Global Investment House: GCC aluminum sector – Attracting strong investments

Published June 24th, 2007 - 04:49 GMT

Global Investment House – GCC Aluminum Sector Aluminum, also called aluminium, is the third most abundant element in the Earth's crust and constitutes 7.3% by mass. The Aluminum industry makes a significant contribution to the global economy as well as to more than thirty individual economies. It is estimated that the Aluminum industry employs over a million people world-wide.

 

Aluminum smelting is a capital-intensive, technology-driven industry concentrated in a few relatively dominant companies. In recent years, China has emerged as a main driver of market fundamentals. Russia is also growing in importance in terms of industry developments and the GCC region is set to emerge as a major production centre due to availability of cheap source of power which constitutes more than 25% of the cost.

 

Aluminum consumption has enjoyed good average growth over the last few decades, partly due to general economic growth and partly due to its substitution of other materials. Total aluminum consumption, primary and recycled-based, has been growing at a somewhat higher rate than the development in overall industrial production. Both production and consumption in China continued to increase at a rapid pace, up about 18 percent in 2006 compared with 2005. In 2006 China accounted for about 25 percent of global primary aluminum consumption, contributing about 4 percentage points, or about 55 percent, to the total increase in world consumption. China's share of global primary aluminum production in 2006 was about 27 percent. Further, it seems likely that China will depend on increasing imports of scrap and off-grade metal to meet domestic needs and as a basis for export of semi-fabricated and finished products. It is possible that domestic aluminum production, together with scrap imports, will not be sufficient to meet the growth in Chinese demand over time, resulting in the need to import primary metal.

 

During the last three years, there has been an upward shift in the cost curve for primary aluminum production, triggered mainly by a significant increase in energy prices in historically-important producing areas for aluminum. The increase in energy prices is also influencing the cost of, and consequently the price for, alumina, as well as other important cost elements. Even though the estimated long-term aluminum price expectation has been increased, announcements of temporary and permanent closure of aluminum production plants have been made in Europe and the United States, the regions most severely affected by the cost increases. In general terms, aluminum production plants in these regions may be subject to closure if they are unable to renew or replace their power contracts at sustainable terms.

 

New capacity, needed to replace closed capacity and to meet increasing future demand, is expected to be largely developed in energy-rich areas. Such countries and regions include the Middle East, Russia, Iceland and some countries in Africa, Asia and South America. Aluminum production, which was once confined to western countries, is now shifting to the developing world. Within the developing world, it is shifting to those countries that either have the raw materials or have the energy resources to produce aluminum – namely the GCC region with its abundant energy resources. The GCC region has two established smelters in the UAE and Bahrain. Aluminum Bahrain (ALBA) was commissioned in 1971 to diversify the national economy from its heavy dependence on oil. ALBA has since grown from a modest 120,000 tonnes per annum smelter to 872,000 tonnes per year, making it one of the largest smelters in the world, with plans to expand the capacity further to 1.3mn tonnes per year.

 

Besides U.A.E. and Bahrain, other GCC countries - Oman, Qatar and Saudi Arabia too, are planning to set up aluminum smelters, entirely on the basis of the availability of inexpensive gas. Saudi Arabia has also deposits of bauxite. U.A.E., because of its leading and successful DUBAL, is poised to be one of the leaders. Capacity build up is likely to exceed 3.75 MPTA by 2010 when the new smelters are commissioned in Oman, Saudi Arabia and Qatar, and when the planned expansion program of ALBA with installation of the sixth pot line project is implemented. The capacity will further increase if the long-term plan of DUBAL to achieve 1.5 Mt/yr by 2011 is realized.
 
Due to the expansion in the construction sector, several extrusion plants have been set up all over GCC states. There are 22 major extrusion plants in the region with a total production capacity of 300,000 TPA, and the overall capacity utilization exceeds 88%. Most of the plants have anodizing, powder coating and painting facilities. About 60% of the extruded products are used in GCC and the balance is exported to international markets. The number of firms for aluminum finished product industries amounts to 496 with investments exceeding US$950mn, and a labor force of more than 24,000.

 

UAE’s DUBAL is currently one of the largest single-site aluminum operators in the eastern world. In addition, it is now ranked as the 7th largest global producer in the industry with a current production capacity of 861,000 tonnes per annum in 2006 and the capacity is expected to reach 920,000 tonnes in 2008.

 

Bahrain’ ALBA is expected to generate at least US$2bn in revenue for the government this year vis-à-vis US$1.5bn generated last year. ALBA is constantly increasing its production capacity and in 2006 it produced 872,388 tonnes of aluminum, a year on year increase of 5.1%.

 

Qatar Petroleum (QP) and Norsk Hydro of Norway are planning to develop one of the world’s largest aluminum plants in Qatar, an ideal location to serve growing markets in Asia, Europe and also North- America. Under the plan, Qatalum, the company set up to build and operate the plant, will have the first stage of its 585,000 ton capacity smelter, 15,000 ton more than initially planned.

 

Saudi Maaden is undertaking the Az Zabirah Aluminum Project to exploit Saudi Arabia’s extensive bauxite reserves and low-cost fuel supplies which will result in economic growth and employment. The project involves the construction and operation of a 0.62mn ton per annum  aluminum smelter and 1.4mn ton per annum alumina refinery at Ras Al- Zour located on the central east coast of Saudi Arabia, and a 3.3mn per annum bauxite mine located at Az Zabirah in central northern Saudi Arabia.

 

Oman’s Sohar aluminum is also building a greenfield smelter which will have a capacity of 350,000 tpa. It has a long term aluminum supply contract with Alcan. The total budget of the project is about US$2.4bn and it will commence production by the second quarter of 2008. 

 

Metals and mineral sector in the Middle East region is attracting private as well as foreign investment and the region is in a favorable position in terms of lower fuel cost, geographic positioning for exports and government support to develop the sector. There are several major smelters coming up in the region and finding enough bauxite to feed them will be a challenge. Alumina supplies account for 45% of smelters’ operational costs while power is responsible for about 25%. Most GCC producers will have to import raw materials for production but the energy reserves in the region will ensure the GCC remains competitive in the world of aluminum industry over the next decade. 

 

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