The surprise was not that the Gulf was planning yet another grassroots smelter. It had long been known that Abu Dhabi had ambitions to follow Oman, Qatar and Saudi Arabia into a GCC aluminium club already dominated by Bahrain and Dubai. Rather, it was the timing of the agreement.
‘The Abu Dhabi signing did take us aback,’ says Tariq Salaria, aluminium consultant at the London-based Commodities Research Unit (CRU). ‘There were a number of other projects that we thought were in advance of this one. But because this one is tied with the Dolphin gas project, it makes sense. An offtake agreement with Dolphin will provide a solid return.’
Like many of the emerging industries of the Gulf, aluminium production relies on the supply of cheap, plentiful gas. Low-cost feedstock underpinned the first wave of investment at Dubal and Aluminium Bahrain (Alba) in the late 1970s and 1980s, as regional governments began to use their gas reserves to diversify their economies away from oil. And while prices have edged up over the years, and competition from heavy industry, petrochemicals, power generation and the liquefied natural gas (LNG) sectors has grown on reserves, the second wave of aluminium smelters will still be able to count on highly competitive and long-term feedstock agreements.
‘We reckon the gas price for the new capacity will be a quarter to a third of what producers are paying in the West,’ says a regional analyst. ‘When you consider that power generation accounts for about 30 per cent of the total cost of producing aluminium, that is a significant advantage.’
It is an advantage that international heavyweights such as Canada’s Alcan, the foreign partner on the Sohar smelter project, are well aware of. ‘We see Middle East capacity growing over the next few years because of the available workforce and cheap energy, which is a key component of our costs,’ Cynthia Carroll, president and chief executive officer (CEO) of Alcan’s primary metals unit, told a MEED conference in Muscat last November. ‘It is a great place for aluminium producers to be.’
Certainly, Alba and Dubal have shown off the region’s advantages. The two companies enjoy some of the lowest costs of production in the world, at about $800 a tonne. Upcoming grassroots projects are also demonstrating robust economics: on the $2,300 million Sohar smelter project, the break-even point for the recently signed debt financing package was set at $1,200 a tonne.
With aluminium prices on the London Metals Exchange (LME) reaching a 17-year high of about $2,665 a tonne in early February and global demand for the material growing at about 3.5-4 per cent a year, there are compelling reasons to expand. And fears that the flood of new Gulf capacity – up to 6 million t/y is at various stages of planning – could lead to serious oversupply and a price crash are being downplayed. ‘Smelters in the US and Europe are closing, plus at the current rate of growth, the world needs one or two new smelters a year and the Gulf has the advantage,’ says Alba’s acting CEO Ahmed Saleh al-Noaimi.
Nevertheless, constraints are already evident. Dubal and Alba have been in a state of almost continual expansion in the last 15 years, and now face serious issues as they seek to achieve even greater economies of scale. Alba’s sixth potline, for which a feasibility study has recently been completed, cannot go ahead until additional gas feedstock is secured. At Dubal’s Jebel Ali smelter, space constraints are becoming a major issue. As a result, both producers are targeting investment abroad. ‘We are looking at two or three locations overseas,’ says Khalid Buhumaid, Dubal’s general man