However, at the same time, the chemical industry is characterized by a distinctive feature: periodically arising crisis shocks in the world economy are stimulation for even more intensive development of chemical enterprises. Indeed, according to the Bureau of National Statistics, for 11 months of last year, while most sectors of the Kazakh economy experienced financial difficulties amid the pandemic, the volume of chemical production, on the contrary, increased, reaching 427.2 billion tenge in value terms.
This year Development Bank of Kazakhstan (DBK, a subsidiary of the Baiterek Holding) turns 20, what projects in the chemical industry are supported by the Bank, about the cyclical development of the chemical industry, its features and prospects, and why it is considered one of the most important sectors of the economy tells the chief banker of DBK's Clients relations directorate Anna Yaroshenko.
The coronavirus pandemic has clearly shown the whole world that the chemical industry is one of the key ones, because it is in close contact with many other key sectors of the economy. However, if we talk about COVID-19, a number of large chemical companies have redirected their capacity to medicine in order to deal with the consequences of the "coronacrisis".
You are right, the role of the chemical industry in the economy and in human life should not be underestimated. As they say, chemistry lives with us, chemistry lives around us. The chemical industry is one of the most important sectors of the economy, a kind of indicator of the country's scientific and technological progress. Chemical enterprises provide raw materials for such industries as metallurgy, mechanical engineering, construction, agriculture. It also produces products, without which it is difficult to imagine the daily life of a modern person. Without the chemical industry, the entire structure of modern healthcare, as well as the pharmaceutical industry, would become useless. We all felt that against the background of the coronavirus pandemic in Kazakhstan, there was a shortage of personal protective equipment, including antiseptic and disinfectants. The need for antiseptics and disinfectants has grown. Many companies redesigned and began to produce antiseptics.
Considering that all DBK projects in the chemical industry are under your direct supervision, please share your expert opinion with what difficulties the chemical industry of our country and the world as a whole is currently facing?
In 2020, the chemistry industry did not stay away from the global crisis associated with the COVID-19 pandemic. The effects of the pandemic were felt by all segments of the chemical industry, with the exception of the sectors related to the production of hygiene and antiseptic products and chemical products for agriculture. Against this background, one of the peculiarities of the chemical industry manifested itself - periodically arising crisis shocks in the world economy are an incentive for more intensive development of chemical enterprises. The Kazakhstani chemistry market has also felt the effects of the pandemic, but despite the crisis, the industry has shown steady growth. So, for 7 months of the last year, the largest upward leap was shown by the production of nitrogen and phosphate fertilizers. The bank, in turn, regularly monitors projects, considers the possibilities of providing support in case of difficulties, and today we are happy to say that almost all enterprises have successfully overcome quarantine restrictions and are increasing their previous production volumes.
What products of the chemical industry are produced by projects financed by the Development Bank?
The chemical industry occupies 3% of the total share in the structure of the Bank's loan portfolio, yielding to the oil sector, industrial production, energy and information, but these are large giants of this industry, mainly producing products aimed at providing agricultural consumers with fertilizers, as well as products that are used in other industries. For example, the Bank participates in financing the modernization of the plant for the production of mineral fertilizers in the Mangistau region "KazAzot" JSC, for caustic soda in the Pavlodar region, for the production of sodium cyanide in the Zhambyl region. Another flagship of the chemical industry, Kazphosphate LLP, receives support from the Bank in terms of export financing.
It should be noted that the capacities of “KazAzot” JSC almost completely cover the needs of Kazakhstan's agriculture in ammonium nitrate, in turn, ammonia is widely used by Kazakhstani chemical companies. Currently, about 60% of the products are supplied to the domestic market, the rest is sold to the countries of near and far abroad. Caustic soda is used in almost all industries: in ferrous and non-ferrous metallurgy, light, food, energy enterprises, where it is an irreplaceable reagent in water treatment systems. Sodium cyanide of "Talas Investment Company" LLP is used by Kazakhstani gold mining companies, and ammonium sulfate, produced together with sodium cyanide, is a highly effective mineral fertilizer. Products of "Kazphosphate" LLP are widely used in various fields: yellow phosphorus and products of its processing are used in the production of plant protection products, insecticides, fire extinguishing agents, plasticizers, means for processing metal surfaces and semiconductors. In addition, the products are used in food additives (phosphoric acid salts), detergents and personal hygiene products, fertilizers in agriculture, feed phosphates in livestock and poultry farming. At these enterprises, thanks to new projects, 1,040 jobs were created
It is known that DBK finances industries, the return on which can be longer than projects with high and fast ROI. How do you determine the investment attractiveness of a project in the chemical industry?
The share of the chemical industry in the overall economy of Kazakhstan is small, about 1.5% in value terms, and our task is to help increase this share by increasing the number of chemical projects in DBK's loan portfolio. The chemical industry is one of the most capital-intensive industries, which is why large-scale enterprises need long-term lending at low interest rates. The Development Bank's niche differs from the niche of second-tier banks. DBK finances projects with long payback periods of up to 20 years, we specialize not only in financing long-term projects implemented "from scratch", but also projects with great socio-economic effect. The Development Bank directs all efforts to finance projects necessary for the country, including under the state industrialization program. At the same time, at the stage of banking expertise, the Bank's experts assess all the risks of the project, and when structuring the transaction, conditions are included that you to exclude or reduce this or that risk.
5-10 years ago, banks primarily paid attention to collateral and risks, but today, in addition to these basic requirements, financial institutions are also looking at projects that meet ESG standards. Are there requirements for future borrowers of DBK in terms of environmental friendliness, sociality and compliance in effective project management ?
The bank keeps up with the times, and time dictates its own rules. And ESG standards (environmental, social and governance), or as they are called, standards for responsible financing are no longer an option, but a new approach to investment that seeks to take into account environmental factors, social factors and management factors.
The enterprises of the chemical industry, financed by DBK, constantly monitor international indicators and quality standards, modernize equipment to ensure high production efficiency and meet modern environmental safety requirements.
Moreover, the Bank encourages Partners to fully disclose information about their environmental and social performance.
It is known that when it comes to chemical projects, the environmental issue also arises. To prevent anthropogenic and man-made disasters in the production of chemical products in today's reality, it is extremely important to take into account the ecological component.
In accordance with the Environmental Code, DBK is not allowed to finance projects without a positive environmental opinion. Potential borrowers fully reflect all environmental aspects in the Business Plans.
The social side of projects is equally important to environmental issues. Indeed, one of the main investment goals is to create new jobs and improve the well-being of the population, and high-quality project management is the key to effective interaction between the management of borrowers and the bank. A company that conducts its business responsibly and aims at long-term development is a reliable investment object.
What should you look for when considering and structuring a project in the chemical industry?
In general, the selection criteria are similar for all investment projects of the Bank, but there are some industry-specific features that are significant when considering and structuring chemical projects. First of all, we analyze the location of the project. Due to the fact that the chemical industry is capacious in relation to raw materials, factories for the production of chemical components are located, as a rule, in the places where raw materials are extracted. Due to the value of raw materials, the cost of it is 40 to 90% of the cost of production. In addition, the industry uses a large amount of water and energy resources, here it is also necessary to assess the resource sufficiency for the project. The consumer factor has a great influence. So, for convenience and economy, some chemical industries are located directly on the territory of another industrial enterprise.
Another characteristic feature of chemical production is that the physical deterioration of fixed assets occurs faster on them, which is associated with the peculiarity of chemical processes and the operating mode of equipment. Chemical production is characterized by a highly aggressive environment in which the means of labor operate, as well as the complex effect of various loads, for example, temperatures, pressure, catalyst, acids, etc., and often continuous operation of equipment. Consequently, the modernization of existing production facilities is a necessary factor in increasing the profitability of domestic enterprises in the chemical industry and is mainly aimed at updating equipment and increasing production volumes. Competition in the market for chemical products directly depends on the quality of the equipment on which this product is produced.
Also, the most important aspect is the elaboration of sales of products on a long-term planning horizon, the presence of off-take contracts or other contracts with counterparties that guarantee the sale of products.
Moreover, an important factor that must be paid attention to is the elaboration on the part of the initiator of the project on the issue of training qualified personnel. The lack of specialists in the field of exact, engineering and natural sciences, exactly those that are required in the chemical industry, is an urgent problem that the initiator of the project needs to work on at the stage of developing the project documentation.
What projects are deficient in the chemical industry?
Chemistry to Kazakhstan mainly imported from China and Russia. The lack of our own low-tonnage chemistry hinders the development of other industries, such as pharmaceuticals. Investors need to take a closer look at low-tonnage chemistry, which produces high value added products.
The demand for chemical products in the domestic market is about $ 3.5 billion per year, of which now about $ 2.4-2.8 billion is accounted for by imports. Chemical projects aimed at import substitution are the main focus for investors in the near future.
Investors should also focus on the following industries:
- potash fertilizers, because given the significant raw material base (according to experts, in the western region of the country there are about 6 billion tons of reserves of potash salts), the high demand from agriculture and the potential for growth in consumption, the production of potash fertilizers remains not only a priority, but also an attractive direction for investment;
- urea, which is the most popular solid form of nitrogen fertilizers, at the same time showing a steady growth in consumption not only in Kazakhstan, but also in the countries of near and far abroad;
- caustic soda in granules, in view of the fact that Kazakhstan has constant consumers of granulated caustic, this niche is free and promising for investment;
- soda ash, the growth of consumption of which in the domestic market is projected at the level of 450-500 thousand tons in the next 5 years, taking into account existing and prospective large chemical enterprises;
- ammonium sulfate is also a promising area for investment by investors due to the lack of industrial scale of its production, high import dependence and the availability of sufficient raw materials.Development Bank of Kazakhstan is interested in transforming the country's chemical industry, its development in accordance with modern digitalization opportunities and the introduction of ESG standards. In this regard, the Bank's Partners - chemical enterprises - can become a growth driver or benchmark for other companies in the industry, and the financing instruments offered by DBK are the key to implementing a large-scale plan to increase the share of the chemical industry in the total share of the Kazakhstani economy. DBK is ready to develop, together with business, new production facilities in the chemical industry, offering the best financing conditions at a low interest rate, in the format of public-private partnerships, project financing, together with financial organizations in terms of syndicated financing, as well as providing guarantees.