Key components: Dipping into aluminium smelting to add value

Aluminium has not been smelted in Saudi Arabia previously, but the Kingdom is now entering a market neighbouring countries have been active in for some time. A $10.8bn integrated aluminium complex is under development by a joint venture formed in 2009 between Ma’aden and the US’s Alcoa. The complex’s smelter is due to begin producing 740,000 tonnes of aluminium in 2013, overtaking Oman and Qatar, though it is still some way behind Dubai’s 1m tonnes per year.

Key Advantages

An advantage which Saudi Arabia can claim to have over other Gulf producers is an abundance of locally available bauxite, the mineral from which aluminium is refined. This too is a resource which until now has remained unexploited. However, the Ma’aden-Alcoa venture includes a mine and a refinery which are due to come on-line at the end of 2014, when bauxite from the Al Azbirah mine is to be transported via a recently constructed train line to the complex at Ras Al Khair. With an annual capacity of around 1.8m tonnes of alumina, the facility is being constructed by South Korea’s Hyundai at a cost of $1.5bn.

Alongside the mining and smelting of crude aluminium, in 2013 a rolling mill is to start processing 380,000 tonnes of aluminium per year. In mid-2012, the AlcoaMa’aden venture awarded the US-based Fluor Corporation a contract to design and construct the plant, whose output seems primarily intended for use in the automotive sector, but also for construction sheet and foil stock sheet. While the project is clearly part of the government’s strategy to expand downstream manufacturing in the Kingdom, as things stand the majority of the output will be for international export.

Global Challenges

Doing business on the international market will be harder than in years gone by. Aluminium producers worldwide are being tested by a glut in aluminium stocks, which caused prices to drop to a low of $1800 in September 2012 – a price at which around 30-50% of the world’s aluminium industry was likely to be losing money, reported the Financial Times. In late 2012, many analysts remained sceptical about a recovery in the near term. Yet the price lows could arguably work out to the advantage of Saudi Arabia and other Gulf producers as they enjoy very low operating costs. Offering some of the world’s cheapest energy – which accounts for around a third of input costs for aluminium – Saudi Arabia should be an attractive place to invest for multinational aluminium producers looking to maximise margins in a difficult market. Pointing to Ma’aden’s smelter as well as the expansion of Emirates Aluminium’s production in Abu Dhabi, a 2011 Deloitte report concluded that “the GCC is poised to become a primary aluminium production powerhouse with the expectation that the region will contribute to over 13% of the world’s aluminium production by 2013.”

The recycling of aluminium is another untapped opportunity in the sector for Gulf countries. Recycled aluminium made up 32% of the world’s production in 2010, but contributed only 2% to GCC production, according to a December 2011 report by Deloitte. Boosting recycling in the Kingdom could dramatically increase its production rates. Achieving this would, however, require legislation which makes it harder for scrap aluminium to be exported, the report added.

Hopeful Sector

Global demand for aluminium is strong in sectors like aerospace – which, according to Alcoa, will boost demand by 7% in 2012 – but others, like automobile manufacturing, looked shaky in 2012. The government hopes for clearer skies in the longer term, not only because of fundamental demand in Asian economies, but also due to the prospect of greater uptake at home from downstream manufacturers. In March 2012, it was announced that the Alcoa-Ma’aden venture would extend the product mix of the complex to cater to construction and automotive ventures. The latter, in particular, has been the subject of much discussion (see analysis). While Saudi Arabia is a relative newcomer, in terms of upstream output, the downstream segment is more developed. In mid-2010 it had 110 aluminium product manufacturers. Government support for manufacturing could see this figure rise.