In 2010 the development problems of the mining and smelting sector (MSS) of Kazakhstan became the target of careful attention of the government, investors and experts. The subjects, following each other, industrial forums and conferences prove that the situation in domestic MSS will change dramatically. This was also confirmed by the results of "Astana Minerals & Metallurgy 2010" first Kazakhstani international congress on mineral resources and metallurgy that took place in Astana on the eve of metallurgists’ professional holiday. The fact that it was personally opened by President of Kazakhstan Nursultan Nazarbayev added political weight to the new event.
The President started his congress speech with congratulations – 50 years ago, on July 2, 1960 the first cast iron was produced by the domestic metallurgy flagship – the Karaganda metallurgical plant (today’s ArcelorMittal Temirtau). Further on the President noted that the congress became an excellent opportunity to finalize the results of the recent recession and discuss "what we are going to do next". On the global scale metallurgy, as well as the financial sector, was one of the industries that incurred the biggest losses as a result of the crisis. Thus, in 2008, the peak time of economic recession, total capitalization of 40 of the world’s largest MSS companies dropped down by 64%.
Despite this fact Nursultan Nazarbayev stated that Kazakhstani enterprises avoided the cut of personnel and continued the implementation of breakthrough economic projects. As an example he brought up the case of launching the second line of the Kazakhstani electrolytic plant and Altyntau gold benefication plant with a capacity of 15 tons of gold per year. "We are getting ready to launch copper production in Ust-Kamenogorsk, started new pipe producing plants in Pavlodar and Aktau, will build a direct reduction of iron plant in Aktobe and many others."
In the opinion of the President, the domestic MSS will continue developing in the course of two major trends, observed in the global market. First of all, the demand and the price for metallurgical products are growing. This year, according to the experts, the volume of the world’s consumption of steel will exceed pre-crisis indicators of 2007. In the next five years we expect an annual 4% growth of demand for alumimum and other nonferrous metals. Overall, all analysts have a common position about expected increase of prices for nearly all major metals.
Secondly, higher requirements are put along with higher demand volume. The impelementation of space programs, nuclear renaissance, development of high technologies in the machine building and construction industry demand products with unique quality characteristics. As a result, the metals quality standards are increasing, the new alloys with special affinities become more demanded, consumption of rare metals is increasing. "These all force us, the metallurgists, to strive to produce innovative production with higher added value", said the head of the state.
We have the growth points also within Kazakhstan: “This year we started a new five year plan of accelerated industrialization. The implementation of projects, included in the specialy designed Industrialization Map, leads to a dramatic increase of domestic consumption in the market of metallurgical products. At the same time, the demand range is extremely wide."
In this concern, the President assigned the miners and metallurgists to increase the production volume by twice, compared to the level of 2008. Prior to that, the AIID program included such big projects as increase of steel production to 10 milion tons per year (today’s figure is little over 4 million), ferrochrome – to 440 thousand tons per yer, aluminum – to 250 thousand tons and others. We expected the emergence of a number of enterprises, producing high conversion products, including the sub-industries of rare-earth and precious metals. "By 2015 we have an opportunity to reach the production level of gold at over 70 tons and become one of the biggest producers of this metal in the world."
Meanwhile, he is affirmed that one of the major principles of today’s MSS development phase is the postulate, saying that the achievement of the result must be accompanied with extensive growth of raw material production. In this concern, Nursultan Nazarbayev announced a number of priorities that need to be followed by the enterprises in their operations.
The first one is comprehensive use of mineral resources. It is self explanatory – there are less and less explored fields with rich reserves of minerals. At the same time, the republic accumulated over 30 billion tons of secondary resources, including 20 billion tons of MMS anthropogenic waste. They need to be considered as an independent raw material base of metallurgy. "In due season the chrome and ferroalloys producers directed chrome oxides with 20–25% content for the construction of roads…The Ekibastuz coal field piles have bauxites with 25% content of alumina. We view them as piles. The world views them as rich ore. This is where our reserves are."
The second problem, raised by the President, is improving energy efficiency. At the moment, the 10 top domestic metallurgical companies consume over 30% of all electricity, produced in Kazakhstan. Therefore, it is obvious that even insignificant successes of the industry in the field of energy saving are a matter of high importance for the national energy system. "The energy saving is new technologies. With such use of energy, the price of which will always grow, we are not going far. This means we need to apply new technologies with more energy efficient production."
According to the head of the state, this is all impossible without technological advances in the industry and here we need the consolidation of efforts of government, private sector and the science-engineering body. In this concern, under the implementation of the AIID program it was decided to establish the Center of metallurgy in the Eastern-Kazakhstan Oblast. The President also promised that a new international university in Astana with its engineering and energy centers will also contribute to the technological modernization of MMS enterprises. At the same time, the development of domestic technologies must be supported by technological intergration with foreign countries. "First of all, it is necessary to rebuild scientific bridges that were broken with the collapse of USSR. You remember the joint achievements of our scientists in various industries. For instance, the technology of bath smelting that was developed by the Kazakhstani institute of metallurgy and enrichment and Moscow institute of steel and alloys."
Speaking of the largest ore mining and smelting enterprises in the republic, the head of the state instructed them to get actively involved in the development of an inter-industry scientific and technical plan and other innovation programs as well as to become the founders of their own scientific-research centers and laboratories.
Nursultan Nazarbayev paid special attention to the issue of access to raw material resources. It is common knowledge that in 2008 Kazakhstan introduced moratorium for offering the fields for subsoil use. During the forum the President gave the following comment to this decision:
"The reason is that back in the days a lot of fields were sold, but nobody performs the contract conditions on investment of money. They seat as dog in the manger: they do not employ fields themselves and allow nobody to do so. For non-performance of contract liabilities we are going to expropriate these fields and give them to those parties that are going to invest money in their development." According to the President, the special Program on development of the mineral and raw material sectors of Kazakhstan is being prepared today. It will be based on the results of comprehensive and all-rounded analysis of the moratorium for offer of subsoil use rights and the consequences of its cancellation, considering the tasks of accelerated industrialization. Nursultan Nazarbayev made it clear for the investors that a major criteria for offering the subsoil use rights for supplying the raw materials to existing enterprises as well as the support of new industrial projects will be the priorities, announced by him earlier – new technologies, energy efficiency, Kazakhstani content, ecology and so on.
Considering the presentation of the problem, we get the impression that current owners of rights for subsoil use at Kazakhstani fields will have to meet these set conditions. Moreover, the new large players are in the back of the pack. Specifically, during AMM the memorandum of understanding was signed between Tau-Ken Samruk National Ore Minining Company JSC and Rio Tinto Mining and Exploration Ltd (the unit of world giant Rio Tinto). The parties agreed to establish a JV with the purpose to jointly run geologic exploration and development of solid commercial minerals.
Speaking of Tau-Ken Samruk it has to be mentioned that this subsidiary of Samruk-Kazyna NWF is supposed to defend the interest of the state in MSS. Meanwhile, established in January of 2009 it has not done anything significant in the last 1.5 years. The organizational period needed more time than it was planned while the process of transferring the state shares in such big players as Kazakhmys and ENRC under its management is not completed yet. The last significant newsbreak, produced by Tau-Ken Samruk, was the announcement about establishing a subsidiary company Tau-Ken Altyn, dated March 2010, that will focus on exploration, production and processing of precious metals. Perhaps, it was a late reaction for already processed deals on purchase of quite promising Kazakhstani gold mining assets by a number of Russian companies. We just need to state that the attempt to create an influential state player in MSS, analogous to KazMunayGas in oil industry, has not been successful.
Despite a slow start, the goals, declared by the national ore mining and smelting company, are quite ambitious. Thus, according to Zhandos Abishev, the Director for management of mining and industrial assets of Samruk-Kazyna, in due course Tau-Ken Samruk must become one of the top 10 most effective vertically-integrated mining companies in the world. At the same time, by 2020 its capitalization must exceed $13 billion.
Mr. Abishev named the following strategic directions of Tau-Ken Samruk development: the establishment of a national service operator for running geologic exploration works, bauxite-nepheline plant for processing of aluminum raw material, as well as a metallurgical plant producing wolfram and molybdenum products. Besides, Tau-Ken Samruk is planning to launch a national center for processing of anthropogenous mineral formations.
As well as in the case with KMG, the major competitive advantage of Tau-Ken Samruk is the right for running direct negotiations with the competent authority (in this case, the Industry Ministry) regarding the Kazakhstani objects of subsoil use under state ownership. Moreover, the national operator may use its priority state right for acquisition of alienated subsoil use right or participating share in the subsoil using legal entities in accordance with article 71 in the law On subsoil.
However, considering the fact that the company’s assets still lack realistically launched investment projects, the private investors do not view such "rights" as an adequate contribution of the state player in the joint business. In this concern, Mr. Abishev noted that at the moment as the basic interaction scheme with potential partners they consider the option, when Tau-Ken Samruk will not only transfer the subsoil use rights, but also, upon necessity, participate financially, provide equipment and technologies.
How realistic the goals, set before Tau-Ken Samruk, are will be clear in the course of time. So far the success of AIID programs in MMS directly depends on the conditions of the biggest private players and projects, implemented by them because they must become the base for the creation of small and medium enterprsies, involved in the production of output of higher conversion.
According to the presentation of Felix Vulis, Chief Executive Officer of ENRC, for his corporation, producing about 3% of Kazakhstani GDP, the recession period turned out more like the period for opportunities, rather than losses. In the last years ENRC managed to buy a number of perspective fields in Africa and South America. In 2009 ENRC revenues reached $3.8 bililon while the basic earnings of the company before income tax, debt and amortization reached $1.5 billion. According to Morgan Stanley, ENRC ranks 6th in the world by capitalization among the world mining companies, only behind BHP, Vale, Rio Tinto, Anglo American and Xstrata while by profitability it is included in the top three (in 2009 the profit margin of ENRC minus income tax, debt and amortization reached 38%).
Mr. Vulis informed that ENRC is actively involved in the implementation of the AIID program. The company approved a medium term program of capital expenditures for the next 5 years in the volume of $5.8 billion, $5.3 billion of which ENRC promises to invest in Kazakhstan. Among the most important projects he named the construction of the fourth melting shop in the Aktobe ferroalloys plant (with a capacity of 440 thousand tons per year) as well as the launch of the second line of agglomeration plant at the Aksu ferroalloys plant (350 thousand tons). The concluding phase is observed at the development of a feasibility study on a new ore-dressing plant (20 million tons of ore) and high quality pelletizer plant (5 million tons) at Sokolovsk-Sarbay mining production enterprises. ENRC also wants to build a hot-briquetted iron producing plant there with a capacity of 1.8 million tons per year. The company continues erecting the baked anodes plant in Pavlodar. The investment in this project will reach about $250 million while its capacity will reach 150 thousand tons of anodes per year. ENRC CEO also notes that this enterprise will help avoid the import of anodes from China that are applied in aluminum production. The perspective plans of the company also assume the possibility of expansion of the Aksu thermal plant by 1200 megawatt that needs the investment of about $1.26 billion.
Mr. Vulis also spoke about the governmental efforts that ENRC views as a necessary condition for the successful implementation of the presented projects. The first one is the extension of subsoil use rights for current contracts. At the same time, he referred to the President’s statement on the necessity to develop legal and economic instruments stimulating the accelerated modernization of all current enterprises of the republic. According to Mr. Vulis, one of the major issues, discussed in this context today, is the firmness of rights for subsoil use for quite an extensive term. "Otherwise, the construction of plants with high added value will not make sense for the investor if his rights are limited to the next few years", he underlined.
Besides, according to the data, supplied in the presentation of ENRC CEO, the company insists on rebuilding the previous (acting until 2009) mechanism of the investment preferences and their effect on projects in the field of subsoil use. Among the measures of state support he proposed to remove the sale of electricity for production of aluminum and ferroalloys as well as alumina for aluminum production as the subjects of transfer and anti-trust legislation. ENRC hopes that the government will help supply an energy and transport infrastructure for new enterprises.
Needless to say, the government must share the investors’ risks. However, on the other hand, it is easy to notice that the investment program of ENRC includes the projects, first of all, targeted at the expansion of the raw material base and modernization of outdated enterprises. Speaking of establishment of enterprises with a high added value they also target at lowering the production costs of ENRC. Thus, for instance, nearly the entire output of the rolling shop at SSMPE – grinding media and cores – will be used in order to cover the needs of the ENRC domestic concentration plants. Similar goals are pursued by the project of producing the anodes at the Kazakhstani electrolysis plant. The launch of constant current stoves technology at the Aktobe ferroalloys plant allows avoiding the import of Russian and Chinese coke. Ultimately, this all will lead to higher profitability of the low-cost profile business of ENRC. To remind, these are the export of ferroalloys, iron ore pellets and primary aluminum that serve as raw material for smelting enterprises in Russia, China, Ukraine, the European Union and countries of South-East Asia.
Meanwhile, according to information, announced at the forum by Albert Rau, the deputy Minister of Industry and new technologies, today, the export of Kazakhstani MSS reaches about $8.5 billion per year while our republic imports the metal products for about $6 billion (or 20.9% of total import volume). Of them, over $5 billion is the share of high conversion output. It feels like in this situation the priority in the field of state preferences must be given to the projects, able to cover these particular needs while our raw material giants are able to independently solve their corporate tasks.
In this concern, the topic, raised by Alexander Willip, the head of the Rusmet project, seems very important. In his opinion, considering wide-scale programs of industrial and infrastructural construction, announced by the government of the Republic of Kazakhstan, in the next 2–3 years the construction industry of Kazakhstan will start growing again. At the same time, its provision by steel reinforcement, as major strain-hardening material for reinforced concrete may become a problem of national scale. In pre-crisis period the domestic demand for reinforced steel was mainly covered by imports from Russia, Ukraine and China. However, considering the integral nature of the crisis, the carcass supply in the post-crisis period will drop to minimum. Russia and Ukraine will be totally busy with their own problems. According the expert’s estimate the current and announced enterprises in Kazakhstan itself may at best supply 2 million tons of reinforced steel to the market while facing the potential market need in the volume of 6 million tons by 2015. At the same time, the current and planned bar-rolling mills of ArcelorMittal Temirtau, Casting, Caspian Stal and other local producers are oriented at manufacturing rolled metal products for traditional carcass reinforcement of armored concrete from regular steel brands. The production of output, meeting western standards, including high-endurance and cold adimensionalized reinforcement, is not reflected in their plans.
Meanwhile, the construction in Europe and USA today consumes up to 80% of preliminarily tense reinforced concrete carcasses with an application of higher-endurance reinforcement. Such solutions increase the reliability and the durability of constructions and significantly reduce the steel spread. The western practice uses this approach in the construction of elite residential buildings as well as construction of bridges, aerodromes, roads, overhead crossing and hi-rise buildings.
In this concern, Mr. Willip believes that one of the most important breakthrough projects for Kazakhstan must be the development of electrometallurgical small plants, targeted at the production of rod iron, reinforcement and hard components, the output of fourth conversion. Among major advantages of establishing small plants the expert named moderate level of capital investment, short terms of constructions (1–1.5 years) and pay-off period (3–5 years), high level of automation and application of the newest technologies, minimum environmental impact as well as the possibility to diversify and perform the orders with small batches thanks to short production cycles.
"The application of a certain decision on this matter will let Kazakhstan turn from importer to major exporter of reinforced steel and rolled products in Central Asia upon manufacturing of output, meeting modern requirements of construction norms and rules", the Rusmet representative is affirmed.
And here we see the emergence of the factor, not related to the market or technologies; however, its impact is greater than all above-listed – this is the position of the state, its priorities in metallurgy in general and new mini-metallurgy in Kazakhstan in particular. How to regulate the import of metal and how to "turn the scrowbar from export to domestic needs" – upon the development of a new mini-metallurgy all these issues will require certain solutions on the state side.
So far, in the opinion of the expert, the republic lacks a single technical policy, coordinating the plan of construction companies, as well as production and import of rolled metal products and carcass. There is no clear picture of demand for reinforced steel in terms of quality and range of sizes. This all leads to the unregulated development of plants, "de facto, based on the principle of scrowbar accumulation in certain regions".
In this respect, Mr. Willip proposed to conduct an analysis of the situation in construction sector at governmental level on priorities regarding the reinforcement steel as well as develop a certain mechanism of deployment of small plants and service centers, based on their guaranteed sales of products, provision of raw material and energy resources.