We noticed you're blocking ads.

Keep supporting great journalism by turning off your ad blocker.

Questions about why you are seeing this? Contact us

Font Size

- Aa +

Sat 26 Jun 2010 04:00 AM

Font Size

- Aa +

A downhill trend or a progressive step forward?

As aluminium takes another sudden price hike, industry experts are apprehensive about its future. Elizabeth Broomhall takes a look at the commodity's ups and downs.

A downhill trend or a progressive step forward?
The price of aluminium made a slight comeback in Q1 of this year, due to an early spike in demand.
A downhill trend or a progressive step forward?
Experts say a general instability characterises the price of raw materials such as aluminium.

As aluminium takes another sudden price hike, industry experts are apprehensive about its future. Elizabeth Broomhall takes a look at the commodity's ups and downs.

Peaking at more than US $3,000 per tonne as a result of rising energy prices and the increased demand on supplies during the construction boom years, the world's second most-used metal after steel presented a real investment opportunity for the Middle East.

Indeed, it was this same year that the primary aluminium producers in the Gulf region announced the formation of the Gulf Aluminium Council (GAC), an organisation established to represent, promote and protect the interests of the emerging aluminium industry, in a geographical area perfectly suited to its high-energy reliant production.

Unfortunately, the inflated prices were not to last. Hit hard by the financial crisis, a time when projects were halted and the demand for materials diminished, aluminium prices, along with copper and steel, entered a steep decline. In April 2009, the price for the metal had slumped to US $1420 per tonne, and by October, it was worth little more than US $1,300, an all time low.

To the surprise of industry experts, aluminium managed to make a slight comeback in Q1 of this year, prices climbing back up to US $2,380 per tonne in April as oil costs rose above $85 per barrel. Suddenly, analysts were optimistic, anticipating economic recovery and an upturn for the metal, with a return to 2008 levels predicted by the end of 2010. But they were shot down during the second quarter as the price fell once more to US $1,930.

Speaking about the price changes, Saudi Arabian Mining Company, Ma'aden's aluminium project manager says: "The long-term trend in the price of aluminium is a downward trend. You get your spikes due to steady demand from China and Middle East construction, but these are just spot prices.

"Since October, the price of aluminium has steadily risen, but has since cooled off again as China has pulled back."

Evidently, this is due to curbs on lending and property speculation in China, which have eased demand for the metal, creating oversupply within China itself and causing prices to fall below the cost of production in the region.

Other reasons for the changes include the decline in the number of Middle East construction projects and a general instability which characterises the price of raw materials.
"There are two reasons for the recent decline in the price of aluminium," explains Naser Al Otaibi of Aluminium Products Company. "One is the very limited demand for the metal. You can't deny that there is a downturn in construction, which causes a downturn in the demand for aluminium. Second is the fact that there is no stability in the price of raw materials."

He goes on to explain how current prices are in fact now causing a ‘price war' among suppliers, some aluminium companies charging their clients unacceptably low prices and making it extremely difficult for competing companies. Meanwhile, according to Ma'aden's aluminium project manager, contractors are less likely to bear the brunt of low prices, since they are exposed to the success or failure of a project, rather than to the cost of raw materials, and shielded by their ability to transfer costs on to the end user.

But of course, in a region where the cost of production is so cheap, deflating prices are still not enough to hold back the industry's biggest aluminium producers. With expensive smelters replaced by cheaper units, greater efficiency in the production process and a more buoyant construction market looming, investors remain optimistic about the possibility of healthy profit margins.

"There is now more efficiency in the systems used to produce aluminium, as well as better access to cheaper energy," says Ma'aden's aluminium project manager.

"In the last ten years the technology for producing aluminium has improved in terms of scale, so you've got much bigger smelter lines with much bigger currents, which reduces the cost and increases the efficiency of production. Cheaper energy makes aluminium production in the Middle East very competitive.

"So in truth, while it's unlikely that you would base your investment decision on a spot price, certainly the current trend in pricing is enough to support continued smelter investment."

This standpoint is supported by the company's recent decision to enter into a JV agreement with Alcoa. The JV will build the world's largest fully integrated aluminium complex in KSA, worth US $10 billion. Banking on the repercussions of cheap production, the company is among several GCC investors expecting the Middle East to become one of the world's key aluminium production hubs, alongside China and India.

But according to construction industry analysts, the generation of high profit margins from such developments is far from guaranteed. While there is already a global oversupply of 1.5 million tonnes, a double dip recession threatens to drive prices down further, and the newest industry players could struggle to find a return on investment.

According to aluminium experts at March's Middle East Aluminium Conference, the real future of the aluminium industry in the Middle East hangs on the sustained recovery of the construction and transport sectors, these having a direct impact on demand and pricing.

Arabian Business: why we're going behind a paywall

Real news, real analysis and real insight have real value – especially at a time like this. Unlimited access ArabianBusiness.com can be unlocked for as little as $4.75 per month. Click here for more details.