scope of activities there, within for example formates. Hydro is also endeavoring to develop the service and support functions run by Hydro Business Partner. Hydro intends also to increase the access of the Grenland Industrial Development company to new capital. The company participates in projects for the creation of new industrial activity. Hydro will inject new capital of NOK 150 million into this company. In a long-term perspective, a possible supply of natural gas in the region will be of great importance, and Hydro is actively engaged in work aimed at setting up gas transport systems that can also supply the district.
As a result of the market changes and the Porsgrunn plant closure recommended by the Board, a write-down of fixed assets of NOK 261 million has been made in the 3rd quarter accounts. Hydro expects that the imminent workforce reduction process, plus the costs in connection with winding down production and clearing redundant buildings, will entail charges to the accounts of NOK 700 to 800 million accruing in the 4th quarter this year and in the first half of 2002.
Certain statements in this press release are or may constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not in the nature of historical facts may be deemed to be forward-looking statements and may contain identifying words such as "believes", "anticipates", "plans", "expects" and similar expressions. These forward looking statements are based on Hydro's current expectations, assumptions, estimates and projections about the company and the industries in which it engages in business. All forward-looking statements involve risks and uncertainties. For a detailed description of factors that could cause Hydro's actual results to differ materially from those expressed in or implied by such statements, please refer to its annual report on Form 20-F for the year-ended December 31, 2000 and subsequent filings on Form 6-K with the U.S. Securities and Exchange Commission.