Aluminum will give economic diversification a big boost in the GCC (page 2 of 2)

Situated with access to the world's oceans, Gulf producers can ship their products to both Europe and Asia at lower cost than Brazilian or Russian producers. Well maintained highways and reliable electric and water grids link the industrial sites to ports and cities. Proximity to India provides a skilled and mobile work force; almost 40 percent of Dubal's employees come from the sub-continent.

Environmentally friendly smelting is increasingly important to potential customers who themselves face public pressure to turn 'green.' Alba and Dubal have incorporated the latest clean technology and are two of the most environmentally friendly smelters in the industry. Nitrous oxide emissions from Dubal's power plant have declined over the years, and the smelter has one of the lowest levels of fluoride emissions in the world.

Alba is spending more than $65 million to reduce harmful emissions from its six gas-fired power plants, and prides itself on being so clean that a vegetable garden grows on its grounds. The other smelters under construction in the Gulf have the opportunity to incorporate the newest technologies and meet evolving environmental standards at a fraction of the cost of older smelters.

Nevertheless, the Gulf's dominance in the industry is not guaranteed. Russian aluminum giant Rusal is taking advantage of Central Asia's vast bauxite deposits and energy resources to expand and overtake Alcoa as the world's largest aluminum smelter. Smaller producers such as Iran have plans to double output and formerly non-producing countries such as Vietnam will start up new smelters. Industry giants Alcoa and Alcan are closing unprofitable plants while still increasing overall output.

Adding to the uncertainty, most GCC producers will have to import raw materials for production. Two tons of refined bauxite, or alumina, are required for every ton of primary aluminum smelted. The Saudi mining company Ma'aden controls the rights to the only major bauxite deposit on the Arabian Peninsula and will use the alumina derived from there in its own plant set to commence production in 2008. The rest of the Gulf must import from elsewhere.

Alumina prices were up over 40 percent on the spot market last year and are projected to stay high. Firms are scrambling to secure their supplies. Dubal recently signed a contract with India's Larsen & Toubro to build an alumina refinery in the southeastern state of Orissa, and bought rights to 40 percent of Global Alumina's output in Guinea. Still, Dubal's alumina production will not be near the amount needed to support its planned aluminum output. For the time being, Dubal and other alumina importers are at the mercy of the spot market for this input.

Good management is also essential for GCC smelters to remain profitable. Dubal's policy of rewarding employees for cost-saving suggestions, for example, saved the company tens of millions of dirhams in recent years. Dubal has also built up a reputation for reliability.

During the first Gulf War, Dubal trucked its aluminum to the port of Fujairah on the Indian Ocean to ensure that its product would reach its customers in case the Strait of Hormuz was closed. The Asian financial crisis of the late 1990s provided Dubal with another opportunity to burnish its reputation as a reliable supplier.

While other companies fled Southeast Asia, Dubal continued to meet its customers' needs, offering flexible financing options in lieu of credit. Dubal is now the preferred supplier of many of its Asian customers, and the company's sales in Asia continue to grow. This constant push to lower costs and earn a good reputation is essential if a state-owned company is to compete successfully on the world market.

The GCC's energy reserves will ensure that the Gulf remains competitive in the world aluminum industry over the next decade. The GCC will have a multi-billion dollar industry that stands to become a cornerstone in a diversified economy.

The Gulf countries are making a smart move to take advantage of their energy reserves, strategic geographical position, and fortuitous global circumstances to build up their aluminum industry. By locking in their alumina contracts now and focusing on good management, aluminum producers will be a step closer to long-term success and profitability.