| Kazakhstan | Apr 11, 2017
Diversification is often easier said than done, but Kazakhstan has its foot firmly on the ladder.
Once the USSR collapsed, and the independence celebrations were over, Kazakhstan, like other former member states, found itself wrenched from a unified energy matrix and prone to brutal shortages that needed immediate remedial action. It also had serious decisions to make regarding the future of its industrial policy.
Today, in step with the national development strategy being rolled out to 2050, the nation is diversifying its industrial matrix. During the command economy era, Kazakhstan had predominantly excelled in the metallurgical industries such as iron and steel manufacturing, centered on railroad rolling stock and heavy agricultural equipment. Now, while the mining and hydrocarbons components remain huge, industry is advancing, powered by an increasingly skilled workforce and vast array of SMEs, which account for over 80% of industrial enterprises. There is a clear shift toward specialized manufacturing of smaller components and electrical equipment, such as insulated and fiber-optic cables and electricity transformers, among many others.
In 2015, industry accounted for 35% of GDP, while agriculture claimed 4.8% and services 59.9%. For FY2016, select basic industrial products were produced in the following volumes: coal 102.4 million tons; petroleum, including gas condensate 78 million tons; crude oil 66 million tons; natural gas 46.6 million tons; iron ore 16 million tons; copper ore 76 million tons; and chrome concentrates 4.2 million tons. For 2016 the total volume generated by industry printed at KZT18.6 trillion, up YoY from KZT14.6 trillion.
Introducing the Brand
The government is also adamant about nurturing “Made in Kazakhstan” brand equity. On this topic, Yerkebulan Ilyasov, the Chairman of Alageum Electric, a major player in electrical distribution equipment, cited the example of China in a TBY interview. “The Chinese government has invested in (an electricity-related) project and stipulated that 100% of equipment has to be Chinese. Now we want to use the same policy; if we need to export to neighboring countries (…) we will use our own products.” In actual fact, Sino-Kazakh relations have strengthened, with manufacturing and light-industry capitalizing on multiple Chinese investments negotiated in late 2015 worth USD23 billion. Note, too, that Chinese companies hold around 25% of Kazakhstan’s oil industry, and that the dry port at Khorgos, launched in 3Q2015, on the China-Kazakhstan border, is a catalyst of bilateral industrial trade.
Enter the Private Sector
Heavy industry accounts for roughly 30% of total industrial investment. And a massive privatization portfolio of 260 state enterprises is to be sold over the coming five years, from energy and other industries. This will generate revenues for state coffers, while attracting international know-how and promising new opportunities for local SMEs. To foster private-sector enterprise, state mining companies were privatized in 1994. Karaganda Metals (Karmet), the principal steel producer, was sold to international firm Ispat-Karmet, which rationalized the operation for efficient production. Yet privatization is somewhat of a chicken and egg affair, whereby conditions, physical and legal, need to be met for FDI to materialize. Fatih Uzunoğlu, the CEO of Galaksi Group, exemplified two concerns in a TBY interview, during which he explained that, “we have land in the Brunday Iliski Raion industrial zone. We bought in July 2014, and (yet) we still await electricity connection to commence our investments there.” That connection only appears set for end-2017. George Apostolopoulos, Regional General Manager of Atlas Copco, which caters to the mining sector, concurs. “In the north, roads are sometimes closed for days, or weeks in the winter (and moreover) it is mainly local contractors that build (them).” Mining, he adds, “has huge potential to be bigger than oil and gas; there is copper, gold, zinc, chrome, iron ore, gold, and uranium, as well as strategic minerals.” Yet, touching on the legal preconditions for this to occur, he reveals that “Many international players left the market because they expected the mining code to become law last year; so long as it is not enforced, very few will come, except for Russian players,” more familiar, he suggests, with the old ways of doing business. In short, “Australian and American miners need to have an operating concession for a good number of years to justify investments of billions of dollars.” New legislation is on the way based on the Australian code, just as elsewhere in the economy British legal code is being introduced in the financial arena. It follows, then, that the third platform of the nation’s New Economic Policy, Nurly Zhol, launched by the President in November 2014, involves comprehensive energy infrastructure development in support of nationwide industrialization and regional specialization.
The government is working to transform agriculture into a sizable pillar of the economy. Currently, the sector comprises roughly 6% of Kazakhstan’s economic production, and while key crops include barley, cotton, and rice, wheat, exported to over 70 countries, is a crucial source of hard currency. Yet while around 75% of the nation is suitable for agricultural production, just 25% of the land is currently arable. The fact that Kazakhstan ranks among the top 10 grain exporters of the world, and that in 2015 cereals ranked seventh fastest-growing export, up 81.7% to USD1.4 billion, underlines the sector’s sheer potential.
Serik Utegen, the CEO of fertilizer firm Sunkar Resources, contextualized the industry by highlighting that India is the world’s single-largest buyer and importer of phosphate fertilizer, with China being the world’s number-one phosphate producer and consumer. With these being the markets to compete with, he told TBY that, “We have invested millions of dollars into the development of technology that would put our project on par with world-scale producers.” Moreover, the firm bucked a longstanding misconception that local phosphate could not be commercially converted into fertilizer of international quality standard. “By establishing technical cooperation and hiring the best consultants in the world we have managed to (achieve this, having) pooled the knowledge of competing engineering firms.”
Kazakhstan is indeed fortunate in terms of natural resources, boasting around one-third of global chromium and manganese deposits. And to these may be added tungsten, lead, zinc, copper, bauxite, silver, and phosphorus. Meanwhile, lucrative beryllium, tantalum, barite, uranium, cadmium, and arsenic are produced. Northern Kazakhstan is home to the largest iron mines, and other commodities tapped underground are goethite and limonite, where capacity is declared at 25 million tons/annum. Coal, meanwhile, is in plentiful supply in central and, again, northern Kazakhstan. There are 23 gold-bearing regions in the country that supply a growing precious metals sub-sector. And while the bulk of gold and silver output is a by-product of base metal production, separate deposits also operate. In fact, the Vasilkovskoye mine in north Kazakhstan is reportedly the world’s fourth-largest gold mine. For 2016 the total volume of mining stood at KZT9.3 trillion, which, while below 2014’s KZT11.2 trillion, was up on 2015’s KZT7.5 trillion print.
Embryonic steps to develop a local automotive industry date back to the early 2000s, when state subsidies had facilitated a production volume of 38,000 vehicles as of end-2014; today’s production capacity enables the assembly of up to 70,000 vehicles per year. It is significant, however, that Kazakhstan’s official WTO membership as of October 31, 2015 means an obligatory drop in customs duties on foreign cars from 23% to 12.5% within five years. This will put the cat among the pigeons in competition terms. Therefore, it is significant that official data for 2015 indicates that over 70% of cars sold in Kazakhstan were priced at USD15,000 or under, and largely Russian and Korean vehicles. A PwC report from 2Q2016 suggests that low consumption among citizens, plus decelerated growth of oil could dent the automotive sector. It concludes that the winners of such an environment will be those automotive players capable of sizable production volumes of those cars most in demand, noting that local manufacturers were already dedicating notable ratios of their production lines to budget models of Chinese automobile manufacturers.
The production of automobile parts and vehicle assembly is on the march with forecast production capacity of 300,000 cars per year at the nation’s largest plant Ust-Kamenogorsk. Azia Avto is by far the market leader for car sales in the country and holds over a 50% domestic market share, with an annual turnover in excess of USD1 billion. It has committed to an investment of USD62 million in nationwide facilities, including the new factory at Ust-Kamenogorsk, the nation’s largest, at an auto cluster. Official forecasts expect the facilities to ultimately increase the gross regional product of Eastern Kazakhstan by 7%. Meanwhile, 12,000 jobs will be created, while annual revenues of KZT30 billion will enter state coffers. The plant, fully operational in 2018, will propel the nation toward the official automotive export target of KZT90 billion. Sector data for January-December 2016 put passenger and light commercial vehicle sales at 43,845 units, down 53.6% YoY.
According to Global Cement Directory 2016 data, Kazakhstan’s cement sector, also highly competitive, has an annual production capacity of 11.85 million tons. Steppe Cement, with a 17% market share in 2016, reported an 8% YoY decline in 2016 revenue to USD54 million, with sales volumes down 4% to 1.57 million tons from 1.64 million tons amid higher competition. Domestic cement consumption shed 8% to 8.9 million tons in 2016, with imports of 0.5 million tons contrasting exports of 0.4 million tons, the former falling and the latter rising.
In December 2015, Chinese cement firm Huaxin Cement announced a 5 million-ton-per-year cement and 1.5 million ton clinker plant investment in Kazakhstan. Construction began in December 2015, with an initial budget of USD111 million. Fast forward, and the firm reported a 1H2016 revenue drop of 11% YoY to USD860 million with net profit down by a concrete 91% to USD1.21 million. Falling sales broadly throughout its markets of operation were blamed. Meanwhile, planning work has been conducted at a 2,500 ton/day cement plant at Aktobe in Kazakhstan. And adding to the competitive mix, the commissioning of the Kokshe Cement plant in the Akmola region is set for completion in 2017, with construction and installation work valued at USD87 million having been completed at time of print. This facility will have an ultimate cement production capacity of 2 million tons/year.
As accommodative legislation combines with enhanced infrastructure, Kazakhstan’s industrial matrix can but benefit, expediting diversification away from hydrocarbon dependency. And with a skilled workforce being essential to industrial advancement, it is noteworthy, too, that the nation’s first ever five-year program dedicated to the field, Digital Kazakhstan 2020, commences in 2017.