Gas price hikes set to hit Bahrain's Alba costs

Aluminium demand and prices have sunk this year.

RELATED ARTICLES: Sohar Aluminium eyes year-end for expansion plan | Bahrain reveals plans for new industrial city | GCC's aluminium investments could hit $55bn

Aluminium Bahrain has said its gas bill to power its plant is set to rise by half on the back of price hikes from the country’s National Oil & Gas Authority.

The aluminium maker said prices were to increase from $1.5 per million thermal units to $2.25, a move that will increase the company’s cost of sales for 2012 to $85m. Shares in the company fell more than 9% yesterday.

Securities & Investment Company estimated that, based on the $85m increase, natural gas accounts for 10-15% of the company’s cost of sales, meaning cost of sales will rise by 5-7%.

Aluminium Bahrain, formed in 1968, is one of the largest smelters of the metal in the world and produces 870,000 tonnes per annum. Around 45% is used domestically for industrial and construction purposes, with the rest exported.

Revenue reached BHD459.7m for the first half of the year, and the company will be looking to surpass the BHD750.8m posted for the full year in 2010. Net income for the first six months was BHD102.9m.

Story continues below

Advertisement

FEATURED COMMENT Please click here to comment on this article

The company paid BHD59.6m for the purchase of natural gas and diesel last yeaer, and BHD 53.561m in the full-year 2009 respectively, SICO estimates. “The announced 50% increase in gas price would therefore translate to approximately a BHD 30mn (USD 80mn) incremental cost assuming full-year 2010 output,” the bank wrote in a report.

Shares in the company have sank on the back of the price hike in gas prices in the country, which recently had been moved forward from January 2013 to January 2012.

The company had warned investors in the run up to its initial public offering last October that there was a strong possibility of price rises, despite a holding a contract that stated that prices would not increase until 2013.

Researchers have revised down the company’s target share price and profit estimates in the wake of its higher upcoming costs. This has been met with a fall in demand globally for the metal on the back of economic uncertainty.

Investors are also concerned with the availability of gas for the
country’s industrial sector, though official sources have confirmed that supplies to Alba should continue at the current level until 2024. The government is planning to spend $200m to drill eight additional wells to boost capacity.

“We believe that there are genuine concerns such as possible future gas price hikes, possible aluminium price decline, and lack of share liquidity affecting investor sentiment,” SICO wrote. “At the same time, we argue that the current panic reaction is not justified as it was along the expected lines though with an aggressive timeline.

"We attribute the sudden panic reaction to incorrect assumptions, conclusions, and views in a recent third party note on ALBA, rather than any serious fundamental factors.”