Aluminium oversupply from Gulf smelters threatens prices
Posted on 13 April 2010 with no comments from readers
This week saw the official opening of the new Qatalum aluminium smelter in Qatar and by the end of the year the new Emirates Aluminium smelter in Abu Dhabi will come on stream.
Between them these two giant plants will add 1.3 million tonnes of aluminium per annum to global supply, squeezing the profit margins of producers in the West and China that do not have access to cheap power from natural gas. Energy is the biggest component in the cost of aluminium production.
Aluminium supply glut
There is already an estimated supply glut of 1.5 million tonnes. The new smelters join Dubai’s Dubal as among the most efficient aluminium production plants in the world.
The impact on aluminium prices of this oversupply will be felt, but ultimately it will be the high-cost capacity that is phased out in any squeeze on prices. In a global marketplace that means the world should get cheaper aluminium in the long-term, or if demand for the metal increases dramatically in future years that the Gulf States make a lot of money from their new smelters.
That of course is what the Gulf States investing in aluminium would prefer. But it is always a gamble when installing new fixed plant capacity on this scale. The oversupply could floor prices for sometime until excess capacity is eliminated.
This is a cost the Gulf States are willing to bear as a price for this addition to their industrialization. Rather like downstream oil processing the production of aluminium levers off the natural resources of these countries to advantage.
Falling prices
Presently aluminium prices are around $2,400 per tonne, almost twice their low of a year ago but well down on record highs of over $3,000 set in 2008.
High energy cost aluminium producers in the West and China are just not going to be able to compete with the virtually unlimited cheap natural gas supplies available in the Gulf States. Indeed, given this advantage it is something of an anomaly that aluminium production is anywhere else.
That said if the world goes into a double dip recession then the newest entrants to this market will find the price of their commodity falling just as expensive new plants come on stream. The Qatalum project alone cost $5.7 billion, and its owners will be looking for a return on this huge investment.
