Azerbaijan Petrochemicals Report Q3 2009

Azerbaijan's petrochemicals industry is faced with a crisis, amid a global economic downturn and large inventories. Yet the government's ability to bail the sector out is limited by severe budgetary constraints, casting doubt on the long-term viability of Azerkimya, the country's leading petrochemicals producer.

Industrial plants in Sumgait are suffering from the effects of lower oil prices and a contraction in credit availability. Azerkimya's facilities stopped production in early March with most workers reportedly sent on unpaid leave, having not been paid since January. Official statistics indicate that the petrochemicals industry is in crisis, with Azerkimya's production dropping by 72.5% year-on-year (y-o-y) in February 2009 as exports collapsed. According to local sources, by April 2009 Azerkimya's plants still had four months' worth of production left unsold.

BMI believes the contraction in the sector will wipe out the gains achieved in 2008, when chemicals output grew by an estimated 35%. The rubber and plastics industry already reported a 5% fall in output in 2008 and is likely to decline further in 2009. BMI forecasts that output across the petrochemicals industry will fall by at least 50%, a fall that could imperil the future of the industry in Azerbaijan. The collapse in sector output is likely to be worse than in 2007, when Azerkimya's output was affected by a rise in electricity and raw material costs which the company struggled to finance without state subsidies.

The situation in 2009 is far worse and BMI expects some form of government intervention to ensure that the petrochemicals industry survives the global economic turmoil and to avert serious social unrest caused by mass lay-offs at plants in Sumgait. However, the government's finances are in trouble after it based its 2009 budget on an oil price forecast of US$70 per barrel (bbl). Much reduced crude export revenues may prompt the government to make more strenuous efforts towards diversification away from dependence on oil, which could lead to greater efforts towards strengthening the petrochemicals sector. But short-term budgetary constraints are a serious concern.

The government is determined to develop downstream sectors, aware that the country has considerable long-term potential. While the government has considered several measures to establish a stable environment for investment, its chemicals and petrochemicals industries remain in the 'have potential' category, awaiting 'trickle-down' funding from other industries to initiate some sort of revitalisation in the sector. In June 2008, national oil and gas producer Socar announced that it was planning to raise EUR20-22bn (US$31-34bn) to invest in building a new oil and gas processing complex and a chemicals and mineral unit in Baku. The company aims to obtain the funding from international lenders, but no potential sources of finance or a timeframe have been announced. In addition, Azerkimya signed a memorandum of understanding and confidentiality in September 2008 with a number of leading petrochemicals companies to construct a large petrochemicals complex at Sumgait, but the project's current status is unclear and could be jeopardised, or at least delayed, by the economic slowdown.

Azerbaijan is in last place in BMI's proprietary Europe Petrochemicals Business Environment Rankings with a score of 32.0. The score has deteriorated considerably in recent months due to growing uncertainties over the future of the petrochemicals industry as well as the impact of the global economic crisis. Azerbaijan's considerable energy reserves and rising gas output have been hampered from improving the country's petrochemicals capacity, largely due to the poor business environment which has deterred investors.