Azerbaijan Petrochemicals Report Q4 2009

Azerbaijan Petrochemicals Report Q4 2009

The collapse in output at Azerbaijan’s chemicals and petrochemicals industries will be sustained
throughout 2009 as the country is gripped by recession, while long-term prospects of the industry will be
severely constrained by major hurdles to investment, according to BMI’s latest Azerbaijan
Petrochemicals Report.
Chemical production in Azerbaijan was down 78% year-on-year (y-o-y) to AZN18.2mn (EUR16mn) in
the first four months of 2009, according to the latest government statistics. This came on top of a 4.1% yo-
y decline in the value of chemicals output to AZN204.3mn in 2008 with a sharp decline in Q4. In 2009
there were signs that the petrochemicals industry as a whole was in crisis due to the contraction in credit
availability amid a decline in liquidity caused by falling oil prices. Azerbaijan State Chemical
Company (Azerkimya) stopped production in early March with most workers reportedly sent on unpaid
leave, having not been paid since January. According to local sources, by April 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 an estimated 35%. 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.
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 long-term scenario for the Azerbaijan petrochemicals industry is likely to be determined by the
country’s investment environment and the ability to limit the wild fluctuations in economic growth
caused by shifts in oil prices. BMI expects the economy to shrink 0.9%, down from growth of 10.8% in
2008 and 25.0% in 2007. The fall into recession is deeply concerning and demonstrates the fundamental
weakness in the country’s oil-based economy. This in turn undermines investor confidence in
downstream industries and their viability. Major hurdles include endemic corruption, weak legal and
judicial systems as well as poorly maintained infrastructure. These significantly undermine the ease of
doing business in Azerbaijan and hinder foreign investment, particularly in the downstream sectors. In
recent months there have been indications from delegations from China, the UAE and the CIS that
Azerbaijan’s petrochemical industry could lead to foreign investment in petrochemicals. There is little
sign of any imminent commitment and in many cases Azerbaijan is heavily reliant on these states for
petrochemicals products, which are more competitively priced than domestic production.
Azerbaijan is in last place in BMI’s proprietary Europe Petrochemicals Business Environment Rankings
with a score of 32. 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.

Executive Summary ...5
SWOT Analysis7
Azerbaijan Petrochemicals Industry SWOT 7
Global Market Overview8
Global Ethylene Capacities ... 8
Table: World Ethylene Production By Country, 2008 And 2013 (‘000 tonnes capacity) ... 8
Polypropylene. 11
Global Oil Products Market Review.. 14
Table Global Oil Prices, 2003-2013 (US$ per barrel)... 18
European Regulation Overview19
Table: Key Elements Of REACH. 20
Azerbaijan Market Overview ..22
Table: Azerbaijan’s Petrochemicals Sector – Cracker Capacity Data And Forecasts, 2004-2012 (‘000tpa). 22
Table: Manufacture Of Petrochemicals Products, 1999-2006. 23
Petrochemicals Business Environment.25
Table: Central And Eastern Europe Petrochemicals Business Environment Ratings .. 25
Limits Of Potential Returns.. 25
Risks To Realisation Of Returns . 26
Industry Trends And Developments ...27
Upstream Activities 28
Refining ... 30
Downstream 31
Petkim Privatisation . 33
Industry Forecast Scenario 35
Table: Azerbaijan’s Oil Sector, 2005-2013.. 37
Macroeconomic Outlook.. 37
Table: Azerbaijan – Economic Activity, 2006-2013 39
Company Monitor.40
Azerkimya 40
Socar. 42
Country Snapshot: Azerbaijan Demographic Data.46
Section 1: Population 46
Table: Demographic Indicators, 2005-2030 46
Table: Rural/Urban Breakdown, 2005-2030 ... 47
Section 2: Education And Healthcare 47
Table: Education ... 47
Table: Vital Statistics 47
Section 3: Labour Market And Spending Power . 48
Table: Employment Indicators 48
Table: Consumer Expenditure, 1999-2004 (US$) ... 48
Table: Average Annual Wages, 2000-2012.. 49
BMI Methodology .50
How We Generate Our Industry Forecasts .. 50
Chemicals And Petrochemicals Industry .. 50
Cross Checks .. 51
Business Environment Ratings 52
Table: Petrochemicals Business Environment Indicators And Rationale 52
Weighting. 53
Table: Weighting Of Indicators .. 53