Wednesday, 24 April 2013

Poor Performance Of Energy Companies Compromise Kazakhstan's 2013 Growth Agenda

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by Georgiy Voloshin (04/03/2013 issue of the CACI Analyst)

While Kazakhstan prepares to launch a series of costly infrastructure projects, including the modernization of its three oil refineries and the much-awaited start of production at the Kashagan oil field, the economic data recently unveiled by the country’s Statistics Agency and major energy companies are far from reassuring. In early 2013, Kazakhstan’s statistics body stated in its annual report that the Kazakhstani economy had grown by a meager 0.5 percent in 2012 as compared to 3.5 percent one year before, let alone the spectacular figures reported in earlier periods both before and even during the world financial crisis. According to most expert opinions, the structure of Kazakhstan’s economy, which is still heavily dependent on the lucrative oil and gas sector as well as mining activities, has largely remained unchanged, despite a broad range of initiatives aimed at greater diversification. At the same time, the major energy companies whose cumulative revenue permitted the country to prosper in better times now face multiple challenges and can further undermine Kazakhstan’s growth prospects.

 

In late March 2013, Kazakhmys Plc, one of the world’s ten mining giants and the biggest employer on Kazakhstan’s domestic market, made public its consolidated performance in 2012. While the company registered US$ 930 million worth of net earnings only two years ago, its 2012 results have turned out to be much less positive, revealing US$ 2.27 billion worth of losses. These highly alarming statistics are mostly due to the deteriorating market position of the Eurasian Natural Resources Corporation (ENRC), another energy giant in which Kazakhmys has an important stake. However, even if the ENRC-driven losses are temporarily excluded from the overall calculation, Kazakhmys’s growth opportunities are likely to remain dim, in the context of flagging production and recurrent strikes by Kazakhstani workers demanding safer working conditions, higher wages and more responsible management.

Kazakhstan’s richest man Vladimir Kim, who has been at the helm of Kazakhmys’ activities since August 1997, announced last May that he was going to step down as the chairman of its board of directors. The next board meeting scheduled for mid-May 2013 is expected to anoint Kim’s successor already hand-picked from among the company’s top managers. This change of leadership is therefore taking place against the backdrop of Kazakhmys’s eroding performance, with its shares losing 8.6 percent in value at the London Stock Exchange (LSE) after the publication of last year’s financial results. Furthermore, increased uncertainty about the copper giant’s ability to restore its erstwhile standing has recently led the LSE to remove it from the FTSE-100 list, which includes the most successfully traded companies, in favor of the less prestigious FTSE-250 category. According to Kazakhstani experts at Halyk Finance, this move would most certainly entail an additional devaluation of Kazakhmys’s shares and further reduce its market attractiveness.

As regards ENRC owned by Kazakhmys, Kazakhstan’s Ministry of Finance and a troika of homegrown oligarchs, it was forced by last year’s poor market trends to write off over US$ 1.5 billion worth of its assets’ value. While its contract with Russia’s Rusal first concluded in 2006 will run through 2015, the low price of argil dictated by the downward market trends is likely to keep ENRC’s margin of maneuver extremely limited and its chances to regain profitability as low. A similarly difficult situation has been observed at ArcelorMittal Temirtau whose steel production dropped from 3.2 million tons in 2011 to 2.8 million tons last year. In early 2013, the company’s management announced the forthcoming departure of more than 2,000 employees by the end of 2013 (it currently employs over 23,000 people). 

Finally, Kazakhstan’s oil and gas sector was not immune to the troubling dynamics already observed in the case of the aforementioned mining giants. In 2012, oil production in Kazakhstan was at the level of 66.5 million tons, which is 1.9 percent lower than the year before. This is also the worst result of the last ten years. Moreover, KazMunaiGas Exploration & Production, the industrial branch of Kazakhstan’s state-owned oil and gas company, scored poorly in terms of net earnings (US$ 1.1 billion between January and December 2012 or 23 percent lower than in 2011), mostly due to the unending fallout from massive strikes organized by oil workers in Mangistau province in May-December 2011. Conversely, the financial performance of KazTransOil, in charge of exporting Kazakhstani oil to foreign markets, was highly positive in 2012, although this achievement should be primarily attributed to a temporary rise in external demand and favorable domestic tax amendments. Overall, the continuing uncertainty on the world’s energy markets could seriously compromise Kazakhstan’s ability to implement its ambitious plans, while its economy continues to rely on revenues from the sale of hydrocarbons and other minerals, in spite of the official rhetoric in favor of better diversification.

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