The document discusses the potential for aluminium production to diversify the economies of Middle Eastern countries away from their dependence on oil. It notes that several Gulf countries have established large aluminium smelting industries over the past few decades, with the six primary smelters in the region producing over 4.9 million tons in 2014. As oil prices decline and reserves are depleted, expanding industries like aluminium will become increasingly important to Middle Eastern economies. The document argues that the region has competitive advantages for aluminium production, like low-cost energy resources and labor, but that foreign investment could be limited by strict rules regarding local hiring and conservative social environments.

1. Can aluminium become a channel for
Middle East’s economic diversity?

2. Oil has been the prime industry in Middle East ever since it was discovered in Iran in 1911 by a
British Company, the Anglo-Persian Oil Company (APOC). It was not until the 1950s that Middle
Eastern countries started enjoying the riches from their oil business. Foreign investments and
revenues flowed into Middle East consisting of Saudi Arabia, UAE, Qatar, Bahrain, Iran and the
surrounding areas and contributed to quick growth and construction of modern civilization and
other infrastructural developments.
As Middle East grew to become the biggest source of oil, almost achieving monopoly status,
America hit upon a new technique to reach the harder-to-reach oil reserves. Around 2007-2008,
they discovered a technique known as hydraulic fracturing or “fracking”, used to crack the
surface of the shale rock formation in the earth’s crust, thus allowing the oil and gas to flow to
the surface. This accelerated the oil production in the US, threatening to give the oil moguls of
the Middle East serious competition in terms of oil production.

3. The Middle East, privileged by its cheap cost of production and generous government wealth
reserves, sharply reduced the price of the oil to counter the development in the US. Since fracking
is a comparatively more expensive technique, it raises the overall cost of production. Thus, if the
price of oil plummets too low, it shall no longer be economically viable to produce oil.
While the US is feeling the stress of low oil prices, Middle East is depleting its financial reserves in
order to sink the US oil and gas industry. It is widely believed that if the US oil and gas segment
falters, the US government will step in to fulfill its aim of attaining “energy Independence”. With
Middle East having little else besides oil and gas to rely on, what will happen when the funds are
exhausted and the oil sector crashes? Herein lies the significance of diversification for Middle East.

4. Aluminium is one commodity that is gaining demand all over the world for its strong, lightweight
and ductile qualities, especially in the automobile and aerospace industries, and is slowly creeping
into the Middle East economy. Bahrain is leading the flock by building the first aluminium smelter
in the Middle East with Aluminium Bahrain or Alba which became operational as far back as 1971,
followed by Dubai as UAE commenced Dubal in 1977. Since then, aluminium has gradually gained
in prominence and has now taken a firm toehold in the Middle East.
During the past decade, the aluminium boom really hit the Middle East regions with Alba
producing nearly 1 million metric tons in 2014 (931,427 metric tons as per company statements).
During the first quarter of 2015, they have already managed to produce 237,774 metric tons,
jumping 2.4% Q-on-Q. The GCC (Gulf Cooperation Council) consisting of Bahrain, Kuwait, Oman,
Qatar, Saudi Arabia and UAE, has produced 432,000 metric tons in March 2015 alone. GCC has
been the highest contributor to the global aluminium production barring China, according to
World Aluminium Statistics.

5. The following figures explain how aluminium production in the GCC has risen over the years.
Source: Gulf Aluminium Council website

6. There are six primary smelters in the GCC region; Alba in Bahrain, Sohar in Oman, Qatalum in Qatar,
Ma’aden in Saudi Arabia and Dubal and Emal (together known as EGA) in UAE. The six together produced
over 4.9 million tons of primary aluminium in 2014 with an expected production of up to 5.3 million tons
in 2015, which would be equivalent to 10 percent of the total world production, according to Abdulla J M
Kalban, Managing Director & Chief Executive Officer of EGA. EGA has a combined capacity of 2.4 million
tons per annum, securing its place among the top five primary producers in the world by volume.
In their own ways, other Middle Eastern countries are also trying to break free of their oil dependence
and create a more diversified economy. Dubai, amongst all its neighbors, has seen the sharpest growth
over the years as it was quick to realize the transient quality of oil. It was swift to begin diversifying its
economy, including International Trade, Airlines and Manufacturing (with aluminium as a major
contributor) to the economic mix. As a result it has been able to reduce its oil dependence from 25% in
real GDP in the early 1990s to around 1.5% in 2014 (Investopedia). This low dependence on oil means
Dubai will possibly remain mostly insulated from the oil price crash while most of the other Middle
Eastern countries suffer.

7. Saudi Arabia, although secured with sufficient government treasury, also feels the need to diversify. With
petroleum sector accounting for roughly 80% of its budget revenues, 45% of GDP and 90% of export
earnings (according to Forbes), it is almost hopelessly oil-dependent. Although late, it too has entered the
world of aluminium as it prepares to initiate the $10.8 billion aluminium complex, Ras al-Khair, which will
include an alumina refinery, smelter and rolling mill. While the smelter has seen some action, the rest of
the project is expected to be commissioned soon, making the kingdom a site for end-to-end aluminium
production chain. The project is a joint venture between Alcoa, a leading aluminium producer from USA,
and the Saudi Arabian Mining Company (Ma’aden), which is quickly becoming the third pillar for Saudi
Arabia after oil and petrochemicals.

8. At the moment, Middle East is evolving into a lucrative destination for developing aluminium. Its oil and gas
resources are still abundant, leading to a situation where it should be able to fuel the energy-hungry
aluminium industry. The cheap labour is always a boon in the industrial sector while the convenient,
midway position between Asia and the US means a good trading point. The only detriment in the way of
investments seems to be the strict rules applicable to foreign industries. The region’s demand for hiring a
high percentage of locals, coupled with conservative social and religious surroundings, prove to be a
deterrent for many investors. One hopes that the building of new, more liberal economic cities in Saudi
Arabia, a country known to be amongst the most conservative in the gulf region, will open up opportunities
for more foreign investments to pour in.
Thank you