Aluminum will give economic diversification a big boost in the GCC (page 1 of 2)

Aluminum accounted for 12 and 7 percent of GDP last year in Bahrain and Dubai, respectively, and the metal's role in the GCC will expand in the coming years. With more than $14 billion in investments planned, aluminum production in the Gulf will rise from 1.5 million tons in 2005 to 5 million tons in 2010. Other proposed projects could lift GCC production beyond 7 million tons by 2012, giving the region 18 percent of world output.

For mega-smelters with planned annual capacities of over 1 million ton, like Alba, Dubal, and the Qatar Petroleum-Hydro joint venture, revenue for each firm could exceed $2.5 billion at today's prices. Finally, it seems, the GCC will have a large export industry that does not rely on oil production.

Creating a national industry that is profitable in the long term is tricky business, but several factors suggest that the aluminum industry has the potential to thrive in the GCC. The world price of aluminum will remain strong. World demand is growing between 4 and 5 percent, or more than one million ton each year.

China's well-documented hunger for commodities to fuel its boom extends to aluminum and the healthy construction and transportation sectors in that country account for much of the world's growing demand. By 2008 the Asian nation will be a net aluminum importer.

Europe and the United States will also import more aluminum in the coming years, but for different reasons. The price of natural gas, which has risen 150 percent for smelters worldwide over the last four years, is making many European and American aluminum plants unprofitable. A smelter with 250,000 tons capacity uses enough electricity to power a medium-sized city, and a power outage of just four hours can allow aluminum to freeze in its pot and destroy the production line. Secure gas supplies are a big question for many smelters.

Declining gas production will turn the US into a major importer in the coming years, and Europe will rely on natural gas for 30 percent of its energy needs by 2020. Political questions surround the ability of Russia and Iran, which have the world's largest reserves, to get their natural gas to market. Alternative sources of energy are also becoming less feasible.

Concern expressed by regulators and customers over high emissions of CO2 and other pollutants is requiring older smelters to switch from coal to natural gas for their energy needs or shut down, and little room exists to expand hydroelectric capacity in Canada and the US Pacific Northwest. Some 75 percent of the world's idle capacity is in North America, and Europe stands to lose millions of tons capacity between now and 2010.

Gulf countries are ramping up aluminum production while smelters elsewhere shut their doors. The GCC's abundant gas reserves make it an attractive locale for aluminum producers. The completion of the $3.5 billion Dolphin pipeline will supply the UAE and Oman with 500 cubic feet of Qatari gas daily. Bahrain is completing terms for a separate deal with its gas rich neighbor. If the price of gas continues to rise, both Saudi Arabia and the UAE have large reserves of their own to develop.

Besides gas, a number of other factors create an atmosphere conducive for heavy industry in the Gulf that few other countries can match.