The development of Azerbaijan’s non-oil and gas sector is a primary target for the government, with aspirations for growth in a variety of areas, including oil, chemical, and industrial products. According to the Ministry of Industry and Energy, the non-oil and gas sector experienced considerable development in 2010, posting a 34.2% growth rate in the chemical industry, a 7.9% increase in manufacturing equipment, a 23.3% increase in metallurgy, and an 8.4% growth rate in oil processing. “Comprehensive reforms in these areas will enable Azerbaijan to export oil, chemical, and industrial products in bigger volumes in the future,” Natiq Aliyev, Minister of Industry and Energy, told TBY.
The value of goods produced in the industrial sector in general in 2000 was AZN3.7 billion, while in 2010 it stood at AZN41.6 billion. Over the 2004-2010 period alone GDP increased three fold, helped along by a doubling of output in the non-oil and gas sector, and growth in industrial production of 2.8 times. Capital investments made in the non-oil and gas sector grew by 8.2 times over the same period. The state plan is thus clear, and was outlined by Minister Aliyev to TBY, “Particular attention will be paid to eliminate the dependency on imports, and to arrange the production of export-orientated daily consumed goods in the country”.
Certain areas of the country’s industrial base have begun to flourish, including building
materials, consumer goods, the automotive sector, petrochemicals, and defense. Leading the way in the consumer goods market are both local and foreign companies, including Danone, Azersun, and Veyseloğlu Holding, and is a key area targeted for expansion by the government. Shahin Mustafayev, Minister of Economic Development, told TBY, “our attention is focused mainly on the intensification of production volume expansion.” Later in the interview, the Minister also detailed predictions of a 7% growth rate in the non-petroleum sector over 2011.
Azerbaijan has heralded strong growth figures in the chemicals and petrochemicals sectors in recent years, yet output is in need of further development. Government programs predict growth, however, and investments continue to be made to increase the sophistication of Azerbaijan’s oil-derived exports. Over the beginning months of 2011, the value of the chemical output of the State Oil Company of Azerbaijan Republic (SOCAR) increased by 60% compared to the previous year, reaching $10.1 million, $6.6 million of which was exported. However, this was thanks to improved prices, as actual output volume increased only 0.3%. Investments also fell by 67% in 2010 in year-on-year terms to AZN1.3 million; however, this is an increase of 42% over 2008. Investors are being encouraged as the government works to restructure the sector. One such new investor is AzMeCo, which is set to open a methanol plant at end-2011, after an investment of $380 million. Target production of methanol is 720,000 tons per year, while the production targets for Dimethylether (DME) is 100,000 tons per year. According to Nizami Piriyev, Chairman of AzMeCo, the company “plan[s] to build a formaldehyde plant as well as an acetic acid plant, and the government is planning to construct an urea plant”. Furthermore, in early 2011, US-based UOP displayed interest in producing a feasibility study for a new oil and gas processing and petrochemical complex to be built in the country. Further details are yet to emerge, yet SOCAR has stated that Baku Oil Refinery would need further modernization in order to supply feedstock to any new petrochemical facilities.
A budding young automotive manufacturing industry has begun to emerge in Azerbaijan over recent years as international firms take note of the country’s unique geography and skilled workforce. Two production facilities with capacities of 5,000 units per year exist in the country, belonging to Iran Khodro, which has recently begun production of Peugeot 206 vehicles, and Lifan, a Chinese manufacturer that established a facility in the Azerbaijani enclave of Nakhchivan in 2010. In addition, Ganja Motor Works produces tractors and trucks. Both the Lifan and Iran Khodro facilities produce for the local market, and with the population becoming increasingly affluent, the sector will likely see increased capacities and continued growth in the future.
Since the 1994 cease-fire that froze hostilities in the Nagorno-Karabakh conflict, Azerbaijan has kept reforming its armed forces at the top of the spending agenda. In 2005 a formal defense industry was established, and in 2007 the $1 billion dollar mark in yearly defense spending was reached. The Azerbaijan Ministry of Defense Industry (MDI) is at the helm of these activities, and has overseen a step up in terms of international military cooperation as well defense technology. At the IDEX 2011 International Defence Exhibition held in Dubai, the MDI displayed 71 defense goods. The exhibition was seen as a success, and led to the establishment of protocols on the production of defense goods and the transfer of advanced technology. As a result, agreements will see Azerbaijan exporting ammunition for small arms, mortar launchers, optical targets for launchers, and various other types of ammunition. The country is also considering cooperation with Paramount Group to produce the Mbombe combat vehicle. To date, in cooperation with the group, Azerbaijan has already produced 30 vehicles of the troop-carrying Matador and Marauder classes. Furthermore, in July 2011, Azerbaijan began the serial production of AK-74M assault rifles under license from Russia. It is planned that MDI will produce 5,000 units before the end of 2011.
The building materials sector has been another key area for economic diversification as the government looks to replace imports. Since the beginning of 2011, prices in the sector have increased approximately 20% in year-on-year terms, with the share of domestic production in the region of 50%. Garadagh Cement, which works within Holcim, was the recipient of a European Bank for Reconstruction and Development (EBRD) loan of $170 million in 2009, the largest example of FDI outside of the oil and gas sector in the country’s history. Yearly capacity was increased to 1.7 million tons from 1.3 million, with CO2 emissions reduced by 10%. Foreign interest in the sector is well established and only increasing as the construction sector recovers from the effects of the global economic crisis. BASF is one example of a large international company involved in the sector. Operating a plant in Sumgait, the company is focused on the production of construction-related chemicals, and has provided admixtures for some of the tallest buildings in Baku. Ümit N. Başdaş, Managing Director of BASF Caspian, told TBY that, “After oil and gas, the biggest sectors in Azerbaijan are construction and agriculture. The desire is to further industrialize the country.”
FOOD & BEVERAGES
Veyseloğlu Holding represents a trend in the Azerbaijani food and beverages sector, switching from being a wholesaler to production and distribution. Although still a major importer, 10% of the company’s revenues now come from its chocolate brand Ulduz, and its mineral water brand Sirab. Aydın T. Veyseloğlu, Director of Veyseloğlu Holding, told TBY that the reason behind this development was that “the government has brought into effect many regulatory changes,” with private businesses having been “heavily supported”. Later commenting on the potential in the sector for investment, Veyseloğlu pointed out that despite Azerbaijan’s small population of just 9 million, there is huge potential for exports to Central Asia, the trans-Caucasus, and Russia. The company also expects a doubling of chocolate production in 2011. Danone is another firm that is working to develop the industry in the country. With the dairy market having grown by 100% in three years, Danone was set to open a related production factory in mid-2011 with a capacity of 200 tons a day, representing more than the country’s current needs. Plans are to export to Georgia, Iran, Turkmenistan, and southern Russia. Commenting on the sector over 2011, Haluk Uçucu, Caucasus Country Manager for Danone said “the market is growing rapidly. In the last two years four large milk production companies were established."
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