April 25, 2018 / 5:30 AM / 7 months ago

UPDATE 3-Aluminium producer Hydro warns on cost savings amid Brazil woes

* Says will miss $63 mln savings target

* Says writedowns possible

* Now expects market supply deficit

* Q1 profit up 38 pct, beats forecasts

* Graphic: tmsnrt.rs/2FapPWM (Adds CEO quotes on Rusal, updates shares)

By Terje Solsvik and Joachim Dagenborg

OSLO, April 25 (Reuters) - Norsk Hydro will miss its cost-cutting target this year and faces possible writedowns as its Brazilian operations work at reduced capacity following a spill, the Norwegian aluminium producer said on Wednesday.

Hydro was ordered by regulators to slash output from Alunorte, the world’s largest alumina refinery, which triggered cutbacks at its nearby Albras aluminium plant and a scramble among other factories and customers for supplies.

Unless it gets permission in the second quarter to restart shuttered output, it may have to write down the value of Alunorte and its related Paragominas bauxite mine, and faces the risk of impairments at Albras and other plants, the company said.

Even if Hydro wins permission to restart the closed production lines at Alunorte, it would take about three weeks to reach full output, the company said.

As a result, Hydro said its “Better” improvement programme was now expected to miss its target of 500 million Norwegian crowns ($63 million) in cost cuts this year.

Brazilian authorities have ordered Alunorte, which has a capacity of about 6.3 million tonnes of alumina per year, to halve production after the plant admitted to making unlicensed emissions of untreated water during severe rains in February.

Hydro has said neighbouring Albras will also halve production, cutting the equivalent of 230,000 tonnes of aluminium per year.

GLOBAL SUPPLY

Hydro’s Brazilian outage and U.S. sanctions imposed on Russian rival Rusal have caused fears of a supply crunch, sending prices this month to seven-year highs, although the rally later faded.

The sanctions on Rusal caused great uncertainty in aluminium markets and will impact trade flows and availability of metal and raw materials throughout the value chain, Hydro said.

The company still expects 4-5 percent growth in global aluminium demand in 2018, but now predicts a supply deficit for the year, rather than the balanced market it had previously anticipated.

“Our customers are worried,” Chief Executive Svein Richard Brandtzaeg told Reuters, adding that supplies could still flow from global warehouses to replace the production cuts for some time.

“It’s important to remember that there are some 12 million tonnes of aluminium in storage,” Brandtzaeg said.

A U.S. decision to postpone the deadline for complying with sanctions to Oct. 23 from June 5 has also provided some relief, he added.

The company reiterated that it may have to declare force majeure on its contracts with Rusal, though it was too early to provide details on the timing or volume impact.

Hydro reported 3.15 billion Norwegian crowns ($398 million) in underlying January-March earnings before interest and taxes, up 38 percent and better than the 3.06 billion expected in a Reuters poll of analysts.

Hydro shares were down 0.4 percent at 0826 GMT. They are down 19 percent this year versus a 4.7 percent rise in the Oslo benchmark index.

($1 = 7.9325 Norwegian crowns)

Editing by Gwladys Fouche, Jason Neely and Dale Hudson

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