Gulf aluminium smelters kept output at full capacity last year due to the region's low energy costs, but further expansion may be capped by tight gas supplies in the region.

Last year, global aluminium demand plummeted as economies around the world fell into recession. This forced smelters in Europe and Asia to scale back on production, but Gulf producers enjoyed the competitive edge provided by cheap energy.

'Gulf smelters could afford to operate at full capacity because they are among the most efficient and energy costs in the Gulf are much lower than other regions,' said Mahmood Daylami, general secretary of the Gulf Aluminium Council (GAC), which represents aluminium manufacturers in the region.

The Gulf region's aluminium exports account for around 1 per cent, or about 1.25 million tonnes per year, of global demand. In order for producers to increase that share, expansion is key, said Daylami. But gas supplies are a big obstacle to that, he said.

'Securing gas supplies for expanding smelters is always going to be an issue for Gulf producers and we need to find ways to overcome this problem,' Daylami said.

Although there is currently a global gas glut, Gulf countries are short of supplies of domestically produced gas that can give an aluminium producer a competitive edge over producers buying gas at market prices elsewhere.

There is currently only one LNG import facility in the Gulf, in Kuwait, but Dubai is building one too.

'Governments in the Gulf want to maximise priority and value from the resources they have left, and they have to decide whether supplying aluminium smelters with gas could be the best way to do that,' said Noel Tomnay, head of global gas and power at Wood Mackenzie, a UK-based energy consultancy.

One of the advantages of having smelters in the Gulf is securing cheap power, but if they can no longer do that then smelter owners may have to reassess expansion plans, Tomnay added.

'With finite gas resources in places like Abu Dhabi and Oman, they now have to factor in the extra cost of importing gas and whether their projects will still remain competitive,' he said.

Oman has spare capacity at its LNG plant because it cannot produce enough gas to meet its domestic demand and export at full potential.

Limited gas supplies held back Oman-based Sohar Aluminium's phase two expansion plan to add 360,000 tonnes per year (tpy) to the firm's existing 360,000 tpy capacity, said Bruce Hall, chief executive of the firm.

'We aspire to build phase two, but there is no formal time frame and the main reason is current gas availability,' he said.

Sohar Aluminium, a $2.4 billion joint venture between the Oman Oil Company, the Abu Dhabi Water and Electricity Authority (Adwea) and a unit of global miner Rio Tinto, is now competing with other industrial projects in Oman to secure gas supplies, Hall said.

'We are also competing with the growing demand for power needed in cities, so everyone really needs the supplies,' Hall said.

Importing gas through the UAE's Dolphin Energy pipeline, which pumps gas from Qatar, could be an option for Sohar, but there were extra costs to consider, Hall added.

Aluminium Bahrain (Alba) had also put plans on hold to boost capacity to 1.2 million tonnes per year from 860,000 tpy due to gas shortages.
 
'Bahrain is now in negotiations with Qatar to import gas, the purchase of electricity through the shared Gulf grid is another option, but costs will be the main issue,' said Daylami.

Global demand for aluminium in 2009 was around 36 million tonnes and is expected to grow by 12 per cent this year compared with a year earlier, said GAC's Daylami, adding that production from the Gulf region is estimated to reach 2.5 million tonnes.

'About 50 to 60 per cent of this production is for exports,' he said.

Demand will mainly be fuelled by Asia and the Middle East,  Dubai-based traders told Reuters.

'The orders this year are mainly coming from places like Japan, Thailand, and Malaysia and there is also demand coming from Syria and Lebanon,' one trader said.

New capacity expected to come online this year includes the UAE's Emirate's Aluminium (Emal) which plans to hit its production target of 700,000 tpy for phase one by December and Qatar's 585,000 tpy Qatalum smelter which will hit its target by the end of the third quarter or early in the fourth quarter.

'This would bring production of the Gulf up to 3 million tonnes by 2011,' said Daylami.
 
Emal is continuing its expansion to become the world's largest single-site aluminium smelter complex with a capacity of 1.4 million tonnes of aluminium per year on completion in 2013-2014.

'If the Gulf wants to become a major player, growth of projects must continue and challenges limiting expansion must be overcome,' said Daylami.-Reuters