Heavy mettle: The aluminium segment is weathering tough times and investing in preparation for future demand

Throughout their modern histories, GCC countries have searched for ways to extract extra value from their massive oil and gas reserves. In the 1970s, aluminium offered these opportunities. The metal, prized for its lightness, flexibility and strength, has made its way into the production of everything from construction components to soda cans. The Hall-Héroult process that produces aluminium, however, requires electrolysis, and that calls for significant amounts of energy. It is this requirement that gives Gulf smelters a competitive edge. The GCC’s abundant gas reserves can power energy-hungry smelting plants and offer a degree of shielding from volatile global energy markets.

In recent decades, GCC primary production has skyrocketed. Within the members of the Gulf Aluminium Council (GAC), an organisation that represents the region’s largest aluminium firms, primary production grew over tenfold from under 250,000 to over 3.5m tonnes per annum between 1971 and 2011, according to GAC statistics. The organisation predicts that regional production will hit 5m tonnes per year by 2015.

Primary Production

Although Oman showed up on the primary production scene later than its peers, it has quickly become one of the region’s largest smelters by production. Oman’s Sohar Aluminium, which bills itself as the sultanate’s “first foray” in the sector, shipped its initial batch of product for export in July 2008. The firm, which is jointly owned by the state-owned Oman Oil Company (40%), Abu Dhabi National Energy Company (40%) and the Brazil-based multinational Rio Tinto Alcan (20%), has invested heavily in its facilities.

Although the company, which is not publically traded, does not release regular financial reports, some production data is available. According to GAC figures, Sohar Aluminium’s annual primary production has grown steadily. Output increased from 350,400 to 373,300 tonnes between 2009 and 2011, despite flagging demand in the wake of the global financial crisis.

Downstream

As production rises, so too does investment in downstream companies. In October 2012 at the Oman Investment Forum, Takamul Investment Company, a subsidiary of the state-owned Oman Oil Company, announced its intentions to invest between $500m and $1bn in downstream industrial projects over the next two years. Among these potential industrial endeavours, metals are set to receive extra attention.

“Metals projects are a high priority as they add value right from the beginning and [are] easy to implement,” Gilles Desoray, the fund’s general manager of business development, told reporters. “We see a lot of opportunities in aluminium and want to continue to add value by going for downstream projects.”

Recovering Demand

One of the country’s oldest aluminium companies, the National Aluminium Products Company (NAPCO), traces its history to its founding in 1984. Like other firms serving the GCC region, NAPCO has been juggling a combination of higher costs and weakening demand following the 2008-09 financial crisis and the corresponding slowdown in real estate investment. Shifting raw materials prices have raised costs, while stiff competition has kept end-user prices low, saddling firms with cost increases, the company said in its third quarter 2012 board of directors report.

In NAPCO’s unaudited financial reports for the first nine months of the year, these circumstances are evident.

While sales dipped from 10,235 to 9680 tonnes, a modest 5% compared to the same period in 2011, net profit has come down 84%, from OR1.08m ($2.8m) to OR176,000 ($458,665). Despite these challenges, the company sees bright spots on the horizon, pointing to a recovering construction sector buoyed by neighbouring Qatar’s of hotels, railways, stadia and other commercial projects ahead of the 2022 FIFA World Cup.

Indeed, other areas of downstream are preparing to ramp up production, likely in preparation for the expected rebound in demand. The Oman Aluminium Rolling Company (OARC), another downstream firm, is already moving ahead with some expansionary investments. The firm announced work on a new 140,000 tpa plant to create flat sheet and aluminium foil. The plant, set to ship its wares to markets in MENA and Europe, is on track to begin operations in the third quarter of 2013. ABB, a Swiss conglomerate active elsewhere in the region, signed a $9m development and maintenance contract for the facility’s activities in February 2012.

Omanisation 

Following the hook-up, the pair said they would also aim to maintain a high ratio of Omanis in the plant’s maintenance teams. “OARC and ABB will work jointly to provide a high rate of Omanisation within the maintenance work force,” Buddy Stemple, CEO of OARC, said in a statement regarding the deal. Omanisation has been a high priority as the country’s burgeoning youth demographic enters the workforce.

Policymakers, however, also realise that ratios can only go so far, which is why they see the creation of jobs in the private sector as the most sustainable way forward. “The state, with all its civil, security and military institutions, cannot continue to be the main source of employment, as this calls for a capacity beyond its reach and a mission that the state cannot sustain forever,” Sultan Qaboos bin Said Al Said said in a speech to the Council of Oman in November 2012. “The citizens have to understand that the private sector is the real source of employment in the long run.”

Ambitions

The aluminium sector has been important in this regard, providing ways for Oman to combine its need for employment and its ambitions for a higher-value-added industrial sector. Employment numbers in the industry so far are promising. In February 2009, for example, Sohar Alumininum’s Omanisation level stood at 65%, according to the company; by October 2011, that rate went up to 70%.

Although already at 71%, more than double the 30% ratio required by the government , the firm says that it aims to raise Omanisation to 85% by 2015. “Aluminium smelters are interesting to an emerging market like Oman because of the direct and indirect employment they create, the purchasing power they provide citizens, and the technology knowledge-transfer that enters and remains in the market,” Henk Pauw, the CEO of Sohar Aluminium, told OBG. The sector also has potential for indirect job creation. In July 2012, the Public Authority for Craft Industries (PACI) announced a memorandum of understanding with Sohar Aluminium to create a training centre for low-income women. PACI is set to provide educational materials, while Sohar will provide the facilities. The project is intended to boost employment opportunities for women in the sultanate.

Although temporarily hit by increasing competition and decreasing demand, the sector continues to show signs of growth. Stakeholders seem to have taken note of the circumstances, expecting an upswing in demand and making investments for coming years. In addition, the industry’s potential to create jobs likely lends it a strategic value in the eyes of the country’s policymakers. In the short term, continuing oil and gas production bodes well for the sector. As for the long term, the country’s leadership recognises that gas reserves are finite. The idea seems to be to nurture the industry through its youth so it can continue to grow and thrive – with or without access to domestic energy supplies.

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The Report: Oman 2013

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