Goldman Sachs Downgrades Norsk Hydro to Neutral on Cost and Premium Headwinds

Goldman Sachs downgraded Norwegian aluminum producer Norsk Hydro to "Neutral" from "Buy" and lowered its price target, signaling a more cautious outlook for the company. Analysts at the bank pointed to the dual pressures of declining aluminum premiums and rising costs as key factors making it more difficult for the company to lift earnings into 2027.

Falling Premiums and Rising Costs

Goldman Sachs noted that the tightness in the European aluminum market is easing faster than it had anticipated. This is attributed to customers delaying purchases and an influx of supply from the Middle East and Indonesia.

Norsk Hydro's own guidance reflects this trend, with the company expecting fourth-quarter realized premiums of $550-$600 per tonne, a notable decrease from the $673 per tonne achieved in the third quarter.

Simultaneously, operational costs are on the rise. Norsk Hydro anticipates spot gas purchases at its Alunorte refinery to cost $90-$110 million in the fourth quarter, up from approximately $85 million in the third. Goldman also highlighted that Hydro's commercial sourcing and trading unit is guided to a fourth-quarter loss due to higher logistics costs and the loss of a marketing fee.

Revised Forecasts and Financial Impact

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In response to these headwinds, Goldman Sachs cut its price target for Norsk Hydro to NOK 79 from NOK 100. The new target implies a 10.1% upside from the stock's closing price of NOK 71.76 on October 22. The bank also lowered its core earnings (EBITDA) forecasts for both 2026 and 2027 by 6%.

The downgrade follows Norsk Hydro's third-quarter results, in which adjusted EBITDA of NOK 9.1 billion missed both Goldman’s estimate by 6% and the analyst consensus by 5%. The company's free cash flow was also significantly below the bank's expectations.

Market Context

The revision comes after a period of significant underperformance for the stock. Since Goldman Sachs added Norsk Hydro to its "Buy" list on April 2, the shares have declined 30.1%, while the FTSE World Europe index fell just 0.2% over the same period.

Looking ahead, Norsk Hydro is scheduled to provide its 2027 outlook at a capital markets day next month. Goldman Sachs identified a potential, albeit unforeseen, upside risk to its thesis: a significant supply outage resulting from the ongoing conflict in the Middle East.