Qatar's metal firms facing up to growth constraints

30 May 2011

Qatar’s aluminium and steel firms are benefiting from access to abundant gas supplies, but a small domestic market is forcing producers to look abroad for growth

In numbers

$5.7bn: Cost of Qatalum’s aluminium smelter in Qatar

585,000 t/y: Qatalum’s current aluminium production capacity

t/y=Tonnes a year. Source: MEED

As the world’s hydrocarbon resources slowly diminish, simply exporting crude oil and gas is no longer acceptable in the Middle East.

Regional governments are keen to add value to their hydrocarbon assets by investing in the petrochemicals, metals and power industries.

Qatar is blessed with huge gas reserves and the past decade has seen Doha focus on building up its liquefied natural gas (LNG) export capacity. The country is now the world’s largest LNG exporter.

Beyond this, Doha faces some serious challenges to enhancing the value of its oil and gas resources.

Small market

Cheap feedstock, availability of land, coupled with the option for 100 per cent ownership and low taxation should make foreign investors clamour to invest in the gas-rich state.

Qatar’s geographical location is a disadvantage as it is not particularly well connected to its GCC neighbours. It is also a three-day voyage away from major international shipping lanes. 

While this is not a problem when exporting large amounts of commodities, it is a concern for a small company with an eye on margins. This has affected investment in some segments of the industrial sector, particularly the downstream aluminium industry. 

Qatar now has a major aluminium smelter, but there has been no talk of a downstream park to accompany it

Middle East-based aluminum source

“Qatar now has a major aluminium smelter, but there has been no talk of a downstream park to accompany it,” says a Middle East-based aluminium source. “The reason is if you build an [aluminium] extrusion plant, you need a market to sell it to that is within close proximity. Qatar does not have that.”

Taking hydrocarbons out of the equation, Qatar has a small domestic economy and the metals sector requires a strong local market to consume its products. This has made GCC neighbours, such as Saudi Arabia, a more attractive investment prospect as it has a large population that can absorb goods produced by aluminium extrusion plants or rolling mills.

Qatar Aluminium (Qatalum) began commissioning its $5.7bn aluminium smelter in 2009 and the facility currently has a capacity of 585,000 tonnes a year (t/y). The plant is a joint venture between Qatar Petroleum (QP) and Norwegian aluminium giant Norsk Hydro.

As a global company, Norsk Hydro can absorb most of the offtake from Qatalum in the form of ingots and billets and market it through its long-established customer base.

“The Qatalum smelter works well for both parties as it adds value to QP’s gas and allows Norsk Hydro to look at maybe trimming some of its less efficient plants in Europe,” says the Middle East-based aluminium source. “Hydro can also sell most of the offtake meaning a downstream park is not needed.”

The Saudi steel market is hard to break into … so taking a share in the Jizan project was a clever decision

UAE-based steel industry expert

Qatalum’s initial start-up has not been without problems, however. The smelter suffered a power cut while ramping up production in 2010. It resulted in the aluminium being produced in the 444 operational cells cooling and solidifying. Initially, it was thought the outage would last up to six months, but the solidified pots were dug out and production restarted, with just three months of work lost.

“Everyone in the industry knows that Qatalum worked hard on getting restarted,” says the Middle East-based aluminium source. “The question that remains is how did the power outage happen?”

Despite the drop in production, the Qatalum smelter is a good example of how Doha can add value to its gas assets through industrial schemes without having to worry about the logistics.

Aluminium ingots and billets are relatively easy to transport and Qatar is far closer than Norway to some of Norsk Hydro’s key markets, including India and China.

Aluminium oversupply in the Middle East

The project was launched with the idea of a second and third phase expansion to 1.2 million t/y in mind, but no announcement has been made to expand the current capacity.

Other smelters in the region are also considering capacity expansions, but analysts say that waiting until the aluminium sector corrects its current oversupply problems is more advisable.

“Despite some increased activity in the Middle East, there is not that much of an impetus to build additional capacity at the moment,” says Julie Beatty, a principal economist at the UK consultancy Wood McKenzie. “There is an overcapacity [in the market] and this is likely to last for the next five years. While smelters such as Qatalum might still add capacity in the next few years, they will not start to see a return on investment until the market starts to correct itself.”

Being able to sell into an established customer base has helped Qatalum to establish itself quickly, but other metal industries, such as steel production, have to take a different approach. Local steel producers need to be able to sell into a strong domestic market, as well as have economies of scale to make projects financially viable.

Steel products are generally easier to transport, making exports to neighbouring GCC countries a practical option. There is high demand in Saudi Arabia for semi-finished steel products, especially steel billets. This offers a large producer such as Qatar Steel Company (Qasco) good export opportunities. 

Qatar steel production

While it not as expensive to produce as aluminium, the production of direct reduced iron requires a gas allocation from the government and countries including Oman and Saudi Arabia currently have issues with supply.

Qasco was established in 1974 and was originally a joint venture with Japan’s Kobe Steel and Tokyo Boeki. Qasco became wholly state-owned in 1997 and currently produces more than 15 million t/y of steel products from its main complex in Mesaieed, as well as at affiliate plants in the UAE.

With a relatively small local market for its products, Qasco has had to plan its expansion carefully to keep in line with demand. But with the government planning billions of dollars of infrastructure projects over the next decade, consumption of steel products in Qatar is set to rise rapidly. The company is considering several options for increasing capacity and will begin work on a new meltshop at Mesaieed shortly.

Austria’s Siemens Steel was awarded the contract to supply equipment for the 1.1 million-t/y facility in March. It will include an arc furnace, ladle furnace and a high-speed billet caster.

The engineering, procurement and construction contract is due to be tendered in June, with commissioning scheduled for 2013. 

“The original plan was to carry out refurbishment of the current facilities, but Qasco knows that there is going to be greater domestic demand so are building a new greenfield meltshop,” says a UAE-based steel industry expert. “To build infrastructure, you need steel and Qatar is going to be building a lot of infrastructure in the next five years.” 

Qasco has also been planning to build another direct reduced iron plant at its complex in Mesaieed, but this has now been put on hold.

In a bid to build up its regional market share, Qasco has taken strategic stakes in a number of regional steel firms. It has a 25 per cent stake in Bahrain-based Gulf United Steel Holding Company (Foulath), which owns several large-scale steel facilities in Bahrain and is currently building a $1.2bn steel mill in Manama.

Qasco also owns a 20 per cent share of Saudi Arabia’s South Steel Company, which is building a 1 million-t/y steel mini-mill at the Jizan Industrial City in the south of the kingdom.

“[Qasco] has made a number of tactical moves into steel companies across the region,” says the UAE-based steel industry expert. “The Saudi Arabian steel market is hard to break into if you are not a local company, so taking a share in the Jizan project was a clever decision.” 

The future of Qatar’s metal industry uncertain

While Qatalum and Qasco are two of the region’s biggest players in their respective sectors, the long-term growth of Qatar’s metals industry remains uncertain.

The LNG export business is booming and Doha might decide that adding value to hydrocarbons comes second to exporting and establishing strong commercial ties with customers in the UK, China and India.  

At the same time, it is clear that a huge metals industry similar to the one being planned in Saudi Arabia is not feasible in Qatar.

The massive infrastructure projects planned as part of the 2022 World Cup in Qatar could make a compelling case for more investment in metals sector. But whether large-scale capacity expansions would be sustainable in the longer term is a matter for debate.

“When you look at the strategy Qasco is pursuing, you know that it doesn’t believe a massive steel industry is a viable prospect in Qatar,” says the UAE-based steel executive. “Its investments across the GCC indicate that a broader footprint is required to drive growth.”

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