Gulf finally lives up to aluminium promise

Canadian producer Alcan has just announced a heads-of-agreement tie-up with the Saudi government investment vehicle Ma'aden to build an integrated bauxite-alumina-aluminium complex on the country's east coast. The smelter component would have an initial capacity of 720,000tpy and, subject to the usual feasibility work, a start date is pencilled in for 2011.

This project is symptomatic of the growing investment flow in new smelter capacity in the Persian Gulf region. Seasoned observers such as us have followed the twists and turns of many attempts by Saudi Arabia to convert its petro-dollars into aluminium capacity. Despite much hype and sporadic bursts of planning action, none ever made it off the drawing-board. This time around things look different, not least because of the agreement with an established aluminium major (and technology supplier) such as Alcan.

But it's part of a broader trend that is seeing the Gulf region finally live up to the long-promoted promise of becoming a global hub of aluminium production.

Two key drivers seem to be at work here. Oil- and gas-rich countries in the Gulf are flush with revenue from soaring energy complex prices and this time seem determined not to let slip yet again the chance to use this cash to diversify their economies.

That's coincided with a drive by established aluminium producers to invest in new smelter capacity with lower costs of production. The same process is encouraging an aluminium boom in Iceland, which also boasts huge potential energy capacity from a combination of hydro and geothermal sources.

For the likes of Norwegian producer Hydro, push has come to shove in terms of its domestic capacity with the country's environmental authorities aggressively accelerating the time-table for older-technology capacity to be closed. Its response comes in the form of the joint venture with Qatar Petroleum to build a 585,000tpy capacity greenfield smelter in that country.

There are two existing producers in the Gulf--Dubai Aluminium (Dubal and Aluminium Bahrain (Alba). Both have been embarked on near continuous expansion programmes over the last couple of years with more to come, largely in the form of technology upgrades.

But there is a sense that both will struggle with major further capacity hikes in the face of dwindling extra energy supply in both countries. That has prompted one—Dubal—to seek out other investment opportunities in the region. It is involved in the 1.4 million tpy greenfield venture in Abu Dhabi. Incidentally, it is also involved in a project in Algeria, which we haven't included in our table because it is not strictly in the Gulf region.

Alcan itself is already a 20% stake-holder in the Sohar Aluminium project in Oman, which is on course to be the first smelter project to come on stream late next year, closely followed by that in Qatar.

That itself is proof that the Gulf's aluminium ambitions have moved beyond pipe-dreams to concrete reality. With three projects already committed—Oman, Qatar and Dubal's joint venture in Abu Dhabi--the region will see at least another 1.64 million tpy of capacity brought on line over the next three years, complementing the 1.81 million that will exist by that stage in Bahrain and Dubai.

Now that the momentum is building, though, that could prove to be just the start.