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Azerbaijan Petrochemicals Report Q1 2011
Business Monitor International, Nov 2010, Pages: 46
The Azerbaijan Petrochemicals Report provides industry professionals and strategists, corporate analysts, petrochemical associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Azerbaijan's petrochemicals industry.
Prospects for the Azerbaijan petrochemicals sector over-rely on the structuring of Azerkimya and the performance of both the domestic economy and the demand situation in the Commonwealth of Independent States (CIS), according to BMI’s latest Azerbaijan Petrochemicals Report.
BMI estimates that in 2010 Azerbaijan’s PE output totalled around 60,000 tonnes. Although this implies that PE production was operating at just 50% total operating capacity, it has reversed most of the 35-40% decline seen in 2009. However, rubber production growth was far slower. Overall chemicals output grew 30-35%, although most local demand will continue to be met by imports as the industry is unable to fulfil all domestic requirements. This will come after an estimated decline of around 35-40% in 2009, but close to the 35% growth reported in 2008. Much of the growth was concentrated in H110 due to base effects and the slowdown in the country’s economy in H210, which prompted BMI to lower its GDP growth estimate for the year from 11% to 5%.
So far, Azerkimya’s intermittent output, technological backwardness and lack of capacity have limited its ability to realise the country’s full potential. In October, company representatives met with the management of Russia’s JSC Sterlitamak Petrochemical Plant, located in Bashkortostan, indicated a renewal of links between the two companies, with the potential for the Russian company to purchase PE, isopropyl alcohol and different types of resins from Azerkimya. Having taken control of Azerkimya in 2010, the State Oil Company of Azerbaijan Republic (SOCAR) is also modernising the company’s operations with BASF reportedly assisting it with its long-term plans.
While the company has heralded the results in 2010 as proof that restructuring is producing significant results, the level of output is still very small-scale and until production facilities are upgraded and expanded it is unlikely that Azerkimya will compete effectively against foreign rivals on both domestic and export markets. Rather, for the time being it owes its existence to state patronage and protection, while remaining plagued by major disruptions in output caused by periodic rapid rises in electricity and raw material costs. Azerkimya’s output has tended to be highly sensitive to changes in the non-oil economy with the rate of petrochemicals sales growth tending to be two or three times the rate of overall economic growth, amplifying the overall economic trends. While the strongly pro-cyclical nature of the industry is likely to result in high rates of growth, with real GDP growth forecast at 7.5% in 2011, with the low level of capacity it will not add much value and Azerbaijan will remain dependent on imports of chemical products. Moreover, with economic growth set to decline after 2011, unless the industry is improved and restructured it will see yet further declines in the years ahead.
There are also some positive developments that should boost the industry, aside from the restructuring of the industry and plans for a new petrochemicals complex. Household and corporate demand should hold up so long as the Central Bank of Azerbaijan maintains a loose monetary policy. This could change if inflation rises, a situation that is only likely if the manat’s stability is undermined. Stable oil prices will also stabilise feedstock prices, which in turn makes planning easier.
What will affect Azerbaijan’s petrochemicals industry is the value of the manat. If it is over-valued, it could undermine the country’s domestic output.
Protectionism is not an option. As it serves only a fraction of the local market, the government will be unwilling to raise tariffs on petrochemical, plastics and rubber imports and this could harm other local industries. The government may seek to intervene to either subsidise market prices or give preferential electricity tariffs, an option it has taken in the past to ease the cost burden on local producers and keep them in business.
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