By Digby Lidstone

IT HAS BEEN A TOUGH YEAR FOR ALBA. The 40-year-old Bahraini aluminium producer has endured a long corruption inquiry, a change of management, an extensive restructuring, job losses and whisperings of a possible privatisation.

Add to this the halving of aluminium prices in the past 12 months and the construction of at least four new smelters in its backyard, and a casual observer might assume that Aluminium Bahrain was on its last legs. Yet quite the reverse is true, says Mahmoud al-Kooheji, chairman of the company. “In many ways the financial crisis has been a good thing as

it has forced us to do our homework and work out how to stay ahead of the competition,” he says. “We’re still one of the lowest-cost producers in the world.”

Alba is one of the oldest metals producers in the Gulf, set up in 1968 to use the gas flared by Bahrain’s oil industry.

Producing up to 880,000 tonnes of aluminium a year, its smelter is the second largest in the region after one in Dubai.

That will soon change. Abu Dhabi, Qatar, Oman and Saudi Arabia are all pursuing aluminium projects that will bring some 1.3m tonnes of capacity on stream in the next two years. By 2020, the Middle East will have quadrupled production and will account for 12 percent of global output, according to the Gulf Aluminium Council, a trade body based in London.

“We are part of a regional industry and it is to our benefit if that industry is put on the map,” says Mr Kooheji, who says he is not fazed by the competition. “Even if you put all the GCC [Gulf Co-operation Council] producers together, it is still a very modest percentage of world capacity. We are not competing with each other, but with Europe and the US.”

The timing is not propitious. Aluminium prices tumbled from a peak of $3,380 a tonne in July last year to less than $1,400 this summer.

Yet Alba has managed to scrape by. Though it will not see anything like its BD293m ($777m) profit of 2008, the company is still in the black, says Mr Kooheji. “We have lost nearly two-thirds of our revenues but we still have a surplus cash flow.”

Even in such poor market conditions, analysts say Alba and its peers have an edge over other producers. Cheap gas, modern smelters and economies of scale all weigh in their favour. “The big advantage Middle East producers have is competitive gas rates, and they can operate at margins where others cannot survive,” says Massimo Rossi of CRU Group, a London-based commodities consultancy. “As this capacity comes on stream, you are likely to see it forcing out the higher-cost producers in the US and Europe. Essentially, it’s a process of capacity substitution.”

The question is where Alba will fit in the regional picture. Unlike its peers, Bahrain is fast running out of natural gas.

Local reserves are about 84bn cubic metres and expected to fall to 75bn by 2011. While Alba’s supplies are guaranteed for decades, the shortage of resources limits its expansion plans.

Yet a little creative thinking could still provide modest room for expansion, says Mr Kooheji. With just a “fractional” increase in gas, Alba can boost production to about 1.2m tonnes a year, he says.

His appointment last year raised speculation that the government was preparing for a sale of Alba, in which it has a 77 percent stake. A former finance ministry official, he was a prominent architect of Bahrain’s privatisation strategy, and also sits on the board of Mumtalakat, the holding company set up to oversee the government’s corporate assets.

“A sale is certainly a long-term goal,” Mr Kooheji says.

“Our aim would be to reduce ourselves to a significant minority stakeholder and bring in partners with the technology and know-how to improve the company.”

The process has already raised political hackles. Alba provides jobs for more than 3,000 people, making it one of the biggest employers in the small Bahraini economy. So far, management has borne the brunt of the revamp, which is intended to reduce costs by as much as 30 percent.

The restructuring has also been accompanied by a rigorous anti-corruption campaign, which made international headlines in March last year when the Bahraini government sued Alcoa, its long-time raw materials supplier, for corruption and fraud. The federal court suit, filed in the US, alleges that Alba was overcharged $2bn during a 15-year period, and claims that Alcoa bribed Alba executives for further supply contracts. Alcoa denies the charges. The case has been stayed pending a criminal investigation by the US Justice Department into the claims.