Gas shortages threaten Mideast aluminium projects

LONDON/DUBAI, Aug 6 (Reuters) - Middle Eastern gas supply cannot keep pace with the region's rapid expansion and fierce competition between industries could force some energy-intensive projects, such as aluminium, to be delayed or even shelved. In their bid for cheap, captive power, several aluminium majors have plans to site new plants in the Middle East, which is fast becoming an important growth area for the metal used in transport, power and packaging. But the region's fast expansion has forced them to vie for lower-than-expected gas and power supplies coupled with rapidly rising demand. Aluminium producers are competing for energy with the steel and petrochemicals sectors, and Asian customers are also willing to pay more for liquefied natural gas (LNG). "A lot of (aluminium) projects that have been put forward have been over-optimistic -- the energy for them is not really there, capital costs are enormous and the price of energy is high," independent consultant James King said of the region. Exorbitant capital costs, put at $9,000 per tonne of aluminium, and insufficient energy might force some aluminium firms to abandon plans and look to other locations, such as Libya and Algeria, which have undeveloped gas reserves, to ensure global supply keeps up with demand. Delays could cause supply blips. Some analysts have cast doubts on up to three Middle East aluminium projects. Last month, Rio Tinto said its Abu Dhabi aluminium smelter project was on hold pending a review by the government of its own energy requirements. Some earlier media reports had suggested the project was "dead". Qatar is the only Gulf Arab country that is not suffering gas shortages. It is the world's largest exporter of liquefied natural gas. But even Qatar has put future development of its natural gas resources on hold and says it needs to devote more fuel to domestic need. Norsk Hydro has a project there, the first phase of which is due to reach full capacity of 585,000 tonnes per year (tpy) in 2010. The region's steel and petrochemicals sectors are also expanding rapidly -- the Gulf has half of the world's new petrochemical projects. The availability of gas for processing in the region is also a big concern for petrochemicals, but analysts said steel producers would be more concerned by rising energy costs than supply when mulling new projects. Aluminium smelting uses 30 times as much power as the typical 500-600 KWh per tonne used by an electric steel plant. BIG PROJECTS But big Middle Eastern projects for both aluminium and steel have secured power and will proceed, analysts and producers say. Khaled Buhumaid, a general manager at state-owned Dubai Aluminium Co (DUBAL), said the firm's Emirates Aluminium project was on track, having secured power supplies for at least the next 30 years. The aim of governments in the region to move away from being oil- and gas-based economies may still provide opportunities for other aluminium producers, if they can land long-term power deals. King predicts Middle Eastern aluminium output will more than double from last year to 4.9 million tonnes by 2015 and almost quadruple to 7.9 million by 2025. By 2025, he expected steel output to rise to 26.2 million tonnes from 16.8 million in 2007. Massimo Rossi, a senior analyst at CRU Group said their view was that aluminium producers would be able to bring on stream enough capacity globally to satisfy demand. "Nevertheless, if capital costs, inflation or energy bottlenecks limit new investment in smelting capacity, we might have some issues and consequently rising aluminium prices." Some heavy industry companies might also think hard about longer-term plans in the Middle East. The tens of billions of dollars of petrochemical projects already announced have mostly guaranteed their feedstock. But tight gas supplies and rising prices might slow further expansion after the current wave of projects is completed, said Michael Corke, senior vice president of Purvin & Gertz in Dubai. "The Middle East has been the place to build capacity on the back of low-cost gas. But the feedstock price advantage that these plants have benefitted from with cheap gas will probably disappear," he added. For details on major aluminium smelter projects in the Middle East see FACTBOX-Major Middle East aluminium smelter projects [ID:nL5735958] (Additional reporting by Simon Webb in Dubai)