Mining in Kazakhstan: Not to reduce, but to sustain

 

Given the negative effects of the world economic crisis, the government of Kazakhstan is going to control the effective use of available human resources and ensure the demand for domestic companies’ production.

Astana will not allow the layoffs…

At the governmental session held on April 21 of 2009, Kazakhstan Prime Minister Karim Massimov gave assignment not to allow the layoffs due to reduced industrial output in various sectors of the economy. Addressing the heads of the appropriate ministries, the Prime Minister noted that avoiding the layoffs is a serious problem, for the solution of which "all public agencies should apply comprehensive measures for implementation of scheduled events under an anti-crisis plan".

According to the estimates of the Ministry of Economy and Budget Planning, the slowdown in GDP reached 2%, as of the end of Q1’09. At the same time, the drop in the industrial output in this period reached 4.6%, including 0.2% in mining, 11.8% in processing industry, 6.7% in electricity, gas and water production and distribution.

The decline in the output of the metallurgy industry and the production of finished hardware reached 15.3%, including 22.4% in the ferrous metallurgy and 9% in the nonferrous metallurgy. The monthly governmental monitoring of big enterprises showed that the contraction in the volume of sold products is taking place in some industries, such as metallurgy and mechanical engineering.

In the regional context, the decline in the industrial output is observed in all oblasts, except for Atyrau and Northern Kazakhstan oblasts.

…and will raise national content in the public purchases

Along with that, the head of the government instructed to prepare a new proposal on raising the local content in the public purchases. "I am instructing to do the best to involve the domestic producers, to raise the local content in the public purchases, as well as to use available resources in the best possible way for preparation and rebuilding of the economy, adapted to the conditions of post-crisis development", Karim Massimov said.

In his turn, the Ex-Minister of Industry and Trade Vladimir Shkolnik informed that by April 2009 with the purpose of developing the local content 1,127 memorandums were signed between the producers and potential customers. They served as a basis for signing 180 contracts for the total amount of about 72 billion Tenge.

In order to better coordinate the actions, attempted by the government, all purchases of goods, works and services were classified into four groups: (1) the procurement by public authorities (2) the procurement by national companies; (3) the procurement by subsoil users, and (4) by backbone organizations. The responsible authorities are defined for each unit; their functional responsibilities are approved.

As per the Ex-Minister of Industry, "the agency has been conducting extensive work on the development of a legal framework to ensure the performance of mechanisms targeted at the the local content development". By April of 2009, the Ministry prepared 9 statutory legal acts; four of them are approved, while two others are under consideration at the government. In addition, other three acts are at the phase of agreeing with the concerned public agencies.

Moreover, at the end of March the government in its resolution approved a "Single methodology for calculation of local content during the purchase of goods, works and services by companies" and "The list of organizations, the procurement of which is subject to governmental monitoring on the part of local content".

According to the statement of Vice Prime Minister Serik Akhmetov, made on April 24 at the forum, dedicated to raising social responsibility of businesses, "the norm on local content was introduced in 144 contracts of subsoil use". He also noted that the following indicators were agreed on the local content: at least 30-50% on goods, at least 90% on works and services, and to 90% on Kazakhstan employees. The Vice Prime Minister also reminded that "213 contracts of subsoil use did not previously provide for liabilities on local content. We also conducted negotiations and prepared appropriate draft amendments".

 

The world market of metals

Leading foreign financial institutions Morgan Stanley, Goldman Sachs, and Barclays Capital are planning to launch a trade floor to trade iron ore. The reason that pushed the banks to start thinking of trading exchange instruments was the destabilization of the price situation across the global market of metals as well as failure of negotiations on the iron ore delivery price between its producers (Vale, Rio Tinto and BHP Billiton concerns) and consumers, headed by Chinese Association of Steel Producers.

Ordinarily, such negotiations are used to be completed before April 1; thereafter, the world producers were signing one year contracts. However, for the first time, in the year of 2008 the negotiations were completed with a one month delay. Due to this fact, the contracts were signed in a rush in the beginning of summer while the consumers had to pay additional amounts of money because of new prices for the iron ore delivered after April 1.

The experts analyze that establishment of a new exchange may affect the business of a number of the largest metal establishments, operating in the CIS. Specifically, this can affect the interests of the Magnitogorsk metallurgical plant that purchases ore from Kazakhstan-based enterprises of ENRC, as well as Russian Metalloinvest that sells ore to Eastern Europe.

It is possible that in the future Morgan Stanley will be trading not only derivatives, but also ore itself. Goldman Sachs is examining the possibility of trading the ore swaps, but there are no particular plans in this area yet.

Meanwhile, the foreign experts highlight alarming trends in the situation of development across the global market of metals. According to the analysts of World Steel Association, in the first four months of 2009 the world output reached 354 million tonnes that is 22.7% less than in the same period of last year. In May, the price of flat section fell by 3-5%, while the demand for this type of product remains unstable. Overall, the traders do not expect the recovery of trades as in the previous volumes until the end of 2009.

According to data, provided by the International Aluminum Institute, the global output of primary aluminum dropped by 7.2% in January-April of 2009, compared to the same period of last year, to 7.89 million tonnes. At the same time, USA and Canada reduced the production of primary aluminum by 15.3% to 1.65 million tonnes. The same drop indicator is observed at 8.9% (1.4 million tonnes) for the countries of Eastern and Central Europe (including Russia), 3.4% (841 thousand tonnes) for Latin America, 4% (540 thousand tonnes) for Africa, 5.9% (722 thousand tonnes) for Oceania. The only region, demonstrating positive dynamics, is Asia, where the production of aluminum increased by 11.6%, reaching 1.42 million tonnes.

In these conditions, the world surplus of aluminum increased six-fold and reached 679 thousand tonnes in the first quarter of 2009, while it equaled only 112 thousand tonnes in the same period of last year.

Meanwhile, active moves in the nonferrous metals market are taken by China: in April of 2009, the country imported almost 400 thousand tonnes of copper, which is three times as much as in April of 2008. The purchases of aluminum also hit a record level in April. According to International Copper Studies Group (ICSG), China became the only country in the world, where the consumption of copper not only did not decline, but, on contrary, increased since the beginning of 2009.

The experts explain this situation not by the increase in demand on the side of Chinese consumers, but by the purchase of nonferrous metals for the state reserves. At the end of 2008, PRC government officially announced that it is going to establish strategic reserves of raw material resources, including nonferrous metals – copper, aluminum, zinc, and nickel.

Performance indicators for January-April

According to data, provided by the Agency for Statistics, in the first four months of 2009 the republic produced 1,218.2 thousand tonnes of crude steel that is 20.9% less than in January-April of 2008.

In the same period, the output reached 976,452 tonnes of flat section (91.4%, compared to the indicator for January-April of 2008), including 56,730 tonnes of tinned plate and tinned plate section (82.1%), as well as 164,210 thousand tonnes of zinc-plated section (87.4%). The production of ferroalloy dropped even more to 380,216 tonnes (65.6%).

At the same time, in January-April of 2009 Kazakhstan produced 3,228 kilograms of affined gold and 219,306 kilograms of affined silver, which is 20.5% and 1.5% more than in the first four months of the last year. Moreover, the country produced 566,374 tonnes of aluminum oxide (102.1%) and 113,359 tonnes of natural zinc (92.7%). The output of pure copper in the form of half-finished material, not including sintered, milled, extruded and hammered items, reached 106,848 tonnes (90.7%).

The production of coal in Kazakhstan in January-April 2009 declined to 31,026,800 tonnes, which is 18% less than in the same period of 2008.

 

ArcelorMittal Temirtau is cutting wages to its employees

The company is seeking for ways to resolve a difficult situation that hit the company due to the falling demand for its production. Specifically, in the first quarter of 2009, compared to the same period of last year, the shipment of finished goods dropped by 120 thousand tonnes, while the release price for the production fell from $781.8 to $604.2 per ton. As a result, in January-March of 2009 the losses of JSC ArcelorMittal Temirtaru reached over $100 million. Meanwhile, the forecast for the Q2’09 predicts further decline in the price without considerable increase in the sales volume of finished goods.

In this concern, in May of 2009 the management of JSC ArcelorMittal Temirtau made a decision in compliance with RK Labor Code to change the employment conditions of its workers through introduction of certain limitations and cease of payment of some bonuses (not provided for in the Labor code) and other payments, starting from July 1, 2009 for the period of to three months. The specified measures can be applied in relation to additionally covered vacations, bonuses for high-quality production and timely shipment of the production for export, payment of compensation of deductions to pension funds and the number of other conditions.

Meanwhile, all employees of the company will continue holding their positions, professions and jobs that match the qualification, specified in the labor contracts. The size of the salary as well as other payments, required under the RK Labor Code, remains unaltered. In the opinion of the company management, these measures will help avoid such serious consequences as stop of production or job cuts at the plants.

JSC ArcelorMittal Temirtau General Director, Frank Pannier, addressed the labor union leaders, heads of units and departments: "I want you to explain our situation to all workers. What is more important: to work for a lesser salary as an option or not to work at all. Of course, this is a painful issue, but today I do not see any other solution. At the same time, we need to understand that this is a temporary measure".

He notes that the funds, to be so saved , will not be spent to increase profit, but rather will be invested in the equipment repairs to ensure the permanent operation of the plant and coal pits and "ultimately, this will allow decreasing the cost of production and raise its competitiveness".

JSC ArcelorMittal Temirtau metallurgical plant is a member of ArcelorMittal transnational steel concern that acquired this plant in the middle of 1990s. The plant is a fully integrated metallurgical factory with the capacity of 5.5 million tonnes of production a year. The company owns 15 coal pits and iron-ore mines.

 

Kazakhmys to independently manage Ekibastuz State District Power Plant-1

On March 20, 2009 Kazakhmys Plc Corporation announced an early termination of the contract with the AES Company for the management of Ekibastuz State District Power Plant-1 (SDPP-1) and Maykuben coal strip mine on mutual agreement of the parties. From now on, the power plant and strip mine will be totally under management of Kazakhmys.

It is a common knowledge that in February of last year the corporation informed about the acquisition of Ekibastuz SDPP-1 and the Maykuben coal strip mine for $1.5 billion from AES. At that time, under the agreement signed, it was expected that AES would manage Ekibastuz SDPP-1 until the end of 2010. The contract term was valid til December of 2010 and included deferred contingent interest to AES in the amount of $365 million, based on profitability and successful introduction of the capital development program.

In concern with the early termination of the contract in April of 2009 Kazakhmys paid AES the first portion of the interest in the amount of $80 million. The second portion of $102 million is to be paid in January of 2010.

According to Chief Executive Director of Kazakhmys Plc, Oleg Novachuk, the acquisition of the said assets will allow the corporation creating a more integrated approach to all its energy companies that "all together generate over 20% of all electricity in the Kazakhstan market".

Ekibastuz SDPP-1 is a plant that operates using coal with the design wattage  of 2.250 megawatt. It was acquired by AES in 1996 while Maykuben coal strip mine was bought in 2001. Since the beginning of 1996, AES invested over $200 million in the programs of modernization of these industrial objects.

Kazakhmys Corporation is focused on the production of pure copper and copper raw material, other nonferrous and precious metals, and coal production. There are four production units of the corporation: Zhezkazgantsvetmet, Balkhashtsvetmet, Vostoktsvetmet, and Karagandatsvetmet. Kazakhmys owns 20 mines, 10 mining-and-processing integrated works, and 2 copper smelteries.

 

ENRC’s performance results

On May 13, Eurasian Natural Resources Corporation (ENRC) published its performance indicators for Q1’09. Although the volumes of production and sales were higher than expected, the company highlights significant pressure on the products of all units.

Comparing to the same period of 2008, the production of commodity chromium ore dropped by 31.3% to 618 thousand tonnes, the output of manganese ore concentrate declined by 55.5% to 81 thousand tonnes. The total production of ferroalloys decreased by 37.4% to 234 thousand tonnes and taking into account the output of the Russian Serov ferroalloy plant and Chinese Tuoli by 32.4% to 253 thousand tonnes . At the same time, the Serov plant posted the output of 6 thousand tonnes of chromium ore and 19 thousand tonnes of ferroalloys.

The total production volume of primary iron ore concentrate dropped due to earlier announced cuts to 40%, compared to the sales volume of 2007. Thus, the production of iron ore declined by 34.8% to 6,617 tonnes, while the output of primary concentrate dropped by 34.3% to 2,657 thousand tonnes. The production of pellets is down by 61.1% to 770 thousand tonnes, while the output of commodity concentrate is reduced by 1.9% to 1,834 tonnes.

The stable production volume was observed for the output of commodity aluminum oxide, dropping by only 0.8%. Meanwhile, in the first quarter the production of aluminum grew by 93.8% due to the expansion of production facilities. 31 thousand tonnes of aluminum was produced that reflects the annual figure of 125 thousand tonnes of the Kazakhstan electrolysis plant Phase 1. The production of bauxite dropped insignificantly, matching the level of raw material reduction in the storage facilities.

Overall, in the opinion of the company analysts, the outlook for 2009 remains unclear. They believe that the assumption, saying that the current increase in demand for iron ore production in China is a signal of global economic recovery, is premature. Considering the fact that ENRC is marketing the greater part of ferrochrome and iron ore at spot contract prices, the company experts confirm that price pressure will continue remaining until second half of 2009.

ENRC consolidated the assets of the enterprises, such as Kazkhrom, Aluminum of Kazakhstan, Kazakhstani electrolysis plant, Zhayrem mining-and-processing integrated works, Sokolov-Sarbay mining-and-processing integrated works, Eurasian Energy Corporation, as well as ENRC Logistics and ENRC Marketing&Sales.

Earlier, ENRC completed deals on the acquisition of the Serov ferro-alloys plant (Russia) and Mineracao Limitada Company (Brazil). Also the group announced the purchase of a 50% stake in Xinjiang Tuoli Taihang Ferro-Alloy Co. Ltd, for $14.5 million, which concentrates on the production of ferroalloys.  

 

JV Semizbay-U launched the Irkol uranium mine

Joint Venture Semizbay-U Ltd launched the Irkol mine, located in Kyzylorda Oblast. This is the first mine, industrially launched under Kazakhstani-Chinese cooperation program in the field of nuclear energy. The project implementation is conducted in accordance with the agreement on strategic partnership, signed between the PRC and the RK in Astana in October of 2008.

The design capacity of the mine is 750 tonnes of uranium a year. It is expected to reach this level already next year. This year it is planned to produce 500 tonnes of natural uranium at Irkol.

It is a common knowledge that the JV co-owners are Kazatomprom national company (51%) and China Guangdong Nuclear Power Co (49%). Under to the agreement between Kazatomprom and China Guangdong Nuclear Power Co (CGNPC), the output of the Irkol mine is designated to satisfy the demand of Chinese nuclear energy.

The launch of the Irkol mine enabled to create 460 jobs; besides, Semizbay-U Ltd will annually invest 100 million Tenge in the social sector .

Semizbay-U Ltd was established in December of 2006 with the purpose to implement the uranium field development projects at Irkol and Semizbay (Akmola Oblast). The geological survey operations at Irkol were initiated in 1977. The detailed survey was conducted in 1982-1985. Under the contract of subsoil use, the company got the license for production of 18,925 tonnes of uranium for the term of 25 years.

 

Lowering of the ratings of KazakhGold Group

In May of 2009 Fitch Ratings international rating agency lowered the long-term default rating of the issuer KazakhGold Group from "CCC" to "C". Besides, Fitch lowered the priority uncovered rating of KazakhGold from "CCC" to "C". Both ratings were removed from "Negative" list of Rating Watch, where they were placed in. Meanwhile, the return on assets rating on priority uncovered debt reached "RR4". According to the experts, the lowering of the rating followed the failure by KazakhGold to effect the coupon payment in the amount of $9.375 million on the priority uncovered bonds of $200 million that had to be made on May 6, 2009.

 

Editorial