Rapid expansion risks aluminium oversupply

28 March 2008
Is the growth in the region’s aluminium smelting capacity justified by the increase in demand?

The first greenfield aluminium smelter to be built in the Gulf in more than 25 years is due to begin production by the end of 2008. The 350,000-tonne-a-year (t/y) facility being developed by Sohar Aluminium Company in Oman is one of four such projects under way. The others are in Qatar, the UAE and Saudi Arabia.

In addition, Dubai Aluminium (Dubal) recently completed the expansion of its Jebel Ali base, while Aluminium Bahrain (Alba) is considering regional expansion plans that could raise capacity by as much as 40 per cent to 1.2 million t/y.

Speaking at the MEED Middle East Aluminium conference in February, Sundeep Biswas, business development director of Australian/Canadian aluminium giant Rio Tinto Alcan, said one-quarter of the additional 35 million-t/y of aluminium the world is expected to demand by 2030 could be produced in the Gulf.

The growing demand has led to the establishment of a newly formed industry body, the Gulf Aluminium Association, which held its first meeting in Dubai in February.

Downstream growth

With such ambitious production targets, it is expected that the region’s downstream aluminium industry, which includes production of flat-rolled aluminium such as foil, is also set to grow. This is driven by increasing access to raw metal supplies and a construction boom that is fuelling domestic demand for extruded aluminium products.

But as such rapid developments come on line, it is not clear how the relationship between supply and demand will take shape in the near term. Several large-scale smelting projects are set to come on stream within a relatively short timeframe and aluminium production in the Middle East is expected to reach at least 4 million t/y by 2012. “At the moment, supply and demand are moving in the same direction,” says Ahmed al-Noaimi, chief executive officer (CEO) of Alba. “But if new smelters start up at the same time, for a period of time there will be a mismatch in supply and demand.”

In the UAE, Emirates Aluminium’s (Emal) 700,000-t/y smelter at Taweelah is due to start production in 2010, the same year the 585,000-t/y smelter being developed by Qatar-based Qatalum is scheduled to supply the market.

Elsewhere, Saudi Arabian Mining Company (Maaden) is developing a 620,000-t/y smelting facility at Ras al-Zour. In Saudi Arabia alone, as many as nine proposals for aluminium smelting projects have been submitted to the Saudi Arabian General Investment Authority (Sagia).

“The supply is not necessarily what it appears to be,” says one senior Bahrain-based aluminium consultant. “Not all of the planned projects will go ahead. There is little local demand for new smelters. The market is well served by the two smelters already in existence [at Alba and Dubal]. Most of their output is exported.”

However, this does not worry Truls Gautesen, CEO of Qatalum, who says the global markets are busy enough for everyone. Reflecting this, Qatalum’s output is already known to be heading for Asia. “For our project here at Qatalum, worldwide consumption has driven development,” he says. “You always like to be close to the market, but energy is the main factor, and the world is realising that aluminium is able to travel great distances.”

With energy accounting for about 30 per cent of an aluminium smelter’s operating costs, the advantages of being located in the Gulf are clear. Gas, the preferred source of energy for smelting operations, costs about one-tenth of the price it does in other parts of the world.

“The Gulf is very much the focal point for growth in global smelting operations,” says Gautesen, who believes Qatar has a clear advantage when it comes to gas availability. “The number of projects may be surprising, but the location is not.”

However, the popularity of gas also presents one of the major challenges to planned projects. Competition among all industrial users is increasingly fierce. Even Alba, one of the Gulf’s oldest aluminium smelting operations and a major contributor to Bahrain’s economy, has to wait in line. “Expansion is still on the agenda,” says Al-Noaimi. “But it is all about timing. Our efforts depend on securing energy.”

Bahrain is in talks with Qatar and Iran to secure future gas supplies.

Beyond the competitive advantage provided by cheap gas supplies, the importance of growth in global demand for aluminium remains fundamental in driving primary aluminium production in the Middle East. To remedy this and stimulate more local demand, the development of the region’s manufacturing industry is key. “The local market needs to be developed,” says Anderson. “It is only the development of downstream industries that will create domestic demand for aluminium.”

The Middle East currently uses a little under 1 million t/y of aluminium, according to Modar al-Mekdad, general manager of UAE-based Gulf Extrusions. “This is around 25 per cent of the primary aluminium capacity expected in 2012,” he says. “Germany alone consumes the same amount annually as the whole of the Middle East.”

Identifying the region’s construction sector as the only significant driver for downstream aluminium industries, Al-Mekdad estimates that year-on-year demand for all processed aluminium products will increase at no more than 3-4 per cent. “The main driver for demand here is the construction industry,” he says. “Of this demand, 80 per cent is for extruded products and 20 per cent is for flat-rolled products. Demand for cast aluminium is minimal.”

Expanding capacity

But despite the relatively limited domestic market, developers say there is still room for downstream growth as smelting capacity in the region expands. “The manufacturing industry is a sector that needs to be explored,” says Al-Mekdad. “Investors should be looking at opportunities here.”

With this in mind, Al-Mekdad is overseeing the development of Gulf Extrusions’ first plant outside the UAE. The 10,000-t/y facility in Qatar is part of its plans to double production.

For Adel Abdul-Rahman, CEO of Bahrain’s Gulf Aluminium Rolling Mill Company (Garmco), the main con-cern is the lack of locally available primary metal in the downstream sector. “The extensive development of downstream industrial initiatives is taking place, and downstream aluminium will be at the heart of these initiatives” he says. “In Bahrain, we are crying out for more aluminium supplies to increase our downstream production.”

As global demand for flat-rolled products also increases, the region’s aluminium smelting growth offers local producers the opportunity to serve a far wider market.

Garmco’s search for primary metal supplies to facilitate its expansion plans have taken the company to Oman. In partnership with Takamul, the investment arm of the state-owned Oman Oil Company, and the Abu Dhabi Water & Electricity Authority (Adwea), Garmco is developing an aluminium processing facility at Sohar to supply Sohar Aluminium with liquid metal for the 160,000-t/y flat-rolled product and foil plant.

Takamul is also developing an aluminium rod plant with Oman Cable Company. If all planned projects in Sohar’s aluminium cluster go ahead, the initial 215,000-t/y primary metal allocation for domestic use will be largely accounted for. Sohar Aluminium is already considering plans to raise production to 700,000 t/y.

The region’s primary aluminium producers will need to strike a balance between serving the international market and providing enough metal to enable domestic downstream industries to grow. But Al-Mekdad remains confident that global supply and demand for primary aluminium will continue to enjoy a healthy relationship. International demand and the loss of smelters in countries where rising energy costs are likely to force their closure are fundamental drivers for Middle East growth.

“Primary aluminium production in the Middle East will mainly be targeting Europe and the Far East,” says Al-Mekdad. “There will be no oversupply as smelting operations elsewhere are closing down because of high energy prices.”

With gas supplies in increasingly short supply and project costs continuing to rise, some planned projects may yet prove uneconomical to pursue. “How many of these smelter projects can be realised and how fast is another question,” says Gautesen. “We know too little about some of them to tell.”

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