Gulf aluminium producers will play a key role in the industry's future, says a new report.

The higher energy prices in the US and Europe make the Middle East a growing base for production of the metal, the Fitch Ratings report said.

The availability of low cost gas power in the region will boost its prospects, together with the construction of more aluminium smelters, it said.

"The Middle East is forecast to have the highest growth rate in primary aluminium production over the next five years, with a doubling of its current production of around two million tonnes by 2011," the report states.

"Driving this growth are energy costs of an average of $20 per megawatt hour (mwh), which compares favourably with $28/mwh in the US, and over $40/mwh in China," the report states.

"Currently, production in the region is dominated by two established players - Dubai Aluminium (Dubal) in the UAE and Bahrain's Alba - which account for around 85 per cent of existing production.

"Future production growth is expected to come from capacity expansions by Dubal and Alba, as well as new smelters planned in Qatar, Oman and the UAE," it adds.

The report says that in recent times new power supply contracts at considerably higher prices in the US and parts of Europe have resulted in a number of smelter output reductions and permanent closures.

This trend is expected to continue over the next decade with around 3.2 million tonnes of primary aluminium production capacity (equal to around 8pc of current world capacity), expected to be taken off-line in the US, Europe and China by 2011.

"The world is currently experiencing a shrinkage in the number of 'power islands' able to support energy intensive industries such as aluminium production," notes Fitch's industrial team director Peter Archbold.

"In the future, new aluminium smelting capacity is expected to be concentrated in areas such as the Middle East, Russia, Iceland and South America," says the report.

"China will also continue to add new capacity over the next decade. However, most of the new small-to-medium smelter capacity added is expected to be located in the top quartile of the global cost curve," the report adds, calling the cost of electricity the most important factor affecting production of the metal.

"Electricity typically accounts for around 25-30pc of the total cash cost of primary aluminium production," Fitch says.

"Smelters have always been located in areas where electricity could be sourced cheaply. However, the breaking down of trade and investment barriers is resulting in primary aluminium production, which has historically been concentrated in western countries, shifting to developing regions," the report adds.

However if the Middle East is to fulfil its potential as a hub for the production of aluminium it will have to rein in spiralling constructions costs, the firm's experts warn.

"While cheap electricity costs represent a substantial advantage, Fitch notes that the economics of future aluminium smelter projects in the Middle East could be impacted by higher construction costs in the region, and increased transportation costs to ship raw material to the region," the report says. - TradeArabia News Service