Gas is key to smelter plans in Gulf

The Middle East’s aluminium producers are poised to take advantage of the tough times the industry has been enduring in recent months. The speed of the collapse of aluminium prices worldwide has been startling - a feature that distinguishes this downturn from those that came before it.

In previous cycles, the average duration between peak aluminium prices and the bottom of the market was 34 months, according to London-based metals and mining consultant CRU Group. The latest fall in prices, down to $1,468 a tonne on 20 April, has taken less than 10 months since the highs of almost $3,300 a tonne in the summer of 2008.

The industry has essentially been caught napping. As prices fell, production was maintained at a steady level, causing inventories to build to record highs. Against this backdrop, the Middle East’s producers’ plans to invest in new smelters and expand existing capacity seem foolhardy.

Producers in Europe and the US have, since December last year, cut production by 2.5 million tonnes in total. As these cuts show, production will be axed in places that have high energy and production costs, which the Middle East does not.

The outlook is particularly strong for Gulf producers. The region has three smelters in operation, in Bahrain, Dubai and Oman, and two more smelters will begin production by the end of 2010, developed by Qatalum in Qatar and Emirates Aluminium in Abu Dhabi.

However, once these smelters are operational, producers will have to compete with other gas-dependent industries such as petrochemicals for feedstock allocations.

Without the advantage of low-cost fuel, the price advantage the Gulf’s producers currently enjoy will be eroded, and with it their competitive edge.