INDUSTRIAL COMPONENT

Over the past two years, Azerbaijan has successfully implemented the strategy of economic diversification and expansion of the non-oil sector, particularly its industrial component. As part of the post-oil reforms, this strategy is aimed at establishing efficient industrial clusters concentrated mainly in technoparks, industrial districts and special economic zones, capable of producing competitive products with export potential using domestic raw materials.

“Just in two years, Azerbaijan has witnessed very serious economic reforms that allowed us to get the country out of a difficult situation due to sharp decrease of oil prices,” said President Ilham Aliyev at the 6^th NAP (New Azerbaijan Party, R+) convention recently. “Sustainable development of the Azerbaijani economy is connected only with the following factors: development of the non-oil sector, promotion of entrepreneurship and administrative reforms.”

Tangible output

According to the president, this policy has already yielded results, which are manifested by the economic indicators of the last year, particularly the growth of non-oil industry reaching 3.7%. This positive trend increased in January 2018: Azerbaijan's GDP grew by 2%, non-oil economy - by almost 4%, and industrial production in the non-oil sector - by 8.7%.

Development indicators of the non-oil industry in 2017 show that the pharmaceutical segment provided the fastest growth rates - 2.5 times. The growth of production indicators was as follows: rubber and plastics - 71.7%, construction materials - 46.6%, textile industry - 44.7%, machinery and equipment - 42.9%, wood - 34.7%, electrical equipment - 34.6%, computers and electronic products - 25.5%. Significant growth was also observed in the production of chemical products, furniture, vehicles, clothing, beverages, tobacco products, food, paper and cardboards.

These figures clearly demonstrate that the industrialization strategy is implemented successfully. The capitalization of the industrial sector implemented in recent years has provided quite tangible output.

What is the industrial potential of Azerbaijan and what are the prospects of industrial development in the near future?

Same as during the previous energy crisis, the leading trend is the policy of concentration of production facilities in various industrial clusters. In recent years, these clusters have served as classical industrial free economic zones (FEZ): thanks to fiscal and tariff preferences, preferential rent of production areas and a number of other advantages, local and partly foreign capital is attracted gradually, contributing to the establishment of a new industrial core in the country.

In particular, the industrial parks with large industrial enterprises of full production cycle and high export potential are actively developed. According to the Ministry of Economy of Azerbaijan, the residents of industrial parks have already invested $2.5b in the implementation of projects contributing to the opening of about 11,000 new jobs. At the next stage, it is planned to attract another $1.1b into industrial parks, which will open another 7,500 permanent jobs.

Chemical localization

Significant preferences and the state-supported development of infrastructure have turned the industrial parks into a locomotive of industrial development in Azerbaijan. For instance, the largest Sumgayit Chemical Industrial Park (SCIP), where the construction of several large enterprises was started last year. One of them will be a glass production plant operated by AzerFloat JSC. The capacity of the plant based on German technologies will be 8 million square meters of products, which is in high demand in the construction sector of Azerbaijan (annual domestic demand is about $80m), and will also be exported to Russia, Georgia and Central Asian countries. Also, the construction of a factory for the production of dyed wool yarn began on the territory of this industrial park.

By the end of 2017, Agrokimya Azerbaijan, a member of the Gilan Industrial Group, completed the first stage of construction of a plant for the production of pesticides (annual capacity = 20,000 tons). “Another new resident of SCIP, Labdisc Azerbaijan, plans to set up production of special equipment for school laboratories, training facilities, electronic and other devices,” said Deputy Minister of Economy Niyazi Safarov.

However, the most important milestone in the development of SCIP will be the commissioning of enterprises of the largest residents of the park in 2018: SOCAR Polymer and SOCAR Carbamide. The total cost of SOCAR Polymer exceeds $750m. In the first quarter of 2018, it is planned to commission the polypropylene plant, followed by the commissioning of the polyethylene plant in the third quarter. At the first stage, the production capacity will be 120 thousand tons of polyethylene and 180 thousand tons of polypropylene. By 2021, the total capacity can reach 570 thousand tons. About three quarters of the products will be exported to Turkey, Europe and the CIS countries. According to preliminary estimates, total export revenue of these plants will reach $8b.

In mid-2018, SOCAR Carbamide plant will start operations at SCIP. Total investments in this project reach about €700m. The plant is designed to produce about 650 thousand tons of products annually. Thanks to the export of over two thirds of nitrogen fertilizers to foreign markets, Azerbaijan will receive more than $140m annually from 2019 onwards.

In general, more than half of the 25 resident companies operating in industrial complexes of Azerbaijan are registered at SCIP. The total volume of investments in plants of the chemical park was $1.8b. In the coming years, this amount will increase to $2.7b, considering the ongoing and projected construction of industrial enterprises. It is planned to launch up to 40 different industrial enterprises on the territory of SCIP.

New industrial districts

The development of industrial districts, where the production and service infrastructure of SMEs are located, should ensure a comparable effect. These SMEs are primarily focused on domestic market.

The range of activities of industrial quarters is very wide - from small-scale production of building materials, furniture, clothing, footwear and other consumer products to relatively large industrial-type enterprises. In particular, in March 2018, the joint Azerbaijani-Iranian company Azermash-Iran Khodro will start a serial assembly of eight car models at the Neftchala industrial district. The annual design capacity of the plant is 10,000 cars, but at the first stage (by the end of 2019), it is planned to manufacture 6,000 cars. Later, the production of most of the components will be localized in Azerbaijan, which will lead to a reduction in production costs and an increase in production.

“The government of Azerbaijan is ready to invest funds in the development of infrastructure for industrial districts. Over time, similar facilities will be established gradually in many regions of Azerbaijan. In particular, in 2018, two more industrial districts will be created in Hajigabul and Sabirabad,” said Minister of Economy Shahin Mustafayev.

So, the future residents of the Hajigabul industrial district (construction should approximately end in July 2018) submitted investment applications for six projects for a total of ₼43m. Thanks to these projects, it is planned to launch enterprises for the production of heavy engineering products, railcars, automobiles and composite materials in the industrial quarter, which covers an area of ​​20 hectares. There will also be enterprises for processing of wool and cotton cleaning, production of wooden, plastic and building materials, processing of agricultural products. The logistics center will also operate on the territory of the district. Products produced in Hajigabul industrial district will be exported to the CIS, Africa and the Middle East.

Tobacco for export

Another perspective segment of the industrial potential is the production of tobacco, where the dependence on imports is still very high. Each year Azerbaijan imports tobacco products for more than $160m. In order to ensure import substitution, the construction of a new cigarette factory has already started.

According to the General Director of Azerbaijan Industrial Corporation Kamran Nabizadeh, the cost per hectare of tobacco in Azerbaijan is higher than in neighboring countries. “It is necessary to reduce the cost per hectare of tobacco, which currently is more than ₼2,300, while in neighboring Turkey this reaches only $800. The cost of tobacco in Azerbaijan sometimes reaches abnormal prices,” said Nabizadeh said.

Director of Intertobacco CJSC Fazil Rustamov explained the reasons for the high cost of tobacco. “Unlike other areas, manual labor is widely used in the tobacco industry, which determines the high cost of production. To reduce these costs, it is necessary to implement partial mechanization of the works, and we are working in this direction,” said F. Rustamov.

K. Nabizadeh also stated that the low quality of local tobacco negatively affects the price and export volumes of tobacco products. “We must do everything to ensure that this problem is solved. These factors negatively affect the whole sphere, hindering its development. We need to take this into account in our work,” said Nabizadeh.

Prospective directions

During the conference on the implementation of the third stage of the State Program of Socio-Economic Development of the Regions of Azerbaijan, held in January 2018, President Aliyev outlined the promising directions for the development of the non-oil industry. In particular, he mentioned that it was necessary to invest in the expansion of sewing and knitting production: domestic demand here is quite large as Azerbaijan imports about $100m-worth of respective products annually.

The development of industrial carpet weaving is very promising. For this purpose, Azerkhalcha Production Association was created. The export potential of the carpet weaving industry is quite high, and, according to the president, 10 new carpet factories will be opened by the end of this year, the total number of which will reach 20, and by the end of 2019, this number will increase to 30.

In this segment of industry, it is also possible to promote the products Sheki Ipek OJSC for export. According to the Chairman of Board Nizami Garibov, the equipment of the plant will be modernized for output of products to European markets, and the range of products will be expanded. In particular, along with the production of silk fabrics, it is planned to arrange the processing of wool highly demanded in Dagestan, Russia.

Yet another promising industrial venture will be the reconstruction of the large aluminum plant in Ganja. The goal is to organize the production of primary and final aluminum products. This will increase the competitiveness of this sphere and increase the export potential. According to K. Nabizadeh, the restoration of the Ganja aluminum plant and the establishment of mining of alunite in the Dashkesan region are also in great demand. Modernization of the plant will allow obtaining alumina (the main raw material for aluminum production) and other products from alunite ore, thus eliminating the need to import raw materials, which will significantly reduce the cost of aluminum production in Azerbaijan.

Apparently, the industrial corporation has many other ambitious projects planned for the near future. In general, according to K. Nabizadeh, it is planned to restore and reorganize the activities of a dozen enterprises using modern technologies.