True as steel: Continued investment and expansion will generate further growth

The metals industry is arguably one of the most important and certainly one of the oldest industries in Bahrain. Of the country’s non-crude oil exports, the metals sector, along with petrochemicals, has traditionally been a leader. Metallurgy, particularly aluminium, has been seen as a lucrative way for the country to monetise its gas reserves effectively, and as a means of laying the foundation for a thriving downstream sector. Sustained investment means the industry is continuing to grow and to diversify.

LONG HISTORY: The Bahraini metals industry began in 1968 with the founding of Aluminium Bahrain (Alba), the state aluminium company. Alba is joint venture between a number of stakeholders: the Bahraini government, through state holding firm Mumtalakat, which holds 69.38% of the shares; the Saudi Arabian Basic Industries Corporation, which owns 20.62%; and the remaining 10% is listed on the Bahrain Bourse and the London Stock Exchange.

In 2012 the company reported revenues of $1.9bn, down 16% from $2.34bn in 2011, while net profits also decreased from $564m in 2011 to $257m in 2012. Production in 2012 reached a new high of a little over 890,000 tonnes, up from 881,000 tonnes in 2011. In 2012 the company decided to construct a sixth train to reach completion by 2015, increasing production capacity almost 50% from around 881,000 tonnes per annum (tpa) to 1.2m tpa.

The cost of the project is estimated at around $2.5bn. As of early 2013, local press had reported that the company was considering issuing a sukuk, or Islamic bond, to fund this expansion. Since the onset of the credit crunch in the wake of the financial crisis, the $1.3trn Islamic funds market has sometimes found it hard to identify projects that diversify its asset base yet remain sharia-compliant, and as such, Alba may potentially be a good fit.

ROAD AHEAD: The main challenges facing Alba over the next few years are the issue of gas pricing and the price of aluminium. While Bahrain was the first country in the region to discover oil in 1931, its small size and territorial waters mean that the country also has the smallest reserves in the Gulf. Moreover, much of the country’s gas used to be what is termed associated gas (i.e. produced as a by-product of oil drilling), but now Bahrain produces mostly raw natural gas, which it is keen to preserve for other industrial purposes (such as feedstock for petrochemicals and plastics) or for export. In order to secure gas supplies for the future, the possibility of building a liquefied natural gas terminal has been discussed, as it would allow the country to import up to 400m cu feet per day from a variety of sources, be they within the region or further afield, although to date no firm decision has been made.

CHALLENGES: Of more immediate impact was the decision by the National Oil and Gas Authority to increase the price Alba pays for its gas from $1.50 to $2.25 per million British thermal units as of the beginning of 2012. At a time when prices for aluminium on the London Metals Exchange had tumbled from around $2500 per tonne in early 2011 to around $2000 per tonne in late 2012, Alba had voiced concerns that the rise in input costs would eat into profitability, and that it would be forced to raise prices to downstream companies, producing a knock-on effect that could erode the country’s competitiveness in this sector. Profits during early 2012 did indeed fall, registering $95m in the second quarter of that year, a drop of almost 50% year-on-year. However, the record output and continued expansion plans demonstrate fundamental optimism about the company’s future. Many think that as long as the price changes are phased in it should not be a problem, and the government has decided to implement the hikes in industries that are better equipped to handle the rise in energy costs.

One way in which Alba is planning to address increasing competition from new smelters springing up around the Gulf region, as well as the issue of rising input costs, is to expand the aluminium scrap recycling market, which remains rather underdeveloped in the region. Presently, according to the Gulf Aluminium Council, as little as 5% of aluminium in the region is recycled, compared to around 63% worldwide, or 98.2% in Brazil, the world leader. As such, there is ample room for growth.

According to a report by analysts Frost & Sullivan, aluminium recycling in the Gulf region is set to increase from just 292,281 tonnes in 2010 to 593,434 tonnes in 2017. Given that recycling scrap aluminium offers significant energy savings, the economics look more than viable. Moreover, rising consumption and construction in the Gulf as the population grows means the potential amount of scrap aluminium available is also on the rise. Increasing efficiency at Alba’s own power plants, which together have a combined capacity of 2234 MW and are gas fired, could also help realise cost savings, as could a shift in Bahrain to renewable energy (particularly solar) over the long term.

NEW PLAYER: In the steel sector, the United Steel Company (SULB), founded in 2008, is a joint venture between Kuwaiti firm Foulath and Japan’s Yamato Kogyo. SULB is building a new steelworks that was due to open in early 2013. The complex consists of a direct reduced iron plant, with an annual capacity of 1.5m tpa, a steel melt shop capable of producing 1m tpa and two rolling mills, with combined capacity of 1.2m tpa, producing light, medium and heavy sections. Total investment in the project is estimated at around $1.4bn. SULB is located in the Bahrain International Investment Park, a dedicated industrial zone which facilitates logistics and delivery.

Bahrain currently has one rebar producer, Universal Rolling (UNIROL), which was founded in 2003. The company produces around 200,000 tpa of steel rebars, customised to clients’ requirements. Currently, around half of production is exported, mostly to Saudi Arabia, and the company uses its flexibility and the ease of delivery to elsewhere in the region as major selling points. Additionally, rebar rollers in Bahrain benefit from an exemption on the 5% duty charged on billet imports.

KEEPING UP: Prices are also an issue for the Bahraini steel industry; in this case, due to the fact that rebar prices tumbled after the bottom dropped out of the local real estate sector and have remained stagnant ever since, standing at roughly the same price levels as billets, or even dipping below on occasion. As such, many rebar production lines across the Gulf have been mothballed until prices recover. Presently, steel exports from Saudi Arabia are banned, and therefore rebar pricing in the Gulf region tends to be benchmarked by UAE prices, which have fallen quite sharply in the wake of the local real estate downturn, or against Turkish imports.

However, the Bahraini steel industry is less affected by the price falls than some other Gulf countries. SULB has brought the capacity to produce medium and heavy products, meaning it is less vulnerable to the vagaries of rebar price fluctuations, while UNIROL, which plans to build an integrated melt shop to produce billets, could benefit from SULB’s proximity by sourcing direct reduced iron from there, helping the industry diversify as a whole and produce more downstream products. Chris Robinson, the CEO of UNIROL, told OBG, “The lion’s share of the steel industry goes to the local market, so there’s tremendous added value for the country.”

One issue facing steel manufacturers in the region is that since steel is considered something of a “strategic” industry in many countries, most states in the GCC have chosen to develop internal production capacity without reference to other markets in the region, which has resulted in vertically integrated steel industries that aim to supply the domestic market. This then reduces the opportunities to develop cross-border supply chains, which in turn has to an extent inhibited the growth of a steel downstream sector across the region. While energy prices do have an impact on steel output prices, the sector tends not to be quite so influenced by energy prices as the aluminium industry. Within Bahrain, however, the downstream metals segment has continued to grow, with German group RMA Pipeline Equipment setting up a €13m pipes facility to supply the oil and gas business, and the local Gulf Aluminium Rolling Mill Company proceeding with its $30m plan to increase its capacity by 100,000 tpa. All in all, the future of the metals sector in Bahrain appears to be healthy.

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