Do Iranian aluminium projects carry more risk?
Core Consultants recently evaluated the merits of Iran’s various investments into their aluminum industry and the potential to procure bauxite ore from Guinea.
Guinea boasts rich, under exploited bauxite deposits. The alumina content averages above 40% and in most cases closer to 46%, while their reactive silica levels vary between 1-2.5% on average. As such the average A/S ratio varies between 20-40, rendering Guinea’s deposits extremely compelling from an investment perspective.
Metallurgical bauxite is the feedstock required to produce aluminium. The aluminium industry itself is a highly capital intensive business requiring large scale investments, which creates significant barriers to entry for small and medium-sized firms. As a result, the aluminium market is characterized as an oligopoly, with ten integrated producers account for around two third of the production (~25m tonnes). Of this, it is no surprise that Chinese firms tend to dominate the integrated primary aluminum market, accounting for more than 40% of these top ten producers.
As such, Iran is not alone in its need to import bauxite and a number of newly emerged smelting operations, which are not integrated are now looking for a reliable source of bauxite or alumina. As such, Guinea has become an area of investment interest. A consideration of the chart below draws us to conclude the following:
- Integrated producers can be found mainly in Australia, Brazil and China
- China will seek to import alumina and bauxite as the availability of cheap credit has resulted in increased smelting capacity
- Brazil is a well-balanced producer and the quality assets are all owned by major players such as Vale and Hydro. Therefore, it is unlikely that Brazil will emerge as a supplier to Iran or any other new entrant
- Australia has six bauxite mining operations and whilst it does have an alumina industry, its share of aluminium production is relatively small. This imbalance may enable Australia to become a viable bauxite supplier. However currently the majority of this material is committed to China. However, from a freight perspective, Australia supplying the Middle East and Iran in particular is actually the most cost effective option as compared with either Guinea or Brazil.
- The Middle East has 9% market share in smelting, which is relatively minimal, but has committed funds to add refining capacity, but does not own quality bauxite resources. As such Iran as well as other Middle Eastern countries are emerging as fierce competitors for the Guinean bauxite sources. However, compared to its Gulf peers, Iran in our opinion, emerges with the short straw.
Within the Middle East, Saudi Arabia has the biggest cost advantage to ensure a successful aluminum industry, both with respect to scale and security of feedstock as well as with respect to lower power tariffs.
Table 1: GCC power tariffs
Power Tariffs (US c/kWh
Furthermore, there are large companies, that are partly owned by bauxite/aluminium companies such as Ma’aden (Alcoa), Sohar (Rio Tinto Alcan), Qatalum( Hydro Aluminium), which invariably means that they are somewhat assured of a bauxite source, rendering them potentially more competitive with the Gulf region.
Table 2: GCC aluminium operations
|Bahrain||ALBA||880,000||1971||Bahrain (67.5%); SABIC (21.5%); Public (11%)|
|UAE||DUBAL||1,056,000||1979||Dubai Government (100%)|
|Oman||Sohar||370,000||2008||Oman Oil Co. (40%)l Abu Dhabi Water & Elec. Authority (40%); Rio Tinto Alcan (20%)|
|Qatar||Qatalum||585,000||2010||Qatar Aluminium (50%); Hyro Aluminium (50%)|
|UAE||EMAL||1,255,000||2010||DUBAL (50%); Mubadala (50%)|
|Saudi Arabia||Ma’aden||740,000||2012||Saudi Arabian Mining Company (74.9%); Alcoa (25.1%)|
As such, for these and other reasons, we feel that the establishment of Iranian refineries/smelters in general carries significant market risks, compared to other regions.