GCC producers and global consumers are expected to reap benefits from low energy costs to feed the regional metal industry, coupled with low labor costs.
The GCC metal industry has been benefiting from ample deposits and strong local markets.
Kuwait Financial Center (Markaz) recently published the executive summary of their GCC metals and mines sector.
The report said GCC economies are skewed toward oil and gas as most of their revenue stream is derived from oil and gas production, thus the metal industry will not only support the development of respective countries and secure supplies, but will also act as a major diversification move and a future revenue stream.
However, that does not come without risks, although power is cheap now the explosive growth in power consumption may curb future capacity growth in the metal industry.
The metals and the mining sector in the MENA region was predominantly constricted to countries outside the GCC community, with players such as Iran, Algeria and Egypt producing metals such as copper, aluminum and lead, in both upstream and downstream sectors.
Ample deposit and strong local markets spurred the metal industry; at the same time GCC countries were preoccupied with upgrading their oil and gas sector.
In the 1970s, however, Bahrain embarked on diversifying away from its oil sector as its resources started depleting.
Bahrain was the first GCC country to embark on the metal industry through Aluminum Bahrain (ALBA).
ALBA started production in 1971 with annual capacity of 120,000 metric tons per year of aluminum products, current capacity stands at 870,000 metric tons per year.
The UAE followed in 1979 with Dubai Aluminum Company (Dubal) whose current annual capacity stands at 1 million metric tons of aluminum.
Oman, Qatar and recently the Kingdom through Maaden have entered the aluminum market as a diversification measure.
GCC producers and global consumers are expected to reap benefits from the low energy costs to feed the plants coupled with low labor costs.
Due to the increasing demand for basic materials in the east, GCC countries are well positioned to satisfy the need.
Highly subsidized energy costs give a competitive advantage to GCC metal manufacturing plants.
Aluminum and steel projects have been deployed in the region due to cheap gas and to secure local homegrown demand for metals.
Based on data from American steel association and metal miners, on average 20 percent of the total cost of producing steel is accounted by power costs and for aluminum, the cost jumps to 30 percent of the total.
In the GCC, major players are either government owned or quasi-government entities with access to cheap subsidized energy.
GCC countries, in general, import the raw materials needed to produce steel and/or aluminum, such as bauxite and iron ore, thus any disturbance in the supply chain could render the industry useless.
However, the risk is very low and is usually disqualified, says the Markaz report.
It said the more moderate risk is the price of raw material in the past iron ore prices were updated every year then changed to every quarter in 2010, and currently pricing has changed to every month which increases the price fluctuation risk.
Nonetheless, Markaz said increasing power consumption might slow down the growth of the metals sector.
Saudi Arabia is a case in point, it said. “If consumption growth continues on the same level, Saudi Arabia may be a net importer of oil by 2038,” the report claimed.
Power allocation is more likely to be allocated for domestic consumption rather than industrial activities.
It is already evident by looking at the UAE, specifically Abu Dhabi, which is home to industrial projects such as Emirates Aluminum (EMAL), Emirates Steel industries and Borouge (petrochemical industry) that it is facing pressure because power demand is outpacing supply.
Currently, additional power supply is being covered by the state of Qatar via the Dolphin pipeline. Qatar, however, plans to increase gas consumption for domestic infrastructure projects.