Arabian Gulf steps up resources usage in driving economic diversification

Bauxite rock imported from Guinea passes along a conveyor belt to the reclaimer machine at United Co Rusal's aluminium oxide factory in Nikolaev, Ukraine. Photographer: Vincent Mundy / Bloomberg

From Saudi Arabia to Oman, Arabian Gulf states are grabbing a greater share of the raw materials needed to power economic diversification.

Gulf economies last year produced 3.7 million tonnes of aluminium, which is equal to 9 per cent of the world’s total, according to the non-profit Gulf Aluminium Council.

With the planned expansions in regional smelters, total production is expected to reach 5 million tonnes by next year, which will be equivalent of about 10 per cent of the world’s primary aluminium production.

By 2014, four of the world’s top 10 primary aluminium producers will be based in the Gulf, according to the council.

“The smelters in the Gulf region have more global outlook than regional,” said Venkatesan Subramanian, a vice president at the consultancy Frost & Sullivan.

“The aluminium industry in the region is increasingly becoming global by catering to the export market in addition to serving local demand. The investments in capacity addition are being done with the global market as the target customer base.”

Saudi Arabia has created two cities based around mining, including for minerals such as phosphate, a raw material used to make fertilizers. In Ras Al Khair, the state-run Saudi Arabian Mining Company, or Maaden, has teamed up with Alcoa in a US$10.8 billion joint venture that includes a bauxite mine, alumina refinery, aluminium smelter, and aluminium rolling mill that is set for completion in 2014.

In Bahrain, home to the Gulf’s first smelter, Aluminium Bahrain (Alba) is planning a $2.5bn expansion of its facility that will add capacity of 400,000 tonnes to its current annual capacity of 881,000 tonnes by 2015.

In Qatar, Norsk Hydro of Norway and state-run Qatar Petroleum are equal joint venture partners in Qatalum. Kuwait is the only Gulf country that does not have a smelter.

In Oman, Sohar Aluminium is considering an expansion of its facility, depending on availability and the price of gas.

With Expo 2020 taking place in Dubai and the Fifa World Cup in Qatar in 2022, the demand for aluminium will rise in those countries because of the vast infrastructure projects.

Mr Subramanian said there had been an enormous demand in recent years for base metals such as steel, aluminium and copper among GCC economies because of infrastructure development.

“Coupled with this, the diversification of oil incomes, massive industrialisation, possible export opportunities and abundant energy sources could offer a gamut of opportunities in the long-term,” he said.

“This diversification plank of economic policy has helped create economic benefits that outweigh any fears of juxtaposing big smelters and creating competition among Gulf smelters.

“The smelters’ success emulates the achievements in the Gulf petrochemical industry where the Gulf now accounts for more than 15 per cent of the world’s petrochemical production and is forecast to have a 20 per cent market share globally by 2015.”

Likewise, the aluminium industry has made huge leaps over the past four decades. In 1971, Gulf aluminium production was 120,000 tonnes, but last year it reached 3.7 million tonnes.

Giyas Gokkent, National Bank of Abu Dhabi’s chief economist, said: “An early critique of diversification strategies pursued by various Gulf governments was that these were very similar, with the danger that overcapacity could be created.

“With the benefit of hindsight, such fears have not materialised, at least so far, because the region has been able to gain at the expense of other economies. For example, there has been a shift in petrochemical activity to this region and away from Europe.”

Gulf countries are also seeking to attract international manufacturers to the region to help support their efforts to diversify their economies. In Saudi Arabia, the kingdom is focusing on the car parts industry.

For all Gulf smelters, the main competitive advantage is the lower cost of gas.

One issue facing smelters is the availability of gas and the longevity of having cheap gas prices. With the exception of gas-rich Qatar, Gulf countries that have smelters will struggle in the future to provide gas for expansion projects.

Mahmood Daylami, the secretary general of the non-profit Gulf Aluminium Council, said that except for Qatar, Gulf states would have to balance their consumption of gas for industrial or domestic needs.

“The UAE, in particular, has a long-term strategy and they are building nuclear reactors,” he said.

The UAE will be the first country in the Gulf to build nuclear plants and it is also ramping up the use of renewable energy to produce electricity. But the region has to reduce gas consumption to allow industries such as smelters to grow and expand because of their high power demand.