The rise of Aluminium cables gives an alternative Connection for the grid
In the past, aluminium cables have been shunned due to poor performance in power transmission lines compared to copper rod. But latest developments in aluminium wiring that compensate for lower conductivity and less flexibility seem to be propelling a massive switch from copper. With a new aluminium factory launched in Dubai recently, what does the future hold for the GCC power cable market?
For many years, copper has been firmly regarded as the conductor of choice for electric power and electronics. But today, power utility companies as well as manufacturers are abandoning copper for its lighter and cheaper rival, aluminium, after a decade of technological innovation that is enabling savings that range in hundreds of millions of dollars.
New demand for aluminium rod in the GCC is largely driven by Saudi Arabia. Saudi Electric Company, the main electric power provider in Saudi Arabia is gradually switching from copper to aluminium for most of its new high voltage and medium voltage projects.
Developments in aluminium wiring that compensate for lower conductivity and less flexibility, new ways to stop corrosion and more efficient conductors, mean there is more scope to replace copper in power grid cables, auto wiring, air conditioning and refrigeration systems.
Copper is losing about 2% a year of demand to less costly materials such as aluminium, or about 500,000 tonnes, London-based researcher CRU estimates. Aluminium is about a third the cost of copper and, supplies in warehouses monitored by the London Metal Exchange are 12 times larger.
The United Arab Emirates (UAE) headquartered cable manufacturer, Dubai Cable Company (Ducab), says that the switch from copper is starting to make economic sense, and that demand for aluminium rod is now headed for an unprecedented surge.
“The relative economics of copper versus aluminium, particularly in Saudi Arabia, mean that clients in the Kingdom have tended to choose aluminium. Although aluminium occupies a larger space, it is very cheap compared to copper,” says Andrew Shaw, managing director, Ducab.
“Due to its relatively large market size, we strongly believe that the gradual substitution of copper for aluminium conductors in Saudi Arabia will be key in influencing demand trends in other regional markets where copper is still dominant.”
To cater for the growing market for aluminium, in January, Ducab Aluminium Company (DAC), a joint venture between Ducab and SENAAT officially inaugurated in the Khalifa Industrial Zone of Abu Dhabi (KIZAD) following an investment of $60mn for buildings, machinery and infrastructure.
The company will manufacture 50,000 metric tonnes of high quality electrical grade aluminium rod and overhead conductor per annum once it reaches its full capacity supplying to both local and international customers.
“The new company adds to a growing number of downstream ventures in aluminium being developed in KIZAD as part of the UAE’s ambitions to further diversify the national economy,” says Shaw.
DAC has already signed several rod supply contracts to service customers across the GCC, India, Lebanon, North America and select markets in Africa. The company is now planning further expansions for Latin America and Europe as the company targets export sales of over $81.7mn.
“The new DAC facility is strategically built close to Emirates Global Aluminium, the fifth largest aluminium producer in the world, which will expand the growing opportunity to provide a reliable and sustainable source of production and distribution of high-quality ISO9001 certified aluminium,” says Shaw.
“The proximity of DAC to the EGA plant provides an ideal supply chain link for the company, with molten aluminium being delivered directly from EGA’s smelter.”
Emirates Global Aluminium will provide all the hot molten metal needed for DAC at KIZAD, Shaw points out. “From a logistics and an operating efficiency point of view, this is great. They are like the mother hen, fostering a downstream industry.”
“Receiving aluminium as molten metal saves on both costs and environmental emissions, increasing the competitiveness of the UAE aluminium fabrication industry and supporting the development of a healthy downstream sector,” adds Shaw.
DAC manufactures Electrical Conductive (EC) grade aluminium and aluminium alloy rods, wires, and bare overhead conductors. The activities at DAC will complement Ducab’s existing portfolio, which has seen the 100% UAE-owned company become a global leader in the development, design, manufacture, marketing and distribution of copper and aluminium wire and cable products.
With six manufacturing facilities across 4 sites in the UAE including DAC, Ducab’s products are currently used in the energy, general construction, oil & gas, renewables, industrial, defence, transport, marine, mining and other specialty industry verticals.
While demand for copper rod is expected to hold steady, the new aluminium factory in the UAE is expected to serve the growing market for aluminium conductors for new power projects.
Saudi Electricity Company (SEC) says it has already saved $640mn by shifting from copper to aluminium in its medium voltage distribution network.
“We started more than a year ago and we plan to continue as the viability of aluminium as the perfect substitute for copper increasingly makes economic sense,” says SEC’s chief executive Ziyad Alshiha.
A push for innovation to overcome the obstacles to substituting the two metals gathered speed in 2011 when copper prices spiked to $10,000 a tonne while aluminium, suffering from a supply glut, was $2,525. Although the price gap has more than halved, around $3,400, aluminium is still cheaper than its rival.
“Ten years of high (copper) prices incentivized many players involved throughout the supply chain to invest in the R&D and make more substitution possible,” says analyst Patrick Jones at Nomura in London. “Now we are starting to see some results on this front.”
According to industry analysts, the biggest potential for switching from copper is in the power sector, where aluminium is already widely used in overhead high-voltage cables from power stations but is now attractive for wiring branching off from substations.
Japan’s Kansai Electric Power (9503.T) last year began replacing 50-year-old copper distribution cabling in Osaka prefecture with aluminium. A spokesman says its plans to replace some 140,000km of copper cabling over 30 years would save tens of billions of yen.
Their new aluminium wires compensated for the downside of being thicker with a dimpled design that reduces wind pressure and helps repel snow meaning they can use existing electric poles and lower the risk of cables snapping, the spokesman says.
The automotive sector also has benefited from innovations, boosting the potential for further use of lightweight aluminium to help the industry cut vehicle weight to help meet stricter emission standards.
As more companies make the switch, the impact on the copper and aluminium markets could be substantial.
Benchmark copper prices CMCU3 on the London Metal Exchange slumped by about a quarter last year on fears that a slower economy could lead to lower demand from China, the world’s biggest consumer of metals.
And China is likely to need 100,000 to 250,000 tonnes less copper this year, Goldman Sachs has estimated, because the authorities released quality standards for low-voltage aluminium alloy power cables, giving industrial users more confidence to replace copper ones.
“Substitution could pose a significant threat to copper demand over the next decade, which could add up to 2-3 million tonnes a year of total demand destruction,” Nomura’s Jones says.
But the copper industry plays down the threat, saying many industrial users are still wary of a switch. Global copper demand will rise to 22.2 million tonnes this year from 21.9 million in 2015, according to Thomson Reuters data.
“In the automotive sector, there is risk of possible technical failure, warranty claims and the unknown aspect of using aluminium with all of its technical issues,” says Colin Bennett, global market analyst with the European Copper Institute.
“In the overall market, the actual loss from substitution is really a blip because the larger market for copper is growing.”
After a record year in 2016 where Ducab registered sales of 10%, the past two years have been tough for the regional cable industry due to a dearth of cash in the market, says Shaw.
He says that despite the tough cable market environment, Ducab managed a 5% growth in overall sales in 2017. Shaw says that competition in the regional cable industry has intensified over the past two years due to the narrowing of the market.
“Dubai was a busy market but unfortunately one of the only busy markets. So most of our regional competition had to come to this market looking for business,” says Shaw. “This put a lot of pressure on margins. So, while there was volume in the Dubai markets, everyone has suffered from a combination of lower margins and the difficulties contractors have raising cash to pay the bills.”
“But for the metals business, the copper rod and wire business which is more export oriented, with strong sales into Saudi Arabia and into India, there was stability with a good year on year growth,” says Shaw.
Entry into aluminium means expanded revenue streams for Ducab especially in its core markets where capital expenditure on new projects has been subdued due to low oil prices.
“We are pleased with the positive response from new customers for the aluminium rod who are delighted with the high-quality offering. Following all the hard work, we now expect business to really start picking in 2018 and we are already seeing that,” says Shaw.
“Budgets are being released as activity gathers momentum in key markets such as Saudi Arabia and the UAE. Some of the pressure is being lifted a little bit. Certainly the activity in the first couple of months of the year have showed that more orders are being placed which have been on hold for a long time.
“So we are cautiously optimistic for the cables business. Metals will continue steadily, mainly long term contracts. High voltage is still a much longer cycle business with a couple of exciting projects but it will be another tough year for the sector,” adds Shaw.
He says that the new DAC factory will broaden offerings and unlock new market opportunities especially in Africa where aluminium is in high demand for overhead lines.
Although demand for aluminium rod is expected to grow steadily, production for copper rod will hardly be affected, with the market for both products expected remain parallel. Copper buyers will be the same customers for aluminium rod, according to Shaw.
“It gives us several more strategic options plus a foot in both camps because of what we see happening in the European and US markets. The shift to aluminium in the GCC has lagged behind that in Europe and will boost demand,” says Shaw.
But competition in the aluminium market is likely to stiffen as production capacity especially from China increases, bringing down prices further.
Analysts polled by FocusEconomics see aluminium prices averaging $2,003 in Q4 2018. The maximum forecast provided for the period was $2,300 and the minimum was $1,779.
The UAE is one of the leading exporters of aluminium to the US where the aluminium industry has shrunk drastically over the last 25 years, down from 23 operational smelters to five. Other key exporters include Canada, Russia and China.
But the recent 10% tariff imposed by the US President Donald Trump on aluminium imports to protect its domestic industry is likely to be a game changer in the global aluminium trade, with some analysts foreseeing further pressure on prices below the break-even point.
Shaw says it is still early to determine the exact impact of the announcement, insisting that there is enough demand to absorb all of Ducab’s existing UAE based production capacity.
“The US is a very large net importer of aluminium and no longer has the capacity to satisfy its own market. But at the moment, no one really knows what the new tariffs mean for the UAE aluminium industry and we cannot tell yet whether it’s a blanket or specific tariff,” says Shaw.
“But I think Ducab is small enough not to be hugely impacted. We have strategically diversified our markets across various regions. So we are not anticipating a major change.”
Ducab last year reported strong financial performance for 2016 with a 10% growth in sales volumes resulting from high-value new and repeat orders from prominent regional and international customers as well as increased product diversification. Ducab increased its reach in international markets by 25% in the same year.
The company also reported a 15% overall EBITDA growth and reduced its short-term borrowing by $62mn over the same period.
Ducab has over the last few years focused on operational efficiency with the implementation of several manufacturing optimisation initiatives along with diversification into new markets and offerings.
The past few years have witnessed an unparalleled demand in power cables across the GCC as new power projects begin to take shape. The double digit demand growth cuts across Low Voltage (LV), Medium Voltage (MV), High Voltage (HV), and Extra High Voltage (EHV) cables.
A recent report by Frost & Sullivan projects the GCC market for power cables to reach nearly $9bn in revenues over the next five years, based on assumptions relating to copper and other raw material prices.
Currently, total GCC investments in power projects are estimated at $150bn, with nearly $94bn into power generation projects, $19.2bn into transmission and the rest in distribution.
The GCC power grid project is expected to connect all member countries through overhead EHV cables, while the ongoing regional real estate construction boom is driving demand for LV cables, which enjoy the largest share of the market.
The power cable market space, traditionally occupied by cable manufacturers such as UAE’s Ducab and Saudi Arabia’s Riyadh Cables, Jeddah cables and Saudi Cables is drawing attention from new players.
The latest market entrants include companies such as Bahra Cables, Al Fanar, RESCAB, QICC, El Sewedy in Saudi Arabia and Qatar, and Power Plus who are capitalising on their close business links with end users.
Bahra Cables has strong links downstream to key end-users Saudi Bin Ladin Group and Electric House, while Al Fanar has a long established distribution network in Saudi Arabia and a sister company engaged in EPC contracting.
Frost & Sullivan however cautions about changing industry dynamics as new demand patterns increasingly align with global trends on efficiency and sustainability, along with a vivid call for value addition that accentuates customer service and after sales services.
“Everyone will now focus on staying relevant to prevailing market needs. To achieve this, traditional players will have to dominate each segment, acquire different core capabilities and learn best international practices that can be replicated in the region,” says Shaw.
Shaw is upbeat about Ducab’s ability to promptly align itself with the future industry dynamics as business prospects evolve.
“The opportunities are boundless for those who can organise the overall value chain for consumers. It is a game that we have mastered,” says Shaw.
Ducab also hopes to take part in the GCC interconnection power grid once it starts rolling out its overhead cables onto the market.
The wide adoption of renewable energy in the region is unlocking more prospects for diversification within the cable manufacturing industry with more companies now focusing on specialised cables.
More than 67GW of clean energy projects are currently at the design and study stage within the region and will require more than $200bn worth of investments in the coming years, according to the Renewable Energy in the Mena Region 2017 report by MEED.
The investments will also necessitate a significant expansion and upgrade of existing power networks to facilitate the extra capacity.
In the UAE, projects such as the Mohammed Bin Rashid Solar Park in Dubai, inaugurated in 2013, and Masdar’s Shams 1 in Abu Dhabi are key factors in influencing the current optimism within the power cable industry. Ducab is supplying its SolarBICC MV, LV power and control and grounding cables for the two projects. The company is now supplying the Ducab SolarBICC cable to projects in Australia as well.
Similarly, Ducab has supplied locally produced 60 year non-class 1E power cables for the four reactors at the $20bn Barakah nuclear facility. Each reactor is expected to produce 1400MW of electricity by 2020, with the first one scheduled to start operating this year.
Saudi Arabia and Egypt are in the final stages of tendering their own nuclear power projects, a move that will widen the market for specialised nuclear power cables.
“These flagship projects not only widen prospects, but are also helping to standardise the industry to international levels,” says Shaw.
“For example, Ducab was the first cable manufacturer in the world to produce cables with a 60 year life span to meet the requirements set by the Emirates Nuclear Energy Corporation (ENEC). It is a feat that will enable us win more business in similar projects in the region and beyond.”
“Quality is soon going to be an important differentiator in the industry. There is now a growing tendency for new projects to set stricter standards. This is something that is going to transform the entire industry.”
Quality boost and product diversification will further enable cable manufacturers to gain traction in fresh markets beyond the GCC.
Frost & Sullivan says that, increasing expenditure on infrastructure in neighbouring countries could present very viable markets for GCC cable producers to mitigate the lacklustre performance occasioned by low oil and gas prices.
“Currently, GCC producers have targeted these countries, but in an ad-hoc and opportunistic manner in most situations. We recommend a focused approach while catering to these markets,” says the report.
Ducab acquired the UK-based AEI Cables in 2014 to start manufacturing specialist cables geared towards more niche markets, especially within emerging economies on the African continent to expand its current export market consisting of countries such as Hong Kong, UK, India and Australia.
The manufacturer has already made business inroads in Nigeria, Africa’s largest economy and it is currently engaging the East African market, including Kenya, another economic giant on the African continent.
However, these efforts will yield no significant results without clearly laid out strategies geared towards customer retention.
Ducab has pioneered a practice within the regional cable industry that empowers the company’s customers to design their own cables to suit their needs.
“We offer our customers a chance to come to our factories to witness the cables being manufactured and also give them an option to customise them according to the projects that they are intended for,” says Shaw.
Customer-initiated linkages are expected to define the industry’s future by cementing the existing bond between manufacturers and customers.
For instance, manufacturers are now encouraging graduate trainees from partnering companies to come to their factories and see the cable production process, hoping that this will aid them in creating designs for future utility cables that meet the necessary technical requirements.
But most importantly, this initiative carries the potential to reinvigorate the business linkage between manufacturers and their customers.
Some companies such as Ducab are even going an extra mile to invite customers to attend their in-house training sessions to allow lateral knowledge sharing for any future projects.
Industry experts agree that the regional cable industry has already entered a crucial phase in its lifecycle, where capability, proximity, quality and customer-centric initiatives will be very important provisions for business success and continuity.
But they insist that quality, rather than price will remain the key differentiator in the market as customers’ awareness and demand for quality products increases.