With dwindling reserves of hydrocarbons, economic diversification is a priority for Bahrain. Aluminium Bahrain (Alba) is one of the country’s oldest and most ambitious ventures, created to reduce the country’s dependence on oil, generate export earnings, maximise use of its natural resources and create jobs.
The initiative to build a major aluminium smelter in Bahrain was first mooted in the mid-1960s. Manama saw a gap in the market to position itself as a staging post to link Australia, one of the world’s major exporters of alumina, with the leading consumer markets for aluminium in Europe, the Americas and Asia.
As well as its location, the kingdom had ready access to the gas supplies needed to drive energy-intensive aluminium production. Bahrain has natural gas reserves of about 3.25 trillion cubic feet, much of it associated gas from the Awali oil field. With approval granted in 1968 for a smelter producing 56,000 tonnes a year (t/y) of aluminium, the smelter poured its first hot metal in 1971, with a production capacity of 120,000 t/y.
Mumtalakat Holding Company, the investment arm of the Bahrain government, holds a 77 per cent stake in Alba. Sabic Industrial Investments, a subsidiary of Saudi Basic Industries Company (Sabic), holds 20 per cent and Germany’s Breton Investments holds a 3 per cent stake. Proposals to offer up to 40 per cent of the company through an initial public offering, first suggested in April 2007, have yet to come to fruition.
Since opening 38 years ago, Alba’s plant has been upgraded five times. In 2005, the addition of a new $1.7bn reduction line, Line 5, increased capacity to more than 830,000 t/y, making it the largest modern aluminium smelter in the world.
The expansion of Line 5 included a new power station, cast house and other facilities. France’s Alstom Power was the engineering, procurement and construction contractor to build the power station to support the fifth potline, a project valued at $1.7bn. The consultant to the overall project was the UK’s Mott MacDonald, and the US’ Bechtel carried out the front-end engineering and design contract. Finance was secured through the Industrial Bank of Japan.
Today, Alba’s production capacity stands at 870,000 t/y and the company contributes about 12 per cent to Bahrain’s gross domestic product (GDP).
The smelter and associated downstream industries have emerged as a major source of employment for Bahrain. Alba now employs 3,000 people directly – more than 80 per cent of them Bahraini nationals – and sustains additional jobs in downstream manufacturing companies that use its products.
“Gulf smelters have the advantage not just of geography but of energy supply,” says Massimo Rossi, senior consultant with the primary aluminium team at UK metal consultant CRU. “They have access to the gas and electricity resources that they need and can build captive power plants so that they do not have to rely on the national grid.
“This has given them longer-term access to competitively priced energy supply than many smelters in Europe or the US. They are also close to the consumer markets of Europe and to Asian markets such as China, Korea and Taiwan. This offers the benefit of being able to shift supply to meet the strongest demand, and that has been very beneficial.”
The company produces four types of aluminium: standard ingots and larger T-ingots, which are used for re-melting; billet, used for extrusion of aluminium profiles or sections; and rolling slabs, which are used in rolling mills for plate sheet and foil.
To do this, Alba imports 1 million t/y of raw alumina, as well as petroleum coke and pitch, through its own marine terminal, which includes a 450,000-t/y coke calcining (a thermal treatment process used in aluminium production) facility and a water desalination plant.
Some 45 per cent of the metal produced supplies Bahrain’s downstream aluminium industry, including companies such as Gulf Aluminium Rolling Mill Company (Garmco), the largest downstream aluminium business in the Gulf, which produces 165,000 t/y of material, including 35,000 t/y of aluminium foil.
Garmco, in which the government holds a majority stake, also owns Midamerica Extrusions, a US-based manufacturer of extruded and rolled products, and has 14 international subsidiaries. In September 2007, it signed a memorandum of understanding to build a plant in Oman that will produce 165,000 t/y of finished material. Construction work on the plant is due to begin in June.
Other local downstream industries that depend on Alba’s products are Bahrain Atomisers International (BAI), Bahrain Aluminium Extrusion Company (Balexco) and Midal Cables, which uses metal delivered while still molten from the Alba smelter to produce conductors, rod and wire. In 1992, Midal launched a subsidiary company, Aluwheel, which exports 500,000 cast wheels a year to automotive manufacturers in Europe and the US. The remainder of Alba’s output is exported to more than 25 countries around the world.
Aluminium is a power-hungry industry. Alba’s site southeast of Manama includes a dedicated energy complex – four power stations able to generate 1,504MW via combined-cycle technology, where waste heat generated by the gas turbines is used to power steam turbines. The plant also supplies electricity to Bahrain’s national grid in the summer peak demand period.
Before the global economic downturn took hold in mid-2008, Alba’s five-year plan included a provision to increase capacity to 1.2 million t/y. This figure is, it says, “the maximum size for the Alba smelter, logistically and environmentally, to ensure optimum productivity and economies of scale”.
The plan to increase output to more than 1 million t/y by 2012 requires a sixth production train, which will only be built if and when Bahrain reaches a deal to source additional gas feedstock. To date, talks have taken place with suppliers in Qatar and Iran.
However, the company announced in January that it plans to delay its expansion for two years, responding to falling global demand for aluminium, because of the worldwide slowdown in construction, and falling production in the shipbuilding, aviation and automotive industries, which in turn has driven down world metal prices.
In mid-May, the price of aluminium on the London Metal Exchange (LME) was hovering at about $1,550 a tonne, half the level of July 2008’s peak of $3,380 a tonne, when it was announced that Alba had put its expansion plans on indefinite hold because of “a shortage of gas needed for power generation”.
“Expansion is off the table for the next couple of years,” confirmed Mahmood al-Kooheji, Alba’s chairman.
Al-Kooheji said Alba had set up an in-house group to study the likely impact of the downturn on the smelter’s current and future business, and plans to expand. This could mean the prognosis for GCC aluminium producers is less bullish than anticipated.
Regional production has doubled since 2000 to 1.8 million t/y and is projected to achieve a further fourfold increase by 2020, when the region is expected to generate more than 12 per cent of the world’s aluminium supply, according to projections from the Gulf Aluminium Council. Middle East aluminium producers currently account for 5 per cent of the world’s aluminium.
Alba does not release its corporate figures. However, falling revenues because of lower global demand are undoubtedly a factor in its decision to postpone expansion, even though the smelter is now stretched to full capacity, with output currently at 860,000 t/y.
The major challenge Alba faces is securing the liquefied natural gas it needs to generate electricity for the smelter. With global energy demand rising, securing access to gas is not easy. “To date, Alba has been able to take advantage of low-cost energy,” says one Dubai-based industry observer. “But its future expansion is being held back by questions over the avail-ability of gas feedstock. The company has been involved in long and complicated negotiations with Iran over gas supply for several years. This uncertainty means Alba is unlikely to be able to expand in the near future.”
Another issue is securing access to the raw materials needed. Alba currently imports most of its alumina from mines in western Australia, but competition from the growing number of aluminium smelters in the Gulf is putting pressure on Alba to secure further supplies through long-term agreements.
One option would be to follow its UAE-based rival Dubai Aluminium (Dubal) into upstream investment in the aluminium industry. Dubal is involved in bauxite mining in India and Africa. In May 2007, the company set up a joint venture with Abu Dhabi state investment vehicle Mubadala Development Company (Mubadala), Australia’s BHP Billiton, and its aluminium supply division Global Alumina International, to develop the Sangaredi refinery in the Republic of Guinea. It has also signed agreements to import alumina from bauxite-rich Brazil, through a partnership with Brazilian mining company Vale, which was signed in April.
Alba has in the past hinted that it is interested in setting up partnerships with third parties, possibly in Saudi Arabia or India. It has held talks with several mining companies, including Saudi Arabian Mining Company (Maaden), with a view to securing future supplies. Alba chairman Mohamed Alghatam told MEED in 2006 that the company was discussing Alba’s involvement in Maaden’s integrated alumina refinery and smelter project, but since the project has been split into two phases, effectively delaying the refinery, no announcement has been made.
That the need to secure sources of raw materials could become Alba’s Achilles heel became apparent in 2008, when a dispute with US mining giant Alcoa, which supplied Bahrain with bauxite from its mines in western Australia, ended up in a federal court in the US. Alba is suing Alcoa with a $1bn claim for damages, following a dispute over pricing and supply.
While power supplies account for about one quarter of a smelter’s operating costs, sourcing alumina accounts for a sizeable 45 per cent of total operating costs.
It takes up to five tonnes of bauxite to pro-duce two tonnes of alumina. Once fed into the smelter, this will yield one tonne of aluminium. Securing supplies of bauxite will be critical to future Gulf production of aluminium as regional producers like Bahria seek to increase their share of global production.