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Can aluminium boost non-oil revenues in the GCC?

Bahrain’s rejuvenated focus on developing its aluminium sector indicates the GCC’s desire to spur economic diversification

GCC countries are turning to aluminium production in a bid to support their economic diversification plans.
GCC countries are turning to aluminium production in a bid to support their economic diversification plans.

Notable government investments and The Big 5 2015 made November a busy month for the GCC’s aluminium sector.

Firstly, Bahrain’s sovereign wealth fund, Mumtalakat, announced a fresh set of funding plans for the metal industry during the month.

Over two consecutive days, reports stated Mumtalakat would invest in Spanish materials producer, Aleastur, as well as form a joint venture with India’s Synergies Castings.

In a Reuters report dated 17 November, Joseph Kirikian, head of industries and services at Mumtalakat, said the Aleastur investment comes in light of the Spanish company’s expansion plans.

“We are taking a minority stake and helping the company to expand into the Gulf,” Kirikian said.

While he did not reveal the total value of the investment, Kirikian said he hopes the deal would “close soon”.

Speaking to Construction Week about Mumtalakat’s plans for Aleastur, Mahmood Al Kooheji, the sovereign wealth fund’s CEO, says: “We can confirm that we are in discussions but cannot comment any further at this stage. In the event that there is anything to announce, [then] we will update the market in due course.”

Al Kooheji, however, divulges Mumtalakat’s strategy for Synergies Castings, with which it inked a joint venture on 18 November.

“The joint venture stipulates the development of a new aluminium casting and specialty alloy wheel manufacturing facility in Bahrain,” he says.

“This will be a cornerstone project at the new molten metal park – being developed adjacent to Aluminium Bahrain (Alba) – which is a combined initiative between Mumtalakat and the Bahrain Economic Development Board.”

Al Kooheji says the project, it is hoped, will diversify the Bahraini aluminium sector, while the global industry moves towards attracting higher value-added downstream capabilities than currently available.

“The facility will offer design, engineering, advanced simulation, product development and manufacturing capabilities, with an annual production capacity of approximately 25,000 metric tonnes,” he continues.

“The manufacturing facility is expected to create approximately 600 new jobs in Bahrain. Mumtalakat will hold a 49% stake in the joint venture with Synergies, and will support the project by procuring all necessary approvals prior to production,” he adds.

Alba is listed on both the Bahrain Bourse and London Stock Exchange, and the company’s shareholders include Mumtalakat (69.38%) and SABIC Industrial Investment Company (20.62), besides general public (10%).

Mumtalakat’s increased focus on the aluminium sector reiterates Bahrain’s faith in the building material as an economically-diversified investment opportunity.

As Dr Jarmo Kotilaine, chief economist at Bahrain Economic Development Board (EDB) tells Construction Week, aluminium has been one of the earliest drivers of economic diversification in the Kingdom.

“Moving aluminium products isn’t just an opportunity to create more [revenue], but also an energy-intensive activity to ensure human capital productivity,” he says.

“It’s a real opportunity for Bahrain. [The country] recognised very early that this industry isn’t just about turning alumina into aluminium, but about creating much more economic value through those products,” EBD’s chief economist continues.

The economic downturn in China and other global markets will play a key role in the growth of not only Bahrain, but the GCC region, as a supplier of aluminium.

Dr Kotilaine concedes the Chinese slowdown has created challenges “that weren’t anticipated a couple of years ago”.

“But the underlying vision for the sector in Bahrain is to use aluminium to create products which will be in demand internationally, and that is a much more robust and resilient proposition,” he adds.

Over at Mumtalakat, Al Kooheji appears to have imbibed this concept into the sovereign fund’s long-term strategy. Indeed, he is far less perturbed by current global economic upheavals – such as the decline in crude values – than one might presume.

“Mumtalakat faces the same challenges that any producers face when it comes to the cyclical movement in commodity prices, but the long term picture is very strong and does not impact our strategy in any significant way,” Al Kooheji says.

“There are real opportunities in the downstream sector in Bahrain – both because of the production at Alba, and because of the high levels of human capital in the country.

“Bahrain’s aluminium sector is well established and there are thousands of Bahrainis with decades of experience working in and running these enterprises – so businesses investing in the sector have a fantastic resource they can tap into.”

This optimism regarding Bahrain’s aluminium sector perhaps formed part of Alba’s decision to deploy its resources towards a line expansion project.

Bechtel Canada completed the Bankable Feasibility study for Alba’s $3.5bn (BHD1.3bn) Line 6 Expansion project in December 2014.

The Line 6 expansion will boost Alba’s annual output by 514,000 tonnes to 1.45 million tonnes a year, with half of the extra production set for sale to existing and new Bahraini customers.

Construction is expected to start in 2016, and production is likely to begin in 2019.

“Alba’s annual production for 2014 hit 930,000 tonnes, the highest since production began more than 40 years ago,” Al Kooheji says.

“The use of this production is split between export, where it plays an important role in diversifying the country’s total exports, and the local downstream industry.”

Aluminium export is also being targeted by manufacturers and suppliers in the GCC region, driven by the ambition to expand their revenue streams in terms of product lines and geography. Local production is expected to steer attention away from imports, which are likely to get cheaper as global economies grapple with diminished oil prices.

This is already visible in the regional steel sector, where Emirates Steel chief, Saeed Ghumran Al Romaithi, has previously lobbied for tighter reins on material imports.

According to The National, Emirates Steel’s CEO Al Romaithi, said in April 2015: “The steel industry plays a crucial role in the UAE’s industrial development plans and therefore should be protected against unfair trade practices.

“If proper measures are not adopted, many producers in the UAE would be at risk of losing capacity, putting the country at risk of losing impetus in diversifying its economy away from dependence on oil as a major source of income,” he added.

Al Romaithi’s statements were aimed at increasing tariffs on Chinese and Turkish steel imports in a bid to reduce “dumping” of low-quality materials and products.

While experts will agree that taking such action to safeguard local production would not be without challenges, it is hard to tell whether market fluctuations in the near future will necessitate the decision.

For now, however, the GCC’s aluminium sector appears to be stable, owing also to the growth of local private sector firms.

Helpfully, some regional material producers also boast diversified horizontal growth across industries and product lines, which shields their operations against the construction slowdown spurred by oil prices, as is currently the case.

Arvind Kumar, business development manager at UAE’s Gulf Extrusions, told Construction Week on the sidelines of The Big 5 2015 that the company’s differentiated product mix provides a degree of insulation against market fluctuations.

“Gulf Extrusions’ product mix is focussed on the architecture, industrial, and automotive sectors,” he said.

“Our focus is well spread and we don’t see an immediate threat to our business from the slowdown,” he continued.

Highlighting the company’s performance in 2015 and his expectations of 2016, Kumar said he will closely monitor market activity as key regional events draw closer.

“This year has been very important because we’re closer to Expo 2020 and 2022 FIFA World Cup,” he said.

“Projects that were on paper so far are now moving past the drawing board. We’ve noticed smooth progress on some of the major developments we’ve planned for beforehand.

“Of course, there are some projects which have continued to remain in the conceptual stage, the niche markets and segments we cater to have been very consistent.”

Saudi Arabia is also part of the GCC’s aluminium strategy, and cannot be discounted as a sizeable contributor to the sector’s growth.

In December 2014, Saudi Arabian Mining Company (Ma’aden) and lightweight metals producer Alcoa announced that the alumina refinery at their joint venture complex in Saudi Arabia had successfully produced its first alumina from Saudi Arabian bauxite.

As Kumar remarked, the jointly-created refinery at Ras Al Khair – which is expected to produce 1.8 million metric tonnes per year (mtpy) of alumina once fully operational – will also greatly benefit the GCC’s economy in terms of revenues and employment.

He also expressed confidence in the GCC aluminium sector’s investment potential.

“Thankfully, the region’s capacity is higher than actual demand, so entry from foreign players like China or Europe hasn’t been set yet,” he said.

“However, we have to understand that the current consumption of aluminium locally is driven by the building and construction sector. This means there are low barriers of entry, which could potentially bring in more imports.”

Yet, the architectural segment may also be the saviour of local aluminium suppliers.The development of fast-tracked and speedy projects demanded in the UAE and Qatar, for instance, mean clients and contractors require timely deliveries, which goes on to encourage local material sourcing.

“Aluminium hasn’t been affected so far, but you do hear of a lot of projects using imported materials, so authorities should keep an eye on that,” Kumar said.

“If there’s a disturbance in that equation, then that could alter [market dynamics].”

Analysts have predicted resource reprioritisation in the GCC construction industry next year. Taxation and subsidy cuts are likely to gain traction in 2016, and the trickledown effect of these measures could affect domestic building material suppliers.

Kumar, however, was less pessimistic about the possibilities: “Next year is going to be interesting. The opportunities are there, and challenges will also persist. We’re not [denying] that oil price correction [is underway], but 2016 is going to be a year of opportunities.”

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