20.04.2009

     In spite of the crisis, Uzbekistan intends to realize several big investment projects in cement production industry. However, these projects can be prevented by the tax pressure and lack of infrastructure rather than by the problems of the market.

     In early March, speaking at the Tashkent International Exhibition UzBuild-2009, deputy chairman of the board of JSC “Uzstroymaterialy” (one of the major players in the local market of building materials) Rustam Israilov said that during 2009, the country intends to begin construction of three new plants with total capacity of 5, 7 million tons and valued at more than USD 700 mln. This will let Uzbekistan to increase the production of cement in 1,6 times to 10 mln tones by 2013, and taking in consideration the modernization of the old plants – to 16 mln tones by 2016. For implementation of this plan, JSC “Uzstroymaterialy” intends to construct 6 new cement plants with total capacity of 9,5 mln tones and valued at USD 1,42 bln.

     Reason for optimism is the production figures of the cement plants. In the last year total volume of exported cement in physical terms almost did not change and this volume in money terms also stayed approximately the same. Only one player – OJSC Akhangarancement - has reduced export from 400 to 250 thousand tons due to falling demand in Kazakhstan. Other manufacturers have managed to diversify risks through more stable customers in Afghanistan and Turkmenistan.

     Hoping for foreign markets, as well as for national construction industry, cement plants did not curtail the investment programs. "We do not have corrective program. However, we do not reject from our plans and the work continues.", - emphasized Mr. Israilov. The general director of JSC Akhangarancement Denis Dotsenko has confirmed that the situation is stable. Cement production companies are confident that the market conditions will not influence on them. The main thing for the players is to reach a cooperation agreement with the government.

     Uzbekistan has managed to keep the base of cement industry inherited from the Soviet Union. And since 2001, companies are increasing production volumes. Over the past five years, output growth in the industry averaged 18% annually. This year, four companies producing 99% of cement in the country - Kizilkumcement, Akhangarancement, Bekabadcement and Kuvasaycement - plan to approach the production performance of 7 mln tons (in the past, it was 6.3 mln), including 1 mln tons going to export.

     In many ways it is a merit of foreign investors. Over the past four years, Uzbekistan has sold them three of the above plants and left only the flagship of government property - JSC Kizilkumcement "(produces 55% of cement, provides 70% of export). Russian “Eurocement Group” has acquired 76% of OAO Akhangarancement, Kazakh LLP “Caspian resources "- OJSC Bekabadcement and OJSC Kuvasaytsement.

     Foreign players are attracted by the prospects of the local market. According to the calculations of JSC “Uzstroymaterialy”, by 2012 the country's cement consumption in sphere of house building will grow from the current 5 to 8-8,5 mln tons. Taking into account the volume of cement, necessary for the infrastructure, industrial and social facilities, the consumption of cement will increase up to 12 mln tons, that is almost twice bigger than the current capacity of cement plants, which current utilized capacity amounts to 90%. "If in 2008 we were able to saturate all the market, then in the next two years it will be too difficult to avoid shortages of cement without an increase in capacity," - head of sales of JSC "Kizilkumcement" Sanjar Jumaniyazov says.

     Neighboring markets, importing Uzbek "gray substance" are also very attractive for the investors. According to the chairman of board of "Uzstroymaterialy" - Erkin Akramov, by 2012 cement consumption of cement in Central Asia and Afghanistan will amount to 34 mln tons, while the existing capacity is only18.5 mln tons. Only Kazakhstan (taking into account the state program of housing construction) by 2012 will consume at least 10.2 mln tons of cement, while the real industrial capacity of five plants in Kazakhstan is 4.9 million tons from 8.35 million initial - the result of worn out equipment. Stated investors’ plans to construct 21 new cement plants with capacity of 26.5 million tons, according to Uzbek experts, is unlikely to be realized because of the negative impact of the crisis. Taking into consideration the reduction of import from Russia, the deficit on the Kazakh market is more than likely. Moreover, according to analyst of “Central Asia investments” – Ilhat Tushev, the location of Kazakh cement plants does not allow them to evenly supply the country. The Uzbek plants are closer to consumers from southern Kazakhstan.

     A similar situation is in Tajikistan, where there is only one plant in Dushanbe. The deficit of 1.6 mln tons by 2010 is the result of large-scale modernization of Rogun and Sanktudinskoy HPS. However, the modernization plans may be affected by the crisis. However, the main hope of Uzbek cement plants is Afghanistan. In spite of political and economic instability, demand for cement in this country is still very high. In the past two years, the Afghan economy imported 2 mln tons of cement, mainly from Pakistan. Uzbekistan exports to Afghanistan just 200 thousand tons, but the players are confident that Afghans will continue to build in any political conditions. "In the worst case, we will reduce export to around 800 thousand tons, - Rustam Israilov considers, - “And if the best happened we will increase our export to 1.3 million tons."

     In anticipation of the market growth, Uzbekistan decided to catch “two birds in the bush”- to build new cement plants and modernize existing ones. “Eurocement Group” has developed an investment program for the plant in Ahangarane, including development of earth-deposits management, increasing of capacity through the acquisition of new equipment, modernization of the energy complex. In 2008 the investor increased capacity of the plant to 1,736 tons of cement, and planes to increase it by another 200 tons by investing USD 20 mln by 2011.

     Akhangaran plant use "wet" technology for production of cement, what requeres the use of water and large volume of gas for drying. But, unlike “Eurocement”, the other players are going to use less expensive "dry" way - with the help of Chinese technology. They help reduce the cost of building of facilities in two times from the usual level of 200-250 dollars per ton. “Caspian resources” announced that it had signed the contract with the Chinese CFMC Engineering Co. worth $ 90 million on renew of the equipment of two plants. The Chinese company will build new production line in Bekabad for production of cement by "dry" method. Project will be implemented by the end of 2009 and after that the company hopes to find itself among the leading players.

     "Kizilkumcement"- the only plant that uses "dry" method, might also attract the Chinese. Initially it was expected that the new line worth USD 150 million will be placed by French “Satarem SA”, which won the tender. However the French began to doubt, and now the government thinks about transfer of the tender to “Chinese CNC Machimpex”, which took the second place.

     Another investor - Polish “Sky Bone”, which has replaced Russia's "TAC-Invest" in building of USD 3 mln plant in Jizzakh region, also plans to attract a Chinese contractor. Polish investor intends not only to substantially increase production capacities, but also to expand the range of the production - to set up production of 300 thousand tons of oil-well cement for oil and gas industry.

     Moreover, there are plans to build plans from scratch. In spring Korean “Natural Cement” - one of the biggest players in the cement market of South-East Asia announced the intention to construct a cement plant with capacity of 1.7 million tons in Surkhandarya. The project costs USD 300 mln and for its implementation the company created a joint venture with the Uzbek partners.

     In addition to the expected growth in demand, the success of investment projects will be ensured by the good raw materials base and low prices for gas and electricity within the country (the government set 8% “ceiling” upon the prices). Uzbek cement’s price is also attractive - for example, in January at the Tashkent Stock Exchange it was for sale for 70 USD per ton, while Kazakh (despite the decline in value), - for 90-120 USD. According to chief of analysis and development department of JSC “Uzstroymaterialy” Akbar Mukhiddinov, the plans of the players are more than real: investments in cement capacity are repaid if ton of cement costs more than 40 USD.

     However there are the potential barriers - primarily the taxation. From 1 January 2008 in the republic it was introduced a 75% additional tax for the cement producers. According to market participants threshold – 65 USD per ton - has taken away two-thirds of profits. Since the beginning of this year, the rate raised to 90 USD, that reduces the tax burden, but did not favored the investment in new capacities. "For the new works, tax on the profit is very burdensome, due to the fact that much time is needed to make a new plant profitable," - Mr. Muhiddinov says. According to him, cement companies made a suggestion to the government to exempt new works from taxation for 10 years - three years for the building and seven years for launching at full capacity. For the present the proposal is not approved. Moreover, cement production was not included in the list of investment projects, which receive tax benefits when get direct foreign investment. According to market participants such situation almost fully “bars the way” for new projects in cement industry.

     An additional risk factor is the lack of infrastructure (roads, power lines, waterways) in the places of new plants building. According to calculations of JSC “Uzstroymaterialy ", the cost of building of energy facilities amounts to USD 125 mln, the construction of transport communications (especially railways) - USD 55 mln. Investors suggest to assume the cost of their construction, but it will be difficult during the crisis, and the amounts have not yet been budgeted.

     Another problem is the lack of railway wagons for transportation of cement. Old wagons owned by "Uzbekistan Temir Yollari”, fail, and there are no new to replace them. To provide monthly traffic volume of raw components and finished products there should be about 6000 wagons only for the new capacities. In solving these emerging problems, cement companies rely on the state, which could help by providing preferential terms for certain investors. Meanwhile, most manufacturers have to rely only on themselves.