By 2012, the Middle East will account for about 10 per cent of the world’s primary aluminium production, compared with just 4 per cent in 2007. Over the past two years, new smelters worth a combined investment of $13bn have started production in Oman, the UAE and Qatar, complementing the two other Gulf plants that having been operating in Bahrain and Dubai for more than 30 years.

Global primary aluminium market

Global primary aluminium market

Oman’s Sohar Aluminium started up its 360,000 tonnes a year (t/y) smelter in 2008 and the plant hit full capacity in February 2009. In January last year, commercial production began at Emirates Aluminium’s (Emal’s) 700,000 t/y smelter in the UAE, while in December of the same year, the first metal was produced at Qatalum’s 580,000 t/y smelter in Mesaieed in Qatar.

Diversification move

These investments in aluminium production have been driven by the Gulf states’ desire to diversify their economies away from a reliance on hydrocarbons revenues by generating new products for export, based on their access to low-cost energy supplies.

Second phase projects are already under consideration for these sites that could see Emal’s capacity increase to 1.4 million t/y, Qatalum’s to 1.2 million t/y, and Sohar Aluminium’s to 720,000 t/y. Aluminium projects are also planned for Saudi Arabia, including Saudi Arabian Mining Company’s (Maaden’s) 740,000 t/y smelter to come on stream by 2013.

Unfortunately for the project developers, this wave of new capacity coincided with the worst global economic recession in decades, which caused worldwide aluminium demand to drop by some 8 per cent in 2009. The transport and construction sectors are the main consumers of aluminium products, accounting for 31 per cent and 23 per cent respectively of total demand, followed by the packaging industry on 18 per cent. Each of these sectors suffered heavily from the financial crisis as sales of vehicles and consumer goods fell and construction projects were put on hold. But according to Marco Georgiou, head of primary aluminium and products at the UK’s CRU Analysis, the global aluminium market has shown signs of recovery since September led by a rise in demand from China.

“We saw a collapse in demand and a large rise in inventory levels at the start of 2009 … but since May prices have strengthened,” Georgiou told MEED’s Middle East Aluminium Conference 2010 in Dubai in March.

 Aluminium prices fell from $3,200 a tonne in July 2008 to below $1,400 a tonne by May 2009, but by December 2009 levels had rebounded to above $2,000 a tonne.

“At today’s prices most producers are able to make money,” he added. CRU predicts prices to average $2,160 a tonne in 2010, compared with an average of $2,620 a tonne in 2008.

Although industry operating rates remain low at 78 per cent, against 88.6 per cent in 2008, the long-term forecast for the industry is positive, justifying the Gulf states decision to invest in the industry.

Products underdeveloped

But while the region’s primary production as a percentage of the world market is rising fast, by comparison the downstream aluminium products sector is significantly underdeveloped. The Middle East accounts for just 1.7 per cent of the global aluminium products industry, producing around 200,000 t/y of flat rolled products, 400,000 t/y of extrusion products and just 100,000 t/y of  casted products.

Modar el-Mekdad, chief executive officer of the UAE’s Gulf Extrusions, estimates that currently 83 per cent of the region’s primary aluminium is exported as billets and ingots to be converted into finished products elsewhere.

But it is this downstream processing that adds most value to the aluminium, and by allowing to it take place in other countries, the Gulf states are not maximising the revenue generating potential of their aluminium industries. To illustrate, El Mekdad says if primary aluminium costs $2,200 a tonne, once converted into billets or ingots it would be worth $2,500-2,800 a tonne, but when extruded into architectural or automotive products, it becomes worth up to $3,600 a tonne. The real value, however, comes when aluminium is cast into wheels or engine blocks or converted into flat rolled products such as cans, when prices of about $5,000 a tonne can be reached.

Plans are under way in Oman, the UAE and Qatar to develop aluminium clusters near the new smelters where industries can process the output, as Bahrain did many years ago. But with at least three countries in the GCC attempting to do this at the same time, they will have to target niche areas in order to attract investors and avoid competing directly with one another.