Gulf aluminium producers build up dominance

07 March 2011

After two years of rapid expansion, GCC aluminium producers are well placed to meet new demand from Asian markets in the coming decade

Key fact

The Gulf countries will produce 12 per cent of the world’s aluminium by 2020

Source: Gulf Aluminium Council

The GCC has invested about $30bn in the aluminium industry in recent years. The Dubai-based Gulf Aluminium Council estimates this could rise to $55bn as countries across the region build new smelters and upgrade their existing capacity. Beyond the oil-rich Gulf too, North African, such as Algeria, see aluminium as an industry ripe for growth.

The past decade has seen production shift away from mature economies towards developing countries. Aluminium is a power-hungry business in which electricity accounts for 40 per cent of the production cost. After a decade of soaring energy prices, Arab oil states’ access to cheap, plentiful energy gives them a growing advantage over traditional producers.

Arab oil states’ access to cheap energy gives them a growing advantage over traditional producers

An estimated two-thirds of European smelters face closure and the coming decade will see production shift to markets, including the Middle East, Russia and Iceland. Meanwhile, with China, India and other Asian markets driving demand for aluminium, the Gulf is well placed geographically to meet future consumption.

Gulf aluminium leader

According to the Gulf Aluminium Council, the Gulf countries will produce 12 per cent of the world’s aluminium by 2020, with regional smelters turning out more than 10 million tonnes a year. In 2008, the combined capacity of Gulf smelters stood at just 2.6 million tonnes a year (t/y), representing just 6.5 per cent of the world’s aluminium production.

Countries from Algeria to Oman are channelling their oil and gas reserves into developing aluminium smelters, as they strive to diversify their economies.

Aluminium Bahrain (Alba) became the Middle East’s first smelter, when it started its production in 1971. Bahrain, which now produces just 40,000 barrels of oil a day, led the regional push to diversify. It opened its fifth potline in 2005. By 2010, the smelter reached full capacity, producing some 870,000 t/y of aluminium.

In spring 2008, at the height of the global boom, Alba announced that it was looking to add a sixth production line. The next phase of growth aimed to boost the smelter’s capacity to about 1.2 million t/y.

Where Bahrain led, Dubai soon followed. Dubai Aluminium Company (Dubal) launched in 1979, becoming the world’s largest modern smelter. Last year, the Dubai government-owned smelter expected to produce 1,024 million tonnes. After four decades of rapid expansion at home, Dubal has shifted its focus towards joint ventures in the UAE, the GCC and beyond in a drive to gain control over raw materials.

The danger is that the smelters will create more overcapacity than was there to begin with

Tobias Merath, Credit Suisse

In 2008, Dubal signed a memorandum of understanding with Saudi developer Emaar, The Economic City and the Saudi Arabian General Investment Authority to build a smelter in King Abdullah Economic City.

Next, it signed a joint venture deal to develop a bauxite mine and alumina refinery in Cameroon. In 2009, it launched a joint venture with Brazil’s Vale and Norway’s Hydro Aluminium to develop a greenfield alumina refinery in Brazil.

Closer to home, Dubal is a partner in Emirates Aluminium (Emal) in neighbouring Abu Dhabi. Today, the two UAE smelting companies, Dubal and Emal produce 40 per cent of the Middle East’s aluminium.

Emal is one of the world’s newest and most cost-efficient smelters. It is an $8bn joint venture between Abu Dhabi government investment arm Mubadala Development Company and Dubal. Launched in late 2009, the smelter is the centrepiece of Abu Dhabi’s new heavy industry zone at Khalifa Port in Taweelah.

Costs are low because the smelter sources its power from the Abu Dhabi’s national grid. Phase one comprises two potlines, which expected to reach full capacity of 750,000 t/y of primary aluminium by the end of 2011. Plans are in place for a second phase that will expand Emal’s capacity to 1.5 billion t/y.

Aluminium smelter project funding

Emal plans to sell $1bn-worth of bonds to fund the second phase, aiming to go to market in the second half of the year. Phase two, valued at $5bn, is expected to be completed by the end of 2013. Emal hopes to secure $700m from export-credit agencies and raise the remaining funds from Islamic finance houses.

Oman, meanwhile, launched its own $2.4bn smelter as an anchor tenant for its industrial city near the port of Sohar. Sohar Aluminium is a joint venture between Oman Oil Company, Abu Dhabi Water & Electricity Authority and the Canada-headquartered aluminium giant, Rio Tinto Alcan.

The smelter started production in 2008. Expected to produce 350,000 t/y, it ramped up production to nearly 366,600 tonnes last year and expects further expansion to 375,000 tonnes in 2011. Potentially capacity could reach 390,000 t/y, but the smelter will need to secure additional gas supplies from the government to reach that level.

Two-fifths of the plant’s aluminium is sold to Rio Tinto customers in Asia. But Sohar Aluminium’s aim is to position Oman as a metals manufacturing hub, attracting foundries, workshops and industries to a dedicated 200 hectare site at Sohar Industrial Estate. Sohar Port industrial zone offers tax breaks and other incentives to potential investors.

So far, it has attracted Oman Aluminium Processing Industries (OAPI) to Sohar, but officials are in “close” discussions with a second potential customer. Sohar Aluminium is one of the few regional smelters configured to be able to supply aluminium in liquid form. OAPI is produces 35,000 t/y of aluminium conductors and plans to increase this to 48,000 t/y.

Another newcomer to the GCC aluminium sector is Qatar Aluminium (Qatalum), a 50-50 joint venture of Hydro and Qatar Petroleum. It aims to produce 585,000 t/y. Full production was due to start in 2010, but the project has encountered power supply problem since production started in April 2010.

Qatalum setback

In August, production shut down for several hours following a power outage. Qatalum was able to start increasing capacity again by mid-September. By January 2011, it had ramped up 352 cells, half its planned capacity. It now expects to reach full capacity in June, after further technical problems with its cooling systems.

Lost production and sales have also dented company performance. In December, Hydro said it expected its share in Qatalum to return an underlying loss of nearly $109m in the second half of 2010, following first-half losses of $49.5m.

Qatalum will use its Norwegian partner’s marketing network to sell its products worldwide. Key target markets include North America, Europe, the Middle East and Asia. Meanwhile, it is keeping a firm eye on costs, aiming to position itself as one of the world’s most competitive smelters.

Despite the slump in aluminium prices, the Middle East looks set to continue to add new capacity. New ventures are under way in Saudi Arabia and under discussion in Algeria. Saudi Arabian Mining Company (Maaden) is building a $10.8bn aluminium complex at Ras al-Zour, as a joint venture with the US’ Alcoa. In January, the partners agreed a $2.1bn financing contract. The project will create the Middle East’s first fully integrated aluminium smelter and can-sheet rolling mill.

The joint venture has four components, including a bauxite mine, producing an initial 4.4 million t/y; an alumina refinery with start-up capacity of 1.8 million t/y; a smelter with initial capacity of 740,000 t/y and a rolling mill, producing an initial 380,000 t/y.

Saudi Arabia’s Public Investment Fund has pledged to lend $1.3bn to Maaden Aluminium Company and $821m to Maaden Rolling Company. Alcoa owns 25.1 per cent of the two companies, while Maaden holds 74.9 per cent.

Alcoa plans to open the smelter and rolling mill in 2013 and the bauxite mine and alumina refinery in 2014. Companies such as Dubal and Maaden that are able to extend their control over the raw materials side of the business will gain further competitive advantage.

Meanwhile, a second new regional smelter may follow soon. Late last year, Algeria’s largest private company Cevital announced that it was negotiating with Rio Tinto to build a $7bn smelter as an anchor tenant for Cap 2015, a planned port and industrial project, spread over 5,000 hectares at Cap Djinet, east of Algiers.

Rio Tinto has not confirmed its involvement with Cap 2015, saying only that it has held talks with the Algerian government. The multinational company was originally a shareholder in Maaden’s planned smelter in Saudi Arabia, but pulled out of the project in 2008, blaming the global economic downturn.

Cevital announced its smelter plans after the UAE’s Emal halted its involvement in Algeria’s planned Beni Saf aluminium project. Emal had planned to develop a $5bn smelter at Beni Saf in partnership with national oil and gas company, Sonatrach. It withdrew in 2010 after the Algerian company became embroiled in a corruption scandal.

Access to power for smelters

But after two years of bullish expansion, the pace of new aluminium projects has slowed in the region. In 2010, Emal announced that it was halting its planned smelter at Ras al-Zour, amid questions over access to power supply. Even in the hydrocarbon-rich Middle East and North Africa, smelters face stiff competition from other new industries for access to power.

Meanwhile, mid-term forecasts suggest that demand for aluminium could slow, following a degree of recovery this year.

Forecasts from Norsk Hydro suggest that demand for aluminium will grow 7 per cent this year, before slowing to between 3-6 per cent in 2012. Alcoa is more bullish, forecasting a 12 per cent increase in demand this year.  However, there are signs that economic recovery in 2011 will help to narrow last year’s yawning gap between supply and demand.

Competition is fierce as all the region’s smelters aim to supply regional customers, while building global export markets. It is taking time for the new smelters to firm up their customer base and to carve out a niche in the market. Nevertheless, industry analysts say with their better cost advantages they are well-placed to succeed.

“The capacity being built in new producer countries is much more efficient than capacity in traditional producer markets,” says Tobias Merath, head of commodity research at Swiss lender Credit Suisse.

“The danger is that the smelters will create more overcapacity than was there to begin with. That is a risk. But it’s too early to say whether that is what will materialise.”

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