Gulf states in race to make low-carbon metals as EU carbon tax looms

The hydrocarbon-rich Gulf states, which are focusing on low-carbon metals manufacturing as part of their economic diversification strategies, could gain an early mover advantage as the EU prepares to impose comprehensive carbon tariffs in 2026.

The Gulf region is a global leader in aluminium production, accounting for roughly 10 per cent of output. Nearly a third of the GCC’s aluminium production is exported to the US and the EU.

The lightweight metal has gained importance in recent years, particularly for its use in battery casings and other components for electric vehicles. However, aluminium production is

energy-intensive and emits about 3 per cent of the world’s direct industrial carbon-dioxide emissions, according to the International Energy Agency. This could become a challenge as the EU gets set to fully implement the Carbon Border Adjustment Mechanism (CBAM) in 2026. CBAM, which seeks to protect European companies that pay for their emissions under the EU's trading system from unfair competition, will impose a carbon price on certain goods imported into the bloc.

The regulation currently focuses on carbon-intensive goods like cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen products.

“A number of Middle Eastern aluminium producers have made clear efforts to offer low-carbon emissions aluminium products to the wider market, including products with higher recycled content, as part of a response to growing demand for this material as well as preparation for the implementation of CBAM in the EU in 2026,” Khaula Bhatti from S&P Global Commodity Insights told The National.

The CBAM will initially focus on the direct emissions (Scope 1) for all covered products, but will also include indirect emissions (Scope 2) for imported fertiliser, cement and electricity.

“Middle Eastern producers are in a favourable position in the European market when considering both Scope 1 and Scope 2 emissions, meaning they are more competitive in terms of overall emissions compared to other global competitors,” she said.

The UAE is responsible for 44 per cent of GCC’s aluminium production and its main company – Emirates Global Aluminium – has been early to the game.

In 2021, EGA became the first company in the world to make aluminium commercially using solar power, producing almost 39,000 tonnes that year. Output increased to 66,000 tonnes last year.

In January, Saudi Arabia Mining Company (Ma'aden) and US-based solar start-up GlassPoint announced the first phase of project development for the world’s largest industrial solar thermal project to decarbonise the miner’s aluminium supply chain.

The initial phase will integrate direct heat generation and storage to deliver a continuous supply of nine tonnes per hour of steam to Ma'aden’s alumina refinery in Ras Al Khair, in Saudi Arabia’s Eastern Province.

“New policies such as the EU’s CBAM will tax high-carbon imports and make low-carbon aluminium, enabled by solar thermal solutions, even more appealing,” Ma'aden said in a statement at the time.

Growing market share
Last week, Ma'aden agreed to acquire Sabic’s 21 per cent stake in Aluminium Bahrain (Alba), the world's largest aluminium smelter outside of China.

The two companies last month also signed a non-binding agreement to begin due diligence on a potential business combination involving segments of Ma'aden’s aluminium strategic business unit. This combination could reshape the global aluminium industry, positioning the merged entity as “one of the largest aluminium producers worldwide”, Alba said in a statement at the time.

“The potential partnership accelerates Alba’s growth strategy, creating a global champion and cementing our position as the largest regional aluminium producer,” Khalid Al Rumaihi, Alba’s chairman.

The combined entity could optimise or expand operations in the earlier stages of aluminium production, such as the supply of raw materials and calcined coke, which is essential for producing aluminium anodes, a Wood Mackenzie analyst told The National.

“The Ma’aden – Alba potential merger shouldn’t make a difference in terms of access to the EU. The combined entity may be able to exploit some synergies with commercial offices abroad, including the EU," said Edgardo Gelsomino, research director, aluminium.

The potential deal may also be influenced by China’s aluminium production limit of 45 million tonnes. This cap, imposed by Beijing in 2017, aims to prevent oversupply and phase out older, less efficient plants. China's production of the metal reached 41.66 million tonnes in 2023, data from the International Aluminium Institute showed.

“China is bent on keeping its primary aluminium capacity at 45 million tonnes and is unlikely to budge,” said Andy Farida, base metals research analyst at Fastmarkets.

“That made the joint co-op between Ma'aden and Alba more appealing since the GCC sees this as an opportunity to step up, fill in the market share and put the aluminium industry as a key player for many years to come,” he told The National.

“China remains the largest factory of the world, but I think the GCC is trying to take some of the burden off.”

Despite being a dominant force in the global metals market, Chinese exports are often viewed negatively in the West. The US and the EU have repeatedly accused China of unfairly subsidising its aluminium and steel sectors, claiming that the resulting overproduction is saturating global markets.

“China’s geopolitical tensions with the West will only benefit the Middle Eastern economies,” Mr Farida said.

Green steel
While the Middle East is not a big player in steel, the move by some regional companies to specialise in green or low-carbon steel could potentially give them an advantage over exports from China and India in certain markets, according to experts.

Emirates Steel Arkan, which is majority owned by Abu Dhabi investment company ADQ, has nearly completed a pilot project with Masdar, which involves the use of green hydrogen, instead of natural gas, to extract iron from iron ore, the company’s chief executive told The National.

Green steel is produced using a specific technology, making it difficult for competitors to enter the market, Saeed Alghafri said.

“The UAE, and specifically the Mena region, is really pioneering and leading, so naturally, this place can be an anchor for export,” Mr Alghafri said. “What's really critical is the reception and the willingness to buy such products. In Europe today, they're really asking for this product, and they want it.”

The EU is currently the world’s largest steel importer. In 2023, the bloc imported 37.3 million tonnes of steel, an 8.7 per cent increase over the previous year, according to the International Trade Administration.

“The impact of the CBAM on EU steel imports and domestic production will be felt around the globe, as European countries weigh up whether to import finished steel, green direct reduced iron to produce steel or additional scrap,” Wood Mackenzie said in a research note this year.

“Emissions-intensive Chinese and Indian flat steel will be hit hardest.”

China has a production capacity of 1 billion tonnes, and a surge in exports to any country, to counter a slowdown in its domestic economy, will create a “huge imbalance” in that market, Mr Alghafri said. “If you look around, everyone is afraid that this would happen.”

He said both the US and the EU had announced protective measures in response to Chinese steel imports.

“We've established ourselves, and if we don't do like the other [markets], then they [Chinese exports] will end up coming here … we're really watching the Chinese market and their economic growth very closely,” Mr Alghafri said.

“The good thing here is we have very much established a diversified portfolio. We really have strategies in place, specifically when it comes to sustainability and technology, to really fight or tackle any Chinese products,” he added.