Last week's signing of a Heads of Agreement between Qatar Petroleum (QP) and Hydro, the Norwegian energy and aluminium supplier, marked another step on the path to fulfilling Qatar's industrial development strategy.
The agreement represents a commitment from the two firms to work together and develop one of the world's largest aluminium smelters.
Signing on behalf of QP was Abdullah bin Hamad al-Attiyah, the second deputy prime minister and minister of energy and industry.
"Qatar is a strategic location for this project and has proven natural gas reserves of more than 900 trillion cubic feet," he explained. "The policy of the government if Qatar is to utilise the country's natural resources for economic and industrial development. Participation in a project for primary aluminium production fits this policy."
Consisting of a metal plant, a cast-house, and a dedicated power plant, the project is expected to reach a full capacity of 570,000 tonnes of primary metal by 2009. The facility will be expandable with room to easily double capacity, but it is still unusual to build such a large plant as a one off, representing a huge risk. This reflects the parties' confidence that the venture will be a success due to Qatar's location and competitive advantage.
"Qatar offers a well developed industrial infrastructure and business climate," al-Attiyah continued. "Excellent market flexibility between Europe and Asia, with a potential to serve the US market, ensuring highly competitive cost to market, makes Qatar a good strategic location for the production of primary aluminium."
However, Qatar is not the first Gulf Cooperation Council (GCC) nation to realise that energy intensive metallurgical processes are a sound move to make the most of the cheap energy they enjoy in relative abundance.
Aluminium Bahrain (Alba) poured its first ingot in 1971 and has grown to be one of the largest single facilities in the world since then; when it's new Line 5 facility comes online in 2005, it will be smelting over 750,000 tonnes per year with plans to cross the million tonne mark in the near future.
To the east, in the UAE, DubAl has been turning bauxite into shiny metal for a similar amount of time and was once even a part of plans to kick start aluminium production in Qatar. In 2003, an agreement was signed between Qatar's United Development Company (UDC) and DubAl to construct an aluminium smelter, in which UDC would hold a 51% stake.
That smelter was planned to be located in the Ras Laffan industrial city and churn out 516,000 tonnes annually. However the firms announced in January 2004 that DubAl's participation in the project terminated in December 2003. The latest move into aluminium is the continuation of the government's drive to set up a smelting operation in Qatar.
The QP and Hydro co-operation will be in the more southerly Mesaieed industrial area. The facility will hopefully come to fruition and allow Qatar to make the most of the opportunity that springs from the sand, rock and sea that gives them a striking competitive advantage in energy intensive industries.
Being party to the 1999 Gulf Cooperation Council (GCC) industrial development strategy means that Qatar has a number of goals to accomplish; not least raising industrial exports to 75% of total exports and doubling the contribution of industry to GDP. The plan has hinged around increasing the role of petrochemical, chemical, fertiliser and metallurgy activities.
Whilst part of the motivation to diversify away from oil and gas activity is to make the economy less dependant on hydrocarbons, the main advantage Qatar holds is a cheap abundance of these as feedstock for other industries; hence the main drive has been to capitalise on this. However, some argue that after a certain point moving further downstream stops making economic sense.
Natural gas gives rise to a group of secondary products and activities. Electricity, desalination and chemicals are at the core of this activity. Among the chemicals, a few stand out - like ammonia, used for making fertilisers at Qatar Fertiliser Company (QAFCO), and methanol; these constitute the first stage downstream along this route. A product of these is ethanol, which has given rise to ethylene and polyethylene plants which are operated by a number of "Q" companies, such as the Qatar Chemical Company (Q-Chem) and Qatar Petrochemical Company (QAPCO).
Some suggest that in order to move further downstream along this path, initiatives should be started that use the plastics as feedstock, making products for export. However, others say that this far downstream, the competitive advantage has been lost because other costs, such as the need to import labour and logistical costs - particularly freight - add up to make the activity unviable.
That is unless there is enough local demand for the products to preclude the need for long-distance transport. One example is Q-Chem's polyethylene, which is shipped to the United States as pellets for use in making plastic milk containers for the US dairy retail market. Making these bottles nearer the source of the raw material makes no business-sense, as the cost of transporting empty bottles, which take up more space than pellets, eats the margins away.
On the other hand, identifying products that can move back upstream does make sense because there is a market to serve with the new products. Qatar Plastic Products Company (QPPC) is an example of one such success. The company makes plastic bags and plastic sheeting using the polyethylene. These products are in high demand among gas producers and in Qatar's booming construction industry; hence they have found a receptive local and regional market which has necessitated increasing capacity to 10,000 tonnes annually in a 2004 expansion.
Whilst moving further downstream in this direction may not make sense, other opportunities need to be taken advantage of. Metallurgy is the other option. On the face of it, importing the labour and raw material, bauxite, looks like it would cost too much, but the availability of cheap electricity makes it more than comfortably viable. Although steel production already exists, the advantages accruing to making aluminium close to a cheap energy source are much greater as the smelting process requires as much as 50 times more gas than making steel. As a reactive metal, the element cannot be extracted using carbon as a catalyst, and has to use an electrolysis process which requires heating bauxite to 2000 C.
Whilst setting up the plant is only the first stage, moving further downstream is unlikely to be viable as Qatar's demand for aluminium and aluminium products is limited. Exporting the primary metal to markets in the Far East and Europe will be the primary objective.
Where downstream aluminium activity has been started in the region, analysts point to the necessity of creating jobs in those countries; it is a form of social engineering through industrial diversification. In Qatar's current situation, there is no need to engineer employment opportunities - it is enough to just find activities that can enjoy the biggest margins as a result of cheap energy. Primary metal is one of those, and when the new plant comes online it will no doubt thrive.