Middle East Smelters Continue Expansion in Spite of Weak Prices and Falling Premiums

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On the face of it Aluminium Bahrain’s Alba smelter’s recent first quarter results underline the huge advantage Middle Eastern smelters have over most of those in the US and Europe.

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The company’s net income for the first three months of 2015 was 37.2 million dinars ($98.7 million), up from 17.1 million dinars in the same period a year ago according to a post on Yahoo Finance. This came on top of a cracking fourth quarter last year. The company made a net profit of 34.6 million dinars ($91.8 million) in the three months up to Dec. 31, up from 13.7 million dinars in the prior-year period.

Alba Expansion

The solid results will have helped the firm’s expansion plans, which are at an advanced stage. The post advises Alba is close to selecting the financial adviser for its $2.5 billion Line 6 expansion project, aimed at lifting capacity from the current 900,000 metric tons.

The scheme will make Alba the largest single-site aluminum smelter in the world by boosting annual production to around 1.3 million mt. Conditional on the projects go ahead was an agreement on gas pricing, but the days of exceptionally low natural gas prices may be drawing to an end.

Bahrain’s gas supplies are not limitless and, like the other Gulf states, questions are being asked about the long-term benefit of consuming such vast quantities of natural gas in a relatively low value-add process such as aluminum smelting. In late January, Alba warned that Bahrain would steadily hike prices of natural gas sold to companies, nearly doubling prices from $2.25 per million British thermal units (mmBtu) at present to $4 per mmBtu in 2021.

Price Hikes

An initial 25-cent (US) price hike took effect on April 1; Alba estimated this would add about $22 million to its costs for the last nine months of 2015. Bahrain’s state finances have been hit hard by the plunge of oil prices, prompting it to seek ways to increase government revenues in the short term and maximize the return on its finite gas reserves in the longer term.

Nevertheless, the Gulf producers still enjoy a huge power cost benefit along with cheap land and low or zero taxes. According to Gulf Business the region accounts for more than 13% of the world’s total aluminum production, with total output estimated to reach five million tonnes per year last year.

New capacity added in the Gulf and Saudi Arabia have collectively more than made up for closures in North America and Europe, marking yet another industrial decline for the west and migration of production to emerging markets.

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