President & CEO Hilde Merete Aasheim and Chair Dag Mejdell's letter to stakeholders in Hydro's 2022 annual report.
The past year has once again shown us how fast things can change in our business environment, how important it is to be robust and resilient, and not to lose sight of the long-term opportunities.
Our people are the foundation on which we are built
Hydro’s most precious asset is our workforce of 32,000 highly skilled and engaged employees around the world. We see a direct link between the health, safety and wellbeing of our people, our performance culture, and the progress of our strategic agenda.
Coming out of the pandemic, we have seen an encouraging safety performance. The 2022 total recordable injury rate (TRI) was 2.4, which is a strong improvement from 3.3 in 2021, and the lowest level ever reported in Hydro. The high-risk incidents rate (HRI) improved to 0.8 in 2022, compared with 1.4 the previous year. We cannot rest though. Ensuring a safe work environment is a continuous job, which needs focus and attention by everyone, every day, at every shift.
A record year and a solid basis to meet uncertainty and pursue opportunities
In a turbulent year, we benefitted from our strong cost position and our improvement efforts as well as from the high prices for aluminium and energy. We delivered record results in 2022, with an adjusted EBITDA of NOK 39.7 billion and a corresponding return on capital (RoaCE) of 22.2 percent, well above our target of 10 percent over the cycle.
Much of this is attributed to our organization’s solid improvement drive. In 2019, we launched an ambitious improvement program, delivering improvements of NOK 7.3 billion annually by 2023. Last year we reached our target well ahead of schedule and decided to increase our improvement ambitions to NOK 10 billion by 2025 and NOK 11 billion by 2027.
We also raised our commercial target by NOK 0.5 billion, already materializing in the form of greener products, better product mix, higher margins and market share growth, aiming to improve results with NOK 3 billion by 2027.
Our low and robust cost positions are on the thirtieth percentile within alumina and at the seventeenth percentile in aluminium, with ambitions to further improve. In an industry seeing a steeper cost curve, this can enable improved margin generation going forward.
A competitive shareholder return is important to ensure that Hydro remains attractive to investors. We are pleased to convey that the Board of Directors proposes to allot 62 percent of adjusted net income in 2022, as a combination of dividends and share buybacks.
Megatrends present new challenges and opportunities
Going forward, we see two megatrends which will have a great impact on our business environment, posing new risks, but also opportunities.
First, we see a new geopolitical reality with increased rivalry between powers, weaker global institutions, a decline in trust and increased polarization within societies. This may have a significant impact on the global economy affecting trade, economic cooperation, supply chains and global development.
The vulnerability in global supply chains was revealed by the pandemic and is further amplified by the Russian invasion of Ukraine. In our view, proven long-term security of supply, affordability and access to energy, minerals and strategic materials will become an increasingly important strategic advantage.
Secondly, amid all the uncertainty going forward, one thing seems certain: We see higher climate ambitions and greater attention to sustainability. These are being turned into stronger regulations and business commitments, and higher expectations to the industry among politicians and regulators. This is most noteworthy though among customers, investors and financiers, and current and potential new employees.
The current energy crisis has demonstrated how crucial access to affordable renewable energy is for society and industry to succeed with the green transition. Markets are increasingly concerned about how products are made, and we expect sustainability frontrunners to be appreciated and preferred.
We are not only committed to contributing to change, but we are also committed to drive change. More importantly, we increasingly see sustainability as our path to profitability. We continue to pursue our strategy to strengthen our position in low-carbon aluminium, as well as growing in new energy solutions.
Shaping and serving the markets for greener products
The transition towards net-zero emissions is expected to be a key driver for aluminium demand towards 2030. Even in a challenging market, we expect 2.8 percent annual growth towards 2030, of which a large part is coming from the automotive segments. Demand for recycled aluminium is expected to grow at double the rate with an annual growth at 5.4 percent.
It is encouraging that demand for low-carbon primary aluminium is accelerating and set to outpace the rest of the market at a 20 percent annual growth rate from 2022 to 2030. In fact, we expect greener and recycled aluminium to make up a majority of the EU and North American market by 2030.
In order to successfully deliver on our decarbonization strategies and achieve our ambitions on shaping the market for low and near-zero carbon aluminium, we have teamed up with frontrunners in the value chain to develop creative, innovative and sustainable solutions. The strategic partnerships with Mercedes-Benz and Polestar, and window solutions provider VELUX, enable smarter solutions with a lower-carbon footprint.
In Extrusions, we grow together with our customers, particularly in the automotive market segment, and have positioned Hydro CIRCAL to be the standard bearer in building and construction. The decisions to build new extrusion presses in Szekesfehervar (Hungary), Rackwitz (Germany) and Tønder (Denmark), together with the acquisition of German building systems and extrusion business Hueck, are firm steps to strengthen our position in important European growth segments within automotive and construction.
Commitment to zero-emission aluminium
To strengthen our position, we aim to demonstrate not only ambitions and targets related to sustainability, but real deliverables which have a positive impact for the climate, the environment and the society at large.
We are pleased to see that the green transition is indeed on its way. The fuel switch projects, changing energy sources from fuel oil and coal to natural gas and electricity at our alumina refinery Alunorte, are progressing well. It is especially encouraging that the significant reductions of greenhouse gas emissions go hand in hand with reduced operating costs. In parallel, we are developing and maturing the technologies needed to reach net-zero greenhouse gas emissions in 2050 or earlier.
For existing primary aluminium plants, we aim to eliminate emissions through carbon capture and storage, and are currently running test projects to verify the efficiency at selected plants.
For new primary aluminium capacity, Hydro’s technologists have worked for the past six years to develop a breakthrough zero-emission technology, the proprietary HalZero. We aim to construct a test facility to further mature the technology concept, with a bold aspiration to deliver our first batch of HalZero aluminium by 2026. Once CCS and HalZero are in place, it is finally realistic to speak of zero-emission primary aluminium.
In addition, recycling will play a vital role in the transition towards a low-carbon economy. For us, recycling represents an opportunity for new profitable growth. Furthermore, recycling of post-consumer scrap is reducing the carbon content in the products we bring to the market. We are excited that Hydro produced its first prime quality, near-zero aluminium based on recycling of 100 percent post-consumer scrap in 2022.
We are encouraged by higher demand for recycled aluminium, strong margins and attractive returns, and have a comprehensive project pipeline. Last year, we made the decisions to establish new recycling capacity at Cassopolis, Cressona and Henderson in the US, Rackwitz in Germany and Szekesfehervar in Hungary, together with our bid to acquire the Polish recycling company Alumetal. These are important steps for implementing our profitable growth ambitions.
In addition to addressing own emissions, Hydro has launched a new target to reduce upstream scope 3 emissions per tonne aluminium delivered to the market by 30 percent by 2030. These are emissions produced by our suppliers, and the target will be reached mainly through greener sourcing of raw materials and metals.
Growing in new energy
Availability of renewable power is more critical than ever to meet global climate targets. For Hydro, the contribution of Hydro Rein to bring forward more power production is crucial. Hydro Rein has made significant progress during the last year and are now executing four projects with contracted revenues amounting to USD 2.7 billion. We continue our active process for raising external capital for Hydro Rein.
Hydro Rein and Hydro Havrand are working together with the respective business areas to contribute to strengthening their position in low-carbon aluminium through renewable sourcing and decarbonization. Through Hydro Havrand, we aim to produce green hydrogen that may replace the use of natural gas in our own production and help external customers decarbonize their hard to abate emissions.
We continue to pursue our ambition to take an active part in batteries and energy storage solutions. Through our 30 percent stake in the graphite producer Vianode, we are taking a role in the production of more sustainable raw materials for electric vehicle batteries. The synthetic graphite materials from Vianode will be produced with up to 90 percent lower CO2 emissions than today’s standard materials.
Europe’s largest electric vehicle battery recycling plant, HydroVolt, a 50/50 joint venture between Hydro and Swedish EV battery producer NorthVolt, has now been in commercial operation for almost a year.
Driving sustainability: Future-proofing our company
It is fundamental for every business to know its impact on nature and people, and to protect and uphold human rights in local operations as well as in global supply chains. This contributes to the health and livelihoods of people and communities in times of transition. Responsible businesses will less likely waste time and resources on crisis and conflict, and more likely get access to new projects, new markets, the most attractive partners and win the battle for the best employees.
Hydro has a 117 year history of partnerships in the communities we are a part of and base our company on our values of Care, Courage and Collaboration. We are committed to invest in education, support just transition by contributing to economic and social development in societies where we operate, and ensure transparency and responsible business practices in our supply chains.
In 2022, we were especially proud to open the new Technical School in Barcarena, also benefiting Hydro by expanding and qualifying the local workforce. We also continue to support the long-term collaborative platform Sustainable Barcarena Initiative and programs for local entrepreneurship, education, health and environmental initiatives.
We have also seen that by educating our suppliers in Pará, we are not only ensuring that our own supply is sourced responsibly, we also enable our suppliers to grow and become preferred suppliers to other businesses in Brazil. This is truly a win-win situation for both Hydro and society.
Working to improve industry standards for human rights, transparency and responsible production, we are engaging with a range of international organizations. We are also a signatory member of the UN Global Compact and a committed member of the Aluminium Stewardship Initiative (ASI).
On the environmental side, we are committed to reducing the footprint of our mining operations, rehabilitate forests and protect biodiversity, and to eliminate landfilling of recoverable waste by 2040.
Well positioned for future value creation
Facing a more unpredictable global economy and an urgent need to drive the green transition, Hydro is well positioned to navigate through turbulence in the short-term without losing sight of our strategic positioning for the long-term opportunities.
We have a highly skilled and motivated workforce, low and robust cost positions with ambitions to improve, a pathway to net-zero aluminium products through targeted technology development, strong market positions and a portfolio of profitable growth projects. We also have ambitious and concrete sustainability targets integrated in our business strategy and operations.
This is all supported by a solid financial framework, ensuring financial strength and flexibility, while also enabling competitive shareholder distribution.
On this basis, we believe Hydro has a unique position to create value in a new reality, developing industries that matter.