Uzbek chemicals sector unveils formula for growth

Policymakers have unveiled an ambitious plan to revitalize and expand Uzbekistan’s chemicals industry with the help of foreign investors to serve booming domestic demand and boost exports

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For a country rich in hydrocarbons and boasting a large domestic market, Uzbekistan has traditionally underperformed when it comes to the production of chemicals.

The industry currently accounts for just 2% of the country’s total production volume and 1% of GDP. “These are very small numbers,” says Temirov Odil, chairman of local chemicals company Uzkimyosanoat. “For developed countries the figure is more than 10%.”

Uzbekistan’s reformers are aiming to close that gap. The process began two years ago when President Shavkat Mirziyoyev ended the practice of price-setting by the government for chemical products, allowing the sector to move to market principles.

The next step was a year-long analysis of the Uzbek chemical industry, undertaken in conjunction with Boston Consulting Group, to assess market demand and identify key areas for investment.

The results of this study were released in April, when the government unveiled an ambitious $12bn strategy to modernise and restructure the sector with the help of foreign investors.

The primary objective of the programme, which comprises more than 30 projects to be completed by 2030, is to reduce Uzbekistan’s dependence on imported chemicals and service rapidly growing domestic demand.

“We are a developing country with a population of 33 million and economic growth of around 5% per annum,” says Odil. “We can expect a big increase in demand for all basic chemical products.”

A core plank of the strategy — which aims to increase chemicals production to 5% of GDP — is the expansion of Uzbekistan’s organic chemicals industry.

Despite its ample reserves of natural gas, the organic chemicals segment currently accounts for just 11% of the country’s chemical output. By 2030, this is scheduled to increase to at least 50%.

Much of this growth is due to come from the manufacture of new value-added polymer products including polyethylene terephthalate (PET), polyvinyl chloride (PVC), synthetic rubber, polystyrene, butyl acrylate and others. 

This in turn will support some of Uzbekistan’s largest and fastest-growing industries. The country’s textile sector last year imported around 70,000 tonnes of PET fibre, while more than 85,000 tonnes of PVC was purchased from foreign suppliers by Uzbek textile and processing companies.

Household chemicals are also largely sourced from outside the country. Around 30,000 tonnes of linear alkylbenzene (LAB) and linear alkylbenzene sulfonic acid (LABSA) are imported annually for detergents and other household products.

Part of this domestic demand will in future be met directly by Uzkimyosanoat, Uzbekistan’s largest state-owned chemical producer.  The firm has announced plans to start production of PVC at its flagship Navoiyazot complex. Initially, a new facility will produce 100,000 tonnes a year of the PVC polymer.

“According to our forecasts that will not be enough to keep up with increasing in-country demand, so we will subsequently add a second complex with a capacity of 130,000 tonnes,” says Odil.

Uzkimyosanoat also plans to begin production of LAB and LABSA using feedstock from the Shurtan gas chemical complex and a new gas-to-liquid (GTL) complex due to be created by state oil and gas giant Uzbekneftegaz.

“We will produce enough LAB and LABSA to cover full in-country consumption,” says Odil. “We also expect to be able to export around 20,000 tonnes a year of household chemicals to nearby countries.”

Overall, policymakers expect domestic demand to account for around two-thirds of Uzbekistan’s output of organic chemicals by 2030, with the rest being sold outside the country.

The sector development programme also calls for a step-up in output of other chemicals currently produced by Uzkimyosanoat.

These include drilling and water system chemicals for the Uzbek oil and gas and petrochemicals industry, as well as adhesives and melamine for the wood processing and furniture sectors.

Fertilising growth

Uzkimyosanoat also manufactures a range of chemicals including cyanic salts and urea for major mining and metallurgical combines based in Almalyk and Navoiy, respectively Uzbekistan’s leading producers of non-ferrous metals — copper and gold — and uranium.

Production of mineral fertilisers, which currently account for around 75% of Uzkimyosanoat’s total chemical output, will also remain a key component of the government’s strategy for the sector.

Indeed, policymakers see the segment as offering excellent opportunities for export growth. “There is strong demand for mineral fertilisers in other central Asian countries, Turkey and Ukraine, as well as China, India and southeast Asia,” says Odil.

Despite being a landlocked country, Uzbekistan has good road and rail links to Afghanistan, Tajikistan, southern Kazakhstan and Russia. The government is also backing the development of a rail link to China.

Along with the large and growing domestic market, this export potential is expected to be one of the main attractions of the Uzbek chemical industry for foreign investors, who will have the chance to gain exposure to some of the country’s key assets over the next four to five years.

April’s presidential decree mandated the privatisation of a clutch of production facilities and non-core assets under the control of Uzkimyosanoat. The company, which employs 33,000 staff, currently comprises 14 industrial enterprises and six service organisations.

Topping the list of assets for sale are three fertilisers and chemical plants: the Dekhkonobod potassium plant; Ferganaazot, which produces nitrogen fertiliser; and the Kungrad soda plant.

The Uzbek government is offering to sell a 51% share in each of the three, in return for investor commitments to modernise facilities, increase capacity — by more than 100%, in the case of the Kungrad soda plant — and establish new production lines.

All three are profitable, although a fall in global potassium prices has recently affected revenues at Dekhkonobod. The most profitable of the three is Ferganaazot, which boasts an Ebitda margin of around 40%.

The privatisation process is already underway, with EY acting as investment consultant to Uzkimyosanoat. More than 150 investors have been invited to view the privatisation process and more than 20 have expressed an interest in Dekhkonobod, while the other facilities have each attracted half a dozen potential buyers.

“We expect to receive binding offers for the Kungrad soda plant and Ferganaazot by the end of this year, and sign the share and purchase agreement in the first quarter of 2020,” says Odil.

For foreign firms, however, the most attractive deals may be those that involve greenfield projects. In May, US chemicals firm Air Products signed a joint agreement with Uzkimyosanoat and Uzbekneftegaz for the construction of the planned gas-chemical complex using methanol-to-olefins (MTO) technology.

Odil says the involvement of the Uzbek government and state-owned enterprises in both individual projects and the wider sector development programme helps to inspire confidence in potential investors.

“With big projects, naturally the risks are also big,” he says. “Investors are therefore keen to partner with local entities that own the mineral resources, feedstock and infrastructure.”

Economic zones

Policymakers have also provided assurances to foreign direct investors regarding the provision of utilities, while further benefits will come from a new drive by the Ministry of Economy and Production to promote co-operation between sectors within Uzbekistan.

To encourage the creation of industry clusters, the government has created a series of economic zones across the country, including one comprising the whole of the Navoiy region.

Other greenfield opportunities up for grabs include Samarkandkimyo, where the government is offering to sell 100% of the company in return for a commitment by the buyer to build a new production facility for phosphoric and NPK fertilisers.

The proceeds from these privatisations will be put into an investment fund, which will be used to finance Uzkimyosanoat’s part of the development programme.

Part of this funding will be spent on knowledge transfer. “For each new project, we will sign licensing agreements to bring in technology and know-how,” says Odil. “We are also planning to send our specialists abroad for training, as well as bringing experts here to provide in-country training.”

This will be backed by a drive to improve technical education in Uzbekistan’s universities. This year will see the opening in Tashkent of a branch of Russia’s Mendeleev University of Chemical Technology, the result of a collaboration between Uzkimyosanoat and the Ministry of Higher and Secondary Education.

The company is also working on a project to create a research and development centre in Uzbekistan for the chemicals industry. A feasibility study funded by Korea Eximbank is already underway and officials say the centre could open as early as 2023.

“This will be an invaluable resource to ensure we have the expertise in Uzbekistan to drive our industry forward,” says Odil.

Meanwhile, Uzkimyosanoat is also undergoing a major internal restructuring to improve corporate governance and transparency.

The resolution passed in April mandated the appointment of independent directors to the firm’s supervisory board and the establishment of an audit committee, as well as the preparation of financial statements according to IFRS accounting standards.

Significant progress has already been made. IFRS standards have been introduced at the entities earmarked for privatisation, while the parent company is due to follow suit shortly.

This in turn will pave the way for Uzkimyosanoat to obtain an international credit rating and, in the near future, access the Eurobond market.

Odil notes, however, that bond buyers will have to wait to gain exposure to the company. “First we have to sell our shares in the main entities listed for privatisation, which will increase our attractiveness for foreign investment,” he says.

In the meantime, the firm is looking to attract finance from international public and private sector banks for individual projects.

“One of the reasons for creating joint ventures with the direct involvement of foreign investors is to bring in project financing from the likes of Export-Import Bank of China and Japan Bank for International Cooperation, and from others ECAs,” says Odil.

There are no plans at present to sell equity stakes in Uzkimyosanoat, although Odil says that will come further down the line. “Naturally in future the government will look to reduce its participation in the company,” he says.

Investment highlights: chemicals

  • Uzkimyosanoat investment projects total more than 30 and the total investment is more than $12bn.
  • Production of paints and varnishes for a growing domestic market
  • Domestic market size: 80 KTA ($120m)
  • Market expected to double by 2030
  • Currently, the production of paints and varnishes is based on imported acrylic resins
  • Production of household chemicals
  • Laundry detergents current market size: 40 KTA
  • Expected market size: up to 200 KTA by 2030
  • Growing household disposable incomes
  • The share of local detergents: 59%
  • Raw materials: soda ash, baking soda, sodium sulfate: produced in UZ
  • Production of cosmetics
  • Indicative Capex: $15m
  • Construction area: 12,000 m2
  • Production of polyester fibres
  • Domestic market size: $45m with expectations to grow up to $450m by 2030
  • Polyester fibres are most relevant PET segment for Uzbekistan
  • Used for fabrics production, which are further used for the production of apparel, home furnishings, and other finished textile goods
  • Production of pesticides
  • Indicative Capex: $30m-$40m
  • Market attractiveness:
  • Domestic market size: $30m
  • Market expected to grow up to $60m-$80m by 2030
  • Carbon black production
  • Capex: $100m
  • Implementation period: 2020-2023
  • Project’s main consumer: ‘BRZ’ tyre producer
  • EVA film production
  • Capex: $2.5m
  • Implementation period: 2020-2021
  • Production of LAB and LABSA
  • Using feedstock from the Shurtan Gas Chemical Complex and a new GTL complex due to be created by state oil and gas giant Uzbekneftegaz that will use gas-to-liquid (GTL) technology