INDUSTRIALISING EXPORTS

Thanks to the efforts of state and private investors, Azerbaijan has initiated a new stage in reviving its petrochemical industry in the past few years. There are more than twenty chemical enterprises in the country, three quarters of which are state-owned. New chemical companies are created in parallel with upgrading the enterprises of Azerkimya petrochemical complex at Sumgayit Chemical Industrial Park (SCIP). In July 2018, SOCAR Polymer launched the first stage of a polypropylene plant. Shortly after, in mid-January 2019, SOCAR Karbamid plant was commissioned.

The only largest plant

"The commissioning of the largest carbamide plant in the region is a clear indication of the development of the non-oil industry and the success of our industrialisation strategy," Azerbaijani President Ilham Aliyev said during the opening ceremony of the SOCAR Karbamid plant in Sumgayit. "The plant will produce about 650,000 tons of carbamide annually. Most of this volume is intended for export. 450mcm of natural gas with a market value of approximately $80 million will be used here annually. Nevertheless, the export of carbamide will provide twice as much revenue - about $150-160 million, which indicates the efficiency and profitability of the project."

President also highlighted the role of foreign banks in the project, which shows Azerbaijan's attractiveness for foreign investors. According to SOCAR, the total construction cost of the plant is estimated at 770-780 million euros. This was possible due to a 500 million euros credit line by Korean Eximbank (c. 50%) and UniCredit, Societe Generale and Deutche Bank (under guarantees of the Korean Export-Import Bank). At the first stage of construction (before concluding bank agreement), SOCAR has independently financed preparatory and earthworks, as well as the cost of building the necessary energy and other infrastructure. In addition, about 100 million euro was allocated to pay taxes and duties under the project and other expenses from SOCAR. Repayment of the loan will begin in 1.5 years after the launch of the plant, and the plant will enter the profitable mode in eight years.

Main contractor for the construction is the Korean company Samsung Engineering; design works have been implemented by the Danish Haldor Topsoe A/S and a Dutch company Stamicarbon B.V. The plant is equipped with the state-of-art equipment of European manufacturers.

Company includes three production sites allowing production of 1.2 thousand tons of ammonia and 2,000 tons of urea. The remaining capacity will be used for the production of urea granules. "SOCAR Karbamid is the only major producer in the South Caucasus region, and it is expected that 2/3 of its products will be exported mainly to Turkey, as well as to Georgia and Ukraine. The plant’s products will also be listed on the international stock exchange through SOCAR Trading," Director of SOCAR Karbamid Khayal Jafarov said.

Growing demand

What benefits will Azerbaijan have through SOCAR Karbamid? According to research conducted by the UN Food and Agriculture Organisation (FAO), carbamide is considered the most common, effective and relatively safe nitrogen fertiliser. This product is also widely used in the manufacture of other chemicals and pharmaceuticals. The insignificant cost and high yield of carbamide production determine stable demand for this product, which today accounts for up to one third of all mineral fertilisers used in the world.

Until recently, the share of the United States, China, and India – the largest producers of carbamide in the world –in export has been insignificant, since they consume most of the carbamide fertilisers produced. This prompted emerging markets to launch new carbamide plants. In the past ten years, around 25 new plants have been built in the world, and the global production of urea has increased by more than 20% with global demand exceeding 200.5 million tons in 2018.

However, the construction in 2017 of two large carbamide plants in the US with a total capacity of 3.1 million tons, as well as the recent decision of the Chinese government to reset customs duties on exports led to an increase in supply and a noticeable decrease in world prices for carbamide. Nevertheless, according to FAO forecasts, the expected population growth and the increase in food demand in developing countries in the coming years level the difference between the market demand for nitrogen fertilisers and the increased supply.

These circumstances suggest that SOCAR Karbamid products will have a growing demand in the world market. Moreover, thanks to the presence of rich natural gas fields and convenient supply logistics, the cost of production of Azerbaijani carbamide is significantly lower than that of a number of other global suppliers.

"The construction of SOCAR Karbamid is part of the strategy of the Azerbaijani government to reduce the export of raw materials and increase processing capacities in order to supply high-tech products with higher value added to the foreign market, which will allow for equivalent foreign trade," economist Elshad Mammadov said.

It is important that the launch of the carbamide plant will play an important role in the development of agriculture in Azerbaijan. "In fact, the government pays 70% of the cost of fertilisers provided to farmers. Therefore, it is easy to imagine the level of financial burden on our budget. Now we will provide our farmers with the highest quality fertilisers," President Ilham Aliyev said.

For comparison, the import of various types of mineral fertilisers to Azerbaijan in January-November 2018 reached 264.9 thousand tons, which is 60% more than in 2017. At the same time, domestic consumption of carbamide in Azerbaijan is estimated at 150 thousand tons per year. Even taking into account the mineral products sold on the local market by private companies, the annual amount of carbamide used by farmers is no more than 60% of the amount required by agrotechnical standards. Therefore, as production at the carbamide plant increases, domestic demand is expected to increase to at least 200 thousand tons annually. Using large volumes of cheaper local carbamide, farmers will be able to increase productivity in crop production and, as a result, increase the competitiveness of products in the external market.

Petrochemical complex

SOCAR Karbamid is by no means the only major project in the petrochemical industry of Azerbaijan. Presently, 18 resident enterprises are registered at Sumgayit Petrochemical Industrial Park: ten of them are functioning (SOCAR Karbamid was the eleventh). At the same time, the total amount of invested and planned investments in SPIP is estimated at about $3 billion.

“Last July, the first phase of SOCAR Polymer’s operation began operating in Sumgayit. This year, we expect to launch a number of facilities as part of the second phase of operations. Excellent export products will also be produced here. At the same time, Azerbaijan will start the sales of finished products made of polypropylene and polyethylene,” President Aliyev said.

SOCAR Polymer was established in 2013 to accelerate the development of the chemical industry in the country: on October 25, 2015, the foundation of the first phase of SOCAR Polymer was laid and after a little less than three years, President Aliyev launched modern and high-tech facilities. This is the first large-scale project implemented over the past 40 years in the petrochemical industry of Azerbaijan. Until recently, Azerkimya Production Association has exported low-density polyethylene and imported high-density polyethylene. With the commissioning of the plant, SOCAR Polymer will be able to get rid of expensive imports and fully meet the domestic needs for these demanded products. The new plant in Sumgayit will annually produce 184 thousand tons of polypropylene of 19 types and 120 thousand tons of high-density polyethylene of 12 types. “Starting from September 2018, propylene is no longer exported, but transferred to SOCAR Polymer for the production of polypropylene. SOCAR Polymer will export more valuable products of the advanced processing cycle, such as polypropylene and high-density polyethylene,” SOCAR reported. It is expected that about 70% of high-density polyethylene will be exported to the markets of Turkey, China and Europe. In general, SOCAR Polymer expects annual income of $350 million from the sale of polypropylene and high density polyethylene, about 75-80% of the production will be exported.

SOCAR Polymer was the first company established in the petrochemical industry of Azerbaijan in partnership with the public and private sectors. Thus, 60% of investments were provided by the Russian Gazprombank, the rest by SOCAR, Vitol, Pasha Holding, Gilan Holding and Azersun Holding, respectively.

As part of the upgrade process, Azerkimiya has been reconstructing and renewing the equipment of the ethylene-propylene plant for the last five-six years. It is planned to complete all stages of upgrade and reconstruction in the first half of 2020.

After a year and a half in Sumgayit, a full cycle of export-oriented petrochemical enterprises producing products with a high share of value added will work. According to preliminary estimates, thanks to SOCAR Polymer’s plants, total export revenues of the non-oil sector of Azerbaijan will increase by 19%.