Aluminium production expands and exports grow in Bahrain despite imposition of US trade tariffs

Bahrain is a major player in global aluminium production, and the sector in turn dominates industrial activity and is one of the largest sources of export revenue. The industry’s economic contribution is set to rise further, with a major expansion project at the kingdom’s state-owned aluminium manufacturer due to come on-stream soon, raising output by 50% at a time when international aluminium prices have recovered from recent lows. The expansion should help facilitate the continued development of the country’s downstream aluminium segment, which the authorities are seeking to encourage. The recent imposition by the US, one of Bahrain’s major trading partners, of new tariffs on aluminium imports is a blow to the industry, but this impact appears set to ease with an exemption for the kingdom’s major downstream player announced in November 2018.

Major Contributor

Bahrain Aluminium (Alba) operates what will soon be the largest single-site aluminium smelter in the world and is a dominant force in the kingdom’s manufacturing sector. According to the firm, its output alone represents approximately 12% of GDP, which suggests that the company accounts for the bulk of national manufacturing output, together worth 14.5% of GDP in 2017.

The firm estimates that when its current expansion project is completed, its contribution will rise to 15% of national economic output. The kingdom’s sovereign wealth fund Mumtalakat is the controlling owner of Alba, with a share of 69.4%. Additionally, petrochemicals producer Saudi Basic Corporation, which is majority owned by the Saudi government, holds a 20.6% stake in the firm, while the remaining 10% of the company’s equity trades on Bahrain’s stock exchange, the Bahrain Bourse.

Alba employed 2700 people as of 2017. It launched its first two potlines in 1971; and two more in 1981 and 1992, respectively. A fifth line entered into operations in 2005. At the end of 2016 total production capacity across the five lines stood at 970,000 tonnes per annum (tpa). In the middle of the following year the firm started work to upgrade two of the lines and improve efficiency at the smelter in order to raise capacity to 1.05m tpa by the end of the year.

Actual production stood at 960,000 tonnes in 2017, down from 970,000 the previous year; however, output had risen consistently in recent years, from 890,000 tonnes in 2012. According to data from the US Geological Survey (USGS), the 2017 figure ranked Bahrain the eighth-largest producer of aluminium in the world, accounting for 1.6% of total global output of 60m tonnes, and the second largest in the Middle East after the UAE, with 2.6m tpa.

Performance & Exports

Alba recorded metal sales revenue of $2.08bn in 2017, up from $1.70bn the previous year, due in large part to higher international aluminium prices (see below). Net profits at the company almost doubled from $129m in 2016 to $246m in 2017. Revenue rose again in the first nine months of 2018, to BD699.8m ($1.9bn), an increase of 16% on the same period a year earlier, as did net profit, by 12% to BD77.3m ($204.8m).

This increase was due in large part to record output and sales in the second quarter of the year. However, profits for the third quarter of the year fell by 44%, on more or less flat earnings, due to a 60% rise in the price of alumina (aluminium oxide), which the company purchases as feedstock. Bahrain imported $400m worth of alumina as feedstock for aluminium production in 2016, according to Observatory of Economic Complexity figures, 95% of which came from Australia. Of Alba’s total output 41% is sold within Bahrain, with the remainder exported.

The firm’s leading export market by region is Europe, accounting for 23% of total sales in 2017, with the Middle East and North Africa, the Americas and Asia each accounting for 12%. As regards individual countries, the US was the leading destination for raw aluminium exports from Bahrain in 2016, which were worth $787m, accounting for 24% of the total. Meanwhile, South Korea received 12% and Turkey accounted for 10%. Saudi Arabia was the leading destination for aluminium wire, exports of which totalled $452m, with 23% of sales, followed by the US with 17% and Algeria with 13%.

New Line

Alba is currently in the process of building a sixth potline, the engineering, procurement, and construction management contract for which was awarded to US contractor Bechtel in April 2016. The facility came on-stream in December 2018 and is set to reach its full production capacity of 540,000 tpa in the second quarter of 2019. The project began in 2017 and is being undertaken at an investment cost of $3bn, with the construction of a 1792-MW power plant to provide electricity for the new line. The expansion will bring production capacity to around 1.5m tpa, equivalent to 25% of the total aluminium production capacity in the GCC.

Rising Regional & Global Output

The expansion is taking place in a context of rising regional aluminium production. Output in the UAE jumped from 1.86m tonnes in 2013 to 2.6m tonnes in 2017, according to USGS figures. Meanwhile, neighbouring Saudi Arabia entered the aluminium market in 2012 with the inauguration of the Ma’aden Aluminium smelter and bauxite mining complex – a joint venture between state-owned miner Ma’aden and US aluminium major Alcoa – leading output to jump from zero in 2011 to 840,000 tonnes in 2016, per the latest available USGS data.

Global aluminium production has risen steadily in recent years, from 49.3m tonnes in 2012 to 60m tonnes in 2017, out of a capacity of 76.9m tonnes, according to the USGS. Much of this increase has been driven by growing production in China – by far the world’s largest producer of the metal – which rose from 23.5m to 32.6m, albeit substantially below its capacity of 44.5m, over the same period. These increases have sparked some concern about the danger of international aluminium overcapacity, something that could push down prices. Nevertheless, these appeared to be holding up in 2018: prices rose from a recent low of around $1500 per tonne in early 2016 to a peak of more than $2500 per tonne in April 2018. However, they had fallen back to just under $2000 per tonne in November.

Downstream Segment

The presence of Alba in Bahrain has led to the establishment of a significant local downstream aluminium products segment. Major players in the field include Gulf Aluminium Rolling Company (GARMCO), which was established as a joint venture between six regional governments, including Bahrain, and is a producer of aluminium sheets and coils, embossed slitted coils and checkered plates. The firm has a rolling mill production capacity of 165,000 tpa and an annual turnover of around $450m. Another significant actor in the segment is Midal Cables, which produces aluminium rods and wires, and aluminium-clad steel, among other products. Additional players in the market include construction products manufacturer Bahrain Aluminium Extrusion Company, which has a production capacity of 33,000 tpa, and Bahrain Alloys Manufacturing Company, with a capacity of 30,000 tpa.

To further bolster the development of the downstream segment, the authorities are looking into the feasibility of developing a downstream aluminium products park on land located near Alba’s plant. The project would potentially involve multiple stakeholders including Idama, Mumtalakat and Alba. “The Alba expansion is also feeding further activity in downstream aluminium and should unleash another wave of activity there,” Jarmo Kotilane, chief economist at the Bahrain Economic Development Board, told OBG.

Tariff Threat

A notable blot on the landscape in the run-up to the inauguration of the Alba expansion is the 10% tariff on US imports of aluminium put in place in March 2018, alongside a 25% tariff on steel imports. The tariffs are in response to what the US administration has claimed is unfair international competition in the segment, and came against a backdrop of declining US aluminium production.

Credit ratings agency Moody’s reported that Bahrain would be among the countries most severely affected by the tariffs. This is due to the economic importance to the kingdom of aluminium exports. However, there are some indications that the issue could be resolved in the near future.

Alba announced in April 2018 that it would apply for an exemption from the tariffs, and in October the US and Bahraini governments were reported to be in talks over the matter, with Bahraini media quoting the US deputy secretary of state, John Sullivan, as stating that the US government was sympathetic to the kingdom, and noting that the tariffs were primarily intended to target imports from China. As a result of these efforts GARMCO was granted an exemption from the tariffs by the US in November 2018.