Saudi Energy Forum: DRI, Steel and Aluminium Industries

1. Saudi Energy Forum:DRI, Steel and Aluminium Industries Dammam, Kingdom of Saudi Arabia 19th November, 2006

2. The rationale for building a DRI or aluminium project in KSA or GCC involves exploiting the region’s natural advantages • Basic rationale: take advantage of abundant, competitive hydrocarbon reserves • Exploit other mineral reserves (eg iron ore, bauxite) • Meet growing local and global demand for steel and aluminium • Trigger development of downstream industries and diversify industrial base from hydrocarbons

3. Hydrocarbons at the heart of the metals proposition Bauxite Iron ore pellets GAS Iron ore, coke Only scrap DRI Plant + some scrap or Alumina Electricity Blast furnace EAF Mini-mill Primary aluminium Rolling mill

4. The typical scale and gas consumption of DRI and aluminium projects is shown below (though note that Ma’aden is planning to use oil to generate power)

5. DRI technology is the dominant iron making process in the GCC, and more growth is expected given the abundance of natural gas • As GCC states add value to their energy resources to diversify their economies, so more DRI-based steel production is being built. Currently, over 6m tpy of additional DRI capacity is under development

6. DRI-based investment projects provide attractive investment opportunities • Exploits low cost gas • Can be built standalone or with steelmaking facilities. HBI (derivative product) is highly tradable - not subject to tariffs/intense Asian competition • Moderate capex needs – much less than for blast furnace plant • Modularity helps to offset drawback of being in the GCC – the relatively small market • Flexibility to produce steel of all grades • Well-established technology, environmental costs not high

7. Power is the major source of competitive advantage for aluminium smelters Average industry Business Operating Cost, 2005 Total = $1421/t Power and Alumina are the largest sources of competitive advantage on the BOC curve Labour and net realisation costs are also important

8. …and aluminium is among the most power-intensive of metallurgical industries Power use intensity by metallurgical industry:

9. Returns on shareholder equity have shown cyclical resurgence in recent years Sample of steel companies Sample of aluminium companies Net income / shareholders equity

10. The rationale for building a DRI or aluminium project in KSA or GCC involves exploiting the region’s natural advantages • Take advantage of abundant, competitive hydrocarbon reserves • Exploit other mineral reserves (eg iron ore, bauxite) • Meet growing local and global demand for steel and aluminium • Trigger development of downstream industries and diversify industrial base from hydrocarbons

11. There is the potential to develop Saudi iron ore… Saudi Arabia is reported to have reserves of iron ore in Wadi Sawawin near the Gulf of Aqaba, in the northwest of the country Feasibility study carried out by British Steel Consultants in the mid-1990s on behalf of Directorate General for Mineral Resources, pointing to an investment in excess of $660m (likely to be closer to $1bn in today’s money), to produce 2.2m tpy of DR grade pellets over 25 years • Project economics appeared poor: • lack of existing infrastructure • ore requires extensive beneficiation Considerable recent interest in commercialising the project since iron ore prices soared

12. …while aluminium provides opportunities for synergies with local raw material suppliers

13. The rationale for building a DRI or aluminium project in KSA or GCC involves exploiting the region’s natural advantages • Take advantage of abundant, competitive hydrocarbon reserves • Exploit other mineral reserves (eg iron ore, bauxite) • Meet growing local and global demand for steel and aluminium • Trigger development of downstream industries and diversify industrial base from hydrocarbons

14. With economy in steel-intensive phase of development, per capita consumption is already relatively high in KSA/GCC… Steel consumption, kg/capita, 2004 Aluminium consumption, kg/capita, 2004

15. …but continuing economic growth, as well as import substitution, should offer scope for expansion of steel & DRI in the GCC. Product focus may shift from construction steels to higher value steels… Steel consumption is estimate based on apparent consumption of finished steel production Million tonnes

16. …while Saudi Arabia and GCC are well-positioned to supply some of the additional 29 million tonnes of capacity needed to satisfy global aluminium demand by 2030 Million tonnes

17. The rationale for building a DRI or aluminium project in KSA or GCC involves exploiting the region’s natural advantages • Take advantage of abundant, competitive hydrocarbon reserves • Exploit other mineral reserves (eg iron ore, bauxite) • Meet growing local and global demand for steel and aluminium • Trigger development of downstream industries and diversify industrial base from hydrocarbons

18. DRI projects could trigger a steel cluster in Saudi Arabia, by producing the steel products used in key downstream industries • Re-bars – structural reinforcing for the construction industry • Coiled Bar – for the fabrication of welded mesh for the construction industry • Wire rod – for the production of wire products used in fencing, nails, radial tyre reinforcing etc • Angles, sections and channels – for many applications in fabricating, engineering and construction applications, such as power transmission towers, oil platforms and petrochemical plants • Merchant bars – for numerous fabricated and engineered products of a specialised nature used in the machine tool industry • Flat rolled products (hot rolled and cold rolled) – for multiple applications including construction, packaging, automotive and other engineering

19. There are a variety of downstream aluminium opportunities of differing orders of magnitude • Downstream investments may include rolling mills, extrusion mills, powder plants, etc • Capex requirements range from $7m for an aluminium rod plant consuming 5,000t of Al p.a. to $800m for a can sheet plant that consumes 200,000t of Al p.a. Employment potential (direct and indirect) per downstream facility

20. There are challenges to going further downstream into the metals sector • Downstream, value-added products have different success factors to upstream metal products • For example, success in primary aluminium production is in large part a function of access to competitive power; but success in downstream fabricating is in large part a function of access to markets • Does the GCC have the market size to support downstream industry? • Do transport costs and service requirements make it feasible to sell downstream products to larger markets?

21. Conclusions • The rationale for investing in the region involves exploiting natural raw materials advantages and to establish globally competitive businesses • Investment in DRI / steel and aluminium will bring the potential for up- and downstream investment (though there are challenges with going downstream) • Expanding demand in Saudi Arabia/GCC and globally creates a need for new investment