As Aluminium Bahrain (Alba) celebrates the 45th anniversary of aluminium production in Bahrain, the firm is looking to the future and working on the construction of its sixth pot line, an expansion plan that will make the company the world’s largest single-site smelter. A few weeks after Alba announced it would be going ahead with the expansion in July 2015, the company released its half-year results. Total sales were up by 8% year-on-year to BD405.9m ($1.1bn) and net income for the same period was up 107% to BD66.9m ($176.2m). The firm reported that global demand for aluminium had grown 5%. However, first-half 2015 figures also made clear that the industry faces challenges. Although the firm is confident enough to invest $3.5bn in the new line that will boost production by 514,000 tonnes when it is fully operational after its 2019 opening, in the shorter term Alba and other aluminium companies in Bahrain are having to contend with a more difficult international market.

Aluminium Hub

When the line six expansion project was announced at an Alba extraordinary general meeting in June 2015, the company’s CEO, Tim Murray, said the development would present many opportunities for the company and for the country. “The line six expansion project will be an important milestone for Alba and will sustain the aluminium industry in Bahrain for many generations to come,” he said in a company statement. The company started production in 1971 with two pot lines, adding its third, fourth and fifth lines in 1981, 1992 and 2005, which means that when line six comes on-line, it will be the biggest boost to the sector in almost 15 years.

The expansion will increase Alba’s production capacity to 1.45m tonnes per year and it also means the firm, whose workforce of 2908 is 88% Bahraini, will be taking on more staff. Alba assured its domestic customers that at least 50% of the new metal production will be sold to existing and new downstream firms in Bahrain. This is in keeping with its current customer profile, with 49% of its product sold in Bahrain, while exports are divided between Asia (13%), other MENA countries (18%), Europe (15%) and America (5%).

Downstream Developments

With the prospect of more than 250,000 tonnes of extra output from Alba coming into the local market, many downstream businesses are looking at their own expansion plans to ensure they are ready to take advantage. A month after Alba formally declared line six was going ahead, Gulf Aluminium Rolling Mill Company (GARMCO) revealed it was building a $55m cast house. Engineering firm Fives Group has been appointed on an engineering, procurement and construction basis to build the re-melt unit over 21 months, to be completed by 2017. GARMCO employs 660 people in Bahrain and the new expansion will require the company to take on another 50 staff.

The new facility will enable the company to streamline its production process. GARMCO’s rolling mill has a capacity of 165,000 tonnes a year, while its foil mill has a capacity of 20,000 tonnes a year. The company’s customers are in 45 different countries and 75% of its exports are to nations outside the GCC. Approximately 15% of its goods are exported by road over the King Fahd Causeway, while the rest are shipped by container vessel from Khalifa Bin Salman Port.

A number of other aluminium firms have grown up around the Alba factory, including Midal Cables, Bahrain Atomiser, Bahrain Welding Wire Products, Bahrain Aluminium Extrusion Company and Bahrain Alloys Manufacturing Company (BAMCO). The importance of this cluster of aluminium businesses to Bahrain’s economy, and to its balance of payments, can be seen by looking at export figures. In its June 2015 “Economic Quarterly” bulletin, Bahrain’s Economic Development Board reported the two most valuable non-oil export commodities from January to May 2015 were aluminium wires, worth BD88.8m ($234m), and aluminium rods, worth BD74.6m ($196.5m).

Production Pioneers

When Bahrain first decided to enter the aluminium industry in the late 1960s, it recognised that while bauxite would have to be imported, the country had key strategic advantages over the well-established centres of production that dominated the world market at that time. The first advantage was that Bahrain had its own energy in the form of natural gas to support the energy-hungry industry. The second was that its government was prepared to invest in and subsidise a largely state-owned enterprise in order to create a more diversified economy that was not simply driven by oil production. Alba is owned by the Bahrain state holding company Mumtalakat (69.38%) and the Saudi state-owned petrochemicals company SABIC (20.62%), with the remaining 10% floated on the Bahrain Bourse. Alba’s two principal shareholders, Mumtalakat and SABIC, are also among the GCC bodies co-owning GARMCO.

When Bahrain entered the aluminium market, primary manufacturing was centred on the US, Japan and Western Europe. That axis later tilted and production shifted to lower-cost regions like the Middle East, Canada, Australia, China and Russia. By 2010 the Middle East accounted for 6% of global primary aluminium output, according to World Aluminium.

Regional Rivalries

Although Bahrain was the first Gulf nation to enter the aluminium industry, some of its neighbours have followed. According to figures from the Gulf Aluminium Council, regional production capacity in 2015 totalled 5.26m tonnes, with this breaking down into the UAE with 2.6m, Bahrain (890,500), Saudi Arabia (750,000), Qatar (640,000) and Oman (380,000). Although Saudi Arabia has begun exploiting reserves of bauxite, other Gulf countries are following Bahrain’s business plan for aluminium, leveraging inexpensive domestic energy sources and importing raw materials. According to World Aluminium, 70% of the variability in the cost of aluminium production is related to energy.

Subsidy Implications

Given the importance of fuel pricing to the primary smelting process, Bahrain may be operating at a disadvantage when compared to others in the GCC. In January 2015 the Bahrain News Agency reported that gas prices for industrial users would rise from $2.25 per million British thermal units to $2.50 on April 1st, and that the price would increase $0.25 a year until 2021. Alba calculated each annual increase would cost the firm $30m. Included in the $3.5bn capital expenditure for the line six project is the construction of a fifth power station for the site with a capacity of 1350 MW. This will complement the 2225 MW already installed, giving a total of 3574 MW. According to the Electricity and Water Authority, the entire installed capacity for the rest of Bahrain totals 3817 MW, which gives some indication of the energy inputs required for the aluminium industry.

Alba’s Products

The Alba works produces aluminium in standard or T-shaped ingots that can be melted down in its customers’ own furnaces, rolling slabs that are used in rolling mills to make aluminium foil or sheets, foundry alloy ingots with a 7% or 11% silicon composition that are used in the automotive industry to make wheel alloys, truck hubs and petrol pump nozzles, and extrusion billets that are designed to be shaped into window and door frames. The company also supplies liquid metal in crucibles to companies near its site in Bahrain including Midal Cables, Bahrain Atomiser, Bahrain Welding Wire Products and BAMCO. These companies use the molten aluminium to create their own products.

Global Volatility

Although the development of line six is cause for optimism in Bahrain, the global aluminium industry was beset by volatility in 2015. Aluminium is priced in US dollars on the London Metal Exchange (LME), and trade has been affected by a strong dollar as well as by the overturning of a UK court ruling on the way LME assesses how much aluminium is stored in warehouses. The latter prompted firms to start selling off what was in their warehouses, thereby increasing the global supply of the metal. “The price has gone from $0.245 a pound to $0.08 per pound in a few months,” BAMCO’s general manager, Graham Banister, told OBG. “At the same time China is not helping by flooding the American market.”

Growth Market

However, the popularity of aluminium is increasing in some sectors, driven in part by environmental concerns. Many auto manufacturers are opting to replace steel with the lighter metal for more components in order to reduce the weight of vehicles and so make them more fuel efficient. “We have one customer in Indonesia who is manufacturing 6m to 7m motorbikes a year using aluminium components,” Banister told OBG. Banister, who has worked in Bahrain for 18 years and at BAMCO for 13 years, suggested the fall in prices is typical of a four-year cycle in the industry, and that Alba’s investment would pay off. “I believe it is a good time for Alba to be building line six, because the market is at the bottom and hopefully, by the time the expansion is completed, aluminium prices will have risen to a high again.”