Gulf Times reported that aluminium production is tilting toward the Arabian Gulf and industry giants Rio Tinto, Alcoa Inc and Norsk Hydro are betting heavily that the region can produce aluminium more cheaply and can grab global market share.
The rush to lower production costs is intense. The aluminium market currently is so oversupplied that market participants say half of the world’s production is unprofitable at current prices. Producers and state owned companies hope Gulf production can take advantage of low energy costs locally and lower shipping rates globally. Such a shift comes at the cost of more costly aluminium smelters in Europe and America.
Mr Mahmood Daylami general secretary of the Gulf Aluminum Council, a trade group said that Mideast output is expected to grow from 3.6mn metric tonnes in 2011 to 5mn metric tonnes by 2015 once new projects in Abu Dhabi and Saudi Arabia are completed. We see the central gravity shifting towards the Gulf.
According to Morgan Stanley, since 2007, global production has exceeded demand by 9.31 million tonnes. Benchmark aluminium on the London Metal Exchange closed at $1,942 per tonne after hitting 2 year low last week.
Mr Jean Simon president and CEO of primary metal for Rio Tinto Alcan said that due to the low prices, only about 50% of aluminium smelters are making a profit. Rio Tinto, Alcoa and Norsk Hydro have all closed smelters this year as prices fell below the cost of production. Gulf nations, hoping to diversify energy-dominated economies, are positioning themselves as a solution. Not surprisingly, energy costs, which account for one third of aluminium production expenses, are lower in the region.
National electricity costs average USD 22 per kilowatt hour in the Middle East, compared to USD 25 per kilowatt hour in North America and USD 34 in Europe, according to a January 2011 Alcoa presentation. Such rates don’t always apply to aluminium smelters, as producers seek to negotiate energy contracts directly with utilities rather than paying market rates. Others produce their own electricity on site.
Ms Bridget Freas senior analyst for Morningstar said that “Given how high energy costs have gotten, it makes a lot of sense for aluminium companies especially Alcoa and Rio Tinto to build new plants in areas where they can access low cost electricity.”
Mr Ryan Derouin an executive for General Electric Company said that meanwhile, rapid ship building in China in recent years has pushed shipping costs lower which builds turbines that produce about 80% of the power used by smelters in the Middle East.
Mr Derouin said that the Baltic Dry Index which tracks shipping rates for dry commodities has dropped 37% so far this year. Aluminum makers used to be compelled to set up shop close to their customers to ease transportation costs but that’s not necessarily the case anymore.
Construction is underway on USD 10.8 billion JV between Saudi Arabian Mining Company and Alcoa. The project intends to integrate the entire aluminium production chain, from mining to recycling. Production is slated to begin in 2013 and produce 740,000 tonnes per year by 2014. A JV between Norsk Hydro and Qatar Petroleum reached full capacity of 585,000 tonnes per year last year.
Rio Tinto was the first to open JV project in the region. Sohar Aluminum, which Rio Tinto owns with Oman Oil and Abu Dhabi National Energy Company reached full capacity of 360,000 tonnes per year in 2009. The Abu Dhabi government, meanwhile, is seeking industry partners to set up shop in the USD 7.2 billion Khalifa Industrial Zone Abu Dhabi. The zone is leasing land around the state owned Emirates Aluminum smelter to manufacturers.
The smelter is currently producing 750,000 tonnes per year of aluminium with plans to increase output to 800,000 tonnes per year by the end of 2012. The smelter will eventually achieve capacity of 1.3 million tonnes a year.
Ms Freas said that expanded output in the Middle East isn’t expected to sway global prices. Increased aluminium supply from the region should be offset by the shuttering of less efficient smelters in North America and Europe. Other producers may be holding back from investing in the Mideast due to current low aluminium prices. Whether others will follow suit really just kind of depends on what market conditions look like a few years from now.
Source - Gulf Times.com
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