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Mideast aluminium output to double

Manama, December 8, 2011

Aluminium from the Middle East, where output capacity will double by 2015 powered by cheaper energy, will feed growing long term demand as smelters elsewhere fall by the wayside, hit by high power costs and a weaker market for the metal.    

Smelter capacity in No.1 user China will continue to rise rapidly in coming years, but as time wears on it will be less able to satisfy its vast domestic needs.

In the near term, meanwhile, capacity could be lost in other parts of the world, perhaps permanently in some instances, as high power costs and low prices erode profits for a large chunk of the energy-intensive industry.

Electricity accounts on average for around 40 percent of the cost of producing the metal used in transport and packaging.

"The Middle East is a major production hub for aluminium and will continue to be an important production hub for aluminium," a metals industry source said.

"They have a reliable source of energy to power the smelters. That's one of the major reasons why they built these projects in the region, and also the keen interest of governments there to diversify the uses for the energy they have and to create employment as well."

Beyond the current global economic woes consumption of the metal is set to grow at a healthy clip. By the end of the decade it will reach over 70.0 million tonnes, compared with around 41.0 million tonnes last year.

But before then, aluminium prices have fallen almost 25 percent since May, and 37 percent since a record high $3,380 per tonne in 2008 to around $2,130 per tonne now, below many producers' break-even levels.

As much as half of the global industry is losing money at current prices and a number of producers are likely to respond by curbing output.

High cost and ageing smelters in parts of Europe and the US without favourable power deals look particularly vulnerable.     

Global miner Rio Tinto  has already said it plans to close its Lynemouth smelter in Britain. New smelter capacity increasingly will have to come from elsewhere. Cue the Middle East, which will step in to help fill any gaps.

"Outside of China, probably most of the large greenfield smelters taking place in the world have been in the Middle East," the metals industry source said.

The region is expected to double its primary aluminium output to 5.0 million tonnes by 2015. Its five smelters will be joined by a sixth in 2013, and other expansions are on the drawing board.

Despite current economic fragility, overall global demand is still holding up, although at lower levels, driven by the need for the metal used in aerospace, building and cars, particularly in China; a boon for low-cost producers.

"Demand is increasing and is still good overall, despite  signs of slowdown in Europe," said Laurent Schmitt, chief executive of Aluminium Bahrain (Alba), which owns the world's fourth-largest aluminium smelter.

"But we have very healthy Middle East and North Africa demand. Asia is on the high side as well," he told Reuters.     

Despite any near term worries, China will continue to propel demand higher in coming years. While annual demand growth in China may slow, it will still rise by an average 8.7 percent between 2011 and 2015, a director at a state-backed industry association said recently.      

And by the end of the decade China will need more than it can produce. "By 2020...China will be the biggest consumer and producer, but will be net importers by then, and that is where the most of the potential for expansion is," Mahmood Daylami, the general secretary of the Gulf Aluminum Council (GAC), told Reuters.

Middle Eastern producers are ready to rise to the challenge. The capacity increases over the next 20 years will make up around 10-15 percent of the 28 million tonnes per year needed, according to Macquarie.

"The Middle East might not make the whole shortfall," Daylami said, "but it will make up a significant amount."    

The cheap natural gas prices that have fuelled energy intensive Middle East smelters are no longer certain, but they are likely to remain a fraction of prices in Europe, China or North America.

Bahrain said in September it will increase natural gas prices for Alba, one of its biggest consumers, as gas demand grows rapidly in the Gulf oil producing country.

"These smelters tend to be among the most cost competitive smelters in the world," the industry source said. "So even if the energy price did go up they'd still be competitive."  - Reuters




Tags: China | aluminium | Alba | gas | smelter |

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