After the country’s lucrative oil and gas industry, construction takes its place alongside agriculture as the sector enjoying the most investment. The rapid injection of funds into the Azerbaijani economy following the re-establishment of the country’s oil and gas exports was quickly followed by dramatic growth in the construction sector. The early years of the century saw a flood of investment into the construction of residential and commercial buildings by both international and local companies. These developments in the real estate sector necessitated the enhancement of the country’s infrastructure, and numerous construction projects for new roads, transport, bridges, and utilities quickly followed.
Although Azerbaijan generally fared better than other countries in the region during the global economic crisis in 2008, the construction sector still saw a slowdown of 25%. The drop was mainly attributed to a crisis in the residential sector, with infrastructure construction demand remaining at the same level according to industry sources. Industry conditions in general began to pick up in 2010 and the State Statistics Committee has reported a 20.1% increase in construction works over the first half of 2011. The recession resulted in the government initiating a number of reforms to improve the efficiency of the construction sector, and in 2009 a new Draft Construction Code was drawn up, which will potentially make pre-development approval and permit application processes more transparent. When implemented, the code will also allow foreign construction service providers to work in Azerbaijan without having to form a joint venture with local companies.
Rahim Sultanov, Chairman of Caspian Service, believes the Azerbaijani market will continue to develop and revive, asserting “we have much to do with regards to restoration work, renovation of facades, layout of parks, and the construction of new businesses, shopping, and entertainment centers.” Sultanov predicts that over the next 20-30 years, more than 230,000 hectares of land will be developed. Projects are being funded both by the state and by private investors, and according to the State Statistical Committee in 2009, 22.8% of construction work was implemented by the state, with the remaining 77.2% coming from private companies. New construction makes up 74.9% of developments, capital repair makes up 15.4%, while current repair makes up 3.3%, and other works come in at 6.4%. Highlighting the
level of developments, 1,780 construction permits were issued in 2009.
Azadad Ibrahimov, President of ANT Group, which carries out much of its construction work in conjunction with the state, believes Azerbaijan is moving closer to European standards in terms of construction. Ibrahimov told TBY in an interview that ANT group aims to “reach European standards in the construction of buildings while at the same time protecting Azerbaijani architecture.” In this respect, a collective of foreign and international companies are undertaking prominent construction projects. These include local company Pasha Group, German company Strabag, and British company Mace Group.
There are currently a number of large projects under construction, including the Heydar Aliyev Cultural Centre, mixed-use developments Port Baku and Flame Towers, and a number of luxury international hotel chains. The mammoth Baku White City development will involve the construction of 10 new micro-districts, and if it proceeds as planned will potentially create a raft of construction work over the next three decades. Retail developments are also continuing apace in spite of the construction slowdown between 2008 and 2010, with numerous mall openings expected over 2011 and 2012. Forum Baku will contain cover 58,000 square meters of space and the Perron mall will cover 23,000 square meters. Further shopping hubs will be contained within the Flame Towers, and Port Baku developments.
It is reported that by March of 2011 prices in the Baku building materials market had risen 13.4% compared to the same period of in 2010. There is a strong demand for Baku sawn stone, sand, and slate, with a rise in prices of these materials having been observed in the market.
Over the construction boom, companies have largely had to import materials from surrounding countries, as Azerbaijan’s construction materials industry sector suffered significant losses in the post-Soviet years. However, government plans to decrease Azerbaijan’s reliance on external suppliers while increasing its exports are showing early signs of success, with new factories, production plants, and workshops entering the market within the manufacturing industry. Construction company Azertunel has recently been tasked with the construction of a new $200 million aluminum factory in Ganja, commissioned by the government. The Azerbaijan branch of BASF Global, BASF Caspian, produces construction chemicals for the industry, and while it currently only supplies products locally from its small plant in Sumgait, Managing Director Ümit Başdaş predicts expansion, stating, “in the future we will export to neighboring countries like Turkmenistan, Kazakhstan, and Georgia”.
BakuBuild, the largest construction exhibition in the region, has been held in Azerbaijan on a yearly basis for the past 16 years. The exhibition allows not only foreign made construction materials to be showcased to the industry, but also the growing local manufacturing potential to be demonstrated. In 2010 the exhibition attracted 285 companies from 26 countries, presenting products and services from over 350 manufacturers.
Azerbaijan currently has one integrated cement plant online—Garadagh Cement—and it produces 1.7 million tons of cement per year following an upgrade from 1.3 million tons. This upgrade was funded by a $170 million loan from the European Bank for Reconstruction and Development (EBRD) in 2009, representing the largest investment outside of the oil and gas sector in Azerbaijan. During a spike in Azerbaijan’s construction industry, total domestic consumption came in at 4.3 million tons. Relying heavily on imports, Garadagh Cement occupies a 35% share of the sector, with the rest imported. According to Holcim, parent company of Garadagh Cement, consumption in 2011 will be more than 4 million tons, meaning significant investment is needed to reduce the level of imports and reduce the outflow of cash, which, according to İsmail Erkovan, CEO of Qızıldaş Sement, “amounts to approximately $150 million annually”. Qızıldaş Sement is the newest player on the scene, and was given permission by the government in 2007 to build a cement-producing facility with a 1 million ton annual capacity. However, when the company steps into the market fully in 2013, it will have the capacity to produce 2 million tons of cement per year and 5,000 tons of clinker per day, making it not only the largest factory in Azerbaijan, but in the entire Caucasus region, according to Erkovan. In addition, it will provide 500 jobs and include the latest filtration systems to reduce harmful effects on the environment. As well, local construction company Akkord has also announced plans to construct a cement facility of some 1 million tons capacity, though details on the project are still being worked out.
The coming online of Qızıldaş Sement, which plans to produce Portland and alloyed cement, will represent a major step forward for the sector, as imports continued to grow in 2011. Over January-March 2011 the country imported 369,200 tons of cement and clinker, up 26.7% over the same period in 2010, with a value of $16.63 million, or 11% more compared to 2010. Sources of imports closing the gap include neighboring Turkey, Russia, and Georgia.
Cement production is also increasing, however, with 244,500 tons produced over January-March 2011, up 6% over the same period in 2010, a year that saw total production reach 1.28 million tons. As the construction sector shows signs of returning to pre-crisis growth levels, though, an increased capacity will be much needed to keep business within Azerbaijan.
Growing demand will likely see the need for even further capacity expansion in the future, with Erkovan telling TBY that Qızıldaş Sement plans to tender for a second production unit, with the capability to consider a third unit if demand were to reach up to 6 or 7 million tons annually. Also taking notice is Turkey’s Akçansa, a joint venture between the Sabancı Group and HeidelbergCement. Currently a leading producer in Turkey, it is looking to branch out of its domestic market, which is currently
experiencing overcapacity issues.
© The Business Year