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“What is the key obstacle to further development of the industry in Kazakhstan?”

At the Downstream Central Asia and Caspian in Almaty Globuc had a chance to talk to Valentin Kotlomin, Consulting Manager with Argus Media and one of most known and respected expert in the industry about the future development of the petrochemical industry in the countries of Central Asia. We spoke in Russian, but the full interview translated to English is available here.

What main trends can you identify in Central Asia’s petrochemical industry?

The Central Asian region has traditionally been viewed as a promising direction for developing the petrochemical industry. Among the prerequisites that are mainly considered and confirm this concept is, first of all, the availability of raw materials. The region is rich in oil and the region is rich in gas.

Recently, several significant events have occurred in Kazakhstan, which make it possible to further unlock this potential.

First of all, I want to note the launch of the KPI polypropylene complex. This is a multi-billion dollar project and the first integrated petrochemical complex in Kazakhstan. Of course, the launch of the complex was a significant milestone for the development of the petrochemical industry in the country.

Before this, petrochemical products in Kazakhstan were produced, but this industry was mainly represented by relatively small enterprises that took advantage of the proximity to oil refining assets.

And just the KPI project is, indeed, such a full-fledged, integrated complex that gives hope that similar complexes will be created in Kazakhstan. The launch of this complex allows us to say - “We did it!” We can build a big petrochemical project.”

Another point I would like to note regarding the long-term development of the industry in Kazakhstan is the entry into the country’s petrochemical projects of large industry players such as the Russian Sibur, the Chinese Sinopec, and joint ventures with Tatneft.

All of these companies have sufficient experience in the petrochemical industry, they have experience in building new production facilities, they have experience in producing petrochemical products, managing the supply chain, entering new markets, and successfully marketing products.

These competencies that companies will bring when entering into Kazakh projects can become a key success factor, allowing for the further development of the industry in the country.

What is the key obstacle to further development of the industry in Kazakhstan?

During this conference, an audience survey was already conducted, where the question was asked - what is the key obstacle? The majority of the audience noted the lack of investment in the development of the industry.

In my opinion, this is more likely a consequence than a cause, because the reasons lie on a slightly different plane.

First of all, in addition to the advantages that we have already discussed, the development of petrochemical industries in Kazakhstan has limitations. This is a limitation, it is not regulated, and you have to get used to it. This is the remoteness of Kazakhstan from key markets for petrochemical products. This means, first of all, high transport costs for transporting products.

In addition to transportation costs, the complexity of the logistics chain should be noted, since to deliver products to key sales markets, it is necessary to use multimodal transportation involving rail transport, sea transport, and transship products in ports, which ultimately, again, creates certain risks in terms of sustainability of supplies.

Another consequence of Kazakhstan’s closed, isolated position is the difficulty in supplying equipment that is necessary to create petrochemical production.

This issue can be resolved, but it has a negative impact on the cost of all petrochemical projects.

As a result, what do we have?

On the one hand, we have a reduction in the profitability of projects due to high logistics costs, and on the other hand, we have high capital costs.

As a result, projects implemented here potentially have lower returns than similar projects, for example, in the Middle East or the Asian coast.

And here a lot depends on government support, on how much the government of Kazakhstan is ready to support the petrochemical industry, and what measures it is ready to take for this.

Support in terms of infrastructure projects is now being actively discussed to provide new production with roads, power transmission lines, and so on, but it may be worth thinking about some direct support measures that relate to tax regulation, and the introduction of some preferential tax rates.

Everything must be done to ensure that investors who come with their money, who want to invest in the petrochemical industry, choose Kazakhstan and, for example, not the United Arab Emirates.

How important is it to strive for import substitution in the development of the industry?

Yes, indeed, in recent years the idea of import substitution has been quite popular in many countries. This is a banner that is very easy to raise and with which it is very easy to walk around government institutions, claiming that we will now build a petrochemical project and provide the domestic market with the necessary products.

But the fact is that the region’s markets for petrochemical products are generally quite narrow. And if you are building a petrochemical project on a global scale, a project that will be cost-effective, then focusing on the domestic market, focusing exclusively on import substitution, is not justified. Of course, domestic markets need to be developed, but we should not create illusions that the development of the domestic market will allow us to increase domestic consumption many times over.

Very often examples are given of Western Europe and North America in terms of per capita consumption of petrochemical products, and these figures are voiced as goals for the development of the domestic market. 

However, it seems to me that we should not fall into this trap, since these markets are different from the markets of Central Asia.

They have a fairly long history of development in terms of consumption of petrochemical products, in terms of polymers, and other products. 

In addition, the consumption of petrochemical products in any country is increasing due to the development of other industries - automotive, construction, and electronics production. If some country sets the goal of increasing domestic consumption, it cannot get away with increasing the production of banal plastic packaging, but we need to think about the comprehensive development of the economy as a whole. 

And this, as we understand it, is a more complex task that is beyond the competence of the petrochemical community.

Are there any country-specific features of the region in the context of the development tasks of the petrochemical industry?

All of the listed countries have their specifics, naturally. Specificity begins even at the level of raw material availability. For example, Kazakhstan is a large oil-producing country. Here the emphasis should be on deep oil processing, that is, moving away from the fuel model and moving to oil as a petrochemical raw material.

Turkmenistan is a country with huge natural gas resources, it is the fourth in the world in terms of these resources. Naturally, the emphasis here should be on monetizing this gas.

From the point of view of consumption, there are also specifics. Uzbekistan is the most populous country in the region with the highest consumption of petrochemical products. This also shapes the industry development strategy paths.

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