Industrial spending remains subdued as oil prices stay low

02 January 2017

Investment in new industrial projects is unlikely to pick up in 2017 unless governments adopt a new approach to economic diversification

There was little cause for optimism in the Middle East and North Africa (Mena) region’s non-oil industrial sector in 2016 as commodity prices remained depressed.

This is reflected in the relatively small number of new projects going ahead, while under-execution megaprojects such as the Waad al-Shamal phosphates city in Saudi Arabia near completion.

Industrial diversification has been one of the core economic strategies of oil-dependent governments in the Mena region for many years, but since the fall in crude prices from mid-2014 there has not been a marked pick-up in industrial spending. In the first 11 months of 2016, about $8.9bn-worth of engineering, procurement and construction (EPC) contracts were awarded for industrial projects, compared with $12.8bn for the full year in 2015, according to regional projects tracker MEED Projects.

Biggest contracts

Of this total, more than a quarter was for the estimated $2.5bn sixth pot line at the Aluminum Bahrain (Alba) smelter, for which the US’ Bechtel was appointed as the main contractor in April. Alba is looking to increase aluminium production from the current level of about 870,000 tonnes a year (t/y) to 1.2 million t/y.

The next biggest deal signed in the region during 2016 was the $1.11bn deal let by the Egyptian government to build six clinker cement production lines for the Ministry of Defence. The contract to install 6,000 tonnes a day (t/d) of new capacity was awarded in June to a subsidiary of China-based Sinoma International Engineering Company.

Alba is the only aluminium producer carrying out or planning a smelter expansion in the GCC. The region has six smelting operations in Bahrain, Oman, Qatar, Saudi Arabia and the UAE emirates of Abu Dhabi and Dubai, with expansions completed in recent years in Saudi Arabia and Abu Dhabi.

 Mena non-oil industrial awards

Mena non-oil industrial awards

Mena non-oil industrial awards

The heads of Oman’s and Qatar’s aluminium companies told the Arab International Aluminium Conference (Arabal) in Dubai in November that they have no immediate plans to carry out long-talked-about expansions of their operations.

Sohar Aluminium and Qatalum have considered second-phase expansions in the past, but have faced barriers including market conditions and energy allocations. Aluminium production is an energy-intensive process that requires large volumes of gas to fire power plants linked to smelters.

“Sohar Aluminium has been designed from the inception [to be expanded]. This will be subject to allocation of energy, pricing and appetite,” says Sohar Aluminium CEO Said Almasoudi. “The potential project is there… we are working towards it. Sohar Aluminium has focused on reducing costs and incrementally increasing output at its smelter in Sohar. Production has risen from 375,000 t/y to the current 394,000 t/y. We are heading to achieve the full potential of 400,000 t/y.”

Qatalum completed its smelter in 2009 and said at the time that a second phase would follow, but this has yet to emerge.

“If you look at the commodities and energy prices, I don’t think we can invest in a second phase today,” Qatalum CEO Khalid Larem told the Arabal meeting. He added that Qatalum is producing at 8-10 per cent above its design capacity.

Expansion potential

The biggest potential for expansion is in Egypt and Iran. Egypt is planning to nearly double its aluminium production capacity as it focuses on domestic manufacturing, according to the CEO of the country’s largest aluminium producer, Egyptalum. “[We will] raise [primary aluminium] capacity from 320,000 t/y to 600,000 t/y. It is a must,” said Abdelzaher Abdou at Arabal. He added that the devaluation of the Egyptian pound should drive an expansion in domestic manufacturing to supply the local market.

Iran, meanwhile, is aiming to boost primary aluminium production to more than 1.5 million t/y by 2025, from about 300,000 t/y today, as it seeks to attract international investment following the lifting of nuclear-related sanctions.

Aluminium prices have recovered somewhat in 2016, but remain well below levels of a decade ago. A tonne of aluminium on the London Metal Exchange was trading at $1,714 on 1 December, compared with $2,830 on 1 January 2007.

Steelmakers from across the globe met in Dubai in October for the annual World Steel Association (worldsteel) conference and there was a mood of cautious optimism, despite little recovery in prices. Demand was expected to grow in 2016 for the first time in three years. Worldsteel forecast in its short range outlook that global consumption of finished steel products would rise by 0.2 per cent in 2016 to 1.5 billion tonnes, followed by a 0.5 per cent increase in 2017. However, this is not enough of a recovery to offset the 3 per cent drop in demand recorded in 2015 as Chinese consumption crashed. Middle East demand is expected to rise by 0.3 per cent in 2016 and 0.1 per cent in 2017, according to worldsteel.

Few significant steel projects remain in the pipeline in the GCC, with several on hold or cancelled. Plans to manufacture automobiles in the region still seem a long way off, with proposals based on Saudi joint ventures with the UK’s Jaguar Land Rover and South Korea’s Daewoo no closer to investment decisions.

In 2016, Saudi Arabia launched its National Transformation Programme to boost non-oil revenue and private sector growth. The government is also aiming to triple the mining sector’s contribution to GDP by 2030.

If Saudi Arabia succeeds in driving more investment into the private sector it could lead to a new generation of industrial projects, breaking with the state-led, energy-intensive model seen in the GCC in the past. But if governments in the region maintain existing approaches to diversification, it is unlikely investment in new projects will pick up in 2017.

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