Enhanced capacity at Bahrain’s largest industrial facility is set to boost downstream manufacturing opportunities and increase industry’s share of GDP.

In December Aluminium Bahrain (Alba) commissioned a major brownfield expansion of its plant known as Line 6, which is expected to make the firm the world’s largest aluminium smelter.

Developed at a cost of some $3bn, the new line will add 540,000 tonnes of capacity to annual output, increasing it to more than 1.5m tonnes per year.

The Line 6 Expansion Project – which includes a new processing line and power station to provide electricity for the facility – is gradually being brought on-line, with completion expected by mid-2019.

The new line will have a significant impact on Bahrain’s economy. The aluminium sector already contributes an estimated 12% to GDP, a figure Alba officials have projected will increase to 15% or 16% when Line 6 reaches maximum output.

Alba expansion follows strong sales and rising production figures

Even ahead of the full start-up of Line 6, Alba posted strong growth in sales and production, along with an increase in its value-added component.

The end-of-year sales volume for 2018 was approximately 1.01m tonnes, a 3.5% increase on the 2017 total of 978,000 tonnes. This came on the back of a 3% rise in production, according to company figures.

This increase in sales was reportedly driven by a higher value-added component, with processed output accounting for 60% of all shipments, compared to 57% in 2017.

Increased international aluminium demand to offset potential oversupply

Alba’s strong performance and facility expansion comes at a volatile time for the global aluminium industry.

Threats faced by the segment include increased protectionism, notably from the US, and the slowdown of the Chinese economy – factors that could see producers reorient towards the broader international market.

However, a report issued by the OECD at the beginning of January warned that excess capacity in the global aluminium industry risked depressing prices, and that high levels of subsidies and state support could generate market distortions.

Despite these concerns, Tim Murray, the CEO of Alba, told OBG that rising demand would likely absorb excess capacity as more manufacturing sectors stepped up their use of the material.

According to Murray, increased substitution of steel with aluminium in manufacturing, coupled with broader rises in demand, are set to increase global consumption of the commodity by up to 5% this year.

“We are seeing widespread substitution in the automotive sector, with manufacturers replacing steel with aluminium,” Murray said. “The same process is taking place in the aerospace industry.”

The Line 6 expansion project is also designed to increase productivity and reduce production costs, which could help offset any fluctuations in price, he added.

New gas terminal to provide energy inputs

While increased efficiency and economies of scale can help maintain profitability, producers also have to contend with the possible rise in input costs.

Bahrain’s leading electricity consumers may find themselves increasingly subject to international energy price fluctuations, as electricity generation will have to rely on imported gas.

However, according to the OECD, Bahrain should benefit from its close proximity to large-scale liquefied natural gas (LNG) producers as it moves from self-sufficiency in gas to becoming a net importer.

Moreover, the kingdom has taken steps to ensure supply by developing a new floating LNG import facility capable of handling 800,000 cu feet per day, due to come on-line in early 2019, coinciding with Line 6 moving to full production.

US tariff exemption spurs downstream activity

Another factor that should help insulate Bahrain from shifts in the international aluminium market is growing domestic demand.

According to Alba data, some 45% of production goes to local firms for processing or value-added input, with much of the final product then exported.

Downstream capacity is expected to rise as a result of the increase in primary production from the expansion project, with up to 3000 new jobs forecast to be created in the manufacturing sector.

One such downstream company is Gulf Aluminium Rolling Mill Company (Garmco), a Bahrain-based producer of flat rolled aluminium stock, including sheets and coils, that currently exports to 45 countries.

In November the company gained a strong advantage in one of its key markets after the administration of US President Donald Trump granted tariff exemptions on its major exports to the US, where Garmco operates a subsidiary.

This exemption could give Garmco and the Bahraini aluminium sector an advantage over Chinese rivals, especially if there is any ratcheting up of the Sino-American trade dispute.

Because of prospects like these, Garmco has potential for growth despite the company recently filing for relief under the government’s new bankruptcy law, which allows companies with strong underlying fundamentals but unsustainable financing structures to receive financial assistance while continuing to operate and undergo reorganisation.

© Oxford Business Group 2019