The decision by Bahrain National Oil and Gas Authority (Noga) to raise the price it charges Aluminium Bahrain (Alba) for gas by 50 per cent will add $80m to Alba’s costs in 2012, according to analysis by Bahrain-based Securities & Investment Company (Sico).

From 1 January, 2012, Alba will pay $2.25 a million BTU for the gas. The price is $0.75 more than what Alba is currently paying. The news was not welcomed by shareholders in the company and Alba’s stock declined by 30 per cent during September trading.

Despite gas shortages across most Middle East countries, many still offer very cheap gas to large industrial projects.

Aluminium prices 2011
($ a tonne)
5 Jan 2,480
5 Feb 2,510
5 Mar 2,580
5 Apr 2,680
5 May 2,750
5 Jun 2,650
5 Jul 2,500
5 Aug 2,610
5 Sep 2,410
5 Oct 2,120
Source: London Metal Exchange

Other aluminium smelters in GCC countries such as Qatar, the UAE and Oman also receive subsidised gas for their facilities. Aluminium production is one of the most energy intensive industrial processes and requires huge amounts of electricity. Running generators on subsidised gas offers the GCC smelters a cost advantage on their international competitors that use coal-fired facilities.

The Sico report states that Alba’s natural gas costs only account for between 10-15 per cent of its total production costs and the latest price increase will push costs up by 5 per cent. Using the Alba smelter as a guide, similar facilities in the region should all be making a decent profit margin based on the current aluminium price of $2,185 a tonne. Sico’s research says that Alba enjoys a profit margin of 18.4 per cent, which bears favourable comparison to smelters based in the US and Europe, where it is less than 3 per cent.

Alba still pays a cheap price for gas and $2.25 is about half of what a smelter in the US would pay. Bahrain’s decision to start increasing the price of gas for Alba is expected to be repeated by other governments in the rest of the GCC, except Qatar.

Saudi Aramco currently charges $0.75 a million BTU to industrial facilities for gas. Most experts say this figure that cannot be sustained in the long term and the industrial sector in the kingdom is bracing itself for an increase of at least 100 per cent in the near future.

Although the outlook for the aluminium is fraught with risks from a slowdown in the global economy, the fatter profit margins of Middle East smelters should enable companies such as Alba to do better than their international peers. If there is a double dip recession in Europe and the US ,the aluminium price could sink to $1,600 a tonne last seen in 2009 Sico says the panic selling of Alba shares is unjustified.

Despite the increased cost base, the region’s oldest smelter still has operating costs that are the envy of the majority of its global competitors.