Region capitalises on low energy cost for aluminium production

The start-up of Maaden’s smelter late last year has reinforced the Middle East’s growing relevance as a producer in the global aluminium market. Published in MEED, 13 July 2013

When the first aluminium was produced at Ras al-Khair on the east coast of Saudi Arabia on 12 December, it marked the start of a new industry in the kingdom. It also helped to cement the Middle East’s position as one of the more important regions for the metal in the world.

The smelter, owned by a joint venture of Saudi Arabian Mining Company (Maaden) and the US’ Alcoa, cost an estimated $9.9bn, and will be able to produce up to 740,000 tonnes a year (t/y) of primary aluminium once fully commissioned. It will use bauxite from mines in the north of the country, which will be refined into alumina at a 1.8 million t/y refinery in Ras al-Khair before being smelted into aluminium.

“Maaden is the only fully integrated Aluminium Project in the Gulf,” says Mahmood Daylami, secretary-general of the Gulf Aluminium Council. “They have their own bauxite, their own alumina refinery, a smelter and downstream products, so the whole value chain. This is a significant change and it is a significant quantity to be added to total Gulf production.”

Middle East capacity

Saudi Arabia’s entry into the market takes the number of countries producing aluminium around the region to seven. It is part of a second wave of aluminium investment for the Middle East. The first plants began operating in the 1970s, starting with Aluminium Bahrain (Alba) in 1971 and followed by plants in Iran, Egypt and Dubai. Since 2008, a succession of new smelters have opened in Oman, Qatar, Abu Dhabi and now Saudi Arabia.

“In terms of world production, outside China, nearly all the new capacity coming on stream is in the Middle East,” says Marco Georgiou, head of aluminium primary and products at CRU Group, a London-based research firm. “There is some additional capacity due to ramp up in India and Russia, but the Middle East has seen its capacity rise the most over the past few years. Russia, the Middle East and China are now probably the three largest regions for production.”

China dominates the market, accounting for more than 40 per cent of global production last year, according to the US Geological Survey, although producers there are focused on the domestic market. By contrast, the Middle East sells the vast majority of its output to other countries. In 2007, the region had a global market share of 6 per cent, but with new production facilities coming on stream that had climbed to 9 per cent by 2011. This will rise even further with the addition of the Maaden plant.

The main motivations for the huge investments being made in new smelters include the desire of the region’s oil-dependent governments to diversify their economies and provide new job opportunities for locals – the Qatalum plant employs 1,100 people, for example. The aluminium industry will certainly not be able to solve the issue of unemployment on its own, but matched with the downstream industries that use aluminium it could be a potent new source of jobs.

Downstream products

That, in turn, explains the investments being made in related areas, such as rolling mills, extrusion facilities, and wire and cable production. Among the emerging downstream industries is Oman Aluminium Rolling Company, which expects its rolling mill in Sohar to come online in August, with a capacity of 160,000 t/y. The firm expects half its output will be used for downstream products in Oman within five years.

Similarly, Maaden and Alcoa are building a rolling mill at Ras al-Khair, which will be able to produce sheet and foil stock for the automotive and construction sectors, when it starts production in 2014. Among its potential customers is Jaguar Land Rover, the Indian-owned car group, which in December signed a letter of intent with Riyadh to explore the idea of setting up a production facility in the kingdom.

The UAE is also developing an aluminium cluster in the industrial zone alongside Khalifa Port. It is based around Emirates Aluminium (Emal), but Khalifa Industrial Zone Abu Dhabi says it hopes to attract rolling mills and companies involved in extrusion, casting, forging and other activities.

Emal’s phase two plant is due to start operations in 2014, taking production capacity at the site to 1.3 million t/y in a project that is predicted to cost the joint venture partners, Dubai Aluminium (Dubal) and Mubadala Development Company, about $5bn.

If there is a danger in all this, it is that countries are all targeting the same downstream activities. “As far as which downstream activates to attract, they all compete,” says Daylami. “That is one of the drawbacks at the moment. There are a lot of rolling mills and extruders.”

Cost advantage

Notwithstanding these downstream developments, the relatively small size of most local economies means the main opportunities remain in the global market.

With that in mind, producers will be grateful that demand is still rising. According to Alba, global consumption was up 3.9 per cent in 2012. China led the way with 8 per cent growth, followed by India with 6 per cent and North America by 5.6 per cent. In the Middle East and North Africa region, demand rose by 5.5 per cent, but it fell by 4.8 per cent in Europe.

Despite such promising indicators, the aluminium industry also faces some problems. Supply has outstripped demand in recent years and there are high inventory levels. That explains why aluminium prices on the London Metals Exchange (LME) fell by 16 per cent in 2012, to an average of $2,019 a tonne, compared with $2,398 a tonne a year earlier.

The cost advantage that Gulf producers have with low fuel prices and modern plants means they should still be able to compete effectively, however. The Maaden/Alcoa smelter, for example, has the lowest production costs of any Alcoa plant in the world, according to the US firm’s chief executive officer, Klaus Kleinfeld.

“The Middle East producers are very competitive,” says Georgiou. “Their low costs typically put them in the top half, or top quartile, when it comes to producing aluminium. They’re very competitively placed in … the global market.

“They shouldn’t have a problem finding customers for their output because demand is still rising. More importantly, they should be able to be profitable. If you have low costs, even if the price stays quite flat they’ll still be in a better position than many other producers around the world. The new plants may force the closure of some higher-cost plants in other parts of the world. We’ve seen that happen already in Europe and Australia.”

The current, three-month price of aluminium on the LME is about $2,100 a tonne. The CRU Group expects it could move up slightly in the near future, but is likely to stay in a range of about $2,100 to $2,300 a tonne. The World Bank forecasts prices could rise gradually to $2,900 a tonne by 2025.

Aluminium industry constraints

Despite the cost advantages Middle East producers enjoy, there are still some constraints on the industry in the region. The high capital cost of developing new plants or expanding existing production facilities means it is not a simple investment decision. The first phase of the Emal project in Abu Dhabi cost $5.6bn, while Qatalum’s smelter cost $5.7bn.

The energy demands to convert alumina to aluminium are also considerable. The Dubal plant in Dubai has a captive power plant with a generating capacity of 2,350MW. Qatalum has a dedicated 1,350MW power plant. Ensuring adequate feedstock for such power plants is not always easy, given the competing demands from other parts of domestic economies and the need to earn export revenues.

Such issues are hampering several potential expansion projects, including a sixth pot line at Alba’s facilities in Bahrain. In 2009, a planned $4bn smelter in Jizan, Saudi Arabia, was cancelled entirely due to feedstock issues.

These constraints mean the current wave of new smelters might be reaching a natural conclusion. Instead, it is in the downstream field where most countries and producers are likely to expand.

“All of them have a strategy to build downstream because they realise they can add value by having more industry as a result of [producing aluminium as a raw material,” says Daylami. “I think the potential for having new downstream developments is far greater than for having new smelters.”