EMAL's partners weigh expansion

Plant may double in size as improved aluminium price makes phase two more feasible.

May double in size Improved aluminium price makes phase two more feasible Chris Stanton A decision on whether to double the size of Abu Dhabi's new aluminium smelter will be reached this year as the market's prospects improve, according to Mubadala Development, which owns half of the project. Emirates Aluminium (EMAL) is completing the initial, US$5.7 billion (Dh20.91bn) stage of its smelter at Taweelah, which it expects will reach full capacity of more than 700,000 tonnes a year by the end of this year. But Mubadala and Dubai Aluminium (DUBAL), the smelter's co-owners, have already been weighing an expansion to 1.4 million tonnes a year, which would make the plant the largest in the world.

Aluminium prices are recovering from a drop of 60 per cent a year ago and are now at "comfortable" levels, said Waleed al Muhairi, the chief operating officer of Mubadala, a strategic investment company owned by the Abu Dhabi Government. "Obviously, if aluminium prices go up, great, that's perfectly fine, but we're in a good place right now," he said. "That's all being fed into the feasibilities for phase two."

The final investment decision would not be based on short-term fluctuations in the market, Mr al Muhairi said. "Just as we're bullish on EMAL phase one, I have high hopes for phase two," he said. "But ultimately it's going to be determined on cold, hard analytical facts, as all our decisions are." Aluminium futures on the London Metal Exchange fell from a high of $3,300 a tonne in July 2008 to a low of $1,288 in February of last year, forcing many producers to slash output and shelve plans for expansions. Contracts for delivery in August traded at $2,255 a tonne in London last week, and a weighted average of 16 forecasts by Bloomberg shows most analysts expect prices to remain above $2,100 a tonne at least for the next three years.

The cost of aluminium production is driven principally by the price of electricity, and the cost of producing each tonne of metal at the first stage of the Taweelah smelter will fall within the bottom quarter of smelters worldwide, EMAL officials have said. The smelter, which started production in late November of last year, is several kilometres long and obtains electricity from its own natural gas-fired power station with the capacity to produce 2,200 megawatts of electricity, enough to power a small city. Mubadala and government officials have described the smelter as a major part of the emirate's efforts to capitalise on its abundant energy resources and diversify the economy away from crude oil exports.

"We believe in the strength of that business. We believe it's an important business for Abu Dhabi going forward," Mr al Muhairi said. The rationale is not unique to Abu Dhabi. Qatar is increasing output at its new smelter, which will be able to produce 585,000 tonnes a year by the end of the year, while DUBAL is incrementally expanding its 30-year-old Jebel Ali plant to more than 1 million tonnes a year.

Plants are planned also for Oman and Saudi Arabia. EMAL's chief executive could not be reached for comment yesterday, but the former head of the company, Duncan Hedditch, said in December that the second stage would probably be less costly than for the first, which was put out to tender during a peak in construction costs. Mr Hedditch left his post early this year after announcing his departure months earlier.

Revenue from the first stage would also help secure low-cost financing for the project, Mr Hedditch said at the time. "It's quite different from phase one. In phase one, we were a project; in phase two, we've already got an operating business," he said. "We'll have a track record."

* additional reporting by Asa Fitch