Downstream aluminium ambitions falter

03 August 2010

Insufficient local customers and questions over Oman’s ability to access further gas supplies are hindering Sohar Aluminium’s phase two expansion

Two years after the first pot started up at Sohar Aluminium in June 2008, the $2.4bn smelter is poised to exceed its nominal 360,000 tonne a year (t/y)capacity. According to outgoing chief executive officer (CEO) Bruce Hall, efficiencies will enable the smelter to produce 370,000 tonnes of aluminium in 2010.

Sohar Aluminium is a joint venture between Canadian metals giant Rio Tinto Alcan, Oman Oil Company and Abu Dhabi Water and Electricity Authority (Adwea). When the smelter hit full stride in February 2009, the partners announced plans to double the plant’s capacity.

But with questions over Oman’s ability to access gas supplies, a date has yet to be set for the expansion.

“There is still genuine interest among the Sohar Aluminium stakeholders in seeing phase two go ahead,” Hall says.

“But we are talking about the need to secure gas supplies for 25 years. That’s a major issue for all parties.”

Lack of gas supplies in Oman

The Omani government needs to increase gas supplies some 48 per cent by 2013 to 7.2 billion cubic metres a year. This is to meet demand that is projected to rise from 13.6 million cubic metres a day (cm/d) to more than 20 million cm/d by 2015. One option under consideration is sourcing gas from Abu Dhabi, but this will require negotiations at government level, plus the UAE has its own gas shortfalls to deal with.

In addition to gas constraints, there is a further reason to hold back on the expansion: insufficient local customers. At the time of its launch, Sohar Aluminium pledged that 60 per cent of its output would support local manufacturing. The aim was to draw new industries to Sohar, with the smelter acting as the anchor tenant for the Sohar Industrial Estate.

Oman’s Public Establishment for Industrial Estates has set aside 1.72 million square metres for downstream aluminium industries at the site. So far, Oman Cables Industry (OCI) is the sole downstream customer to have set up shop there.

In mid-2008, OCI created a joint venture – Oman Aluminium Processing (Oapil) – with the local Takamul Investment Company to build a cables plant at Sohar.

Oapil will use hot metal from Sohar Aluminium to produce up to 48,000 t/y of electricity transmission cables. The facility is due to open this year.

Hall acknowledges that Oman’s downstream ambitions suffered a major setback when SAG Sohar went into receivership. The company, a joint venture between Austria’s Salzburger Aluminium and Takamul Investment, had set up a $12.5m manufacturing plant at the Sohar Industrial Estate.

SAG Sohar had a capacity of 25,000 t/y of aluminium busbars, mostly for export to Malaysia, Indonesia and South Africa. The plant began commercial production in March 2008. Hall attributes the plant’s closure to Salzburger Aluminium’s financial difficulties outside Oman. The Austrian partner held a 70 per cent stake in the company.

“We still believe it’s realistic for the local market to use 60 per cent of Sohar Aluminium’s output,” Hall says.

“Sohar Aluminium has signed a memorandum of understanding with Gulf Aluminium Rolling Mill Company (Garmco) of Bahrain to build a rolling mill at Sohar to process 160,000 t/y of aluminium.”

Oman sees Bahrain as the model to emulate. The Gulf’s oldest smelter, Aluminium Bahrain (Alba) has attracted a diverse base of downstream companies since it started production in 1971. Garmco’s Bahrain rolling mill is the Gulf’s largest downstream aluminium company, producing 165,000 t/y of cold-rolled aluminium.

Sohar Aluminium, Garmco and its project partners Takamul Investment and Adwea have been evaluating bids for the construction of a $350m rolling mill in Sohar for some time. A decision on awarding the main engineering, procurement and construction contract is now expected in August. If all goes to plan, the rolling mill will open in early 2013.

Sohar Aluminium’s future growth rate uncertain

Hall steps down as CEO this summer to return home to Australia and will be replaced in August by Henk Pauw, managing director of Rio Tinto Alcan’s Rotterdam subsidiary, Aluchemie.

The Sohar Aluminium smelter is a modern plant whose AP36 technology is a closely kept secret that places the operation in the lowest quartile worldwide in terms of its production costs. The business is profitable, Hall says, despite the sharp fall in aluminium prices since the global recession took hold in late 2008.

The pace of the smelter’s future expansion is uncertain. It urgently needs to attract downstream manufacturing to strengthen its argument for securing additional gas supplies from the Omani government.

But Hall remains bullish. “We are still confident that local customers will take up 60 per cent of Sohar Aluminium’s output,” he says. “The combination of the Oman Cable demand with Garmco’s proposed rolling mill will put us pretty much on target and we have a couple of smaller projects under discussion too.

“We believe that we have a good business model – one that follows the example of Bahrain. Like Bahrain, we see good prospects to build a hub for downstream metals industries. In 10 years’ time, we should be well along that road, with anchor businesses in the form of a rolling mill and an extrusion plant at Sohar.”

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