International companies get stuck into Kazakh cement

By bne IntelliNews June 9, 2008

Clare Nuttall in Almaty -

Cement mixers are standing idle at abandoned residential projects in Almaty, but in Shymkent, Astana, Karaganda and other Kazakh cities, construction of new cement plants is racing ahead in anticipation of future demand.

New players from Russia and Europe are entering the Kazakh cement market, lured by high prices and strong long-term forecasts for the construction materials sector, while local companies are expanding their operations. If all their plans come to fruition, a staggering 10m tonnes of extra production capacity will be available by 2011 - almost twice the existing capacity. "Everyone is planning investments in this sector. People are drunk on cement and construction," says Fabrizio Donegà, deputy general director of Italcementi, owner of the Skymkent Cement plant.

An imbalance between supply and demand has kept prices rising steeply for several years. Kazakhstan produced barely more than half the cement it needed in 2007, making up the shortfall with imports from China, Kyrgyzstan, Russia and Uzbekistan. In the last year alone, the price for cement has increased by 26%, from KZT10,014 per tonne in the first quarter of 2007 to KZT12,639 a year later.

The situation is similar across the construction materials sector, which has not been able to keep pace with the country's building boom. As well as importing one-third of the cement it consumes, Kazakhstan has also imported 55% of roofing materials, 73% of paints and varnishes, 100% of construction glass, and high proportions of numerous other materials, according to a report from PMR Research.

Admittedly, the last nine months have seen a slowdown in construction activity, with many projects, especially in the residential sector, progressing slowly or being abandoned altogether. This has led to a 20% drop in demand for cement since July, according to Javier del Ser, CEO of Steppe Cement. However, del Ser and others in the sector are confident about its future growth and the consequent demand for cement and other materials. "In Spain we have a saying: in the long-term everyone will be bald," says del Ser. "We don't know exactly when demand for cement will go back up, but we do know that it will go up."

Donegà of Italcementi, which bought Shymkent Cement back in 1998, also believes in the long-term potential of the Kazakh market. "At the time when we acquired Shymkent Cement, Kazakhstan was in economic difficulties, but we thought the potential of this country was large enough to justify entering the market," he says. "Since 2000, the market has changed completely. Kazakhstan lacks infrastructure, but its natural resources mean it has the money to invest in building new and replacing old infrastructure. As a result of this and the growth of the construction sector, consumption of cement has increased enormously. We believe this will continue."

Soviet baroque

Massive urban developments projects in the capital Astana and the oil cities of the Caspian basin are already in progress. In Astana alone, at least 7m square metres of housing must be built by 2016 to house the growing population. In other cities, the existing Soviet-era housing stock needs to be replaced. Almaty's municipal development programme, for example, envisages an increase in living space from 18 sqm per person to 22 sqm - which is still well below the Western European average of 45 sqm per person - as well as the replacement of old buildings that do not comply with current safety standards. Cement will also be needed as Kazakhstan upgrades its road and rail, communications, energy transmission and other infrastructure.

Donegà forecasts that the sector will return to its steep upward trajectory by 2010 at the latest. By that time, most of the cement plants being planned are due to be operational.

Steppe Cement will triple its capacity this year, after an expansion funded through a new share issue in March 2006, while Italcementi is more than doubling its capacity with the planned opening of a new plant near its existing one in Shymkent.

The first new entrant to Kazakhstan on the back of the construction industry's expansion was Oleg Deripaska's BaselCement, which bought a small plant from Sastobe Cement in December 2006, and is in the process of expanding. Russia's second-largest cement producer Sibcement followed Basel into Kazakhstan, where it set up Yug Cement, an Aktau-based joint venture with an unnamed local partner. It later bought into the BI Cement plant near Astana and plans to increase the plant's capacity from 550,000 tonnes to 1.75m tonnes a year by 2011.

Companies from other parts of the world are also entering the Kazakh market. France's Vicat Group is building a $232m new plant in the Zhambyl Region of South Kazakhstan, with KazkommertsInvest as a co-investor. Switzerland's Viger is collaborating with local manufacturer Yuzhpolymetal; the two companies are planning to invest $220m setting up a cement plant in Kentau. Inder Cement announced in April 2008 that it is building 1m-tonne plant in Atyrau near the National Industrial Petrochemical Techno Park and other development projects.

The extra capacity these plants will provide is expected to be enough to satisfy domestic demand. Indeed, analysts at Renaissance Capital forecast that demand will catch up with supply by 2009. When that happens, the high margins that have made the sector so attractive recently will be eroded. Kazakhstan could even become a net exporter of cement, with plants in the north of the country serving the Russian market.

However, both del Ser and Donegà consider that at least some of the construction plans will fall through. "A lot of people have arrived, but we won't count them as competition until they start producing, which will take at least three years," said del Ser.

Donegà agrees: "There have been plenty of announcements, but the investment payback in this sector is a very long-term one. The construction industry is very capital intensive, energy intensive and needs expertise." He also points to the difficulties inherent in entering the Kazakh market, where the anti-monopoly commission takes a close interest in cement production, and red tape is among the tightest in the world.

Italcementi has had its fair share of problems - only recently its licence for Shymkent-Cement was voided and only restored after several months of negotiations and a promise to supply the South Kazakhstan authorities with 85,000 tonnes of cement at the previous year's price.

For now, the existing players in this market remain predominant. Steppe Cement's is the only large-scale expansion expected in the near future. It will take at least two years to see if the new entrants to Kazakhstan's cement production industry will realize their plans and change the dynamics of this sector.

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