Positive forecast for aluminium creates economic gains for Bahrain

As one of the world’s top-10 aluminium producers, Bahrain’s raw and value-added aluminium shipments account for the bulk of non-oil exports. With recent rises in manufacturing investment, the sector is set for a year of significant growth in 2020. Majority-state-owned smelter Aluminium Bahrain (Alba) is leading the implementation of the Line 6 expansion project to offer a major increase in production capacity, keep Bahrain among the world’s leading aluminium producers, and significantly augment non-oil and value-added exports in the coming years. However, downstream players are facing notable challenges, the most prominent being the resurgence of protectionist global trade policies and a trade war that could see major export markets flooded with aluminium from China. At the same time, there are serious concerns regarding rising input and electricity costs. The rising price for alumina (aluminium oxide), which Alba purchases as feedstock, made a significant impact on the company’s bottom line in 2018, even as production and sales volumes recorded healthy growth.

Meanwhile, an ongoing fiscal consolidation programme is set to reduce electricity subsidies that have been vital to the industry’s profitability. Nonetheless, sales and production have already surged in 2019 as a result of Alba’s new potline, and look set to remain on a strong growth trajectory into 2020, keeping the aluminium sector at the forefront of domestic manufacturing, and export revenue and economic diversification efforts.

Key Player 

As the largest manufacturing industry in Bahrain by value and output, aluminium plays an important role in maintaining and growing the kingdom’s non-oil economy. The sector is dominated by Alba, which is majority-owned by Bahrain’s sovereign wealth fund Mumtalakat, with a 69.4% stake. Petrochemicals producer Saudi Basic Corporation, holds a 20.6% share in the firm, while the remaining 10% of the company’s equity is traded on Bahrain’s stock exchange, the Bahrain Bourse. Alba originally launched its first two potlines in 1971, adding further potlines in 1981, 1992 and 2005.

Performance

Alba recorded a mixed performance in 2018. Profits and income expanded in line with the increasing value of aluminium, with the company reporting a 7% growth in sales prices for the metal in 2018. At the same time, a 34% increase in the cost of alumina put pressure on margins as all necessary production inputs are imported. According to the company’s annual report, full-year net income stood at $158.9m in 2018, a 35% decline on $245.9m in 2017, while gross profits fell by 36% from $358.1m to $228.6m between 2017 and 2018. At the same time, total sales revenue was up by 6% in 2018 to reach $2.4bn, and the total value of Alba’s assets rose by 31%, from $4.5bn in 2017 to $5.9bn. That same year aluminium output rose 3% to 1.01m tonnes, while sales volumes rose by 3.5%, also reaching 1.01m tonnes. This followed the completion of upgrades at two of Alba’s potlines to improve efficiency and boost production.

Economic Gains

Several downstream industries, notably Gulf Aluminium Rolling Mill Company (GARMCO), joint Bahraini-Australian venture Midal Cables, Bahrain Aluminium Extrusion Company and Bahrain Alloys Manufacturing use Alba’s raw output as feedstock for value-added processing. This makes Alba’s role in the manufacturing ecosystem even more important, as it plays a crucial role in boosting the value and volume of Bahraini exports. Indeed, according to global data firm the Observatory of Economic Complexity, raw and processed aluminium products led Bahrain’s non-oil exports in 2017, the most recent year for which statistics were available. Global shipments of raw aluminium accounted for $1.03bn that year, followed by aluminium wire ($286m), aluminium plating ($273m) and stranded aluminium wire ($71.3m). Together these products comprised approximately 30.5% of the total $5.6bn in export revenues in 2017.

Expansion Project

Alba is currently in the process of bringing its Line 6 expansion project on-line. Officially launched in June 2015, it was one of the biggest brownfield developments in the Middle East at the time, with total capital expenditure of $3bn, according to company reports. The project entailed construction of a sixth potline at Alba’s existing facilities using US firm EGA’s proprietary DX+ Ultra technology, as well as Power Station 5, a 1792-MW power station. When fully commissioned, Power Station 5 will be the largest and most efficient station in Bahrain, as well as the first station with H-class gas turbine technology in the Gulf.

The engineering, procurement and construction management contract was awarded in April 2016 to US engineering company Bechtel to build the smelter and associated industrial works. A joint venture between US conglomerate General Electric and Turkey’s GAMA won an engineering, procurement and construction contract for the power station, while Germany’s Siemens acted as the power distribution system contractor. A consortium of domestic and international financial institutions including JPM organ, Gulf International Bank and the National Bank of Bahrain acted as financial advisors. In October 2016 the company successfully closed a $1.5bn financing agreement, divided between conventional and Islamic tranches.

Alba secured its first tranche for $700m of export credit agency (ECA) coverage from French credit insurance company Euler Hermes in July 2017. The second ECA-tranche was divided into instalments, with $226.5m from French company Bpifrance Assurance Export and Euler Hermes closed in April 2018, and the final instalment of the second tranche, for $136m and $99.7m, secured at the end of 2018.

Ramping Up

Line 6 came on-line ahead of schedule in December 2018, and is expected to reach full capacity by the end of 2019. In June 2019 Alba reported that work on the Line 6 smelter was 96% complete, including engineering work, which was 99.7% complete; contracts and procurement (98.1%); the power station (95%); and the power distribution system (99%). Upon full completion, Line 6 will increase Alba’s annual production capacity by 540,000 tonnes per annum (tpa), bringing total maximum production to 1.5m tpa. The expansion is already making an impact, with Alba reporting that total production was up by 13% year-on-year (y-o-y) in the first half of 2019, to 578,434 tonnes, while sales volumes had risen by 14% y-o-y, to 569,042 tonnes. The second quarter of 2019 was particularly strong, with sales volumes up 25% y-o-y to reach 311,928 tonnes, and production up 21% y-o-y to reach 305,727 tonnes. Value-added sales comprised 52% of total shipments in the second quarter, against 60% over the same period in 2018.

Economic Headwings

While the domestic market consumes around half of aluminium output, a notable challenge on the landscape is the 10% tariff on US imports of aluminium put in place in March 2018, alongside a 25% tariff on steel imports. As the US accounts for approximately 15% of Alba’s export market, the kingdom was nonetheless among several GCC member states that have since been lobbying for exemptions from the new fees. In April 2018 Alba announced it had applied for tariff exemptions, and in November 2018 the US granted an exemption to GARMCO. However, there are still concerns that other key export markets, for example Europe, which accounts for 23% of Alba exports, could be flooded with lower-priced Chinese aluminium exports as trade tensions between the US and China heat up.

Another major concern for the aluminium industry is the fiscal balance programme, which seeks to bring the kingdom’s budget deficit to zero by 2022. As part of the plan, the government has been removing generous electricity subsidies that had long offered a significant competitive advantage for aluminium producers. The government announced plans to double electricity and water tariffs for expatriate residential customers and large industrial clients in early 2016, and in March 2019 the Ministry of Finance and National Economy reported “gradual” hikes to electricity and water tariffs, with some rates increasing from 13 fils ($0.034) per KWh to 29 fils ($0.077) per KWh. This has raised a number of serious concerns about the impact that higher taxes will have on local industry.

Nevertheless, with global aluminium prices continuing to trend upward and production capacity rising steadily, Alba and the broader aluminium industry are expected to still record a positive performance in 2020, supported by increasing domestic demand as the kingdom moves to effectively deliver its multibillion-dollar infrastructure development programme (see Transport and Construction chapters).