Gulf takes on industry heavyweights with aluminium

12 June 2009

The Middle East is catching up with the US and Europe in aluminium production as regional governments invest in all areas of the sector, from bauxite mining to smelters and refineries.

The aluminium industry has historically been dominated by producers in Europe and the US. But as energy and labour costs have risen in these regions, so too has the cost of production, leading Western companies to seek more cost-effective markets in which to produce the metal.

The Middle East is now emerging as a significant new primary aluminium producer, taking advantage of the region’s low production costs and good transport links for exporting. As a result, a raft of new projects and expansions to existing Middle East smelters have been announced over the past five years. 

London-based industry analyst CRU estimates that a total of 38.1 million tonnes of aluminium was produced globally in 2007, while consumption reached nearly 37.8 million tonnes, leaving a surplus of only 320,000 tonnes.

Plants across the globe were operating at an average of 92 per cent of capacity in 2007. With London Metal Exchange (LME) prices averaging $2,700 a tonne over the year, the industry was highly profitable. Sales revenues were estimated to be more than $100bn.

Industry expansion

However, 2008 was a different story for the industry. Demand for products that use aluminium, such as automobiles, collapsed, as did the construction industry, and prices crashed from highs of $3,300 a tonne in July 2008 to $1,300 a tonne in January 2009.

Despite the slump in demand, the Middle East is going ahead with its expansion plans. In 2008, the region accounted for only 5.3 per cent of the world’s total primary aluminium production. However, the scale of the Middle East’s ambitions is clear in forecasts released in January this year from the UK-based Gulf Aluminium Council. It predicts global primary aluminium production will reach about 50 million tonnes a year (t/y) by 2020, with the GCC accounting for 10 million t/y.

As the figures show, there is still some way to go before the Middle East fulfils its potential. The first producer in the region was Aluminium Bahrain (Alba), which commissioned a 120,000-t/y smelter in 1971 as the government sought to move away from an entirely oil-reliant economy. The plant now has a capacity of 855,000 t/y.

The UAE joined Bahrain in 1979 when Dubai Aluminium (Dubal) began operations at its 136,00-t/y smelter. Dubal now produces more than 866,000 t/y.

Oman’s Sohar Aluminium reached full capacity of 360,000 t/y in February this year.

In addition to these smelters, the UAE’s Emirates Aluminium (Emal) and Qatar Aluminium (Qatalum) are expected to be fully commissioned by 2010, while Saudi Arabian Mining Company (Maaden) is expected to start aluminium production at Ras al-Zour around 2014.

There are also less advanced aluminium projects in the pipeline. Dubal and Abu Dhabi state-owned investment company Mubadala Development Company signed a memorandum of understanding in January 2008 with Saudi Arabian General Investment Authority (Sagia) and UAE developer Emaar, The Economic City for the development of a $5bn greenfield primary aluminium smelter at King Abdullah Economic City in Saudi Arabia. Pre-feasibility and potential downstream industry studies for the 700,000-t/y project have been completed, but the start date of the project has not yet been set. 

Domestic consumption

Lacking a mature downstream industrial sector to absorb locally produced aluminium, the broader Middle East has historically been a net exporter of the product. Total production of primary aluminium in the Middle East reached 2.2 million tonnes in 2008, of which only 16 per cent was taken up by the domestic market.

The extrusion industry - the manufacturing of aluminium products from its primary form - is the largest of the downstream sectors, used mainly for the GCC construction industry, followed by the rolling and casting industries. However, the downstream sector is expected to grow over the next decade as Gulf governments encourage the development of local industry for the purposes of job creation and economic diversification.

By developing a downstream industry, the Gulf smelters “could raise the region’s captive consumption to at least 50 per cent of their production, from today’s 16 per cent, reducing the risk of being beholden to international markets”, says Modar al-Mekdad, general manager of Jebel Ali-based Gulf Extrusions.

Demand for aluminium has weakened over the past few months, predominantly because of the deterioration of the automotive and construction industries in Japan, the US and Europe. According to CRU, demand fell by 19.9 per cent in the first quarter of 2009 compared with the same period in 2008. Despite production cuts and temporary plant closures, producers were unable to keep pace with the collapse, curtailing supply by only 8 per cent.

The result is a massive increase in the surplus of aluminium. Inventories at LME bonded warehouses stood at a record high of more than 4 million tonnes on 19 May, having stood at 1.1 million tonnes in June 2008.

To address this problem, Europe and the US have together announced capacity curtailments of 2.5 million tonnes.

Nevertheless, according to Marco Georgiou, consultant at CRU, producers’ efforts will not be enough to reduce the warehouse inventories. Cutting a further 2 million tonnes of production by the end of the year will only stabilise stocks at their current high levels rather than kick-start demand, he says.

Despite weak demand for aluminium, none of the Gulf producers has cut production. The region’s newer plants are more efficient than the ageing smelters in Europe, and low energy costs have allowed them to continue operating. 

Challenges ahead

Abdullah Kalban, chief executive officer of Dubal, confirmed that the company continues to run at full capacity when speaking at the World Aluminium Conference in Dubai in May. This is despite a 30 per cent drop in orders in the first quarter of 2009. The majority of this fall came from automotive and building industries, said Kalban, adding that Dubal maintained sales volumes equal to those in 2008.

Despite closing its Norwegian plant at Sunndal, Norsk Hydro has reaffirmed its commitment to Qatalum, a joint venture with Qatar Petroleum, on the basis that when operational in the third quarter of 2010, the 585,000-t/y smelter will be profitable, even if prices remain low.

Despite the region enjoying access to cheap energy, there are some fundamental obstacles to the progress of the Gulf aluminium industry. While energy and labour are readily available in the region, alumina feedstock is not. Securing supplies of bauxite or alumina presents a major challenge for smelters. In the Middle East, only Saudi Arabia has indigenous deposits of bauxite; the other producers depend on imports.

The global financial crisis and plummeting commodity prices cast serious doubts over a $10.5bn Maaden partnership with Rio Tinto Alcan, which would open up supplies of bauxite to the kingdom and the wider Gulf. 

Maaden originally agreed to undertake the project to establish a refinery for bauxite mined in northern Saudi Arabia, together with a smelter at Ras al-Zour, with Canada’s Alcan. But Alcan was taken over by Rio Tinto in 2007, and in early December 2008, Rio Tinto announced it was shedding 14,000 jobs worldwide in a bid to rein in spending.

Despite the scare, the two companies signed two agreements in March including a technology transfer deal as part of Maaden’s ‘mine-to-metal’ aluminium project.

The smelter will have an initial capacity of 720,000 t/y. Commercial production has been pencilled in for early 2014 and more than 70 per cent of the plant’s output is intended for export.

Securing long-term supplies of raw material at economically viable prices has been a priority for Dubal, which has entered several joint ventures with upstream producers. In 2005, the company joined with India’s Larsen & Toubro to build a 3 million-t/y alumina refinery, and a bauxite mine and smelter, at a cost of $1bn. The project is expected to be completed in 2010.

In 2007, Dubal entered into a joint venture with Mubadala, Australia’s BHP Billiton and its subsidiary Global Alumina International to develop and operate the 3 million-t/y Sangaredi alumina refinery in Guinea, a country that is estimated to contain a third of the world’s bauxite reserves.

For any investors doubting the future emergence of the Gulf as a major hub for aluminium production, Dubal’s Kalban sums up the new reality that the industry now faces.

“Not only are several of the major global players already actively pursuing opportunities to invest in greenfield primary aluminium smelter developments in the Gulf, but the new smelters will also incorporate the latest generation technologies that are not only more cost-efficient than their older counterparts, but also have less impact on the environment,” he says.

With the latest technology in place, coupled with low energy and labour costs, the Gulf’s existing aluminium smelters are now relying on a recovery in global demand for aluminium to justify further expansion of their production capacity. And the region’s governments need to act on pledges to help develop a substantial downstream industry for the region’s growing number of smelters.

Aluminium in the Middle East

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