Kazakhstan Mining Report Q3 2009

On May 25 2009, Kazakhstan's security service, the KNB - successor to the Soviet-era KGB - arrested the head of the country's state uranium company. Mukhtar Dzhakishev, the long-serving head of Kazatomprom (one of the world's largest uranium producers), has been detained on allegations of theft. A KNB spokesman stated that a number of other Kazatomprom executives have also been arrested, and that investigations are ongoing. While the extent of the evidence against Dzhakishev has yet to become clear, we caution that this move could be another concerning sign of divisions and factional power-plays within the Kazakh elite. These detentions are the latest in a series of high-profile industrial and government arrests, and we expect these divisions to sharpen further as the economic crisis bites harder.

With mining accounting for 20% of industrial employment, BMI believes that a further deterioration in economic situation could result in significant unrest and could even jeopardise the rule of President Nazarbavev. In general, the Kazak population is considered to be relatively benign when it comes to social issues, but quick to hit the streets in protests on economic matters. According to local reports, unrest is already stirring in the coal mining region of Karaganda as well as the major copper producing area of Zhezkazgan. The current situation is not without precedent. In the 1990s falling living standards and disputes over wages resulted in riots in Karaganda.

It seems that the government is taking measure to avert a crisis. Tax cuts are to be offered to mine companies that do not sack workers. Meanwhile, the fiscal stimulus package should increase stability and liquidity in the sectors such as mining, and provide the authorities with extra funding to spend creating jobs. Oil revenues, despite the collapse in prices, are continuing to grow as more output comes on-stream.

This is providing some protection for the economy, while the depreciation of the tenge should also help to boost exports.

An industry that was in disarray due to the break-up of the Soviet Union, Kazakh mining witnessed widespread technological upgrades and privatisations in the 1990s. This was further fuelled in recent years by spiralling international metal prices, rapidly expanding demand from China and India, and streamlined procedures for obtaining permits and foreign investment. The country's current reserve of copper is estimated at 36mn tonnes. Further, it ranks second globally in terms of manganese ore reserves, which are estimated at 600mn tonnes. Kazakhstan also hosts 30% of the worldwide chromite ore deposits, as well as 95% of the total chromium reserves within the Commonwealth of Independent States (CIS).

Industry Forecast By 2013, BMI forecasts that the market will be worth US$18.9bn, up from a level of US$15.38bn in 2008. However, in the short-term the sector is set to suffer, as the collapse in metals prices and slumping demand has forced the country's leading producers such as ENRC and Kazakhmys to cut production. In 2009, we expect the US dollar value of the market to contract by 14.4% in real terms, while in 2010 similar levels of negative growth will be recorded. Recovery of any sort will not occur until 2012 at the earliest