Circular Economy Shift Will Crush Primary Aluminum Markets

Key Takeaways

• The global pivot toward recycling, geopolitical pressures, and technological breakthroughs in alternatives threaten demand, margins, and growth in Hydro's core aluminum business.
  
• Hydro's dependence on hydropower and large decarbonization investments expose it to climate risks, cost overruns, and potential operational and financial instability.
  
• Strategic focus on low-carbon aluminum, sustainability, efficiency improvements, and disciplined capital allocation positions Hydro for long-term growth, resilience, and value creation.

Catalysts

Engages in the power production, bauxite extraction, alumina refining, aluminium smelting, and recycling activities worldwide.

• As global economies accelerate their shift toward recycling-based circular models, long-term consumption of primary aluminum may face significant structural decline, undermining Norsk Hydro's revenue and casting doubt on growth projections for its core upstream operations over the next decade.
  
• Intensifying trade protectionism, mounting geopolitical instability-including rising tariffs, quotas, and regulatory fragmentation-pose a persistent threat to Hydro's export volumes and cost base, with escalating risks of supply chain disruptions and unpredictable regional demand patterns likely to erode both earnings and net margins.
  
• Technological innovation in advanced composites and alternative lightweight materials could sharply diminish aluminum's share in automotive, aerospace, and construction, compressing Hydro's addressable markets and impacting long-term top line growth.
  
• Heavy reliance on hydroelectric power leaves Hydro increasingly vulnerable to adverse climate patterns, with potential disruptions in energy supply or higher power costs risking net margin deterioration and operational instability.
  
• Large-scale capital outlays on decarbonization and green aluminum initiatives may generate suboptimal returns or experience significant project overruns, further straining Hydro's free cash flow and weakening its earnings power relative to the current elevated valuation.

Norsk Hydro Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Norsk Hydro compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Norsk Hydro's revenue will decrease by 3.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.5% today to 5.0% in 3 years time.
• The bearish analysts expect earnings to remain at the same level they are now, that being NOK 9.6 billion (with an earnings per share of NOK 4.88). The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.3x on those 2028 earnings, down from 13.3x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 10.3x.
• Analysts expect the number of shares outstanding to decline by 1.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

Norsk Hydro Future Earnings Per Share Growth

Risks

• Rising global demand for low-carbon and recycled aluminum, supported by strong regulatory momentum for sustainability and climate action in Europe, is driving increased sales volumes and higher premiums for Hydro's greener products, which could support revenue and margins over the long term.
  
• The company's strategic positioning as a leading provider of low-carbon and recycled aluminum is leading to premium contracts-such as the first Hydro CIRCAL sale to a major auto manufacturer in North America-suggesting the potential for continued growth in high-margin segments and top-line expansion.
  
• Hydro's robust sourcing of renewable power for its Norwegian smelters, with power purchase agreements extending beyond 2030, improves cost predictability and positions it as an ESG leader, helping to protect or potentially grow net margins as customers increasingly prioritize sustainable supply chains.
  
• Efficiency and cost-cutting initiatives, such as automation in the Extrusions segment and workforce optimization, are on track to deliver substantial annual cost reductions, which could lift operational efficiency and sustain or enhance net earnings even during sluggish end-market demand.
  
• Progress toward 2030 strategic goals, strong free cash flow generation, and disciplined capital allocation-demonstrated by flexibility in reducing/reprioritizing CapEx-enhance the company's resilience to short-term volatility, which could support long-term value creation and total shareholder returns.

Valuation

• The assumed bearish price target for Norsk Hydro is NOK46.6, which represents two standard deviations below the consensus price target of NOK65.88. This valuation is based on what can be assumed as the expectations of Norsk Hydro's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK79.0, and the most bearish reporting a price target of just NOK44.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be NOK193.1 billion, earnings will come to NOK9.6 billion, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 7.2%.
• Given the current share price of NOK64.34, the bearish analyst price target of NOK46.6 is 38.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.