RESEARCH & KNOWLEDGE MANAGEMENT
KAZAKHSTAN: ECONOMIC & SECTOR OUTLOOK
SEPTEMBER 2016
Kazakhstan: economic & sector outlook
CONTENTS
KEY HIGHLIGHTS 3
MACROECONOMIC DYNAMICS
Review of 2Q16 GDP growth 5
Fiscal position 7
Inflation & monetary policy 8
USD-KZT exchange rate 10
External positions 12
Foreign direct investment 13
Global oil & metal markets 14
Regional economies 18
2016 outlook 20
KEY SECTORS
Oil & Gas 22
Mining & Metals Industry 27
Infrastructure 38
REFER TO DISCLAIMER & DISCLOSURES AT THE END OF THIS PUBLICATION 2
Kazakhstan: economic & sector outlook
KEY HIGHLIGHTS
Preliminary estimates showed that Kazakhstan’s GDP growth increased by 0.1% in 1H16 as compared to a revised -0.1% in 1Q16. Despite registering a marginal growth rate in 1H16, the economy has rebounded gradually from a contraction of 0.5% registered in January 2016. We maintain our in-house GDP growth projection of 0.8%-1.0% for 2016, premised on oil price of USD43pb-USD45pb average for the year. The official forecast for 2016 GDP growth remains at 0.5%, with upside potential of 1.0% provided that the funds allocated under the Nurly Zhol program and anti-crisis funds are disbursed fully for the remaining of this year. In line with our earlier expectations of monetary policy for stimulus, NBK cut its base rate by 200bps for a second time this year, from 15% to 13%. The rate cut would bode well for domestic demand, business investments and the general economic activities. On the general price level, we expect inflation to remain elevated, with a more realistic projection of 13%-14% average for 2016. Inflation has stayed at record highs of 16.4% average in 8M16. On currency, we caution that decline in global oil prices may cause the tenge to weaken. However, any weakening of the tenge would not be sharp as the regulator plans to participate in FX market to smooth out significant fluctuations. Year-to-date, the tenge has averaged at 344.75 as at 31 August 2016. On regional economies, growth prospects have remained uneven among Kazakhstan’s major trading partners, which could negatively impact the country’s exports. Economic recession is expected to continue in Russia with GDP projection of -1.8% in 2016. China’s GDP growth is likely to moderate further to between 6.2% and 6.5% over the medium-term.
GDP Growth vs. Brent (2005-2016f) 12 120 10 100 8 80 6 60 4 40 2 20
0 0
2009 2005 2006 2007 2008 2010 2011 2012 2013 2014 2015 2016f
GDP growth % Brent oil USDpb (RHS) Source: National Bank, Bloomberg, Samruk Kazyna
The oil and gas industry accounted for 21% of GDP and 53% of total exports in 1H16. Kazakh producers slowed down their production in reaction to the price decline due to natural decline at some mature fields (Petrokazakhstan fields), decrease of drilling activity and maintenance works at some fields (Karachanganak). Further oil production growth depends upon both the expansion phases in Tengiz and the start of production at Kashagan. Kashagan is expected to finally start its oil production in 4Q16, while Tengiz Future Growth Project by the Chevron-led consortium in Kazakhstan will only see first oil around 2022. Based on our conservative assumptions, oil output from Kashagan will be at around 1.4 mln tons in 2017 and 2.8mln
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Kazakhstan: economic & sector outlook in 2018 (20% and 40% of the expected production). This will contribute approximately 0.4% growth to the GDP in 2017 and 2018, respectively, ceteris paribus.
Oil production in Kazakhstan, ‘000 tons (1991 – 2016f) Decline in oil output due to 90,000 maintainence works 80,000 at major fields 70,000 60,000 50,000 40,000 30,000 20,000 10,000
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016f Source: Agency of statistics, Ministry of Energy, Samruk-Kazyna
Kazakhstan has about 8.1% of the world reserves of uranium, 2.0% zinc, 1.2% iron ore, and 10.9% lead and 8.0% silver. At the current production rate, the operating mines will need at least forty years to exhaust their reserves. Mining and metallurgy represent a large chunk of Kazakhstan’s economy. In 2015, mining industry accounted for 7% of the country’s GDP. In 2016, Kazakhstan plans to increase the production of uranium by 2.1% YoY to 24,080 tons, while zinc, iron ore and silver production is expected to decrease based on the 1H16 results. Meanwhile, lead output increased by 24% in 1H16.
Kazakhstan’s 2015 mineral commodity production and exports, ‘000 tons Mineral Production Exports Main producers Main export destinations Iron ore 37,396 15,224 ENRC, Arcelor Mittal Russia, China Zinc 324 282 KAZ Minerals, Kazzinc China, Turkey Kazatomprom, China, EU, US, South Uranium 24 23 Uranium One Korea Lead 120 108 Kazzinc Spain, Russia Silver 1.3 1.3 KAZ Minerals Switzerland, US Sources: USGS, Statistics agency of RK, World silver survey 2016, ILZSG
On infrastructure sector, Nurly Zhol is a USD9bln domestic economic stimulus plan to develop and modernize roads, railways, ports, IT infrastructure, and education and civil services in Kazakhstan over 2015-2019. Key performance indicators of the program include estimated contribution to GDP of 0.87% in 2016 and 1.18% in 2017. Multiplier effect from the infrastructure spending in the long-term should bring economic growth up to 4.1% by 2019. Over the course of its implementation, the program is expected create 405,600 new jobs. Investments in infrastructure are expected to improve Kazakhstan’s ranking to 57th position in the World Economic Forum competitiveness rating in terms of infrastructure.
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Kazakhstan: economic & sector outlook MACROECONOMIC DYNAMICS
Review of 2Q16 GDP growth Preliminary estimates from the Ministry of National Economy showed that Kazakhstan’s GDP growth increased by 0.1% in 1H16 as compared to a revised -0.1% in 1Q16. Despite registering a marginal growth rate in 1H16, the economy has rebounded gradually from a contraction of 0.5% in January 2016 to achieve a small positive recovery as at June 2016. Declines in private sector consumption and investment have been cushioned by the government’s fiscal stimulus packages (transfers from the National Fund to the budget amounted to 6% of GDP in 2015 and 8% of GDP in 2016). At this juncture, the official forecast for 2016 GDP growth remains at 0.5%, with upside potential of 1.0% provided that the funds allocated under the Nurly Zhol program and anti-crisis funds are disbursed fully for the remaining of this year. We maintain our in-house GDP growth projection of 0.8%-1.0% for 2016, premised on oil price expectations of USD43pb-USD45pb average for the year.
Quarterly GDP Growth Trend % YoY Month-To-Date GDP Growth Trend % YoY (2007-2Q16) (2016) 12 0.4 10 0.2 8 6 0 4 -0.2 2 0 -0.4 -2 -0.6
-4
Jan
Jan-Jul
Jan-Jun
Jan-Apr
Jan-Feb
Jan-Aug
Jan-Mar
14:Q1 16:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 15:Q1 Jan-May 07:Q1 Source: Ministry of National Economy, Bloomberg, Samruk Kazyna
A sectoral review of 1H16 results showed that growth momentum was dragged down by declines in industrial output, trade and communication services. The short-term indicator, which is a gauge for change in production indices of basic industries i.e. agriculture, industry, construction, trade, transport and communications (accounts for more than 60% of GDP), contracted by 0.7% in 1H16 (1Q16: -0.6%). The main economic industries that pushed down production in the first half were mining, telecommunications, and trade sectors.
In particular, the mining sector fell by 3.4% in 1H16 due to contraction in coal and lignite (-8.0%), oil (- 3.6%), and iron ore (-22.2%) production. The decline in iron ore output was due to a drop in Chinese demand for iron ore and pellets, decrease in exports of pellets to Russia, and decline in world prices for iron ore.
The manufacturing sector recorded a growth rate of 0.5% in 1H16, up slightly from 0.3% in 1Q16. Metallurgy (+15.6%) and production of coke and petroleum products (+10.5%) subsectors contributed to this output increase. Non-ferrous metallurgy output increased by 19.5% and ferrous by 8.8%. There were some sub-segments that showed weak performance during the first half of 2016: The machinery-producing sub-segment demonstrated a 24.3% drop in production, The production of beverages decreased by 6.8% due to declining price competitiveness of the domestic producers compared to Russian food producers.
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Kazakhstan: economic & sector outlook The services sector, in particular, trade, information and communications demonstrated a poor performance as well in 1H16. The 4.1% production decline in information and communication sector can be explained by decrease in cellular communications since the mobile services became cheaper. The wholesale trade index declined by 6.6% in January-June 2016. This drop was associated with decrease in foreign trade activity and the volume of industrial production in the country.
In January-June 2016, crude oil production declined by 3.6% and was equal to KZT3.3tln, and natural gas output increased by 6.1% reaching KZT80.2bln as compared to the same period of 2015.
In 1H16, electricity, gas, steam and air conditioning declined by 0.7%, electricity production alone declined by 0.9% to KZT494bln. This can be explained by the seasonal factors.
Construction output increased by 6.6% to KZT1,041bln in first half of 2016 supported by state programs.
GDP Growth Breakdown by Sectors, % GDP components 1H16 1Q16 2015 GDP 0.1 -0.1 1.2 Short-term indicator 0.7 -0.6 0.4 Mining -3.4 -1.4 -2.5 Manufacturing 0.5 0.3 0.2 Electricity, gas, steam and air -0.7 -0.7 -1.6 conditioning Water supply -5.9 -6.6 -8.9 Construction and warehousing 6.6 6.0 4.3 Freight turnover 0.9 0.3 5.5 Passenger transport 1.9 1.0 1.8 Communications -4.1 -3.6 0.6 Wholesale trade -6.6 -7.4 0.0 Source: Ministry of the National Economy
GDP Growth Forecasts for 2016 Ministry/ Institutions GDP growth, % Previous Revised Ministry of National Economy 1.2 0.5 Fitch Ratings 3.5 -1.0 Standard & Poor’s 2.8 0.0 Asian Development Bank 3.3 0.7 International Monetary Fund 2.2 0.1 European Bank for Reconstruction and Development 1.5 1.1 World Bank 1.2 0.1 Source: Ministry of the National Economy, multilateral organizations, rating agencies
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Kazakhstan: economic & sector outlook Fiscal position The consolidated budget for 2016 was revised earlier this year due to overall economic slowdown and the introduction of floating export custom duties on crude oil. Adjusted revenues forecast (excluding transfers from the National Fund) for 2016 was reduced by KZT400bln and now amounts to KZT7.1tln. Meanwhile, guaranteed transfers from the National Fund are expected to be KZT3.7tln, an increase of KZT720bln due to the depreciation of the tenge and the revision of expenditures within the Nurly Zhol program. Nurly Zhol provides counter-cyclical spending on infrastructure while the government reduced or delayed other non-priority budget capital expenditures.
Budget expenditures projection was increased by KZT700bln to KZT9.7tln. The overall deficit of the republican budget for 2016 is expected to be KZT2.58tln (increased by KZT1.1tln), or at -5.8% of GDP (previous estimate was -3.3%). In 2015, budget deficit was at 3% of GDP. Non-oil deficit of the consolidated budget (excluding oil revenues and expenditures on national debt service) was higher by KZT666bln and is now expected to amount to -10.3% of the GDP.
Consolidated budget for 2015-2016, KZT bln Budget items 2015 preliminary 2016 revised forecasts Consolidated budget Revenues 7,207.8 7,123.9 % GDP 17.4 16.1 Oil revenues 2,277.6 1,956.0 Non-oil revenues 4,930.3 5,167.9 Expenditures 8,639.1 9,705.6 % GDP 20.9 22.0 Consolidated deficit -1,431.2 -2,581.6 % GDP -3.5 -5.8 Non-oil deficit -3,708.8 -4,537.7 % GDP -9.0 -10.3 National Fund Revenues 7,297.9 2,021.3 Expenditures 2,468.6 3,700.3 Balance of the National Fund 4,829.4 -1,678.9 National Fund assets, end of 21,258.7 20,829.6 period % GDP 51.4 47.2 USD bln 62.5 57.9 Source: Ministry of Finance
Despite falling oil revenues and the overall economic slowdown, Kazakhstan’s fiscal position remains resilient to support fiscal stimulus programs. Resources of the National Oil Fund allow the government to execute massive infrastructure projects (assets of the National Fund stood at USD64.72bln as at end-July 2016). According to official projections, even with oil prices at a conservative level of USD30pb, the National Fund will still amount to USD58bln or 47.2% of the GDP as at end-2016. This provides some fiscal space, since government debt including government guaranteed debt remains relatively low at USD12.9bln as at end-1Q16.
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Kazakhstan: economic & sector outlook Inflation and monetary policy In line with our earlier expectations of monetary policy for stimulus, National Bank of Kazakhstan (NBK) cut its base rate by 200bps from 17% to 15% on 5 May 2016, as the USD-KZT exchange rate and inflation risks subsided. A second rate cut followed on 11 July 2016, whereby the base rate was further reduced by 200bps to 13%. The decision on the base rate was taken premised on the following factors:
Inflation currently corresponds to the expectations of the NBK, with the risks of acceleration being minimal under current circumstances. NBK anticipates inflation to achieve the upper limit of its official target of 6%-8% band by end-2016. Taking into account the time lag effect of the base rate on inflation, usually up to one year, the decision to cut the base rate reflects NBK’s confidence that inflation will remain within the target band over the next 12 months and up until end-2017.
The USD-KZT exchange rate has stabilized since March 2016, reflecting the combination of an improved external and domestic environment in the past few months, with the exception of the short-term turbulence in the global financial markets created by the UK exit from the European Union. Direct risks of Brexit are estimated to be limited on Kazakhstan. Global oil prices improved between March and mid-July 2016, providing the added support needed by the tenge. Similarly on the domestic front, improved economic stability reduced the negative expectations on currency risks. These developments have contributed to the conversion of foreign currency denominated assets to tenge-denominated assets in both the foreign exchange cash market and the bank deposit market.
Total deposits in the banking sector grew by 7.6% in first seven months of 2016 to reach KZT7.40tln as at July 2016. Even though foreign currency denominated deposits more than doubled the amount of tenge deposits, tenge deposits grew by 65.0% in the first seven months of 2016, while FX deposits fell by 7.5%. Tenge and FX deposits stood at KZT2.37tln and KZT5.04tln respectively as at July 2016. The rebound in tenge deposits since February 2016 was supported by recovery in global oil prices and the changes in interest rates in favor of local currency deposits (interest rates on tenge deposits were raised from 10% to 14%, while FX deposits were reduced from 3% to 2% effective 1 February 2016).
KZT vs. Foreign Currency-Denominated Deposits, KZT bln (2013-July 2016) 8,000
6,000
4,000
2,000
0 13:J 14:J 15:J 16:J FCY deposits KZT deposits Source: National Bank of Kazakhstan, Samruk Kazyna
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Kazakhstan: economic & sector outlook
The domestic money market has been experiencing structural liquidity surplus condition, with the NBK continues to actively conduct operations to absorb excess liquidity since March 2016. The net volume of tenge liquidity injected into the financial system amounted to KZT1,278bln in December 2015 and KZT1,438bn in January 2016, before declining to KZT849bn in February 2016. This was followed by the excess of tenge liquidity in March 2016 leading to an absorption of KZT1,224bln. NBK’s volume of operations in the money market in the form of withdrawn liquidity continued to grow to KZT1,545bn in April 2016, KZT1,874bln in May, KZT2,112bln in June 2017, and KZT2,260bln as of 29 August 2016. NBK absorbs liquidity from the market through notes, repo auctions and deposits.
Open position of NBK’s operations, KZT bln (2015 – 29 August 2016)
2,000
1,000
0
-1,000
-2,000
-3,000 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Standing facility, net Open market operations, net Other operations Net Source: National Bank of Kazakhstan, Samruk-Kazyna
Despite this, excess liquidity however did not result in credit growth. High dollarization level of deposits and ensuing currency risks prevent banks from expanding loans to businesses and individuals. On a monthly basis, the amount of tenge-denominated credit grew by KZT86.44bln in July 2016 after NBK cut the base rate in the previous month. Despite this, credit to the economy fell by 1.9% year-to-date to KZT8,242.83bln as at July 2016 vs. KZT8,401.11bln as at December 2015. Credits are mostly concentrated in sectors such as retail, transportation and other sectors, while industry only holds 12.8% of the aggregated credit portfolio. Lack of long-term financing is one of the major obstacles preventing growth of non-oil industries.
Loans Breakdown by Sector (7M16)
13%
6% Industry Agriculture 46% 8% Construction Transportation Telecom 5% Retail 1% Other sectors
21%
Source: National Bank of Kazakhstan, Samruk-Kazyna
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Kazakhstan: economic & sector outlook NBK highlighted that further actions on the base rate will depend on the actual inflation, its deviation from the forecast, inflation expectations of population and market participants and currency preferences of economic agents. Further easing of the monetary policy moving forward would depend on the presence of sustained signal indicating the convergence of inflation to the target range. The next decision on the base rate will be on 3 October 2016.
Overall, we welcome the NBK’s move in cutting the base rate which would bode well for domestic demand, business investments and the general economic activities. The index of business sentiment, based on the survey of top management of real sector enterprises, moved into positive territory, signaling a gradual recovery in economic activity. The cut in the base rate has stimulated banks to lower market rates since July, which will be crucial in lifting the demand for resources and the expansion of credit activities in 4Q16.
On the general price level, inflation has stayed at record highs of 16.4% average in 8M16. Consumer prices are only expected to ease significantly in 4Q16 when the base effect diminishes in the fourth quarter. As such, we expect inflation to remain elevated, with a more realistic projection of 13%-14% average for 2016. Take note that official projection for inflation is based on a one-point expectation i.e. the level anticipated as at December 2016 (6%-8%), and this does not reflect the elevated levels of CPI in the first seven months of 2016.
Monthly Inflation Trends, % YoY (2010-August 2016) 30
25
20
15
10
5
0 10 11 12 13 14 15 16
CPI Food Non-food Services Source: Bloomberg, Samruk Kazyna Note: CPI in 7M16 – January 14.4%, February 15.2%, March 15.7%, April 16.3%, May 16.7%, June 17.3%, July 17.7%, August 17.6%
USD-KZT exchange rate Between early-March and end-June 2016, volatility in the USD-KZT exchange rate has reduced significantly compared to the trends observed in January-February 2016. The USD-KZT exchange rate was last traded at 339.18 on 30 June 2016, having averaged at 335.37 in 2Q16. These compared to the closing rate of 344.59 as at 31 March 2016 and average of 346.11 in 1Q16. Factors that contributed to stabilization of the USD-KZT exchange during these period include the following:
Stabilization in oil prices have mitigated downward pressures on the tenge - Global oil prices have rebounded from their lows in January 2016, encouraged by a slew of data releases. The US dollar weakness has also provided some support to the oil markets between March and mid-July 2016.
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Kazakhstan: economic & sector outlook
US interest rate expectations – Investors have pushed back the timing on an interest rate hike to late-2016, with fed funds futures pricing in the 50% probability of a rate hike in December 2016. Global economic uncertainty, exacerbated by Brexit, and erratic readings on domestic job creation are pushing policymakers to wait for further clarity and confidence that domestic economic health and inflation are firming. Delay in the US monetary policy normalization makes emerging market assets attractive for now vs. dollar assets.
Catching up with the declines in global oil prices that started since the third week of July 2016, the USD-KZT exchange rate however fell by 5.1% to close at 354.12 on 26 July 2016, after touching an intraday high of 354.45. This was the biggest decline since December 2015, and the weakest level in five months. The tenge’s slide in late-July prompted a statement from the NBK, which reiterated that the tenge is subject to a free float and is influenced mainly by oil and the exchange rate of the country’s main trading partners.
USD-KZT Intraday 26 July 2016 USD-KZT Trend (2015-2016YTD)
400
350
300
250
200
150 15: 16: A S O N D J F M A M J J A Source: Bloomberg, Samruk Kazyna
We caution that decline in global oil prices may cause the tenge to weaken. However, any weakening of the tenge would not be sharp as the regulator plans to participate in FX market to smooth out significant fluctuations. In July 2016, NBK sold almost USD199mln on the exchange market. As at 31 August 2016, the USD-KZT exchange rate closed at 340.50, almost unchanged from end-December 2015. We expect the USD-KZT exchange rate to range at 350-355 average for 2016.
USD-KZT Exchange Rate Projections 2016 Price 1Q16 2Q16 Average YTD, 2016f average 2016f average average average as at 31 August 2016 USD-KZT 346.11 335.37 344.75 360* 350-355^ Source: Bloomberg, the Ministry of National Economy, Samruk Kazyna * represents official projection (by Ministry of National Economy), average price expected for full year 2016 ^ represents in-house projection by Samruk Kazyna, average price expected for 2016, projections were based on data as at 31 August 2016.
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Kazakhstan: economic & sector outlook External positions The contribution of net exports to GDP fell significantly to 4.0% in 2015 compared to 13.9% in 2014. This was due to reduced export revenues (fuels and energy account for 72.7% of the country’s exports in 2015) and generally weaker trade environment. Devaluation in the currencies of key trade partners also reduced Kazakhstan’s trade competitiveness, further impacting export revenues. In US dollar terms, exports decreased by 42.3% and imports fell by 22.7% in 2015 compared to 2014.
In 2Q16, preliminary estimates showed that total exports rebounded by 2.7% QoQ to USD8.67 billion vs. USD8.45 billion in 1Q16. This was an improvement from the -16.7% QoQ recorded in the first quarter, supported by higher global oil prices in the second quarter (Brent averaged at USD48.01pb in 2Q16 vs. USD39.33pb in 1Q16).
Similarly, imports turned around to increase by 13.0% QoQ to USD6.53 billion in 2Q16 from USD5.78 billion in 1Q16, mainly due to low base effect of the previous quarter and as the tenge stabilized in the second quarter. This compared to a decline of 29.6% QoQ registered in 1Q16. As a result, trade surplus narrowed by 19.7% QoQ to USD2.14 billion in 2Q16 from USD2.67 billion in 1Q16. Given a narrower trade surplus and increased services trade deficit, current account deficit widened to USD1.87 billion in 2Q16 vs. USD1.02 billion in 1Q16.
The country’s current account first showed deficit of USD955.2 million in 3Q14, returning to a marginal surplus of USD14.1 million in 4Q14. Combination of weakening exports and declining trade competitiveness resulted in current account deficit of USD5.82 billion in 2015, the first since 2009, and compared to a surplus of USD6.38 billion in 2014. This trend is expected to continue in 2016, with official projection of current account deficit being 4.4% of GDP.
External Trade Trend, USD bln Current Account Balance, USD mln (1Q14-2Q16) (1Q14-2Q16)
30 20 7,000
5,000 20 10 3,000 10 1,000
-1,000 0 0
-3,000
3Q14 1Q14 2Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
4Q15 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 1Q16 2Q16 Exports Imports Trade balance (RHS) Source: National Bank of Kazakhstan, Bloomberg, Samruk Kazyna
On reserves, Kazakhstan’s official international reserves comprise of foreign-exchange assets at the NBK and in the National Oil Fund. Total international reserves grew by 4.2% or USD3.86bln in 7M16 to USD95.24bln as at July 2016. This was attributed to a 9.5% or USD2.65bln increase in FX reserves at the NBK to USD30.52bln, and a 1.9% or USD1.21bln rise in FX reserves to USD64.72bln at the National Oil Fund. NBK’s repayment of FX swaps to commercial banks in 7M16 (at KZT1,000bln or approximately USD2.84bln) improved the quality of these reserves.
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Kazakhstan: economic & sector outlook International Reserves Trend, USD bln (2005-July 2016) 120
100
80
60
40
20
0 05 06 07 08 09 10 11 12 13 14 15 16
International reserves National Oil Fund assets Source: National Bank of Kazakhstan, Samruk-Kazyna
Foreign direct investment Gross inflows of FDI fell to USD14.83bln in 2015, from USD23.73bln a year earlier, reaching their lowest level since 2006, due to regional and global economic slowdown. Over 1Q16, foreign direct investment to Kazakhstan increased by USD4.28bln and accumulated at USD226.67bln since 2005. Inflow of investments went to traditional sectors, such as mining with total investments of USD59.98bln or 26.5% (mainly in the extraction of crude petroleum and natural gas), as well as investments into professional, scientific and technical activities at USD83.57bln or 36.9% (majority relates to geological exploration and prospecting activities). The oil and gas, natural resources and extractive industries continue to remain the most attractive sectors for investments, comprising more than half of Kazakhstan’s accumulated FDI inflows to-date. Nonetheless, the manufacturing, wholesale and retail trade, financial services, and information and communication attracted commendable investments of USD26.71bln (11.8%), USD19.49bln (8.6%), USD11.89bln (5.3%) and USD4.61bln (2.0%) respectively, reflecting relative success of Kazakhstan’s efforts to diversify the economy.
Gross Inflows of FDI, USD mln (2005-1Q16)
35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16
Source: National Bank of Kazakhstan, Samruk-Kazyna
Netherlands remains the largest investor in Kazakhstan with investments amounted to USD65.64bln as at 1Q16, while the US has USD24.68bln investments in the country. Other major investors include Switzerland, France, UK, China, and Russia. Kazakhstan has increasingly been receiving FDI from China namely within the Chinese “One Belt, One Road” initiative.
New Asian partners such as China, India and even Iran are replacing Kazakhstan's traditional investment partners. However, they have not been able to fully substitute Russia and western investors,
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Kazakhstan: economic & sector outlook many of which have been deterred by lower oil prices, weakening domestic and regional economic cycle.
Kazakhstan has a high ranking in terms of investor protection, according to the Doing Business report. Index of transaction transparency, Index of manager’s responsibility and Index of investment protection are well above the average for Eastern Europe and Central Asia. Government policy has been encouraging foreign investment with measures such as reduction and in some cases waiver of taxes for five years, state subsidies, partial or total exemption from duties and taxes on equipment and other materials.
FDI by Sector (as at 1Q16) FDI by Country (as at 1Q16)
Mining & Netherlands 8% quarrying US 3% Manufacturing 26% 23% 29% Switzerland Wholesale & China retail trade France Financial 2% UK services 3% Russia 37% Prof, science & 4% 12% tech BVI 4% 11% Construction Italy 9% 5% 5% 6% 7% Others 6% Japan Others
Source: National Bank of Kazakhstan, Samruk Kazyna
Global oil and metal markets Crude oil prices plunged and closed at USD39.51pb on 2 August 2016, the first time that prices have dropped below USD40pb in four months. The selling pressures have been driven by realization that global oil oversupply remains intact, compounded by increasing production and stockpiles from the US and OPEC members.
Brent vs. WTI Price Trend, USD pb (2014-31 August 2016)
120
100
80
60
40
20
0 14 15 16
Brent WTI Source: Bloomberg, Samruk Kazyna
Global oil prices have staged a strong recovery since their January 2016 lows, gaining up to 56% to their seven-month high of USD53.26pb on 8 June 2016. Delay in the US interest rate hike contributed to the dollar weakness this year, providing some support to the oil markets up until mid-July 2016. The
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Kazakhstan: economic & sector outlook WTI for September delivery closed at USD49.01 per barrel as at 30 June 2016, upped 17% from USD41.90pb as at end-1Q16. Meanwhile, Brent for October settlement last traded at USD50.16 per barrel as at 30 June 2016 and was 18.7% higher compared to USD42.27pb as at end-1Q16.
Significant upside potential to global oil prices moving forward will be limited by the following factors, mostly supply related:
US oil explorers have boosted the number of active rigs by 90 since early-June to 406 as at 19 August 2016, with 32 being added during the first three weeks of August. US crude stockpiles were at 523.59 million barrels for the week ended 19 August 2016, more than 100 million barrels above the five-year average. Meanwhile, US crude production increased to 8.55 million barrels a day for the week ended 19 August 2016, as drillers put rigs back to work. Official data showed that US gasoline stockpiles rose in four of the past five weeks, sending supplies to the highest levels since April. A report from the EIA showed gasoline inventories have increased by 452,000 barrels for the week ended 22 July 2016, adding on to the swelling fuel stockpiles. The addition to gasoline stockpiles was less at 32,000 barrels for the week ended 19 August 2016. Oil output from OPEC members, especially Iraq and Iran rose to a record high in July 2016, with oil production above 31mln barrels per day for a fourth consecutive month. As such, the Middle East market share of global oil supplies rose to 35%, the highest since 1970s. The Bloomberg Dollar Spot Index, which measures the dollar vs. major currencies, advanced by 1.4% since end-June to reach 1,202.2 as at 25 July 2016, before easing to 1,187.91 on 31 August 2016. A stronger dollar reduces the appeal of dollar-denominated commodities.
OPEC Oil Production (2010-July 2016) US’ Oil Inventory (2014-19 August 2016)
34 600 33 500 32 31 400 30 300
29 000 bpd mln bpd mln 28 200 27 26 100
0
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-10 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Oct-15 Oct-11 Oct-12 Oct-13 Oct-14
Oct-10 14 15 16
Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-10 Source: Bloomberg, Samruk Kazyna
Expect global oil prices to remain volatile in the near-term, underpinned by oversupply concerns and moderate global demand. Oil demand has picked up since January 2016, but the take-up pace has been slower than before compared to supply growth. Demand was then driven by China’s oil purchases for its strategic petroleum reserves, which has now reach full capacity and hence has seen demand tapering off. According to the IEA report, refinery runs growth was 60% higher than refined product demand growth in 1Q16. Despite regular upward revisions to oil demand growth, there are signs that demand momentum is easing, putting downward pressures on oil prices. Furthermore, Bloomberg database indicated that money managers have raised their short positions by the largest amount since 2006, which will drive the oil market lower. As at 31 August 2016, WTI for October closed at USD44.70pb, an increase of 4.3% year-to-date. Meanwhile, Brent for October settlement last traded at 15
Kazakhstan: economic & sector outlook USD47.04pb, rising by 9.0% year-to-date. We expect oil price to range at USD43pb-USD45pb average for 2016.
Oil Price Projections 2016, USD per barrel Price 1Q16 2Q16 Average YTD, 2016f average 2016f average average average as at 31 August 2016 Brent 39.33 48.01 44.62 30* 43-45^ IMF - - 35 - World Bank - - - 43 - Fitch - - - 42 - Source: Bloomberg, Multilateral Organizations, Fitch Ratings, Samruk Kazyna * represents official projection (by Ministry of National Economy), average price expected for full year 2016 ^ represents in-house projection by Samruk Kazyna, average price expected for 2016 Projections were based on data as at 31 August 2016
In June 2016, base metal and mineral prices were up by 0.3%, while precious metal prices increased by 1.2% as compared to May 2016. The average base metal prices advanced by 1.1% except copper. The increase in metal prices was supported by a weaker dollar following May’s significantly weaker payrolls data and continuing improvements in China’s property sector. In May 2016, prices of China’s newly constructed residential buildings increased in 60 of the 70 largest cities. Zinc prices increased by 8.2% on concerns of tightening supplies. Nickel prices were up 2.8% supported by the prospect of an environmental review of the mining sector by the new government of the Philippines.
In 2Q16, all base metals prices increased during the quarter except for lead (-1.27%) and iron ore (- 0.6%) as compared to 1Q16 price levels. In April-June 2016, zinc and tin prices advanced the most, by 14.3% and 9.5% respectively. Other base metal prices also improved during this period - aluminum (+3.7%), nickel (+3.6%), and copper (+1.2%). Among precious metals, platinum price jumped by 10% and gold rose by 2%, while silver price dropped significantly by 33.8%.
In 1H16, prices for all base metals and precious metals except for gold dropped as compared to the same period of 2015. Gold price increased by 1.2% in 1H16. Other precious metals prices as silver and platinum fell by 4.2% and 8.5% respectively in 1H16. All base metal prices dropped in 1H16 as compared to 1H15 i.e. nickel (-37%), copper (-21%), aluminum (-13.6%), zinc (-10%), lead (-7.9%), and tin (-4.8%). Uranium price in 1H16 fell by 19.6% as compared to 1H15.
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Kazakhstan: economic & sector outlook Uranium, pound (2015-31 August 2016) Gold, troy ounce (2015-31 August 2016) 45 1400 1350 40 1300 35 1250 1200 30 1150 1100 25 1050 20 1000 15 16 15 16 Source:15 Bloomberg , Samruk Kazyna16
As at 31 August 2016, the average iron ore price YTD was at USD53.04 per ton. The average iron price for 1H16 was at USD51.42 per ton, which is 8.4% lower than average price level seen in 2015. As at 1H16, the world average hot rolled steel price stood at USD486.91, which is 5.7% higher than average price for 2015.
Steel, ton (2015-31 August 2016) Iron Ore, ton (2015-31 August 2016)
635 75 70 585 65 60 535 55 485 50 45 435 40 385 35 15 16 15 16 Source: Bloomberg, Samruk Kazyna
Metal Price Projections 2016, in USD Price 1Q16 2Q16 1H16 Average YTD, 3Q16f 4Q16f 2016f as at 31 average* August 2016 Gold 1,232.8 1,258.5 1,221.72 1,251.58 1,335.0 1,338.0 1,225.0 Iron ore 53.2 52.87 51.42 53.04 54.41 50.23 52.0 Silver 25.4 16.81 15.86 16.84 19.86 19.9 18.0 Steel 352.5 565.11 486.91 498.33 600.0 575.0 500.0 Uranium 28.1 27.6 30.12 29.66 32.5 37.0 30.0 Zinc 1,684.06 1,926.64 1,806.32 1,916.01 1,958.00 1,965.00 1,850.00 Source: Bloomberg, Market consensus, Samruk Kazyna * represents in-house projection by Samruk Kazyna, average price expected for full year 2016 Projections were based on data as at 31 August 2016
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Kazakhstan: economic & sector outlook Regional economies Global economic growth is expected to be modest in the medium-term, with global GDP growth projected at 3.2% in 2016 and 3.5% in 2017, according to World Bank’s economic outlook released in July 2016. Meanwhile, the International Monetary Fund revised downward its expectations for global growth by 0.1% each year to 3.1% in 2016 and 3.4% in 2017. Global growth will be driven by major developed economies and emerging markets of China, India and ASEAN-5 and despite this, weaknesses remain within this group. Uncertainty associated with the strength of global economic recovery has raised volatility of the global financial markets and undermined confidence.
GDP Growth Forecasts of Selected Countries, % (2015-2017f) 10 6.9 6.5 6.2 Eurozone 5 2.5 2.5 US 1.6 2.2 1.5 1.4 0.8 Russia 0 China
-1.8 -5 -3.7 2015 2016f 2017f Source: International Monetary Fund, World Bank, market consensus
Similarly, growth prospects have remained uneven among Kazakhstan’s major trading partners, which could negatively impact the country’s exports. Being Kazakhstan’s largest oil export market, economic recovery in Europe is progressing at a lackluster pace despite aggressive and unconventional monetary policy measures, low oil prices and expansionary fiscal policies. Weak global trade and manufacturing activity, renewed domestic uncertainties and broader geopolitical risks continue to weigh on confidence and economic activities. In March 2016, the European Central Bank cut the deposit rate further below zero while long-term refinancing operations for banks were offered at below-zero interest rates. EU’s GDP growth is expected to remain moderate at 1.4%-1.6% over 2016-2017.
China, being Kazakhstan’s largest export market for oil and metal products, witnessed economic growth of 6.7% in 2Q16, unchanged from 1Q16, as the still buoyant property market and government spending on infrastructure cushioned the slowdown in the manufacturing sector. Second quarter growth was slightly above market estimates of 6.6%, and was in line with the government’s official target of at least 6.5% for full year 2016. This suggests that the economy is responding to stepped up monetary and fiscal policy support, and reduces the pressure on policymakers of having to increase fiscal and monetary stimulus in 2H16. Market expectations are that China’s GDP growth is likely to moderate further to between 6.2% and 6.5% over the medium-term as the economy rebalances and reforms are being implemented and calibrated by policy easing.
Russia’s GDP growth contracted at a slower pace of 0.6% in 2Q16 vs. -1.2% in 1Q16, with industrial production, transport and agriculture being the factors supporting growth during the quarter. Construction and retail sales continued to have a negative impact on growth. Meanwhile, the ruble appreciated by 4.8% against the USD in 2Q16 after rising by close to 10% in 1Q16, and is currently trading at levels seen in mid-2015. A stronger ruble has contributed to easing inflation from 12.9% as at end-2015 to 7.9% average in 1H16. The central bank cut the interest rate for the first time in a year by 50bps to 10.5% in June 2016. Despite these, economic recession is expected to continue with GDP
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Kazakhstan: economic & sector outlook of -1.8% in 2016, recovering gradually to 0.8% in 2017. President Putin however warned that the Russian economy may stagnate near zero next year if no new growth drivers are found. Russia is a major destination for Kazakhstan’s metal exports.
As such, future performance of China and Russia will have spillover effects to Kazakhstan through trade and weaker commodity prices, as well as through diminishing confidence and increasing volatility in financial markets. China and Russia account for 12% and 9% respectively of the country’s total exports, and more-than-expected slowdown in China’s economy and prolonged economic recession in Russia will put downward pressure on Kazakhstan’s GDP growth. In addition, devaluation of the currencies of key trade partners especially the ruble will weigh on the competitiveness of the Kazakh exports and may result in downward pressure on the USD-KZT exchange rate with the risk of increased dollarization.
Exports by Region (5M16) Exports by Country (5M16)
14% 3% 3% 4% Europe 21% Italy 1% 5% CIS (excl Russia) 7% China Switzerland 10% Iran Asia (excl China) Netherlands China Russia 52% 13% France Russia 13% 17% Spain US Greece 3% Others 13% 2% 14% 5%
Source: Statistics Committee, Samruk Kazyna
Ruble and Yuan outlook Similar to the tenge, the USD-RUB exchange rate strongly correlates to movements in global oil prices. The RUB-KZT exchange rate last traded at 5.30 on 30 June 2016, strengthening by 2.9% on the quarter from 5.15 as at end-1Q16. Mirroring its strengthening trend vs. the USD, the ruble appreciated by 15.6% against the tenge in 1H16. As at 31 August 2016, the RUB-KZT exchange rate closed at 5.2050, gaining 13.6% year-to-date.
In contrast, the CNY-KZT exchange rate closed at 51.07 on 30 June 2016, weakening by 4.4% on the quarter from 53.44 as at end-1Q16. Yuan weakened by 2.6% against the tenge in 1H16, mirroring a similar trend against the USD during the same period. As at 31 August 2016, the CNY-KZT exchange rate last traded at 52.54, a decline of 2.8% year-to-date.
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Kazakhstan: economic & sector outlook RUB-KZT (2015-2016YTD) CNY-KZT (2015-2016YTD)
6 60 55 5 50 45 4 40 3 35 30
2 25
J J J J
16:J 15:J 16:J 15:J Source: Bloomberg, Samruk Kazyna
RUB-KZT, CNY-KZT Projections 2016f Exchange 1Q16 2Q16 2016 avg as 3Q16f 4Q16f rate at 31 August 2016 RUB-KZT 5.15 5.30 5.03 5.34 5.38 CNY-KZT 53.44 51.07 52.54 53.80 55.01 Source: Bloomberg, market consensus
2016 outlook In summary, Kazakhstan’s GDP growth increased by 0.1% in 1H16 as compared to a revised -0.1% in 1Q16. Despite registering a marginal growth rate in 1H16, the economy has rebounded gradually from a contraction of 0.5% in January 2016 to achieve a small positive recovery as at June 2016. Declines in private sector consumption and investment have been cushioned by the government’s fiscal stimulus packages (transfers from the National Fund to the budget amounted to 6% of GDP in 2015 and 8% of GDP in 2016).
At this juncture, the official forecast for 2016 GDP growth remains at 0.5%, premised on lower oil price projection of USD30pb. Continued decline in export revenues (expected at approximately 31% on the year) will contribute to current account deficit of 4.4% of GDP in 2016. Our expectation is that GDP growth will remain in positive territory in 2016, though growth rate is likely to be marginal, at 0.8%-1.0%, with in-house oil price expectation of USD43pb-USD45pb average this year. The Ministry of Economy highlighted that upside potential of 1.0% to GDP is possible provided that the funds allocated under the Nurly Zhol program and anti-crisis funds are disbursed fully for the remaining of this year.
In line with our earlier expectations of monetary policy for stimulus, NBK cut its base rate by 200bps for a second time this year, from 15% to 13%. Inflation currently corresponds to the regulator’s expectations and the USD-KZT exchange rate has stabilized since March 2016, reflecting the combination of an improved external and domestic environment in the past few months. Further easing of the monetary policy moving forward would depend on the presence of sustained signal indicating the convergence of inflation to the target range. The next decision on the base rate will be on 15 August 2016.
Overall, we welcome the NBK’s move in cutting the base rate which would bode well for domestic demand, business investments and the general economic activities. However on the general price level, we expect inflation to remain elevated, with a more realistic projection of 13%-14% average for 20
Kazakhstan: economic & sector outlook 2016. Inflation has stayed at record highs of 16.4% average in 8M16. Take note that official projection for inflation is based on a one-point expectation i.e. the level anticipated as at December 2016, and this does not reflect the elevated levels of CPI in the first seven months of 2016.
On currency, we caution that decline in global oil prices may cause the tenge to weaken. However, any weakening of the tenge would not be sharp as the regulator plans to participate in FX market to smooth out significant fluctuations. In July 2016, NBK sold almost USD199mln on the exchange market. We expect the USD-KZT exchange rate to range at 350-355 average for 2016.
On regional economies, growth prospects have remained uneven among Kazakhstan’s major trading partners, which could negatively impact the country’s exports. Russia’s GDP growth contracted at a slower pace of 0.6% in 2Q16 vs. -1.2% in 1Q16, with industrial production, transport and agriculture being the factors supporting growth during the quarter. Despite these, economic recession is expected to continue with GDP of -1.8% in 2016, recovering gradually to 0.8% in 2017. China, being Kazakhstan’s largest export market for oil and metal products, witnessed economic growth of 6.7% in 2Q16, unchanged from 1Q16. Second quarter results suggest that the economy is responding to stepped up monetary and fiscal policy support, and reduces the pressure on policymakers of having to increase fiscal and monetary stimulus in 2H16. Market expectations are that China’s GDP growth is likely to moderate further to between 6.2% and 6.5% over the medium-term as the economy rebalances and reforms are being implemented and calibrated by policy easing.
Future performance of China and Russia will have spillover effects to Kazakhstan through trade and weaker commodity prices, as well as through diminishing confidence and increasing volatility in financial markets. China and Russia account for 12% and 9% respectively of the country’s total exports, and more-than-expected slowdown in China’s economy and prolonged economic recession in Russia will put downward pressure on Kazakhstan’s GDP growth. In addition, devaluation of the currencies of key trade partners especially the ruble will weigh on the competitiveness of the Kazakh exports and may result in downward pressure on the USD-KZT exchange rate with the risk of increased dollarization.
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Kazakhstan: economic & sector outlook KEY SECTORS
Oil & Gas The oil and gas industry accounted for 21% of GDP and 53% of total exports in 1H16. In 1H16, Kazakh producers slowed down their production in reaction to the price decline due to natural decline at some mature fields (Petrokazakhstan fields), decrease of drilling activity and maintenance works at some fields (Karachanganak). Crude oil production declined by 2.9% YoY to 32.8mln tons in 1H16, while condensate gas output tumbled by 9.9% YoY to 5.8mln tons. In June 2016, oil output decreased by 4.1% MoM to 5.3mln tons, the lowest level since October 2015.
Monthly oil production, mln tons Drilling activity, 000 meters (2009-2016f) (2014-June 2016)
8.0 3000
7.5 2500 2000 7.0 1500 6.5 1000 6.0 500
5.5 0
Jul
Jan
Jun
Oct
Apr Feb
Sep 2009 2010 2011 2012 2013 2014 2015 2016f
Dec
Aug
Nov
Mar May 2014 2015 2016 Production Exploration Total
Source: Agency of statistics, Kazenergy, Samruk-Kazyna
Total drilling activity decreased to 1.5mln meters in 1H16 from 2.5mln in 2015 and is expected to decline further by 50% YoY in 2016. Although drilling activity does generally match declining production, the presence of other factors also influences oil extraction trends such as global prices.
Since 1991, Kazakhstan almost tripled its oil output to 80mln tons per year in 2015. Much of the expansion of oil production has been driven by two large projects, Tengiz and Karachaganak. However, oil production growth has faltered since 2011, largely due to delays and maintenance works at these major projects. During 1H16, volumes at the Karachaganak field were lower, due to maintenance that started in late April and reduced Caspian pipeline consortium loadings in June. Further oil production growth depends upon both the expansion phases in Tengiz and the start of production at Kashagan.
Oil production in Kazakhstan, ‘000 tons (1991 – 2016f) Decline in oil output due to 90,000 maintainence works 80,000 at major fields 70,000 60,000 50,000 40,000 30,000 20,000 10,000
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016f Source: Agency of statistics, Ministry of Energy, Samruk-Kazyna
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Kazakhstan: economic & sector outlook Over 90% of the oil reserves in Kazakhstan are concentrated in the fifteen largest fields – Tengiz, Kashagan, Karachaganak, Uzen, Zhetybai, Zhanazhol, Kalamkas, Kenkiyak, Karazhanbas, Kumkol, North Buzachi, Alibekmola, Central and Eastern Prorva, Kenbay, Korolevskoye. The key strategic projects – Tengiz, Karachaganak and Kashagan jointly hold almost 70% of Kazakhstan‘s oil reserves. Tengiz and Karachaganak are already producing almost half of the country’s total oil output, while Kashagan is expected to start production in 4Q16 and to boost the country’s output by at least 9% by 2017. A number of smaller fields are still at the exploration stage. In almost of each of these exploration projects, Kazmunaygaz NC holds 50%. Those fields which are already at the production stage are operated in the form of joint ventures with foreign ownership.
Kazakhstan’s 2P oil reserves by operator, mln barrels
18% North Caspian Operating Co (NCOC) BV TengizChevroil Ltd 40% 3% Karachaganak Petroleum Operating Co 5% KazMunayGas EP 5% CNPC-Aktobemunaygaz MangistauMunayGaz 8% Others
21%
Source: National Energy report 2015, IHS Energy
The production profile of Kazakhstan depends heavily on major projects, and trends in output have become increasingly uncertain as growth became contingent upon the expansion plans and pending patterns of just few big projects.
Oil production in terms of value shrank by 36% YoY to KZT5,894bln in 2015 as a result of oil prices decline. Despite lower oil production volume in 1H16 compared to 1H15, oil production value amounted to KZT3,372bln which was 19% higher than YoY mostly thanks to tenge deprecation.
Oil production in terms of value, KZT bln (2005- 6M16)
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 6M16
Source: Agency of statistics, Samruk-Kazyna
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Kazakhstan: economic & sector outlook Kashagan to ramp up oil production in 4Q16 Kashagan is expected to finally start its oil production in 4Q16. In December 2016 the initial production is expected at 35,000 tons, equivalent to about 8,500bpd according to Ministry of Energy. The annual initial production at the project is expected to be at 7mln tons and with further growth to 11-13mln tons. The field is expected to be a major source of oil growth over the next two decades.
According to the World Bank, the country’s GDP is forecasted to be near zero in 2016 and to rise to 1.9% in 2017 and 3.7% in 2018 partly thanks to the ramp-up of oil production in Kashagan and oil prices recovery. Current account deficit is expected to shrink significantly with an increase of oil prices and Kashagan starts production in 2017. The increase in oil production will boost consumer and investors’ confidence.
Based on our conservative assumptions, oil output from Kashagan will be at around 1.4mln tons in 2017 and 2.8mln in 2018. This will result in an increase of oil revenue by 2.0% and 1.8% in 2017 and 2018, respectively, assuming average oil prices at USD44pb and average USD-KZT exchange rate of 353. Consequently, this will contribute about 0.4% annual growth to the GDP in 2017 and 2018, respectively, ceteris paribus.
Expected oil production growth in 2017-2018 Key indicators 2014 2015 2016f 2017f 2018f Oil production, mln tons 80.8 79.5 75.0 76.4 77.8 Contribution of Kashagan, mln tons - - 0.1 1.4 2.8 Average Brent price, USD/b 97.9 45.4 43.0-45.0 44.0 44.0 Average USD-KZT 160.0 223.0 350-355 353.0 353.0 Oil production, KZT mln 9,281,625 5,894,570 8,526,623 8,698,106 8,857,496 Source: Agency of statistics, Ministry of Energy, Bloomberg, Samruk-Kazyna
The key question for Kazakhstan’s oil production profile in the long-term is the implementation of the second phase of the project, which is designed to drive output to over 47mln tons per year. The Phase 2 has not yet been approved and any decision will be taken after the Phase 1 restarts and is operating smoothly. IHS Energy expects the Phase 2 production to start up after 2025, so that Kashagan’s 2030 output amounts to 35.8mln tons, to 48mln tons in 2035 and to reach 52mln tons in 2040. If the Phase 2 is never approved then Kashagan production reaches only 17.5mln tons in 2025 and stretches only to 18.5mln tons.
Tengizchevroil to boost production in 2022 Tengiz field holds around 6.4-10.7bln barrels of recoverable oil reserves or about 20% of Kazakhstan’s total reserves. Tengizchevroil (TCO), the largest oil producing company in Kazakhstan, produced 27.2mn tons in 2015, a new annual production record, which represented 34% of total country’s output. In 1Q16 the company produced 7.37mln tons or 58.8mln barrels. It does not publicize its production forecasts for 2016. The majority of TCO’s crude oil production was exported through the CPC pipeline, while the rest was exported by rail to Black Sea ports and via the Baku-Tbilisi-Ceyhan Pipeline to the Mediterranean.
Tengizchevroil plans to invest about USD37mln to increase production capacity by 13mln tons annually or 260,000 bpd. The recent final investment decision of the Tengiz Future Growth Project by the
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Kazakhstan: economic & sector outlook Chevron-led consortium will only see first oil around 2022. According to the IEA, Chevron’s announcement was a good news, but the fact that the project will partly utilize existing infrastructure is key to making it viable at today’s oil prices. The investment is the single largest since the downturn of 2014, and the first investment of more than $10 billion this year.
The Ministry of Energy forecasts TCO’s production to reach its peak at 37.8mln tons in 2021 and then to be flat at 38.8mln tons from 2026-2031, after which the production begins to decline quite rapidly, falling to 29mln tons in 2035. In contrast, IHS sees TCO production to rise only after 2021 when the Future Growth Project expansion is launched, reaches a maximum of 42mln tons in 2030 and then declines slowly to 36mln tons in 2035.
Oil production at Kazmunaigas EP continues to decline Total crude oil production for Kazmunaigas EP (KMG EP), including its stakes in Kazgermunai (KGM), CCEL (Karazhanbasmunai) and PetroKazakhstan (PKI), was at 6.1mln tons or 246,000 bpd in 1H16, 0.7% lower than over the same period of 2015. Ozenmunaigas (OMG) produced 2.8mln tons or 112,000 bpd, 2% higher than in 1H15. Embamunaigas (EMG) produced 1,4mln tons or 57,000 bpd, 2% higher than in 1H15. The company’s share in production from KGM, CCEL, and PKI for 1H2016 amounted to 1,9mln tons or 77,000bpd, which was 6% less than in the same period of 2015, mostly as a result of the reduction of production at PKI.
Oil production breakdown (3Q15-2Q16)
Source: Company’s data
In 1H16, 129 wells were drilled at OMG and EMG compared to 162 in 1H15. Currently, 179 wells planned for drilling in 2016 at OMG and EMG.
KMG EP’s production results in 1H16 '000 tons 1H16 1H15 YoY Total crude oil production 6 078 6 122 -0.70% OMG 2 779 2 722 2.10% EMG 1 407 1 385 1.60% KGM, CCEL, PKI 1 892 4 018 -52.90% Sales of OMG and EMG 4 168 8 305 -49.80% Export 2 464 4 647 -47.00% Domestic market 1 704 2 742 -37.90% KGM, CCEL, PKI 1 875 3 943 -52.40% Export 922 1 707 -46.00% Domestic market 953 2 167 -56.00% Source: Company’s data, Samruk-Kazyna 25
Kazakhstan: economic & sector outlook Karachaganak’s oil output declines due to maintenance works Karachaganak Petroleum Operating (KPO) is the second largest oil and gas producing company in Kazakhstan. In 2015, KPO produced 11mln tons oil and 18.2bln cm of gas. This was equivalent to about 14% of Kazakhstan‘s total oil production and to over 40% of its gas production. Roughly 23% of Kazakhstan‘s proven oil reserves are attributed to Karachaganak field.
Over 1H16, KPO produced 66.9mln barrels of oil equivalent in the form of stable and unstable liquids, gas and fuel gas. In addition, 3.52bln cm of sour dry gas were re-injected to maintain the reservoir pressure, a volume equivalent to approximately 42.4% of the total gas produced.
Karachaganak’s oil output in 2013-1H16 Key indicators 2013 2014 2015 1H16 Total production, mln boe 136.0 142.5 141.7 66.9 Total oil production, '000 tons 10,492 11,004 10,796 N.A. Total gas production, mln cm 17,531 18,248 18,234 N.A. Source: Company’s data, Samruk-Kazyna
The Ministry of Energy forecasts Karachaganak output to decline from 12mln tons in 2015 to 7.2mln tons in 2025 and to only 4.8mln tons in 2035 (average annual decline of 4.5%). It assumes that no further field expansion. In contrast, IHS forecasts a generally flat production profile with output declining slowly after 2025 following another expansion phase.
Oil production forecasts Kazakhstan’s oil production is expected at 75.5mln tons in 2016, 5% lower than in 2015, according to the Ministry of Energy. The IEA forecasts Kazakh oil production to get a boost later this year or in 2017, once the giant Kashagan field resumes production. Further ahead, additional volumes are set to come from the Tengiz field.
OPEC forecasts on Kazakhstan oil supply, IEA forecasts on Kazakhstan oil supply, mbpd (2015-2017f) mbpd (2014-2017f)
1.7 1.7 1.6 1.6 1.5 1.5 1.4 1Q 2Q 3Q 4Q 2015 2016f 2017f
Source: OPEC, International Energy Agency (IEA), Samruk-Kazyna
OPEC forecasts Kazakhstan’s oil supply to decrease by 50,000 bpd over the previous year to average 1.55mln bpd or 78mln tons in 2016, revised down by 10 tb/d from the previous MOMR. Kazakhstan’s oil production in May dropped to 1.46 mb/d, but recovered in June by 100 tb/d to average 1.56 mb/d after seasonal maintenance in Karachaganak ended.
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Kazakhstan: economic & sector outlook Mining & Metals Industry
Mining and metallurgy represent a large chunk of Kazakhstan’s economy. In 2015, mining industry accounted for about 7% of the country’s GDP. Kazakhstan has about 8.1% of the world reserves of uranium, 2.0% zinc, 1.2% iron ore, and 10.9% lead and 8.0% silver. Today, the country is the world’s leading producer of uranium (39% of the world output in 2015). The country also produces and exports significant quantities of zinc in concentrate and ores (324,000 tons in 2015), lead (120,000 tons in 2015), iron ore (37 396 tons in 2015), refined silver (1.3 tons in 2015). In 2015, the country increased production of uranium (+2.0% YoY) and refined silver (+32% YoY). The production of zinc stayed unchanged YoY, while production of some commodities declined in 2015: lead (-5.6% YoY), iron ore (-27% YoY).
Kazakhstan’s major mineral reserves Mineral, '000 tons Reserves % of global Ranking Iron ore 2,500,000 1% 11 Uranium 373 8% 4 Zinc 4,000 2% 9 Lead 10,900 11% 3 Silver 53 8% 6 Sources: US Geological Survey 2016, National Energy report 2015, Association of Metals & Mining companies
Kazakhstan’s uranium deposits are concentrated in the Chu-Sarusy region. Easy to leach underground, the sandstone deposits of this region yield one of the lowest cost yellow cake in the world. All of the output ultimately is exported, primarily to China, but also to the EU, South Korea and the US.
Kazakhstan’s 2015 mineral commodity production and exports, ‘000 tons Mineral Production Exports Main producers Main export destinations Iron ore 37,396 15,224 ENRC, Arcelor Mittal Russia, China Zinc 324 282 KAZ Minerals, Kazzinc China, Turkey Uranium 24 23 Kazatomprom, Uranium One China, EU, US, South Korea Lead 120 108 Kazzinc Spain, Russia Silver 1.3 1.3 KAZ Minerals Switzerland, US Sources: USGS, Statistics agency of RK, World silver survey 2016, ILZSG
Kazakhstan proven reserves of silver are located in more than 100 deposits, the majority of which are polymetallic (copper-lead-zinc) deposits. The level of silver content in these deposits ranges between 40 -100 g/t. In 2015, refined silver output was around 1,300 tons.
As of July 2016, there are over 190 large and medium-size mining and metallurgical companies in Kazakhstan. The five largest are ENRC, Kaz Minerals, Kazzinc, Kazatomprom and Arcelor Mittal Temirtau. ENRC is the largest producer of iron ore in the country. Kazatomprom is a state-owned uranium miner and a joint venture partner with all foreign companies mining uranium in Kazakhstan. Kaz Minerals produces zinc, gold and silver as by-products. Kazzinc is the leading producer of zinc and gold in the country. The large share of extracted mineral resources is exported mainly to China, Russia, and Turkey.
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Kazakhstan: economic & sector outlook Resources, production and exports of uranium in Kazakhstan Global reasonably assured resources of uranium are estimated at 4.6mln tons. With 8% of this amount is located in Kazakhstan, the country is fourth largest resource holder trailing only Australia, Canada and the US. In terms of inferred resources the country holds a total of 0.5mln tons (17% of the world’s total), which is the second to Australia’s 0.6mln tons.
Although Kazakhstan’s uranium resources are characterized as low grade, they are of the sandstone bedded infiltration type. This allows resources to be mined using an in-situ leaching (ISL) method, which is more cost-effective and involves less exposure to the radioactive materials than the traditional underground and open pit mining.
Kazakh uranium production by mine, tons
Province and Group Mine 2010 2012 2013 2014 2015
Tortkuduk (Katco) 2,439 2,661 3,558 4,322 4,109 Moinkum (northern, Katco) 889 1,000 both both Chu-Sarysu, Eastern Southern Moinkum 443 500 (Taukent/GRK) 1,129 1,174 1,192 both both Kanzhugan (Taukent/GRK) 562 575 Uvanas (Stepnoye- 300 215 RU/GRK) 1,192 1,154 1,154 Eastern Mynkuduk both both 1,029 1,019 (Stepnoye-RU/GRK) Central Mynkuduk (Ken 1,242 1,622 1,800 1,790 1,847 Dala.kz) Western Mynkuduk 442 1,003 998 870 1,000 Chu-Sarysu, (Appak) Northern Inkai-1, 2, 3 (Inkai) 1,637 1,701 2,047 1,922 2,234 Inkai-4 (South Inkai) 1,701 1,870 2,030 2,002 2,055 Akdala (Betpak Dala) 1,027 1,095 1,020 1,007 1,019 Budyonovskoye 1, 3 740 1,203 1,499 1,594 1,642 (Akbastau) Budyonovskoye 2 1,708 2,135 2,115 2,084 2,061 (Karatau) North and South 1,017 1,000 1,000 941 948 Karamurun (GRK) Syrdarya, Western Irkol (Semizbai-U) 750 750 750 700 750 Kharasan 1 (Kyzylkum) 260 583 752 858 1,110 Kharasan 2 (Baiken-U) 262 603 888 1,135 1,400 Syrdarya, Southern Zarechnoye (Zarechnoye) 778 942 931 876 826 Northern, Akmola Semizbay (Semizbai-U) 224 470 411 400 453 region RU-1 (Vostok, Zvezdnoye) 352 370 331 298 0 TOTAL 17,803 21,317 22,451 23,127 23,595 Source: World Nuclear Association (WNA), Samruk-Kazyna
Based on the geological structure of ore body and the geography of the deposits uranium resources of Kazakhstan can be subdivided into six provinces (Northern Kazakhstan, Caspian, Balkhash, Illi, Syrdarya and Chu-Sarysu). Resources of Chu-Sarysu province account for 60.5% of total Kazakhstan’s resources, with the presently producing mines being Akdala, Budyonovskoye, Inkai, Kanzhugan, Moinkum, Mynkuduk, Uvanas.
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Kazakhstan: economic & sector outlook Since 2009, Kazakhstan has been the top uranium producer in the world. In 2015, its share in global uranium production from mines was at 39%. The country’s uranium output increased by 2% YoY to 23,595 tons, with the share of the national uranium mining company, Kazatomprom, in the total production at 54%.
Uranium production by country, tons (2008-2015)
60,000
40,000
20,000
0 2008 2009 2010 2011 2012 2013 2014 2015 Kazakhstan Canada Australia Niger Russia Namibia Uzbekistan US Others
Source: WNA, Uranium 2014: Resources, Production and Demand ("Red Book"), Samruk-Kazyna
The uranium deposits are explored either solely by Kazatomprom, or through the joint ventures established with the industry’s major players. In 2015, Uranium One accounted for 18% of domestic output, while Areva (11%) and Cameco (6%) closed the top four.
Leading world uranium producers Kazakh uranium producers in 2015, tons Kazatomprom Cameco 17% 2,703 Kazatomprom 21% Areva 1,340 5% Uranium One Rosatom 5% CNNC&CGN 2,704 Areva 5% 18% 12,717 BHP Billiton Cameco 13% 4,132 Other 16% Rio Tinto Others
Source: Companies’ data, Samruk-Kazyna
All of the produced uranium is exported, primarily under long-term contracts, as Kazakhstan does not presently possess nuclear power generation capacity. The country is expanding exports as rapidly as it can grow production. China is the largest importer of Kazakhstan’s uranium and accounts for over half of total exports (56%). Major importers are China Nuclear Power Corporation and China Nuclear Energy Industry Corporation. However, in the future, export situation looks more complicated for Kazakhstan, as a demand surge in China may not be sustainable over the longer term.
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Kazakhstan: economic & sector outlook Kazakh uranium export routes in 2015
4% 11% China
11% Europe South Korea 56% US 18% Others
Source: The national energy report 2015, Samruk-Kazyna
Nuclear fuel bank in Kazakhstan Kazakhstan proposed an initiative to host an IAEA Nuclear Fuel Bank1 on its territory to provide open access to low-enriched uranium for the countries developing nuclear power industry, to build a fuel inventory, and to strengthen the nuclear nonproliferation regime. In 2015, Kazakhstan and the IAEA reached an agreement on locating the Nuclear Fuel Bank at Ulba Metallurgic Plant. The first such fuel bank was established in Angarsk, Russia which became operational on 1 December 2010. Kazakhstan’s willingness to host a nuclear fuel bank is a significant indication of its commitment to be a responsible actor on the international stage.
Global uranium demand Currently, demand for uranium is generated by 437 nuclear reactors in 30 countries, with a total net installed electricity capacity of 380 GW. In 2015, 28% of global demand was from the US, which remained stable compared to 2014. China and South Korea accounted for 12% and 8% of global uranium demand.
World nuclear reactors and uranium requirements Nuclear Reactors Reactors Reactors under Reactors Uranium electricity proposed, Country operable, construction, planned, demand, generation MWe MWe net MWe gross MWe gross tons bln kWh gross US 799 98,792 6,018 6,063 26,000 18,692 France 418 63,130 1,750 0 1,750 9,230 China 124 23,144 27,393 49,970 153,000 8,161 Russia 169 25,264 7,968 33,264 16,000 4,206 South Korea 149 21,677 5,600 11,600 0 5,022 Japan 0 40,480 3,036 12,947 4,145 2,549 Others 752 106,508 18,342 72,860 164,025 19,023 Total 2,411 378,995 70,107 186,704 364,920 66,883 Source: Uranium miner 2016, Samruk-Kazyna
The world’s overall nuclear generation capacity is expected to increase. More specifically the OECD projects a net increase in global capacity from the current capacity of 379 GW to 400 GW by 2035 in low demand scenario and up to 680 GW in the high demand scenario. This will result in an increase of reactors’ demand for uranium to 72Mt and 122Mt tons under the respective scenarios. The OECD
1 The IAEA LEU Bank is a physical reserve of up to 90 metric tons of low enriched uranium suitable to make fuel for a typical light water reactor, which is the most widely used type of nuclear power reactor worldwide. Such a reactor can power a large city for three years. 30
Kazakhstan: economic & sector outlook projections are lower than those offered by the International Atomic Energy Agency (IAEA). Global capacity is expected to reach 400 GW by 2030, five year earlier than the OECD forecast.
It is expected that very few mines will be developed at today’s low prices level. Thus, the shortages of supply combined with rising future global demand may support uranium prices. China will focus on investing in mines to satisfy domestic demand and on maintain long-term supply contracts with select few trading partners, such as Kazakhstan. Russia can invest directly in domestic uranium assets as needed to support its own generation needs rather than resorting to the spot market. These two major players are increasingly inclined to take actions outside of the world spot market by investing in mines in other countries or by insulating their domestic markets from market price and supply fluctuations. South Korea and regions such as Middle East, where uranium demand is expected to grow as new nuclear generating capacity is added.
Although prices are unlikely to return to the low levels of the late 1990s due to the escalation of the costs of mine production, it is likely that producers who can remain competitive in a low price environment through their own low costs of production, including Kazakhstan, will have the best prospects for maintain or increasing production.
Resources, production and exports of zinc in Kazakhstan According to the US Geological Survey, Kazakhstan has zinc reserves of 4mln tons or 2% of global reserves. In 2015, the country was the ninth largest zinc producer globally with zinc output of 324,000 tons. The country produces and exports both zinc concentrate and unprocessed zinc.
World zinc production by country in 2015, World zinc resources by country, ‘000 tons ‘000 tons
Australia 1,580 31,700 China 2,530 324 6,200 4,000 Peru 63,000 Mexico 300 10,000 US 830 4,900 India 11,000 850 Canada 15,000 38,000 Kazakhstan 1,370 25,000 660 Others
Source: USGS Mineral commodity report in 2016, Samruk-Kazyna
The country has more than eighty zinc deposits, of which about thirteen are producing. Kazakhstan’s zinc ore has low-quality characteristics resulting in higher than average mining and processing costs, on a global scale. All the zinc metal in the country is produced by Kazzinc. Kazzinc with annual output of 305k tons of zinc metal is the largest zinc producer in the country, accounting for 90% of Kazakhstan’s annual zinc output. Kazakhmys is the second largest producer with an output of 94k tons zinc concentrate.
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Kazakhstan: economic & sector outlook Select zinc deposits in Kazakhstan, tons Measured Deposit/mine Company Mining method resources Maleevsky Kazzinc 651 OC Ridder-Sokolny Kazzinc 150 UG Tishinsky Kazzinc 784 UG Shubinsky Kazzinc 320 UG Shaimerden Kazzinc 927 OC Stockpiles Obruchevskoe Kazzinc - UG Chelyabinsk pipe Akzhal 439 OC works Shalkiya Shalkiya Zinc 3,200 UG East region mines Kazakhmys 3,600 UG, OC Source: Companies’ data, Samruk-Kazyna
In 1H16, the production of unprocessed zinc amounted to 162k tons (+1% YoY), zinc concentrate at 291.7k tons (-10% YoY), zinc contained in zinc concentrate 148.2k tons (-8% YoY). Major zinc concentrate export destinations are Uzbekistan (41%), Russia (37%) and China (22%). 62% of unprocessed zinc is sold to China and 29% to Turkey. The rest of produced zinc is used domestically primarily by Mittal Steel Temirtau for production of galvanized steel sheets.
Zinc production (2011-1H16), ‘000 tons Unprocessed zinc and zinc concentrate export routes, ‘000 tons
800 Turkey 83 600 China 400 Uzbekistan 127 241 200 Russia 0 135 2011 2012 2013 2014 2015 1H16 Zinc in zinc concentrate Unprocessed zinc Zinc concentrate
Source: Agency of statistics, Samruk-Kazyna
Global zinc demand
The urbanization and industrialization of China will result on a continuing increase per capita zinc production. Long-term demand will be supported by zinc’s first use of galvanizing and final use in construction. Zinc demand is expected to grow at an average rate of 2.2% per annum until 2035. Majority of global zinc consumption growth will be from China, which is expected to increase to over 50% of market share by 2020. The use of galvanized steel in Indian automobiles has started picking up, with less than 3% in a typical car to 7% currently, and is expected to increase to 20% by 2020. Solar energy is another avenue which may demand an additional 50-350t of galvanized steel/MW of installed capacity.
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Kazakhstan: economic & sector outlook Zinc demand by region (2011-2016f), ‘000 tons Zinc demand by country (2016f)
16,000 Other countries 16% 14,000 South Korea 12,000 4% 10,000 8,000 Japan China 3% 6,000 47% 4,000 India 5% 2,000 0 US 7% 2011 2012 2013 2014 2015 2016f
China Europe US India Other countries Europe 17% Source: ILZSG, Samruk-Kazyna
Resources, production and exports of lead in Kazakhstan According to the US Geological Survey, global known lead reserves stand at 89mln tons, while the data on Kazakhstani lead reserves is not available2. However, according to the National Geological exploration company Kazgeology, lead reserves in Kazakhstan stood at 11mln tons.
2015 world lead production by country, ‘000 World lead reserves by country, ‘000 tons tons
China Australia
38 814 Australia China 22,300 240 US 35,000 Kazakhstan 2,300 300 Peru 6,700 Russia 385 Mexico Peru 9,200 15,800 633 Kazakhstan Others 10,900 Others
Source: USGS 2016, Kazgeology, Samruk-Kazyna
Lead production dynamics in Kazakhstan, 2015 unprocessed lead export routes, ‘000 tons ‘000 tons (2010-1H16)
150 2
100 22 Spain 50 China
0 Russia
85
2015 2010 2011 2012 2013 2014 1H2016 Unprocessed lead Lead in lead concentrate Source: Agency of statistics, Samruk-Kazyna
2 Lead reserves in Kazakhstan amounted to 5mln tons in 2008, according to the last available data. 33
Kazakhstan: economic & sector outlook According to the Agency of Statistics, in 1H16 production of unprocessed lead amounted to 68k tons and of lead contained in lead concentrate stood 31k tons. Major unprocessed lead export destinations are Spain (78%) and China (20%).
In Kazakhstan, there are about 80 lead deposits, while only 15 are producing. Lead ore has low quality characteristics, as volume of lead in lead concentrate amounts to around 25-50k tons compared to copper and zinc.
Global lead demand Global demand of refined lead metal declined by 3.3% YoY in 5M2016 primarily due to a decrease in Chinese apparent demand of 12.4%. Demand in Europe rose by 9.8% but fell by 1.2% in the US and 7.5% in South Korea. Chinese imports of lead contained in lead concentrates totaled 286k tons, down by 19.9% compared to the same period in 2015. Auto sales in China remained stable during 2Q2016, while car registration in Europe rose strongly for 34th consecutive months and increased by 6.9% in June 2016. US auto sales rose in June at annual rate of 16.6 mln, but the growth is slowing down.
China, which accounts for 39% of the world's refined-lead consumption, may propel the recovery with its use of lead in industrial batteries and automobiles. In the mid-term with pollution concerns aggravating in China, market share of electric is likely to get a boost, thereby increasing demand for industrial batteries. India’s growing telecom industry and ongoing infrastructure development will also support industrial battery demand, as should an expanding photovoltaic market.
Resources, production and exports of iron ore in Kazakhstan Kazakhstan’s iron ore reserves are estimated by the US Geographical Survey at around 2.5bln tons, or 1.3% of the total world reserves. The production of iron ore in 2015 declined by 27% YoY and accounted for almost 1% of the global iron ore output.
World iron ore reserves by country, mln tons 2015 iron ore production by country, mln tons
6,300 39 68 25 Australia 2,500 25,200 129 275 Russia 824 Brazil 6,500 54,000 43 China 8,100 US 112 India 11,500 25,000 23,000 1,380 428 Ukraine 23,000 Kazakhstan Canada Other countries
Source: USGS 2016 Mineral commodity summary, Samruk-Kazyna
According to the Agency of Statistics, in 1H16 the country mined 17.2mln tons of iron ore (-21% YoY), while production of iron ore concentrate amounted to 5.1mln tons, iron ore pellets 1.5mln tons, and iron ore sinter 5.0mln tons. Main export destinations are Russia (70%) and China (30%).
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Kazakhstan: economic & sector outlook Kazakhstan iron ore production by product type, Kazakhstan iron products export (2010-1H16), ‘000 tons routes, ‘000 tons 60,000
40,000 China 4,632
20,000 Russia 10,592 0 2010 2011 2012 2013 2014 2015 1H2016 Concentrate Sinter Pellets Other Source: Agency of statistics, Samruk-Kazyna
The country’s iron ore reserves are mainly concentrated around Rudniy city in Kostanay region (Sokolovsky, Kasharsky, Korzhinkol’skoye, Sarbaisky and Lisakovski deposits), Karaganda region (Kentobe, Atasu) and Akmola region (Atansore).
Global iron ore demand The iron ore market is driven by demand for steel, which in turn is linked to developments in the global economy and its growth. China accounts for more than 50% of seaborne iron ore imports and almost half of the world’s total steel production.
Demand dynamics in China have substantially affected the global steel business. After growing strongly since 2000, Chinese steel demand has started to decline because of weaker real estate sector construction (31% of steel demand) and machinery production (22%). This decline in domestic demand has led to a surge in Chinese steel exports, which increased by over 30mln tons from 2013 to 2014, and then by an additional 18mln tons from 2014 to 2015. This increase in Chinese exports is greater than the growth in world ex-China steel demand over the past two years, and has had the effect of curtailing domestic production in countries outside of China over the period.
Steel consumption in China and the world, mln Iron ore supply and demand, mln tons tons (1980 - 2015) (2010 – 2015)
2500 2500
2000 2000
1500 1500
1000 1000
500 500 0 0 1980 1985 1990 1995 2000 2005 2010 2015 2010 2005 2010 2011 2012 2013 2014 2015 China Rest of world Supply Demand
Source: Wood Mackenzie, World Steel association, Samruk-Kazyna
Iron ore demand growth is expected to fall 3% YoY in 2016, but grow 3% in 2017 and on average 1.6% in 2018-2020. The main growth is projected to come from CIS, European countries and India, while in China iron ore demand is forecasted to grow only in 2017-2018 and to decline thereafter. 35
Kazakhstan: economic & sector outlook Resources, production and export of silver in Kazakhstan According to the Association of Metal & Mining companies, Kazakhstan has 53,204 tons of silver reserves. This accounts for 9% of world total reserves. Kazakhstan proven reserves of silver are located in more than 100 deposits, the majority of which are polymetallic (copper-lead-zinc) deposits. World silver reserves by country, tons (2015)
124,000 120,000 Peru Australia Poland 37,000 Chile 85,000 43,000 China Mexico 77,000 85,000 Others
Source: USGS 2016, Samruk-Kazyna
According to the Agency of Statistics, refined silver output in Kazakhstan rose by 32% YoY to 1,303\tons in 2015. Silver production dropped slightly by 0.1% YoY to 621tons in 1H16. Kazakhstan exports 80% of its refined silver output to Switzerland, and the rest to the US.
Refined silver production in Kazakhstan, tons Refined silver export routes, tons (2015) (2010-1H16)
1400 1200 1000 US 244 800 600 400 Switzerland 792 200 0 2010 2011 2012 2013 2014 2015 1H16
Source: Statagency, Samruk-Kazyna
Global silver demand Total physical demand rose to by 3% YoY 1,171Moz in 2015. Coins and bars were the largest contributors to the demand increase rising by 24% YoY to 292.3Moz. This was driven by strong North American and Indian purchases. Jewelry fabrication also contributed to the demand increase reaching 226.5 Moz. Strong growth in Indian and North American fabrication offset a near one third drop in Chinese fabrication. Industrial fabrication declined by 22.5Moz YoY to 588Moz in 2015, including electrical and electronics, photovoltaic, photography and for other industrial uses. Meanwhile, demand in silver for ethylene oxide more than doubled from 5Moz in 2014 to 10.2Moz in 2015. The biggest consumers for industrial fabrication are Asia, North America and Europe, with 97% of the global market share.
China and the US were the leading consumers of silver for electronic production in 2015, 70Moz and 54Moz respectively. Main investors into coins and bars are the US and Canada. They invested into 49Moz and 36Moz of the silver respectively in 2015, representing 60% of the market share globally.
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Kazakhstan: economic & sector outlook
Global silver demand components, mln ounces Main investors in coins & bars (2006-2015)
1500 United States 13% 1000 Canada 7% 36% 8% Australia 500 9% China 0 India 27%
Others
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jewellery Coins & Bars Silverware Electrical & Electronics Brazing Alloys & Solders Photography Other Industrial Uses Source: Thomson Reuters, Samruk-Kazyna
The silver market realized an annual physical deficit for the third consecutive year in 2015. The market’s deficit of 129.8 Moz (4,038 tons) was more than 60% larger than deficit of 78.6 Moz (2,445 tons) in 2014 and the third largest on record.
Silver physical surplus /deficit, mln ounces (2006-2015)
60 20 -20 -60 -100 -140 -180 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Thomson Reuters, Samruk-Kazyna
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Kazakhstan: economic & sector outlook Infrastructure
Kazakhstan continues to invest in infrastructure and logistics to support economic growth and improve its transit potential. These include internal projects to promote regional growth as well as projects aimed at improving logistics and transit between major trading partners, such as China, Russia, EU and Central Asian countries.
Most of the projects are incorporated into the Nurly Zhol plan, announced in the end of 2014. Nurly Zhol is a USD9bln domestic economic stimulus plan to develop and modernize roads, railways, ports, IT infrastructure, and education and civil services in Kazakhstan over 2015-2019. Since then the amount of spending in tenge has been revised upwards. It targets seven areas of infrastructure development: transportation and logistics infrastructure industrial infrastructure energy infrastructure public utilities infrastructure housing infrastructure social infrastructure small and medium-sized enterprises
Consequently, spending on infrastructure under the Nurly Zhol program will be disbursed as follows:
Project area Project name Financing Auto roads projects Construction and reconstruction of KZT57bln in 2015, KZT35bln (KZT296.7bln). Central-South route (Astana- in 2016. Karaganda-Balkhash-Kurty- Kapshagai-Almaty). Construction and reconstruction of KZT77bln in 2015, KZT43bln Central-East route (Astana- in 2016. Pavlodar-Kalbatau-Ust- Kamenogorsk). Construction and reconstruction of KZT2bln in 2015, KZT6.4bln Central-West route in 2016 reconstruction of other roads of KZT42bln in 2015, republic importance KZT34.3bln in 2016 West Europe–West China and USD763mln, joint financing Beineu–Aktau by IFI’s Kurty-Burubaital, Usynagash-Otar, KZT4.6bln in 2016, joint Aktobe-Makat, Zhetybai-Zhanaozen financing by IFI’s Railway projects construction of the second line KZT27.7bln (KZT46.3bln) Almaty-1-Shu Civil aviation projects Reconstruction of Astana Airport KZT29bln, with possible co- runway and terminal of Astana city financing by IFI’s Development of industrial Development of Khorgos-Eastern KZT68.5bln in 2015 infrastructure and tourism Gates Special Economic Zone infrastructure (SEZ), Pavlodar SEZ, Aktau port SEZ, Innovation technologies park SEZ, Astana SEZ, ChemparkTaraz. Other projects including Over 2015-2019, 50 projects are tourism, subsidizing going to be implemented creating business activities, export 17,000 workplaces support and new anti-crisis measures Source: Baiterek National Holding, Samruk Kazyna
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Kazakhstan: economic & sector outlook
Overall, KZT349.8bln was allocated in 2016, including KZT171.3bln from the National Fund. Due to the devaluation of the tenge in 2015 and the fact that National Fund assets as well as foreign financing are denominated in USD, the amount of funds allocated for the projects is constantly being revised, mainly upward.
Key performance indicators for the program include estimated contribution to GDP of 0.87% in 2016 and 1.18% in 2017. Multiplier effect from the infrastructure spending in the long-term should bring economic growth up to 4.1% in 2019. Over the course of its implementation, the program should create 405,600 jobs, including 91,400 permanent workplaces. Investments in infrastructure are expected to improve Kazakhstan’s ranking to 57th position in the World Economic Forum competitiveness rating in terms of infrastructure. However, according to the latest 2016 Global Competitiveness Report, Kazakhstan has already improved its rank from 62nd place in 2014 to 58th place in 2016, which is one of the highest rankings among landlocked countries.
Key infrastructure projects Kazakhstan has embarked on key infrastructure projects to improve its transit potential. These include new rail connections in inner regions of Kazakhstan, such as the 293km-long Zhetygen-Khorgas line, which reduces the route from China to the port of Aktau on the banks of the Caspian Sea to 500km (project cost is KZT153bln). Another major project that was launched in 2014 is the 1,036km Jezkazgan- Beineu line that cuts transit through Kazakhstan to only 1,000km. Combined with the 400km highway between Aktau and Beineu and the expansion of the port of Aktau to handle cargo flows up to 25mln tons per year, these lines allow Kazakhstan to connect with such countries as Azerbaijan and Iran. In addition, construction of the ferry complex in Kuryk port (60km away from Aktau) will allow cargo shipment without unloading them from wagons. Project cost is KZT32bln and handling capacity will be four million tons of ferry cargo per year.
Another wide scale international project is Western Europe-Western China international transit corridor, the total length of the corridor along the route St. Petersburg-Moscow-Nizhny Novgorod-Kazan- Orenburg-Aktobe-Kyzylorda-Shymkent-Taraz-Korday-Almaty-Khorgos-Urumqi-Lanzhou-Zhengzhou- Lianyungang is 8,445km. Approximately 2,233km are on the territory of the Russian Federation, 2,787km belong to Kazakhstan, while 3,425km belong to China. Its total cost is estimated at USD20bln, and the Kazakh section will be completed by end-2016. The project has high importance and multiplier effect for the economy of Kazakhstan, since significant regional development will be allocated to five major regions of the country (Aktobe, Kyzylorda, South Kazakhstan, Zhambyl and Almaty) with a total population of 7.5mln people or nearly half of the country's population.
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Kazakhstan: economic & sector outlook Railway corridors going through Kazakhstan
Source: Kazakhstan Institute for Strategic Studies, Samruk Kazyna
To get more benefits from the expected increase in cargo traffic passing through the new routes, Kazakhstan is establishing and developing 10 SEZs, all with different sectorial focus and priority, including the USD3.5bln Khorgas-East Gate SEZ. This SEZ, located on the border between China and Kazakhstan, has fast become one of the anchor projects for transforming Kazakhstan into a major commercial and transportation hub of the Eurasian continent. The zone hosts several facilities: International Center for Boundary Cooperation (ICBC), a dry port, logistics and industrial zones, ready connection with the Zhetygen-Khorgas Railway and West Europe-West China Highway and a package of attractive fiscal benefits, including exemption from import tariffs, land tax, property tax and value- added tax.
The construction is proceeding with DP World, a major UAE logistics company. Khorgos’ capacity currently is 200,000 containers per year and is expected to reach 500,000 by 2020. China was a major supplier of funds, whereby China’s Jiangsu province recently invested more than USD600mln for developing the surrounding infrastructure in Kazakhstan.
Khorgos is five times bigger than Bishkek’s Dordoi, previously the largest Central Asian market, and is expected to redraw regional trade routes in favor of Kazakhstan. Direct railway that crosses the entire territory of Kazakhstan and reaches Iran is expected to additionally boost the country’s infrastructure. Cargo trains have already begun running from China to Iran through Kazakhstan and Astana is hoping to modernize its own available locomotives and repair 800 km of rails. The project’s total cost amounts to USD2.7bln.
KTZ Express, a subsidiary of Kazakhstan Railways, opened an international development office in Hong-Kong. It aims to build a platform to promote multimodal freight logistics between Europe and China, via Kazakhstan. KTZ Express has also invested in a 21-hectare intermodal freight and logistics center at the port of Lianyungang in China. It’s intended to provide direct access to Central Asia for cargo coming from Japan, Korea and Southeast Asia. By 2020, KTZ plans to raise the share of transit in the structure of revenues from rail freight from 23-25% to more than 50%. According to market
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Kazakhstan: economic & sector outlook estimates, more than 700,000 containers per year will be transported via the transcontinental railway "China-Kazakhstan-Turkmenistan-Iran".
In February 2016, a demonstration container train departed from China to Iran, through the new line in Kazakhstan. Total length of the train route was more than 9,000km, however travel time was only 10 days, which is significantly less than by sea (25 to 30 days).
Another big railway project is Uzen-Bolashak-Bereket-Gorgan, which has length of 928km and is one of the most important international infrastructure projects in the region. It is a strategic link in the North- South railway corridor, providing cargo transportation between Russia, Kazakhstan, Turkmenistan, Iran, Turkey, Pakistan and Afghanistan.
New infrastructure projects already allowed to increase the volume of freight traffic by 26% over the first half of 2016, potential traffic on this line only is estimated at more than 1mln tons in the current year. At the same time, in the first half of this year 429 container trains went between China and Europe through Kazakhstan. This is 2.4 times more than in the same period of 2015. In 2016, the volume of transit container traffic between China and Europe will be 100 times higher than in 2011, and by 2020 Kazakhstan intends to increase the volume of container traffic to 800,000 TEU. Overall transit railroad traffic in 1H16 amounted to 679 trains, which is 13% more than the same period last year.
The share of revenues from transit reached 35% of total revenues. Five million tons of cargo was transported using new railway lines Shalkar-Beineu, Zhezkazgan-Saksaulskaya, Arkalyk-Shubarkol over 1H16. "Dry" port handled 11,500 TEUs of containerized cargo while the terminal of Aktau port handled about 180,000 tons of grain cargos, transport-logistics center "Astana" handled 47,800 tons of cargo.
Besides investment in railways and roads, Kazakhstan will spend KZT75bln on modernization of municipal infrastructure in 2016 under Nurly Zhol, which will also have a positive impact on the growth of the economy and social well-being of citizens.
Role of Kazakhstan in the One Belt One Road initiative China is looking for ways to stimulate sustainable growth and find new markets. One of the key initiatives under this policy is One Belt, One Road (OBOR). Since its announcement in September 2013, the One Belt, One Road initiative has become an integral part of the Chinese policy in Central Asian. All this fits into China's short- and medium-term development plans. Indeed, one of the immediate objectives of China's Belt and Road construction projects is to use excess production capacities left by slowing manufacturing industries at home.
In 2015 investments of Chinese enterprises into 49 countries along the OBOR initiative amounted to USD14.82bln. This is 18.2% higher than a year earlier. According to the Ministry of Commerce of China, investment flows were directed to Singapore, Kazakhstan, Laos, Indonesia, Russia and Thailand. 2016 is likely to see further trade, transport and investment integration between these countries.
Kazakhstan, as the largest economy in Central Asia and a crucial logistics link between China (world’s largest industrial producer), and Europe (world’s largest consumer market) is going to play a key role in the successful development of the One Belt, One Road initiative. In particular, two of the six international economic co-operation corridors developed and modernized under the initiative will pass
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Kazakhstan: economic & sector outlook through Kazakhstan, before branching out to West and East Europe, Central Asia and the Middle East. A new direction of the Silk Road was launched in January 2016 and included the Ukraine-Georgia- Azerbaijan-Kazakhstan-China route.
Each year more than 6bln containers transit between Europe and the Asia Pacific region, 98% of which are transported by sea. According to estimates and preliminary data, cargo routes through Kazakhstan are more than twice shorter, up to three times faster than traditional sea routes, and up to 4 times cheaper than air transport. By upgrading infrastructure, Kazakhstan aims to capture a part of the USD600bln trade volume between China and Europe.
China-Central Asia-West Asia Economic Corridor is also a very important step in enhancing connectivity for Kazakhstan, the largest landlocked country in Central Asia. It will link with markets in Iran and Turkey in West Asia, the Persian Gulf, the Mediterranean coast, Central and Eastern Europe, the Arabian Peninsula, as well as other countries in Central Asia. This gives Kazakhstan access to the worldwide ocean logistics business and has the potential to make the country a key player in global logistics.
Aside from being a strategically important player under the OBOR initiative, as well as a founding member of the Asia Infrastructure Investment bank (AIIB), Kazakhstan is also committed to creating a more business-friendly environment and developing several massive industrial projects.
China is heavily involved in several infrastructure projects in Kazakhstan. JSC Baiterek and CITIC Group signed an agreement on joint participation in Kazakhstan Infrastructure Fund. The target capitalization of the Fund will be USD600mln. Moreover, JSC Samruk-Energo, Development Bank of Kazakhstan and the State Development Bank of China reached an agreement on conditions for financing the construction of a wind farm with a capacity of 60MW (possible expansion to 300 MW). China's State Development Bank will provide a loan of USD120mln for the development of green energy in the Almaty region.
In November 2015, the third 1,303 km-long C line of the gas pipeline Kazakhstan-China, that connects Turkmenistan, Uzbekistan, Kazakhstan and China, started operating. The designed capacity of the entire Kazakhstan-China pipeline is 55bln m3. The main gas pipeline Kazakhstan-China is part of the cross-border gas pipeline Turkmenistan-Uzbekistan-Kazakhstan-China, having total length of more than 7,500 km. The Central Asia-China gas pipeline predated the new Silk Road but forms the backbone of infrastructure connections between Turkmenistan and China.
Expo 2017 Kazakhstan is the first former Soviet state to host Expo in 2017, an international universal exposition that will attract tourists and potential investors from more than 100 countries and receive 2-3mln visitors between June and September 2017. The Kazakh government views this as an opportunity to establish Astana as a regional hotspot for tourism and business.
The theme chosen for this event is "Future Energy" with the subtitle "Solutions for Tackling Humankind’s Greatest Challenge". Therefore, the Expo will showcase future energy solutions for tackling social, economic and environmental challenges. Twenty five hectares are planned for the pavilions of Expo 2017. The site has a convenient access to Astana’s city center, the international airport and the railway station. The Expo Site is also linked with a network of Kazakhstan’s inter-city roads to ensure a quick access from all the country.
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Kazakhstan: economic & sector outlook In preparation for the Expo 2017, the administration of Astana launched several "smart city" projects. The projects imply introduction of digital technologies in such areas as payment, education and healthcare. The Ministry of Investment and Development intends to implement at least 100 energy efficiency projects with total investments of KZT20bln before the start of Expo 2017 in Astana.
JSC NC Astana EXPO-2017 and the Chinese Office international tourism signed a memorandum of cooperation. JSC Astana LRT, a company responsible for modernizing transport infrastructure for the Expo in Astana signed a loan agreement with the State Development Bank of China, and an EPC- contract with a consortium of Chinese companies. Chinese company Huawei is working with the Government of Kazakhstan in creating 4G networks in 33 major cities of Kazakhstan. This will greatly enhance the quality of mobile communication in the country.
Due to the growing number of passengers, two new bus terminals will be built in 2015-2018. The capacity of each will be 135mln passengers per month. Rapidly growing population of the capital also raises the question of railroad transportation. A new station with a capacity of 35,000 passengers per day is already being built. Together with the current station it will fully cover passenger traffic in the long term, as well as during Expo 2017.
In addition, to meet the growing demand for air transportation, Astana Airport is being reconstructed and expanded to increase capacity by 2 times. The European Bank for Reconstruction and Development has provided a loan for KZT8.5bln. Astana Airport, where a new international terminal will be built, is planned to become a major distribution center for Eurasian freight and passenger traffic, while other airports in Kazakhstan will also be modernized. Kazakhstan’s Airport Management Group together with strategic partners, Zurich Airport International and Swissport International, will improve the quality of services by implementing the best international practices and competencies for airport management.
The international exhibition is expected to generate positive impact on the regional and domestic economies. Expo projects to-date have created more than 5,000 new jobs, including 1,500 in 2016. Meanwhile, domestic businesses and enterprises supplying products for Expo have employed about 30,000 workers.
More than USD14bln will be allocated for the construction of infrastructure facilities in Kazakhstan in the next three years. A huge portion of these funds will be invested in Astana - in building highways, promoting tourism, developing SEZ, housing, objects of Expo 2017. About a third of these funds is provided by international financial institutions.
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Kazakhstan: economic & sector outlook
Disclaimer & Disclosures
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