Many energy intensive industries in the Middle East have thrived on huge gas price subsidies that industry observers say should be phased out to encourage investment in regional gas exploration and discourage waste.
From Jan. 1, Bahrain's state run energy supplier will raise the price of gas it supplies to Alba by $0.75 per million British thermal units (mmbtu) to $2.25/mmbtu, Alba said on Wednesday. This will increase Alba's costs significantly while still offering the plant cheaper fuel than most of its competitors outside the region.
"If the notified price increase takes effect, Alba expects that it would result in an increase of approximately $85 million in Alba's cost of sales for the year 2012 based on its expected production level," Alba said in a statement.
Alba currently pays just $1.50/mmbtu for gas it uses to produce more than 870,000 metric tons a year of high grade aluminum, a fraction of the cost paid by competitors in other parts of the world.
Analysts say that the big subsidies prevalent in the Middle East are unsustainable because these prices are often lower than the cost of production of non-associated gas reserves.
Gas demand in the small Gulf oil producing country has grown rapidly in the last few years, pressing the island nation to find new sources to feed its refining and aluminum smelting businesses.
The National Oil and Gas Authority of Bahrain (NOGA) has started a comprehensive study of long-term natural gas supply and demand in Bahrain and is considering establishing a new gas pricing structure after 2012, Alba said.
As one of the most energy intensive industries, the cost of gas to make enough electricity to smelt aluminum is a major variable cost for the production of the key metal.
Low production costs due to cheap energy have meant the Middle East has been the main source of aluminum smelter capacity growth outside China in recent years as high costs have forced plant cutbacks and closures in the US and Western Europe.
"To the extent that the real cash costs of energy are rising, then I think it's fair to anticipate that the power price to smelters in the region will increase," said metals analyst Duncan Hobbs of Macquarie.
"While some power suppliers may perceive an opportunity to charge a higher prices to aluminum producers in the region, at the end of the day they're not going to push the price beyond what the smelters can afford," he added.
"It's likely that the producers in the region will remain very competitive."
Alba feeds the gas into its own 1,500-megawatt gas fired power plant and sells some to the national grid during the summer when air conditioning demand surges across the Middle East.
Bahraini Energy minister Abd Al-Hussein Mirza said in July the country may have to look as far as Russia to meet growing demand for gas as supply talks stall with its neighbors, including Qatar, one of the world's biggest gas exporters.
