One Bright Spot To Keep A Close Eye On


BMI View: Home to a plethora of mineral resources, Kazakhstan possesses colossal potential to become one of the hottest mining regions in the world. While a proliferation of labour disputes across the land-locked country will continue to dent Kazakhstan's political risk profile, President Nursultan Nazarbayev's firm grip on security forces will see to it that investor appetite remains anchored. The government's renewed focus on instilling a positive investment climate will be a major boon to the mining space going forward.

Despite Kazakhstan ' s position as a landlocked country, plagued with corruption , red-tape and bureau cratic hurdles, investment into the mining space have been forthcoming in recent years. T he abundance of mi n eral reserves in Kazakhstan has colossal potent ial for development and could effectively transform the country into one of the world ' s hottest region s for mining investment. Indeed, the vast quantities of natural resources have attracted an influx of mining giants into Kazakhstan , including the likes of Rio Tinto , Severstal , Ivanhoe Mines and Arcelor Mittal .

Table: Kazakhstan - Country Reserves Relative To Global Reserves
Source: BMI, USGS, Ernst & Young, Europe's Energy Portal, BP Statistical Review of World Energy
Mineral Reserves Reserves (% of global total) World Rank
Bauxite 360mnt 1.3 11
Bismuth 5kt 1.6 5
Cadmium 51kt 1.7 4
Chromium 180mnt 51.4 1
Coal 33.6bnt 3.9 8
Copper 18mnt 2.9 11
Iron Ore 8.3bnt 4.6 6
Lead 5mnt 6.3 4
Molybdenum 130kt 1.3 9
Uranium 820kt 15 2

Bountiful, Yet Untapped Resource Sector

The robust growth of the mining sector in the past decade or so was preceded by a period of decline following the fall of the Soviet Union in 1991. The collapse of systems and outflow of investment led to the demise of Kazakhstan's mining sector, with a lack of funds for new exploration activities and the upgrade of infrastructure and production facilities. As a result, reserves were depleted and production dropped . However, Kazakhstan remains one of the most resource-rich countries in the Commonwealth of Independent States (CIS), after Russia.

The Central Asian state boasts staggering amount of world-class mineral resources including the largest chromium reserves and substantial coal, iron ore and bauxite deposits. Given that the majority of mineral deposits in the country remain relatively untapped, we believe Kazakhstan's mining industry has the potential to emerge as one of the brightest spot for investment. We expect the mining sector to become more competitive and increasingly fragmented in the coming years, with an influx of investors , armed with the necessary capital and technology, encouraged by the vast potential on offer.

Land Of Wealth
Kazakhstan - Coal & Metal Mines

A Sector Positioned To Take Off

While we acknowledge that a proliferation of labour disputes (the recent deadly riots in the western town of Zhanaozen highlight the vulnerability of the former Soviet republic's long-tem political stability) across the land-locked country will continue to dent Kazakhstan's political risk profile and inhibit the inflow of foreign investment, recent developments in the country's mining space have been encouraging. We note that incumbent President Nursultan Nazarbayev, a former miner at Arcelor Mittal steel plant, has been adopting an increasingly proactive stance towards foreign investment in recent years. To highlight, Nazarbeyev has pushed on a raft of proposals in the mining sector and these include plans to double mining output while expanding the economy's downstream industrial base by 2015. As a central Asian country, the strategic location of Kazakhstan provides mining companies with easy access to the key commodity markets countries such as China and India, whose insatiable appetite for resources has been a major driver behind the surge in commodity prices over the past decade.

A Turbulent Ride
Kazakhstan - Inward Foreign Direct Investment (US$mn)

Colossal Potential, But Pivotal Challenges

Poor infrastructure support remains one of the main obstacles hindering the long-term growth of Kazakhstan's mining sector. While the country boasts adequate infrastructure in urban regions, many new and planned projects are located far away from the main cities or transport routes with poor access to roads and power sources. This will be a considerable hindrance to companies such as Rio Tinto, which look to export in bulk. Unless the country's road network and power supplies are developed in line with the projects, antiquated infrastructure facilities will remain a significant hurdle to future investment.

Although the issue concerning the succession of Nazarbayev will continue to weigh heavily on Kazakhstan's political risk profile, we do not expect that strike action will have a prolonged negative impact on investor appetite to invest in the country. Rather, we expect that Kazakhstan's authoritarian model offers some degree of comfort for investors on the grounds that the government can rapidly mobilise the armed forces to react to public uprisings. While foreign direct investment into Kazakhstan fell in the fourth quarter of 2011 to US$1.3bn from US$1.8bn in Q410, the lowest level since Q306, FDI rebounded rapidly with the Q112 figure rising to US$4.8bn, the highest level on record. Indeed, this rapid rebound in FDI speaks volumes about the country's attractiveness for investment and we believe Nazarbayev's firm grip on security forces will see to it that investor appetite remains anchored.

Economy In The Clear?
Kazakhstan - Real GDP Growth (%)

A Brighter Future In Store

The mining sector plays a pivotal role in Kazakhstan's economy, representing more than 20% of the country's GDP while generating approximately US$21.3bn worth of economic output. Underpinned by the ongoing development of the nation ' s vast natural resource base, we forecast Kazakhstan will continue to enjoy healthy economic growth in the years ah ead, with real GDP growth of 5.9 % and 6.4% in 2013 and 2014 respectively. Although the mining sector ' s growth trajectory has undergone a period of turbulent ride over the past few years, we are generally optimistic towards the future prospects of the industry. Beyond the country ' s outstanding resource portfolio, we highlight that Kazakhstan has consistently climb up the ranks on the World bank's Ease of Doing Business Ran kings and is currently ranked at the 47 rd position , out from 183 economies . No doubt, t he government ' s renewed focus on instilling a positive investment climate will be a major boon to the mining space going forward.

This article is tagged to:
Sector: Mining
Geography: Kazakhstan, Kazakhstan, Kazakhstan, Kazakhstan