LONDON, 12 August — Both Aluminum Bahrain (Alba) and Dubai Aluminum Company (Dubal) have announced ambitious expansion plans to their existing smelter operations, which has all the makings of a looming "aluminum war".
On completion of the expansion projects, Alba’s capacity will increase to 775,000 tons per year (tpy) and Dubal’s to 710,000 tons per year. Alba, having the benefit of being the first kid on the block, has always been ahead on the smelter capacity stakes. But the fact that Dubal is now fast catching up suggests that the smelter, which is situated beside Jebel Ali Industrial Free Zone, means business.
To complicate matters further, civil works has started on a second aluminum smelter being built by Iran Aluminum Company (Iralco) across the Straits of Hormuz in Arak in Iran. The 110,000 tpy smelter which will cost an estimated $280 million will be built next to the existing 120,000 tpy smelter at Arak, boosting total capacity to 230,000 tpy.
Currently, there are also smaller aluminum smelters in Egypt (Aluminum Company of Egypt) and in Turkey at Seydeshir. Saudi Arabia’s Alujain Corporation had plans to build a 214,000 tpy smelter at Yanbu but this project never took off mainly because the company failed to resolve its differences with the Saudi government over the supply and pricing of natural gas, the main fuel for the smelter. Similarly, Abu Dhabi had plans for a 220,000 tpy smelter which has yet to take off.
Aluminum like oil is a commodity and as such is subject to the vagaries of the volatility of world prices which in turn is subject to economic factors such as GDP growth, the state of the main consumption sectors such as the car industry which uses aluminum for components and body structures; the food canning industry; the construction industry which uses aluminum extrusion products; and the electronics industry which uses aluminum components. If production especially energy costs are too high and world prices fall below the $1,500 per ton, then smelters can be in trouble. As such, most of the larger smelters are locked into longer-term uptake contracts which has an in-built price volatility mechanism.
The price of high-grade aluminum on the London Metal Exchange (LME) last Friday for cash purchases averaged between $1,291.5-$1,292 per ton. This is well below the $1,650 per ton on the mid-1990s. The price for 3-months forward contracts was quoted at $1,309-$1,310 per ton and for 15-months contracts at $1,370-$1,375 per ton.
So why then the rush to increase smelter capacity in the Gulf? The reasons are both nationalistic and economic. Bahrain and Dubai have uncanny similar economic profiles. Both have meager oil reserves and production. Both get stipends toward their annual budgets — Bahrain from Kuwait and Saudi Arabia; and Dubai from Abu Dhabi. Not surprisingly, both are trying to build economic futures without oil.
Bahrain saw an opportunity in aluminum because of relatively cheaper energy costs (smelters burn up huge amounts of energy during the various processes), and because of its strategic position between Europe and Asia, both of which are high consumers of the metal. The Middle East market is too small to absorb the capacities of the region.
Bahrain also launched a successful offshore banking unit (OBU) which incorporates a recognized international center for Islamic banking.
Dubai also went down the aluminum route. And belatedly has launched the Dubai International Financial Center (DIFC). Although DIFC officials are quick to point out that it is not competing with Bahrain’s OBU, the perception in the market is that this is exactly what it will do as it develops further and more banks start to use Dubai as their regional headquarters.
Dubai is also a major hub for re-exports mainly to Iran. But as Iran opens up to the world and the threat of sanctions continue to recede, there is no reason why most of Iran’s imports would not be done directly in the future. Dubai is also trying to develop tourism and a hub for so-called duty-free shopping. But these are geared more to upmarket tourism as opposed to mass tourism; and prices also are far from competitive, and very often more expensive in duty free than outside. Dubai has also successfully launched next to the Jebel Ali Port, the Jebel Ali Free Zone, which serves as a light manufacturing and warehousing hub for regional and international companies. It is trying to emulate this for the hitech sector by setting up the Dubai Internet City, but with the dotcom bubble effectively burst and tech stocks on a relatively bear market for more than a year, the immediate future looks sluggish. The prime economic driver for aluminum production, at least in the Gulf, is Asian economic growth, because East Asia is the core market for both Alba and Dubal. Both Dubai and Bahrain are leveraging their proximity and therefore lower transport costs to Asia, compared to say US, Latin American, West and East European smelters.
Of the top ten largest consumers of refined aluminum, four are from Asia — Japan, China, South Korea, and India. All these countries do not have the advantage of lower energy costs. As such it is more economical for them to import vital commodities such as aluminum. Japan and China are in the top three after the US as by far the world’s largest consumers of refined aluminum.
Europe consumes about a quarter of world refined aluminum production. European smelters however are in general technologically behind and as such production costs are higher. The EU could be an important market for Alba and Dubal, but the high import levy on Gulf aluminum exports is a significant barrier. However, the formation of a Gulf customs union on Jan.1, 2003, and the imminent EU-GCC free trade pact could pave the way for Gulf aluminum exports to a potentially important market. The Gulf after all is even nearer to Germany and the United Kingdom than to Japan or China.
But Asia will remain the demand driver for both Alba and Dubal at least in the foreseeable future. Post 9/11, the US economy, if we heed the pronouncements of the pundits, is either heading toward recession or is already in decline; Brazil and Argentina are effectively bankrupt; economic growth in Europe, save perhaps the UK, is sluggish. This leaves Asia (minus Japan) which has the highest GDP economic growth rates forecast for 2002-2003. Malaysia, for instance, recorded a GDP growth rate of 0.4 percent in 2001. The forecast for real GDP growth rate in 2002 is 3.5 percent. This scenario can be repeated for most of the emerging East Asian countries, especially China, the pearl of the aluminum consumer countries.
The fact that both regional and international banks are rushing to finalize financing packages for both the $1.53 billion Alba expansion to build a fifth potline; and the $900 million 155,000 tpy Kestrel expansion of Dubal, suggest that the financiers are in tune with the producers about the prospects for aluminum at least in the foreseeable future.