Qatalum taps natural gas advantage

12 June 2009

The smelter being built at Mesaieed Industrial City will benefit from the country’s vast energy reserves, creating jobs and a low cost base for the production of aluminium.

Qatar Aluminium (Qatalum) is a 50:50 joint venture of Qatar Petroleum and Norwegian national oil company Norsk Hydro. Together, the two are developing an aluminium smelter in Qatar that will produce an initial 580,000 tonnes a year (t/y) from 2010. Total investment in the project is $5.6bn.

The smelter is under construction at Mesaieed Industrial City, 40 kilometres south-east of the capital, Doha. Construction work began in 2007. On completion, Qatalum’s smelter will be the largest aluminium plant ever constructed in a single phase. Production is expected to start at the end of the year, with full capacity of 580,000 t/y to be reached by mid-2010.

The project will take advantage of Qatar’s vast natural gas reserves, which are estimated at 900 trillion cubic feet. Anxious to diversify into new industrial sectors to encourage economic diversification and create jobs, Qatar will use its cheap and plentiful gas reserves to create a low cost-base for aluminium production. Qatalum pays about $1 a million BTUs for its gas.

Crucially, Qatalum has long-term alumina feedstock contracts with Norsk Hydro and third-party suppliers. With smelters such as Dubai Aluminium (Dubal) having secured their alumina supplies through investing in refineries in Guinea and Brazil, ensuring a long-term, secure supply of alumina in the increasingly competitive Gulf aluminium industry is vital.

Qatalum will source gas to fuel its captive power plant from the second-phase development of the Al-Khaleej gas project announced in 2006. The smelter’s power plant deploys combined-cycle technology to supply 1,000MW, with a nominal total capacity of 1,350MW. In July 2007, Qatalum awarded the contract for the plant to a consortium of the US’s GE and Korea’s Doosan Heavy Industries Construction Company.

The smelter is divided into two buildings, each with a 1,500-metre pot room housing 352 cells to turn out alloyed cast-house products. The extrusion ingot cast house will be able to produce up to 350,000 tonnes a year (t/y) and the primary foundry alloys cast house up to 275,000 t/y.

A carbon plant on the site will supply the pot lines with 300,000 t/y of anodes and recycle 63,000 tonnes of spent anodes. Raw materials will be imported through Qatalum’s dedicated jetty and finished product exported via the Port of Mesaieed, which is able to handle ships of up to 65,000 deadweight tonnes.

By the start of 2008, 65 per cent of Qatalum’s construction was completed and work on the pot rooms is now approaching that stage. By the spring, 17,000 workers were on site, with 25 per cent of the steel construction and 20 per cent of the pot room cladding in place. Two of the gas-fired power station’s four turbines had been installed and the power station is scheduled for completion in January 2010, with the smelter’s power needs being met by the public grid until its completion. 

There is sufficient space at the Mesaieed site to double the smelter’s capacity to 1.2 million t/y if required. If that expansion goes ahead, it will make Qatalum the largest aluminium smelter in the Middle East. Finished aluminium will be sold through Norsk Hydro’s existing marketing network.

Within the $5.6bn project, Qatalum has secured limited recourse financing of $2.6bn, centred on a $2.25bn commercial bank term loan facility. The remaining $350m comes in the form of a credit agency facility with the Norwegian Guarantee Institute for Export Credits (GIEK).

Committed financing

The commercial bank term loan was put together by credit export agency Export Development Canada and 30 banks. “The initial request for proposal issued by the financial adviser in April 2007 resulted in more than $3.5bn offered for underwriting commitments for the commercial bank term loan facility alone,” says Truls Gautesen, chief executive officer of Qatalum. “The rest is financed directly by the owners.”

Construction costs have increased sharply over the past three to four years, with Qatar’s high inflation - currently about 13 per cent - adding to the project’s cost. The budget surged from an initial $3bn in 2004 to $5.6bn by mid-2007, despite the joint venture’s piece-by-piece contracting strategy.

As part of Qatar’s commitment to reducing its dependence on hydrocarbons and increasing home-grown manufacturing industries, the smelter aims also to support new downstream production. Talks have taken place with local and international companies to discuss prospects for an extrusion plant.

If this goes ahead, it could become a centrepiece for a planned aluminium free zone to be established near Mesaieed, one of several Qatar Economic Zones (QEZs) that the Economy Ministry plans to develop in the emirate. The QEZ north of Mesaieed Industrial City will cover 78 square kilometres.

Qatalum says it has no plans to become active in downstream industries itself, but will work with metal supply and manufacturing companies to attract new business to the country. A taskforce has been set up to look at its potential to attract aluminium finishing industries and inward investment in the sector.

Downstream industries

“In terms of developing downstream industries, proximity to a smelter can be a real advantage for companies to source liquid aluminium, rather than having to remelt ingots,” says one metals market analyst. “When the region’s real estate sector recovers, there is real potential to bring downstream companies and investment in such ventures into the market.

“Most Gulf aluminium ventures are currently very focused on the external markets, and are geared towards exports at this stage. But as local downstream industries are launched and start to expand, there are definite prospects to increase the share of local supply to export volume. That is still a long way off, but it can happen.”

Manufacturing currently accounts for 8 per cent of Qatar’s gross domestic product (GDP). Qatalum alone expects to contribute $1.5bn a year - representing 5.5 per cent of GDP - once full production is under way. The smelter will employ more than 1,000 people at Mesaieed and secure an additional 700 jobs in distribution and supporting businesses.

Qatalum has set itself a five-year Qatarisation programme from the outset, aiming to build up the number of nationals employed at the smelter to 50 per cent. Currently, one fifth of the company’s 40 senior managers are Qatari nationals.

By going into partnership with Norsk Hydro, Qatar Petroleum will not only share the risk but will also be able to tap into the company’s skills, experience and sales networks.

“Because Qatar is not developing the smelter alone, but has gone into partnership with Hydro, the risks of entering the aluminium market for the first time are greatly reduced,” says the metals analyst. “The market is tough, because prices are so low due to oversupply.”

Hydro’s project team in Oslo carried out much of the initial design and procurement, and made it possible to divide construction into a large number of engineering, procurement and construction packages to control costs. Hydro will also supply the alumina and pot-line technology, and manage and market the finished product.

The smelter will be fitted with HAL250 electrolytic reduction cell technology, which Hydro developed at its base at Sunndal in Norway to produce aluminium at temperatures of 960°C. The technology is used to reduce investment costs, emissions and energy consumption to maximise aluminium smelters’ productivity. The high temperatures mean operations will be highly mechanised.

Among the contracts awarded for the smelter are a $93m deal with Italy’s Astaldi to undertake civil works and $5.5m deal with Sweden’s Atlas Copco to supply compressed air systems.

Qatalum will produce primary aluminium cast-house products - extrusion ingots, billets and foundry alloys - for export to Asia, Europe and North America. Products will be used in the construction industry, transport, engineering, household durables and leisure projects.

On launching, the smelter will compete with established Gulf rivals Aluminium Bahrain (Alba), Dubal and new UAE producer Emirates Aluminium (Emal), which will begin full production in 2010.

Competition for customers will be tough. The global recession has resulted in a fall in aluminium prices from last July’s highs of $3,380 a tonne, although there has been a recovery this year from January’s $1,300 a tonne low to $1,500 a tonne by mid-May.

However, Gautesen says a decision to go ahead and double production to 1.2 billion t/y will depend less on world demand for aluminium than on availability and the priorities set for Qatar’s gas reserves. “No investment decision has been made so far,” he says.

GCC aluminium producers currently export 40 per cent of their output, increasing their reliance on volatile commodities markets. Cutbacks in car and aerospace manufacturing have created a world glut of aluminium, the London Metals Exchange (LME) having accumulated more than 100 days’ inventory in mid-May.

Even though Qatar has an undeniable advantage in its access to plentiful supplies of low-cost energy, softening demand for aluminium has implications for Qatalum’s profitability from the outset.

“Aluminium prices are expected to remain low in the medium term,” says Gautesen. “There are indications that the rate of increase in LME inventories is slowing, and curtailments have been put into effect. A better balance between production and consumption will be needed for a sustainable recovery.

“In the longer term, we believe the global need for aluminium is increasing, but current visibility is limited. But once operational, Qatalum will have a very favourable cost position, among the top 10 per cent of smelters on the global cost curve.”

As for the prospects for rapid expansion, opinion is divided. Qatalum will have to weigh up the relative difficulties of weak global aluminium prices in the short to medium term against the lower cost of construction materials. With capital-cost requirements for smelters coming down as a result, it could decide to launch phase two regardless of current market demand.

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