Trading Charts reported that aluminum production is tilting toward the Persian Gulf and industry giants Rio Tinto, Alcoa Inc and Norsk Hydro ASA are betting heavily that the region can produce aluminum more cheaply and can grab global market share.
The rush to lower production costs is intense. The aluminum 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 Persian 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 aluminum smelters in Europe and America.
Mr Mahmood Daylami GM of the Gulf Aluminum Council said that Mideast output is expected to grow from 3.6 million tonnes in 2011 to 5 million 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 aluminum on the London Metal Exchange closed at USD 1,942 per tonne after hitting 2 year low last week.
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 aluminum production expenses are lower in the region.
According to a January 2011 Alcoa presentation, 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. Such rates don't always apply to aluminum 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 aluminum 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.
He 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 joint venture between Saudi Arabian Mining Company and Alcoa. The project intends to integrate the entire aluminum 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 aluminum 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.
Source - Tradingcharts.com
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