Aluminium to boost economic diversification in GCC

DUBAI — One of the GCC's biggest challenges is to foster growth in non-oil sectors of the economy, and indications are the bloc is succeeding in the aluminium industry. Aluminium accounted for 12 and 7 per cent of the GDP last year in Bahrain and Dubai, respectively, and the metal's role in the GCC will expand in the coming years.

By James Plasman

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Published: Fri 25 Aug 2006, 9:22 AM

Last updated: Sat 4 Apr 2015, 2:20 PM

With more than $14 billion in investments planned, aluminium production in the Gulf will rise from 1.5 million tonnes in 2005 to 5 million tonnes in 2010. Other proposed projects could lift GCC production beyond 7 million tonnes by 2012, giving the region 18 per cent of world output. For mega-smelters with planned annual capacities of over 1 million tonne, like Alba, Dubal, and the Qatar Petroleum-Hydro joint venture, revenue for each firm could exceed $2.5 billion at today's prices.

Finally, it seems, the GCC will have a large export industry that does not rely on oil production.

Creating a national industry that is profitable in the long term is tricky business, but several factors suggest that the aluminium industry has the potential to thrive in the GCC. The world price of aluminium will remain strong. World demand is growing between 4 and 5 per cent, or more than one million tonne each year. China's well-documented hunger for commodities to fuel its boom extends to aluminium and the healthy construction and transportation sectors in that country account for much of the world's growing demand. By 2008 the Asian nation will be a net aluminium importer.

Europe and the United States will also import more aluminium in the coming years, but for different reasons. The price of natural gas, which has risen 150 per cent for smelters worldwide over the last four years, is making many European and American aluminium plants unprofitable. A smelter with 250,000 tonnes capacity uses enough electricity to power a medium-sized city, and a power outage of just four hours can allow aluminium to freeze in its pot and destroy the production line. Secure gas supplies are a big question for many smelters. Declining gas production will turn the US into a major importer in the coming years, and Europe will rely on natural gas for 30 per cent of its energy needs by 2020.

Political questions surround the ability of Russia and Iran, which have the world's largest reserves, to get their natural gas to market. Alternative sources of energy are also becoming less feasible. Concern expressed by regulators and customers over high emissions of CO2 and other pollutants is requiring older smelters to switch from coal to natural gas for their energy needs or shut down, and little room exists to expand hydroelectric capacity in Canada and the US Pacific Northwest.

Some 75 per cent of the world's idle capacity is in North America, and Europe stands to lose millions of tonnes capacity between now and 2010.

Gulf countries are ramping up aluminium production while smelters elsewhere shut their doors. The GCC's abundant gas reserves make it an attractive locale for aluminium producers. The completion of the $3.5 billion Dolphin pipeline will supply the UAE and Oman with 500 cubic feet of Qatari gas daily. Bahrain is completing terms for a separate deal with its gas rich neighbour. If the price of gas continues to rise, both Saudi Arabia and the UAE have large reserves of their own to develop.

Besides gas, a number of other factors create an atmosphere conducive for heavy industry in the Gulf that few other countries can match. Situated with access to the world's oceans, Gulf producers can ship their products to both Europe and Asia at lower cost than Brazilian or Russian producers. Well maintained highways and reliable electric and water grids link the industrial sites to ports and cities. Proximity to India provides a skilled and mobile work force; almost 40 per cent of Dubal's employees come from the sub-continent. Environmentally friendly smelting is increasingly important to potential customers who themselves face public pressure to turn 'green.' Alba and Dubal have incorporated the latest clean technology and are two of the most environmentally friendly smelters in the industry. Nitrous oxide emissions from Dubal's power plant have declined over the years, and the smelter has one of the lowest levels of fluoride emissions in the world. Alba is spending more than $65 million to reduce harmful emissions from its six gas-fired power plants, and prides itself on being so clean that a vegetable garden grows on its grounds. The other smelters under construction in the Gulf have the opportunity to incorporate the newest technologies and meet evolving environmental standards at a fraction of the cost of older smelters.

Nevertheless, the Gulf's dominance in the industry is not guaranteed. Russian aluminium giant Rusal is taking advantage of Central Asia's vast bauxite deposits and energy resources to expand and overtake Alcoa as the world's largest aluminium smelter. Smaller producers such as Iran have plans to double output and formerly non-producing countries such as Vietnam will start up new smelters. Industry giants Alcoa and Alcan are closing unprofitable plants while still increasing overall output.

Adding to the uncertainty, most GCC producers will have to import raw materials for production. Two tonnes of refined bauxite, or alumina, are required for every ton of primary aluminium smelted. The Saudi mining company Ma'aden controls the rights to the only major bauxite deposit on the Arabian Peninsula and will use the alumina derived from there in its own plant set to commence production in 2008. The rest of the Gulf must import from elsewhere. Alumina prices were up over 40 per cent on the spot market last year and are projected to stay high. Firms are scrambling to secure their supplies. Dubal recently signed a contract with India's Larsen & Toubro to build an alumina refinery in the southeastern state of Orissa, and bought rights to 40 per cent of Global Alumina's output in Guinea. Still, Dubal's alumina production will not be near the amount needed to support its planned aluminium output. For the time being, Dubal and other alumina importers are at the mercy of the spot market for this input.

Good management is also essential for GCC smelters to remain profitable. Dubal's policy of rewarding employees for cost-saving suggestions, for example, saved the company tens of millions of dirhams in recent years. Dubal has also built up a reputation for reliability. During the first Gulf War, Dubal trucked its aluminium to the port of Fujairah on the Indian Ocean to ensure that its product would reach its customers in case the Strait of Hormuz was closed. The Asian financial crisis of the late 1990s provided Dubal with another opportunity to burnish its reputation as a reliable supplier. While other companies fled Southeast Asia, Dubal continued to meet its customers' needs, offering flexible financing options in lieu of credit. Dubal is now the preferred supplier of many of its Asian customers, and the company's sales in Asia continue to grow. This constant push to lower costs and earn a good reputation is essential if a state-owned company is to compete successfully in the world market.

The GCC's energy reserves will ensure that the Gulf remains competitive in the world aluminium industry over the next decade. The GCC will have a multi-billion dollar industry that stands to become a cornerstone in a diversified economy. The Gulf countries are making a smart move to take advantage of their energy reserves, strategic geographical position, and fortuitous global circumstances to build up their aluminium industry. By locking in their alumina contracts now and focusing on good management, aluminium producers will be a step closer to long-term success and profitability.

(James Plasman is GRC visiting scholar at John Hopkins University)

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