Just 12months ago, the prospects for the aluminium industry in the Gulf were healthy, with a series of massive investments in capacity being planned at smelters across the region.
But today, the global financial crisis is creating deep uncertainty in the industry. As well as the now-widespread cash flow issues, market fundamentals are weak. Orders and prices are tumbling as a result of the construction slowdown, while inventory levels climb and smelters are being forced to close.
Against this backdrop, there are 36 aluminium projects planned or under way in the GCC and Iran, worth a total of $41.7bn, according to Gulf projects tracker MEED Projects.
Of this, Saudi Arabia is the largest spender, with the value of planned projects just under $20.3bn, while Qatar’s are valued at $4.2bn.
GCC countries are planning to expand their production capacity to 3.5 million tonnes a year (t/y) by 2010, up from 2.2 million t/y. Analysts expect the GCC share of the world market will rise to about 10 per cent by 2010, from the 5 per cent share recorded in 2005.
Sheikh Hamdan bin Rashid al-Maktoum, UAE Finance Minister and chairman of Dubai Aluminium Company (Dubal), told delegates at the International Arab Aluminium Conference & Exhibition held in Dubai in November last year, that the GCC is set to increase its share of world production to 20 per cent, or 9 million (t/y), by 2020.
Qatar is making its key contribution to this regional capacity expansion through the construction of Qatalum, a 585,000-t/y smelter, which is a joint venture of Qatar Petroleum and Norway’s Norsk Hydro.
For Qatar, as for other Gulf states, the expansion plans are yet another expression of its desire to diversify its economy away from hydrocarbons, despite falling global demand for aluminium. However, the strategies being employed by the region’s aluminium producers vary.
In Dubai, Dubal exists primarily to export and now contributes 45 per cent of the emirate’s non-oil exports. Saudi aluminium producers, by contrast, are aiming at the domestic market and demand created by the construction of the kingdom’s economic cities.
For state-backed aluminium producer Qatalum, Doha’s economic diversification strategy means exports to Asia and Europe are the priority in the short to medium term. “We are also preparing for some export to the US,” says Truls Gautesen, chief executive officer (CEO) of Qatalum.
The company says there may also be prospects for growth in domestic use - for example, in Qatar’s cabling sector.
Qatalum’s two partners are to build a 585,000-t/y capacity plant at Mesaieed Industrial City, 40 kilometres south of Doha. It will be the biggest aluminium plant ever constructed in a single phase.
The first metal from the plant is expected to be produced in late 2009 and full production is set for mid-2010. If required, the plant site is big enough to double the capacity of primary aluminium production to 1.2 million t/y.
Qatalum’s entire production will be marketed through Norsk Hydro’s global marketing network and the Norwegian firm is “actively looking” for customers, according to one source at Qatalum.
“We see our role as a future catalyst for growth in the manufacturing sector in Qatar,” says Gautesen.
Qatalum says that when operational, its contribution to Qatar’s gross domestic product (GDP) will be as high as 5.5 per cent. The country’s manufacturing sector currently accounts for 8 per cent of GDP.
The project is expected to create about 1,000 permanent jobs for the locals of Mesaieed, along with 700 indirect jobs in the supply chain. Qatalum is also expected to create about 5,500 jobs over the span of its three-year construction period.
Long-term alumina feedstock contracts have been entered into with Norsk Hydro and third-party suppliers. Gas to fuel the captive power plant will be sourced from phase II of the Al-Khaleej gas project.
“Its location is ideal, says Faisal Hassan, head of research at Kuwaiti bank Global Investment House. “We believe the country will export most of its aluminium production, since the reason for establishing Qatalum is to reduce the economic dependence on oil.
“Moreover, we also believe that the inclusion of a Norwegian company in this project could help the country export the aluminium products to Norway.”
When construction of the Qatalum plant began in November 2007, the annual growth rate of the global primary aluminium market was estimated at 4-5 per cent. Analysts estimate growth in demand for aluminium fell by 2.5 per cent in 2008, and is likely to fall even further in 2009.
Aluminium prices on the London Metal Exchange (LME) continued to fall in January, undermined by large stock increases and ongoing weak sentiment. On 21 January, the price of the LME’s benchmark three-month aluminium contract fell to about $1,362 a tonne, from its peak of $3,380 a tonne in July 2008. At the same time, aluminium stocks in LME-approved warehouses rose to a 15-year high of 2.6 million tonnes, from 88,975 tonnes.
As prices plummet, there have been calls for large production cuts to rein in supply and arrest the fall. Global aluminium production rates have been cut, and as much as 4.5 million tonnes has been removed from capacities as smelters respond to falling demand and prices. The construction and automotive sectors are two of the biggest users of aluminium, but have both been hit by the economic slowdown.
Further cuts have been called for and analysts say the market is facing significant oversupply. “Combined with the new capacities coming on line in the next couple of years, we will be in a very tricky situation,” warns Michael Widmer, senior metals market analyst at French bank BNP Paribas. “We could see a structural oversupply, with low prices beyond 2010.”
So far, Middle East producers have resisted calls to scale back their plans and have made no announcements of cuts in production. However, Qatalum may be forced to review its production targets if the global market continues to shrink.
“The downturn has marked the end of the commodity super-cycle, which saw the prices of these commodities reach unprecedented levels, with many firms around the world opting for production cuts and workforce retrenchments,” says Hassan.
“A massive slowdown in auto sales and demand for products with aluminium content will inevitably lead to a slowdown in demand for aluminium. As the GCC countries export 40 per cent of the aluminium they produce, it is likely to have a negative impact on profitability, forcing the firms to rethink their current production scale. New projects, such as Qatalum, might review the economic conditions before deciding to embark on full production.”
For now, however, Qatalum is sticking to its plans to build a site with capacity to produce 585,000 tonnes of aluminium a year in the run-up to firing up the smelter in December.
“Prices have stabilised recently at just under $1,400 a tonne, which is still a work-able level for Qatalum to survive, given the energy advantage,” says the Qatalum source.
He adds that the project team is working hard to maximise cost savings made possible by falling raw materials prices.
However, the source says that with a launch date planned for the end of 2009, the project could come on stream at a time when he believes the world economy will be starting to recover.
His optimistic view is shared by Duncan Hedditch, CEO of Abu Dhabi-based Emirates Aluminium (Emal), another company that has embarked on a similarly ambitious aluminium project. “Emal’s strategy is to become a global player by supplying both the international and the domestic market, with a focus on encouraging domestic downstream businesses,” says Hedditch.
Emal plans to begin full production at its $5.6bn, 700,000-t/y plant on schedule at the beginning of 2011. Its overall business strategy has not changed despite the economic downturn. “Both companies [Qatalum and Emal] are still in the construction phase and hence not yet affected by the current commotion in commodity prices and demand,” says Hedditch.
Emal and Qatalum alike will be hoping that by the time the smelters are in full production in 2010, world demand will have picked up.
With many of the ageing European aluminium smelters operating inefficiently, new producers will be hoping that some of their rivals are forced to exit the market during the economic downturn.
“By the time Qatalum is operational, as much as 20 per cent of the market will have gone out of business,” says the Qatalum source. “We have already seen signs across the world, particularly in Europe, of smaller producers going bust.”
With access to such large volumes of cheap gas feedstock, Qatalum’s operating costs will be among the lowest in the industry, making it a potentially highly competitive global supplier.
Alumina feedstock supplies account for 45 per cent of a smelter’s operational costs, while power comprises about 25-30 per cent. Qatar has one of the world’s largest proven natural gas reserves, standing at more than 900 trillion cubic feet in January 2007, behind only Russia and Iran.
Should the economic recovery happen in 2010, as many economists are predicting, Qatalum’s ambitions to contribute more than 5 per cent to the economy, from a standing start, could well be realised.