Pedal to the metal

Aluminium Bahrain (Alba) is weeks away from completing its US$1.7 billion expansion programme. But how will it deal with increasing competition from similar projects elsewhere in the Gulf?

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By  Richard Agnew Published  April 17, 2005

Pedal to the metal|~|EXPANSION-200.jpg|~|EXPANSION: Once the new line is opened, Alba will increase production from 530,000 metric tonnes per year to 840,000 tonnes, giving it a huge competitive edge. |~|DRIVE just half an hour away from Manama’s hotels and shopping malls and you reach the dusty heartland of Bahrain’s two main industries — oil and aluminium. Between them, these massive facilities tell the recent history of the kingdom’s economic development. The creation of Aluminium Bahrain (Alba) in the 1960s was the first step in Bahrain’s effort to diversify its economy and reduce its dependence on oil, which had been discovered 30 years earlier. The company’s massive plant, it was hoped, would also absorb excess labour during a period of under-employment, use Bahrain’s gas supplies and serve as a go-between for the bauxite mines of Australia and the markets of Asia and the West. In the act, it has spawned and supported a number of downstream companies in Bahrain. Exploding demand from China and high prices on London Metal Exchange have also given the smelter, Bahrain’s largest non-oil exporter, a tidy windfall over the last few years. This has helped to strengthen the commitment of some of the company’s owners, which include the Bahrain government (77%), the Saudi government (20%) and Germany’s Breton Investments (3%). “There has been talk in the past about some of the shareholders not being that interested in the aluminium industry, that it’s not their core business and they might move on,” says Bruce Hall, Alba’s Australian chief executive. “But I don’t know that there’s any immediate chance that there will be ownership changes. More recent undertones I’m picking up are, ‘Gee, the prices of aluminium are high and the profitability of Alba is better than our core industry — maybe we should hang in there for a while’,” he adds. Worldwide demand for aluminium is expected to grow by 4.6% per year until 2008, according to the metal research group, CRU. So the immediate prospects for Alba look rather good. It’s also nice timing that the company is only weeks away from announcing the completion of its latest phase of expansion, which will create its fifth ‘pot-line’ and increase its capacity by some 60%. The US$1.7 billion project will also make Alba the third biggest smelter in the world. “Line 5 is not just a creep increase,” Hall says. “It’s kind of a rebirth. We’re taking a 30-year-old plant and giving it a higher asset value in terms of generating capacity because more than 65% will be supported by leading-edge technology. It also makes us the biggest aluminium smelter in the world outside of Russia,” he adds. When the new line is opened, Hall expects the plant to be churning the stuff out at a rate of some 840,000 metric tones per year, up from its current outflow of 530,000. He also expects that Alba’s competitive position in terms of production costs will improve markedly, although it already stands in the top 25% of the industry. To Bahrain, as well, the returns could be significant, given Hall’s expectations that Alba’s revenues will jump from around US$800 million to US$1.5 billion per year. “Its always hard to predict how much of an impact a project like this could have,” says Hall. “We always had aspirations to deliver something more to Bahrain than just a piece of hardware producing aluminium. We wanted to demonstrate the ability of a Bahraini company to manage a large amount of money professionally, that the indigenous population is willing to work for a living… and that you could come to Bahrain as an investor and be comfortable that your investments will be secure. Have we done that? I don’t know. But the effects can’t be negative for the country’s future,” he adds. The development, which was 90% project financed, has left the company with a significant amount of debt to service. But Hall is confident that the buoyancy of the global aluminium market will continue for some time. He argues that there will be a lag until “at least the end of 2006” before global producers activate idle capacity to take advantage of the high prices. Clearly, the project will also position Alba to take better advantage of the spike’s effects. Just over 52% of the total production of the plant, Hall says, currently goes to customers within Bahrain, while another 15% stays within the GCC. But each round of expansion that the company has undertaken has seen the additional capacity taken up mostly by exports, before local industries increase their own output. “It is inconceivable that that amount of metal will be consumed locally, so we’re going to take a huge step in our export component,” says Hall. “Then we’ll start the next 10-year cycle where that will diminish as the downstream industries take more of our production,” he adds. The only thing that presents a threat to Alba’s export position, Hall says, would be an increase in China’s own smelting capacity. “If China became a net exporter we’d have to rethink whether we could remain competitive there,” he says. “But Chinese metal is not that cheap — their power costs are quite high. Unless they were taking marginal profits by dumping metal into the Asian market, it’s fairly conceivable we could remain competitive, in spite of the transport costs. And if we couldn’t we would simply move to other areas of the world and muscle in on market share there,” he adds. For now, though, Alba remains much more focused on the Far East rather than other areas, partly because its transport costs to the US remain prohibitively high. “We can tolerate that in terms of profitability because our operating costs are so low, but why give up margin if you don’t have to?” Hall says. He also sees little sign that tariffs that hinder exports to the EU will be relaxed in the short term. “Everyone talks about it all the time; that there’s going to be a change this year or next year, but frankly I don’t see any immediate change,” Hall adds. But Alba also faces the prospect of increasing competition within the GCC itself. The abundance of cheap energy from natural gas, the high prices and fatter government budgets from the oil and gas price boom have prompted regional governments to invest in a string of smelters in recent years. Among others, Dubai Aluminium’s (Dubal’s) production capacity is expected to reach 760,000 tonnes this year, while Oman’s Sohar Aluminium Company has earmarked 325,000 tonnes per year by 2008 through a new US$2 billion smelter. The Gulf Organisation for Industrial Consulting also reckons that at least two million tonnes of aluminium will come out of the Gulf by 2010 as other smelters come online, including one planned in Bubiyan in Kuwait. “Every time there’s a new smelter built anywhere in the world it’s a threat to us,” says Hall. “Geographical location has very little impact on that threat — if you are going to build a big smelter like Sohar’s in South America or Oman, it doesn’t matter. Because they [Sohar] are building a new smelter it’s obviously going to be a low-cost smelter. But on the other hand, if that threat is going to come, I would rather have it nearby because we can capitalise on synergies, such as security provision, spare parts and even alumina supply. If you’re going to have to deal with the devil, better the devil in your backyard,” he adds. So far, Alba’s own expansion project also seems very much on track. The facility started production two weeks ahead of schedule on February 28, two years to the day after it started being built in 2003. The company is aiming to bring the line up to full capacity within 100 days of that date, although Hall predicts that it is “probably going to beat 80”. “We didn’t throw resources at it,” he says. “The idea was to galvanise the workforce around a single challenge which they could relate to and which would bring huge financial benefits to the shareholders. Currently, we are looking at being in full production more than 100 days earlier than we were expecting. And with US$1.4 million per day revenue generation and about US$800,000 net profit before interest from the project, that’s around US$80 million net revenue more than we were anticipating, just through schedule management,” he adds. The company’s plans also don’t end with Line 5. Its stated target is to be producing 1.1 million tonnes per year within the next five years. Although plans for a sixth line were shelved recently after an equity swap with US giant, Alcoa, fell through, Hall says that the project isn’t dead. “We have the space and the licence to build Line 6 and I think eventually Line 6 will be built,” he says. Pity, then, that Hall himself will be heading back Down Under when his contract is up in June. ||**||

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