For a new entrant into any market, building up a client base from scratch is a challenge, but the management team behind Qatalum’s new smelter at Mesaieed in Qatar has been relieved of this task.
One of the crucial elements of the joint venture agreement signed between state-run energy firm Qatar Petroleum (QP) and Norway’s Hydro in March 2006 was that Hydro would be responsible for marketing Qatalum’s output.
As one of the world’s largest integrated aluminium producers, Hydro has a network of sales agents across the globe, and they now have the added responsibility for selling aluminium produced in Qatar.
This year, Qatalum’s metal sales are expected to amount to about 340,000 tonnes, but once the plant reaches full capacity in 2011 the casthouse will be able to produce up to 625,000 tonnes a year (t/y) of semi-finished products. Qatalum has five casting lines; two for the production of extrusion ingots and three for making foundry alloys.
Even though the smelter is still in the startup phase, Qatalum is already producing aluminium custom-made to clients’ specifications – initially by remelting ingots made by other facilities. This has been made possible by the market access provided by Hydro. This year, just 25 per cent of Qatalum’s output is expected to be standard ingots sold to the general market.
We are just starting the adventure. There are all sorts of possibilities for this smelter
Pals Vigeland, casthouse manager, Qatalum
“We have an advanced product casthouse and customers are already qualifying us to be their principal suppliers, thanks to the marketing agreement that we have established with Hydro,” says Jan Arve Haugan, chief executive officer of Qatalum.
Producing custom-made ingots at Mesaieed while the plant is still in the early months of operation would be a risky strategy, were it not for the backup provided by Hydro.
“Hydro has a huge market network so, if there were any production problems here, it could supply clients from another source,” says Pal Vigeland, group casthouse manager at Qatalum. “You need that presence, otherwise you risk upsetting your customers and you might fail in the marketplace.”
Qatalum benefits from a strategic location that allows it to serve customers in Europe, Asia, the US and the Middle East, while at the same time benefiting from access to Qatar’s abundant gas supplies.
But it is just one of three new aluminium projects in the Gulf region to have started production since 2008. By 2012, the Middle East will account for around 10 per cent of the world’s primary aluminium production, compared with just 4 per cent in 2007.
A 360,000-t/y smelter started up in Oman in 2008 and in December 2009, commercial production began at a 700,000-t/y smelter in the UAE. The new smelters complement aluminium production in Bahrain and Dubai, which began in the 1970s. Dubai currently has the largest aluminium smelter in the region, with a capacity of about 1 million t/y.
Saudi Arabia also plans to break into the aluminium industry. It is the only country in the GCC with its own bauxite reserves, estimated at more than 90 million tonnes. In December, it signed a deal with the US’ Alcoa for a $10.8bn mining-to-metals venture, which includes construction of a 1.8 million-t/y alumina refinery, a 740,000-t/y smelter, a bauxite mine to source 4 million t/y of raw material and a rolling mill able to produce up to 460,000 t/y of products. Start-up of the smelter and mill are scheduled for 2013, with the refinery to follow in 2014.
Despite the slew of capacity that has come on stream in the Gulf region, and 1.5 million t/y of capacity due to start up in India, Haugan is not concerned about the region being oversupplied with aluminium.
He says the Gulf producers will be competing globally and not with each other.
“The regional plants will be very competitive on the global stage,” he says. “Our challenge is to be always among the most competitive plants in the world, and in that way the supply/demand balance will not affect us.”
The new smelters in Oman and the UAE would have been hit by the collapse in aluminium prices in the wake of the global economic crisis, which caused worldwide aluminium demand to drop by some 8 per cent in the past year. Aluminium prices fell from $3,200 a tonne in June 2008 to below $1,400 a tonne in May 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, representing 18 per cent. Each of these sectors suffered heavily in the recent global financial crisis as sales of vehicles and consumer goods decreased sharply and construction projects were put on hold.
Fortunately for Qatalum though, by the time it produced its first metal in December 2009, prices had rebounded to above $2,000 a tonne. Aluminium prices are predicted to average $2,160 a tonne this year, some 17.5 per cent lower than the average of $2,620 a tonne in 2008, but above the $1,900-a-tonne level that Hydro says would provide satisfactory economics for the Qatalum project.
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, with demand from China and other emerging economies expected to continue to drive growth in the years ahead, justifying the Gulf states’ decision to invest in the industry.
In 2010, world aluminium demand is forecast to total 39 million tonnes, compared with 37 million tonnes in 2008. Production, meanwhile, is predicted to reach 41 million tonnes this year.
The wave of investment in aluminium projects in the Gulf region is part of a wider trend among leading aluminium producers to shift production away from traditional, high-cost production bases in North America and Europe towards countries with access to cheaper and more plentiful energy supplies. According to the European Aluminium Association, two-thirds of the smelters in Europe are facing closure, due to rising power costs.
The changing economics of aluminium production explain the appeal of the Qatalum venture for Hydro. The Norwegian firm itself went through an intensive rationalisation last year, cutting staffing levels by nearly a third and its primary aluminium production by more than a quarter. Repositioning the company means shifting production to more efficient smelters.
Its partnership with QP provides access to low-cost, long-term sources of feedstock, and Hydro has applied its in-house technology at Qatalum to hold down costs even further.
Phasing out older capacity and ramping up aluminium production in Qatar is expected to enable Hydro to cut its upstream conversion costs by 20 per cent and reduce cash costs by $100 a tonne of aluminium produced.
“Hydro is maintaining its market share in aluminium,” says Harald Odegaard, senior vice-president for strategy and business development at Hydro. “Our business model is to produce quality aluminium products and Qatalum is part of that strategy.”
Odegaard says that because Qatalum will fulfil orders from Hydro’s established customer base, its prospects are more secure than those of rival start-up smelters. The 340,000 tonnes of output from Qatalum this year will be targeted at customers in Japan, South Korea, China, Thailand, India, the GCC, southern Europe, Turkey, the Iberian Peninsula and the US.
The new 360,000-t/y smelter in Oman also benefits from a marketing agreement with the UK/Australian Rio Tinto, which holds a 20 per cent stake in the facility and sells 40 per cent of its output to an established customer base in Asia. Eventually though, more than half the smelter’s production is expected to be consumed by local and GCC markets. Oman has been pushing the development of a downstream metals industries cluster at a 200-hectare site next to the smelter. Salzburger Aluminium of Austria has already set up a 30,000 t/y plant at the site with local partner Takamul Investment, which has also opened a cables factory in partnership with Oman Cables.
Abu Dhabi is also encouraging the private sector to invest in metals production near its new smelter. It is something that Bahrain, as the early pioneer of aluminium production in the region, achieved many years ago. Today, some 50 per cent of output from Bahrain’s smelter is sold locally to a well-developed downstream sector. And Qatar is certain to follow suit.
“We are just starting the aluminium adventure here,” says Vigeland. “There are all sorts of downstream possibilities for this smelter and it is very interesting for Qatalum and for Qatar.”
The development of primary aluminium production is expected to generate $1.5bn a year in revenues for Qatar, equivalent to 5.5 per cent of gross domestic product. If a downstream industry is also developed, that contribution could be doubled.
Hydro has a long list of downstream industries in its company portfolio, so this is another area where the two parties could potentially co-operate. But, for now, any plans are being kept firmly under wraps.
“It is obvious that in future we will see downstream activities in Qatar,” says Haugan. “Qatalum has the obligation to promote business development and opportunities, but that is a beyond my current agenda. Our mandate is to run this smelter and produce [aluminium] as efficiently as possible.”