The Dubai Aluminium-Emirates Aluminium (Dubal-Emal) merger comes at an opportune time for the aluminum industry, which has been labeled as the "ugly sister" of the metals industry because of an acute fall prices over the past 24 months.
The merger will create a USD 15 billion giant and position the entity as the world's fifth largest producer behind Rusal, Rio Tinto, Alcoa and Aluminium Corp. of China.
The combined entity is set to benefit from cheaper natural gas and feedstock at a time when metal companies are struggling with higher prices and softer commodity prices.
The news comes two weeks after Mubadala Development Company and Dubai Aluminium bought Global Alumina Corp.'s stake in the Guinea Alumina Corporation Ltd, which would give the UAE companies access to precious bauxite - an aluminum ore. Guinea has a quarter of the world's bauxite reserves.
GLOBAL WOES
The global aluminum industry has been suffering from a huge stock overhang with rising production and slowing demand. But a number of plant closures lately helped stem the tide this year.
Source: International Aluminum Institute
"Cost inflation, in a period of softer commodity prices, is forcing mining and metals companies to either re-evaluate, shutdown or divest high cost and non-core business units," said Ernst & Young in its outlook on the metals industry.
"Several companies are reviewing their portfolios to identify underperforming assets. Energy-intensive aluminum is already witnessing multiple shutdowns and closures in the industry."
Close to a million tons of capacity was shut down in China at the start of the year. Meanwhile, Russian giant Rusal said it would slash 300,000 tons of capacity this year and suspended production at its disputed 100,000 smelter plant in Nigeria.
Others such as Alcoa are reviewing nearly half a million ton of capacity, while Century is also contemplating closure of 244,000 tons smelter plant in the United States. New Zealand Aluminium Smelters also announced cutting production by 5%.
Still, the avalanche of new output coming to the market will ensure prices remain depressed. In March, Barclays Capital was projecting an output surplus of 1.5 million tons.
Source: International Aluminum Institute
PRODUCTION SET TO RISE
Harbor Aluminum Intelligence data shows global output for the metal is set to rise 50.6 million tons this year, a respectable 5.5% rise over the previous year, with demand set to reach 50.5 million tons in 2013.
Global output is set to hit 56.2 million tons by 2014, with demand reaching 55.7 million during that period, the research company said.
But aluminum prices have fallen from their peak of USD 2,800 per ton in early May 2011, to their current spot price levels of USD 1,888 per ton.
"We think that the price of aluminum is unlikely to be able to sustain moves much outside the range of USD 1,800 to USD 2,100 per ton over the next year or two, due to the potential supply responses in either direction," said Ross Strachan, commodities economist at Capital Economics.
"These figures are at the low end of consensus expectations, especially for this year, although we think the downside for aluminum is less than for most other industrial metals."
Strachan thinks prices will remain bearish primarily because of rising production, poor prospects for the global economy and high inventory.
"Prices are unlikely to stray far from current levels for a sustained period, due to the overhang of spare capacity, which will limit the upside, and high costs, which will limit the downside," Strachan said, adding that prices will probably drop a little further to around USD 1,750 per ton, before sufficient production cuts occur to enable a slow recovery.
"Thereafter, we forecast aluminum to end 2014 at around USD 2,100 per ton."
OPPORTUNITY FOR UAE
Falling prices could result in a number of players lowering production, which would allow the UAE entity to strengthen its position in the market.
The combined entity's access to its assured supplies of bauxite and natural gas feed from Abu Dhabi would help lower costs and compete better with other producers.
Dubal produces one million tons of aluminum, while Emal plans to expand production from 800,000 tons to 1.3 million tons.
And once the global economy repairs itself, the merged entity would well find itself in a strong position, especially as the metal's long-term outlook remains bright.
The International Aluminium Institute estimates that the demand for the metal is set to accelerate from 3% each year in the past four decades, to 4% per annum over the next two decades on the back of urbanization, industrialization and economic development in emerging markets.
Source: International Aluminum Institute
The growth trajectory means the equivalent of about 40-50 new smelters (with a capacity of 500,000 tons each) will be needed to satisfy 2030 forecasted demand, the Institute forecasts.
"Given that electricity will remain the most important driver of competitiveness, the new smelters will be found in the Middle East region, Russia, the western and north-western provinces of China, Malaysia, Africa and India," the institute said.
Also Read: Guinea's bauxite market
© alifarabia.com 2013
