UAE steps onto the global aluminium stage

The planned merger of the two big UAE aluminium smelters has ushered in a flurry of natural resource agreements as the economy enters a new phase of diversification.

The tie-up between Dubai Aluminium (Dubal), the biggest smelter in the Arabian Gulf region, and Abu Dhabi’s Emirates Aluminium is expected to create a US$15 billion enterprise that will be the world’s fifth largest aluminium producer by output by 2014, when Emal’s second-phase expansion finishes.

At that point the combined capacity of the two smelters is expected to be 2.4 million tonnes a year.

To feed this goliath, the Emirates has struck a number of related deals.

“The aluminium industry in UAE has now moved from being a regional company to an international company because they have interests in the raw material bauxite in different locations around the world,” said Mahmood Daylami, the secretary general of the non-profit Gulf Aluminium Council.

“For the last 30 years, the UAE and the rest of the Gulf till today purchased their raw material from various sources in the world, but mainly form Australia. However, it is strategically important to have your own source of raw material.”

The latest UAE purchase agreement involves a $5bn investment in Guinea for a bauxite mine, alumina refinery and a port in the world’s top supplier of bauxite, the raw material used in aluminium production. Alumina is refined bauxite that is used in smelters.

Guinea is estimated to have more than 25 billion tonnes of bauxite.

Abu Dhabi’s Mubadala and Dubal signed the deal through Guinea Alumina Corporation (GAC), a joint venture firm owned by the two companies.

Under the agreement, GAC will build a bauxite export mine to be operational by 2017 and an alumina refinery with an initial capacity of 2 million tonnes per year. Work on the refinery will begin in 2018, with the first commercial output expected in 2022.

In May, Mubadala and Dubal announced they were jointly taking over the GAC project in Guinea, acquiring a 66.6 per cent stake from BHP Billiton and Global Alumina, two international mining companies. Mubadala and Dubal had previously been minority investors in the project, owning 8 per cent and 25 per cent of GAC respectively.

Mubadala had also signed in 2011 an agreement to build a calcined petroleum coke facility in China in a joint venture that will produce a material used in smelters to produce aluminium.

Dubal has a 45 per cent stake in the joint venture Cameroon Alumina, which will develop bauxite mining, a 3 million tonnes a year alumina refinery, and associated infrastructure. Dubal has a 19 per cent stake in the joint venture Companhia de Alumina do Pará in Brazil, which is building an alumina refinery.

The UAE is buying resources to compete with global players in the aluminium industry, which is currently dominated by conglomerates, such as Rio Tinto and Alcoa, some of which have joint ventures in the Arabian Gulf.

But the Emirates is not alone in the region in seeking to build an aluminium industry as part of a mining industry, which is becoming the third pillar of energy revenue across the region after energy products and petrochemicals.

“Gulf countries are looking at diversifying their economy into non-oil sectors for twin benefits, which are reducing risk of oil dependency and generating employment for citizens,” said Venkatesan Subramanian, a metals and minerals executive at Frost & Sullivan.

“The UAE has a unique advantage of an established aluminium industry as compared to other countries in the region. Having invested in smelters, the UAE is looking to vertically integrate into upstream and downstream in the future,” he said.

“Globally, aluminium is a growing sector and is considered to be metal of the future, especially due to its properties like lower weight, corrosion resistance and higher electrical conductivity.”

The UAE is not just focusing on the upstream investments in aluminium industry. It is also seeking to create a specialised downstream industry through various ventures that could utilise aluminium products. Mubadala for example, is building an aerospace industry with partnerships with companies including GE, Boeing and Airbus.

“There is now a strong drive by the UAE and the Gulf states to attract more downstream investments to the Gulf to utilise the large quantity of aluminium available, but still the aluminium produced in the Gulf is still export oriented,” said Mr Daylami. “Seventy-five per cent of aluminium produced in the Gulf is exported to different parts of the world and will continue to do that.”

The UAE and other GCC governments are seeking from the aluminium industry the same benefits elicited from the petrochemical industry, which has created in all Gulf countries a revenue stream besides oil and gas products, an industry manufacturing value-added products for a local industry and exports, and companies and services around petrochemicals that have boosted economic growth.

“Relatively cheap energy is a fundamental comparative advantage of the Gulf economies given their substantial energy endowments. The energy hungry nature of the metals industry renders it an obvious choice to focus on,” said Giyas Gokkent, the chief economist of National Bank of Abu Dhabi.

“Metals have use in a wide range of sectors from transportation, packaging, construction, industrial, and so on. The pursuit of plans to diversify their economic base has a self-reinforcing aspect. In other words, availability of domestic production will encourage and support growth in related industries as well.”

The smelters in the UAE are also new and employ the latest technology that allows them to consume less energy than other smelters that suffer from high cost of energy. Several old smelters in the West have closed down due to drop in aluminium prices and demand as high Chinese production floods the market.

“Smelters being energy intensive, countries like the UAE have an advantage of lower cost of production due to lower energy prices; and are hence, attracting investments in the aluminium sector,” said Mr Subramanian.

“The UAE can become the global hub of aluminium industry due to its excellent infrastructure and utilities, skilled manpower availability, and logistic advantage serving proximity to markets in the Gulf as well as Europe, Asia, Africa and American geographies.”

business@thenational.ae