EXCLUSIVE: Kazakhstan – Commodities that Count, Markets that Matter; Highlights over the week ending February 24 2017
Kazakhstan’s commodity output and sales are of crucial importance to its economy. The country’s hydrocarbon, mineral and agricultural sectors employ some 80 per cent of the working population and generate more than 60 per cent of the nation’s external income. This is why developments and trends concerning commodities in the global market arenas must constantly be kept under the eyeglass, since they directly affect the nation’s earnings and thereby its prosperity.
1] London Bullion Market – https://www.bulliondesk.com/gold-prices/
2] London Metal Exchange – https://www.lme.com/
3] InterContinental Exchange – http://www.topoilnews.com/
4] GASPOOL – https://www.eex.com/en/market-data/natural-gas/spot-market/daily-reference-price#!
5] CAPP – http://www.infomine.com/investment/metal-prices/coal/
6] UxC – https://www.uxc.com/p/prices/UxCPrices.aspx
7] Chicago Board of Trade – http://www.agrimoney.com/futures.php
8] New York Board of Trade – http://www.agrimoney.com/futures.php
For almost a quarter century since the break-up of the USSR and Kazakhstan’s by and large unsolicited independence, the republic has been struggling to shift from a commodity-driven to an industry- and service-driven economy. That job has been unsuccessful so far, and only the food and beverage industry, which represents the bulk of the midstream industry’s cash value in January calculated by the national statistics agency at 606.756 billion tenge (UDS1=approx. 320 tenge at current exchange rates), or hardly more than a third of the entire industrial turnover, can be called an achievement to speak of. Upstream subsoil industries account for 970.761 billion tenge, or well over half of the entire industrial sector’s cash value, put at 1.755867 trillion tenge.
It means that for some 60 per cent of its national income Kazakhstan remains dependent on upstream commodity output, excluding agriculture which accounted for no more than105.3634 billion tenge in January while more than 40 per cent of the population owe their personal income to it. It all means that soething is fundamentally wrong with the Kazakh economy, and even though there is no lack of plans and aspirations, tangible results leave a lot to be desired. It also means that Kazakhstan’s national revenue is overdependent on so-called external forces, i.e. price settings determined on the other side of the globe with little influence of producers left to the process and maintaining a huge gap between producers and consumers of commodities in the world. For almost three centuries, economists have warned against the risks of such a mechanism (see below) but these days it is stronger than ever, maintained by politicised monetary institutions which decide in how far entire populations have bread on the shelf and the amount of butter they can spread on it.
Urals benchmark blend strengthens its position
Crude oil’s Urals blend, to which the bulk of Kazakhstan’s output belongs, strengthened by $1.15 per barrel through last week, following the trend set by Brent, which gained $0.93 through the week, thereby narrowing the discount margin maintained by Urals. Kazakhstan adheres to the OPEC/NOPEC group of exporting counties that have put a temporary lid on output – not so much in the illusion that it could push prices back in the direction of $100 per barrel but at least to keep it from plummeting below half that amount, in which they so far have succeeded.
Urals is a mix of heavy and high-grade oil of Urals with light oil of Western Siberia, extracted in Khanty-Mansiysk autonomous region, Bashkortostan and Tatarstan, and Kazakhstan. Urals brand oil is pumped through the Atyrau-Novorossiysk pipeline (CPC) and the Druzhba pipeline system. Russia’s largest Urals crude oil producers are Rosneft, Lukoil, Surgutneftegaz, Gazprom Neft, Tatneft, while Kazakhstan’s output comes from a number of partnerships with western and Chinese companies. Urals Crude futures are traded on the Saint Petersburg International Mercantile Exchange (SPIMEX) under ticker symbol U in U.S. dollars.
For how long Kazakhstan will remain a docile member of the output-restriction pool remains to be seen. Major producers like Venezuela, Iraq and Russia have let it known that they do not wish to remain within the “club of restraint” forever, and after two decades of tagnation Kazakhstan, with its first major-scale offshore project materialising, appears to join that chorus. “Production from part of Kashagan oil field in the Kazakh waters of the Caspian Sea should reach capacity by the end of the year,” According to the economists at the Organization of Petroleum Exporting Countries,” UPI reported referring to the consortium operating the field. Kazakhstan was producing around 1.38 million barrels of oil per day last year with the main share of growth coming from Kashagan. “The North Caspian Operating Co., a joint venture operating the giant oil field in the Kazakh waters of the Caspian Sea, confirmed to UPI that production from Kashagan was holding steady at 160,000 bpd and production would accelerate to 180,000 bpd in the coming months. Once secondary production methods are optimised to increase pressure in the reservoir, a spokesperson for the NCOC said the first phase of Kashagan “is expected to reach production capacity of 370,000 barrels per day by the end of 2017.”
Natural gas output in Kazakhstan mainly comes from its northeastern onshore field of Karachaganak, jointly owned and operated by the Royal Dutch Shell and Italy’s Eni. The bulk of the gas is exported by Gazprom which has a marketing agreement with the consortium. Gas’ European benchmark lost 78.5 euro cent last week, accelerating a trend that set in by the end of last year. The decline is seen as seasonal and caused by early signs of spring., since Europe’s gas consumption peaks in winter as more than two-thirds of its households depend on it to keep warm.
Minerals: in search for midstream reinforcement, price trends encouraging
Apart from oil and gas, Kazakhstan’s mining sector keeps representing a non-negligible part of the nation’s income and thereby of its living standards. Only part of the mines’ output is being processed in the country, in particular lead and zinc, and part of copper. Others, like iron, tin, bauxite and manganese are sold in the form of ore, mainly to Chin and Russia. According to the National Statistics Agency, Kazakhstan produced 409,500 tonnes of bauxite in the month of January this year, along with 7.1829 million tonnes of copper ore and 416,900 tonnes of copper/zinc ore. Output of zinc concentrate stood at 25,300 tonne and of lead concentrate at 7,400 tonne. Iron ore production reached 1.3812 million tonne for the month. The statistics agency gives no figures for precious metals, non-core base metals such as molybdenum and cobalt and uranium.
Through last week, benchmark prices of copper, aluminium and cobalt gained marginally on the London Metal Exchange where they are determined. Lead, nickel, tin and zinc found themselves on the losing end, though not to dramatic proportions. All non-ferrous metals have scored significant gains so far this year (see table), topped by cobalt which has jumped from just below $3,300 to $4,800 per tonne since the last trading day of 2016. Miners hope that if the current trend persists, investors will be attracted for metals’ upstream sector, which it currently painfully lacks.
Agro-commodities: right for now, no breakthrough in sight
Being a major-scale exporter of wheat and a mid-scale one of cotton, Kazakhstan could nonetheless do a lot better. Last year witnessed a major increase in wheat output but a loss in quality, which caused a shift in supplies from human-consumable grain to fodder – which Kazakhstan produced insufficiently for a long time, obliging it to purchase fodder in neighbouring countries.
The immediate outlook of Kazakhstan’s farming sector could be described as stable, with winter weather having been favourable to most crops and no excessive drought expected in late spring or early summer. This means that on the international markets Kazakhstan, which has pegged its export prices to that of the Russian Federation, can expect to consolidate itself, but not to work itself up.
“The International Grains Council (IGC) updated its forecast of grain production in Kazakhstan in 2016/17 MY to 19.4 mln tonnes, as opposed to the previous figures at 21 mln tonnes, the Kiev-based agro-news agency APK Inform reported. “The expected total supply of grains reduced from 24.2 mln tonnes, to 22.7 mln tonnes. At the same time, the consumption forecast increased from 10.1 mln tonnes to 10.5 mln tonnes, including feed grains – from 4.6 mln tonnes to 4.9 mln tonnes. The IGC decreased the export forecast from 9.8 mln tonnes to 8.7 mln tonnes, as well as the ending stocks – from 4.3 mln tonnes to 3.5 mln tonnes.”
The US Department of Agriculture’s latest cotton outlook, which gives its first views on supply and demand 2017-18 season, sees consumption exceeding demand by 6.0m bales,” the American agro-newsreel AgriMoney reported last week.
All of this decline was down to China, were stocks are seen falling by 9.1m bales despite rising imports and domestic production. And the USDA said that the decline in Chinese stocks could set the stage for larger imports in the season to come. […] The USDA saw Chinese imports up 500,000 bales year on year, at 5.0m bales.” Cotton has been a winner so far this year on the New York Board of Trade, where benchmark prices are defined, rising from 60.25 US dollar cent as of end-2016 to $0.7657 last Friday, posting a $0.0309 gain through the week.
Denying historic visions on commodity trade
Price settings thereby prove to depend on forward-looking policies to excessive extents, and nobody knows how long it will remain that way. It contradicts market theorists, starting with France’s XVIII-Century physiocrats who used to profess that wealth is created by productivity rather than by demand. Only productivity, not “stockpiles of precious metals”, can create demand, in the words of François Quesnay, the French physician and theorist generally considered the founder of the physiocratic economic mainstream. It stands opposed to the “classical” view on economics, based on the concept that demand is an autonomous mechanism which generates and determines productivity.
Quesnay’s theory was based on a rough division of the French society he lived in into three categories: the “productive class” meaning farmers and other producers of raw materials, the “proprietory class” meaning the owners of land and other tangible fixed assets, and the “sterile class” which comprised both manufacturers, administrators and other servers of what Quesnay saw as non-tangible interests of society. Quesnay adheres to the view of cost-related sales, where the investment sets a produce’s par value and the market (= par plus added) value is being determined on the sales end.
“The productive expenditures are employed in agriculture, meadows, pastures, forests, mines, fishing, etc. to perpetuate riches in the form of grain, beverages, wood, cattle, raw materials for the handicrafts, etc.,” an explanation of his theory in Arthur Eli Monroe’s classic Early Economic Thought, (Cambridge, 1923, pp 336-348) reads. The sterile expenses are made upon handicraft products, housing, clothing, interest on money, servants, commercial expenses, foreign commodities, etc.The sale of the net product which the Cultivator has produced during the preceding year, by means of the annual advances of 600 livres employed in agriculture by the Farmer, furnishes the proprietor a revenue of 600 livres. The annual advances of 300 livres in sterile expenses are employed for the capital and the expenses of commerce, for the purchase of raw materials for the handicrafts, and for the subsistence and other needs of the artisan until he has finished and sold his product. Of the 600 livres of revenue, one half is spent by the Proprietor on purchases from the productive class, such as bread, wine, meat, etc., and the other half on purchases from the sterile class, such as clothing, furnishings, implements, etc.”
Within this context, François Quesnay observes that “… money is not the wealth people need for their well-being. What must be obtained are the necessary provisions to live and the annual reproduction of the said provisions. […] A nation’s mass of money cannot grow without growth of this very reproduction; otherwise, the growth of the money mass cannot take place but at the expense of the annual reproduction of wealth.”
In other words: accumulative earnings in markets deduct value from produce rather than adding to it. This as it were anticipates on the present-day friction in wealth determination. In practice, economic strength is measured by the performance of gross economic product, which is the sum of productivity and expenses on purchases – with the latter taken as the determining factor. According to critics, however, ignoring the breakdown between production and consumption in GDP calculation comes down to turning a blind eye to availability of produce on the market as the initial generator of prosperity.