Gulf's new aluminium smelters will squeeze high cost rivals

New aluminium smelters in Qatar and Abu Dhabi will squeeze the margins of higher-cost producers in the West and China.

New aluminium smelters in Qatar and Abu Dhabi will pile more than 1.3 million tonnes of metal on to a weakened global market this year, squeezing the margins of higher-cost producers in the West and China. The Qatalum smelter officially opened yesterday will add 585,000 tonnes of aluminium to the market by the time it hits full production by the end of the year. The new supply will coincide with the Emirates Aluminium smelter in Taweelah, Abu Dhabi, which is expected to reach full capacity of 750,000 tonnes in the same period.

Both projects will add to an existing glut of supply estimated at 1.5 million tonnes, according to Norsk Hydro, the Norwegian partner of Qatar Petroleum in the US$5.7 billion (Dh20.93bn) Qatalum project. The two plants achieve vast economies of scale and source their electricity from low-cost natural gas, and are among the most cost-efficient aluminium producers in the world. Qatalum yesterday described its smelter as "the world's most efficient".

Current aluminium prices of $2,424 a tonne are almost double the low they hit in February last year but are still down significantly from the record highs of above $3,000 in 2008. A weighted average of analyst forecasts by Bloomberg showed prices remaining below current levels for at least the next three years. In 2013, aluminium will average $2,315 a tonne, according to the forecast. Norsk Hydro is one company under pressure. Even as it commissions the Qatar smelter, Norsk Hydro has plans to close down a smaller plant in Germany, the company's chief financial officer Jorgen Arentz Rostrup said on Sunday. The company had already curtailed output by 90 per cent, Mr Rostrup said.

"It is a fantastic plant, but the energy situation in Germany makes it extremely challenging to run," he told Bloomberg at the official opening of Qatalum. "It's more likely that it will close, but we haven't decided yet." Aluminium smelters need access to decades of low-cost electricity to be profitable. The most lucrative plants have historically been located near hydroelectric dams or large reserves of cheap natural gas.

Germany and other European countries have some of the highest electricity prices in the world, while Chinese producers face difficulty in securing low-cost electricity from coal-fired power stations. The Middle East will increase aluminium exports and "it's the rest of the world that will have to find a supply-and-demand balance", Mr Rostrup said. The Qatalum smelter will aim to sell 75 per cent of its production to Asia and Europe, the company's deputy chief executive, Hassan al Rashid, said.

Global demand would rise by 5 to 7 per cent this year, Mr al Rashid said. Qatar Petroleum and Norsk Hydro have not formed definite plans to increase the size of the plant, Abdullah al Attiyah, the Qatari minister of energy and industry, said. The Gulf Aluminium Council (GAC), a regional industry trade group, noted in a report last year that the Gulf was well-positioned to take market share from higher-cost producers.

"Increasingly, primary aluminium smelters in some of these industrialised countries are becoming uneconomic, particularly as labour and energy costs escalate," the GAC wrote. "Producing primary aluminium in the Gulf for export to the rest of the world has then proved to be an effective and economic alternative way of exporting energy." * With agencies