kazakhstan: economic & sector outlook · the main economic industries that pushed down...

RESEARCH &

KNOWLEDGE MANAGEMENT

KAZAKHSTAN: ECONOMIC & SECTOR OUTLOOK

SEPTEMBER 2016

2

Kazakhstan: economic & sector outlook

CONTENTS

KEY HIGHLIGHTS 3

MACROECONOMIC DYNAMICS

Review of 2Q16 GDP growth 5

Fiscal position 7

Inflation & monetary policy 8

USD-KZT exchange rate 10

External positions 12

Foreign direct investment 13

Global oil & metal markets 14

Regional economies 18

2016 outlook 20

KEY SECTORS

Oil & Gas 22

Mining & Metals Industry 27

Infrastructure 38

REFER TO DISCLAIMER & DISCLOSURES AT THE END OF THIS PUBLICATION

3


KEY HIGHLIGHTS

Preliminary estimates showed that Kazakhstan’s GDP growth increased by 0.1% in 1H16 as

compared to a revised -0.1% in 1Q16. Despite registering a marginal growth rate in 1H16, the

economy has rebounded gradually from a contraction of 0.5% registered in January 2016.

We maintain our in-house GDP growth projection of 0.8%-1.0% for 2016, premised on oil

price of USD43pb-USD45pb average for the year. The official forecast for 2016 GDP growth

remains at 0.5%, with upside potential of 1.0% provided that the funds allocated under the Nurly

Zhol program and anti-crisis funds are disbursed fully for the remaining of this year.

In line with our earlier expectations of monetary policy for stimulus, NBK cut its base rate by

200bps for a second time this year, from 15% to 13%. The rate cut would bode well for domestic

demand, business investments and the general economic activities.

On the general price level, we expect inflation to remain elevated, with a more realistic

projection of 13%-14% average for 2016. Inflation has stayed at record highs of 16.4%

average in 8M16.

On currency, we caution that decline in global oil prices may cause the tenge to weaken.

However, any weakening of the tenge would not be sharp as the regulator plans to participate

in FX market to smooth out significant fluctuations. Year-to-date, the tenge has averaged at

344.75 as at 31 August 2016.

On regional economies, growth prospects have remained uneven among Kazakhstan’s major

trading partners, which could negatively impact the country’s exports. Economic recession is

expected to continue in Russia with GDP projection of -1.8% in 2016. China’s GDP growth is

likely to moderate further to between 6.2% and 6.5% over the medium-term.

GDP Growth vs. Brent (2005-2016f)

Source: National Bank, Bloomberg, Samruk Kazyna

The oil and gas industry accounted for 21% of GDP and 53% of total exports in 1H16. Kazakh

producers slowed down their production in reaction to the price decline due to natural decline

at some mature fields (Petrokazakhstan fields), decrease of drilling activity and maintenance

works at some fields (Karachanganak). Further oil production growth depends upon both the

expansion phases in Tengiz and the start of production at Kashagan. Kashagan is expected to

finally start its oil production in 4Q16, while Tengiz Future Growth Project by the Chevron-led

consortium in Kazakhstan will only see first oil around 2022. Based on our conservative

assumptions, oil output from Kashagan will be at around 1.4 mln tons in 2017 and 2.8mln

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GDP growth % Brent oil USDpb (RHS)

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in 2018 (20% and 40% of the expected production). This will contribute approximately 0.4%

growth to the GDP in 2017 and 2018, respectively, ceteris paribus.

Oil production in Kazakhstan, ‘000 tons (1991 – 2016f)

Source: Agency of statistics, Ministry of Energy, Samruk-Kazyna

Kazakhstan has about 8.1% of the world reserves of uranium, 2.0% zinc, 1.2% iron ore, and

10.9% lead and 8.0% silver. At the current production rate, the operating mines will need at

least forty years to exhaust their reserves. Mining and metallurgy represent a large chunk of

Kazakhstan’s economy. In 2015, mining industry accounted for 7% of the country’s GDP. In

2016, Kazakhstan plans to increase the production of uranium by 2.1% YoY to 24,080 tons,

while zinc, iron ore and silver production is expected to decrease based on the 1H16 results.

Meanwhile, lead output increased by 24% in 1H16.

Kazakhstan’s 2015 mineral commodity production and exports, ‘000 tons

Mineral Production Exports Main producers Main export destinations

Iron ore 37,396 15,224 ENRC, Arcelor Mittal Russia, China

Zinc 324 282 KAZ Minerals, Kazzinc China, Turkey

Uranium 24 23 Kazatomprom,

Uranium One

China, EU, US, South

Korea

Lead 120 108 Kazzinc Spain, Russia

Silver 1.3 1.3 KAZ Minerals Switzerland, US

Sources: USGS, Statistics agency of RK, World silver survey 2016, ILZSG

On infrastructure sector, Nurly Zhol is a USD9bln domestic economic stimulus plan to

develop and modernize roads, railways, ports, IT infrastructure, and education and civil services

in Kazakhstan over 2015-2019. Key performance indicators of the program include estimated

contribution to GDP of 0.87% in 2016 and 1.18% in 2017. Multiplier effect from the

infrastructure spending in the long-term should bring economic growth up to 4.1% by

2019. Over the course of its implementation, the program is expected create 405,600 new jobs.

Investments in infrastructure are expected to improve Kazakhstan’s ranking to 57th position in

the World Economic Forum competitiveness rating in terms of infrastructure.

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Decline in oil output due to maintainence works at major fields

5


MACROECONOMIC DYNAMICS

Review of 2Q16 GDP growth

Preliminary estimates from the Ministry of National Economy showed that Kazakhstan’s GDP growth

increased by 0.1% in 1H16 as compared to a revised -0.1% in 1Q16. Despite registering a marginal

growth rate in 1H16, the economy has rebounded gradually from a contraction of 0.5% in January 2016

to achieve a small positive recovery as at June 2016. Declines in private sector consumption and

investment have been cushioned by the government’s fiscal stimulus packages (transfers from the

National Fund to the budget amounted to 6% of GDP in 2015 and 8% of GDP in 2016). At this juncture,

the official forecast for 2016 GDP growth remains at 0.5%, with upside potential of 1.0% provided

that the funds allocated under the Nurly Zhol program and anti-crisis funds are disbursed fully

for the remaining of this year. We maintain our in-house GDP growth projection of 0.8%-1.0%

for 2016, premised on oil price expectations of USD43pb-USD45pb average for the year.

Quarterly GDP Growth Trend % YoY

(2007-2Q16)

Month-To-Date GDP Growth Trend % YoY

(2016)

Source: Ministry of National Economy, Bloomberg, Samruk Kazyna

A sectoral review of 1H16 results showed that growth momentum was dragged down by declines in

industrial output, trade and communication services. The short-term indicator, which is a gauge for

change in production indices of basic industries i.e. agriculture, industry, construction, trade, transport

and communications (accounts for more than 60% of GDP), contracted by 0.7% in 1H16 (1Q16: -0.6%).

The main economic industries that pushed down production in the first half were mining,

telecommunications, and trade sectors.

In particular, the mining sector fell by 3.4% in 1H16 due to contraction in coal and lignite (-8.0%), oil (-

3.6%), and iron ore (-22.2%) production. The decline in iron ore output was due to a drop in Chinese

demand for iron ore and pellets, decrease in exports of pellets to Russia, and decline in world prices

for iron ore.

The manufacturing sector recorded a growth rate of 0.5% in 1H16, up slightly from 0.3% in 1Q16.

Metallurgy (+15.6%) and production of coke and petroleum products (+10.5%) subsectors contributed

to this output increase. Non-ferrous metallurgy output increased by 19.5% and ferrous by 8.8%. There

were some sub-segments that showed weak performance during the first half of 2016:

The machinery-producing sub-segment demonstrated a 24.3% drop in production,

The production of beverages decreased by 6.8% due to declining price competitiveness of the

domestic producers compared to Russian food producers.

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The services sector, in particular, trade, information and communications demonstrated a poor

performance as well in 1H16. The 4.1% production decline in information and communication sector

can be explained by decrease in cellular communications since the mobile services became cheaper.

The wholesale trade index declined by 6.6% in January-June 2016. This drop was associated with

decrease in foreign trade activity and the volume of industrial production in the country.

In January-June 2016, crude oil production declined by 3.6% and was equal to KZT3.3tln, and natural

gas output increased by 6.1% reaching KZT80.2bln as compared to the same period of 2015.

In 1H16, electricity, gas, steam and air conditioning declined by 0.7%, electricity production alone

declined by 0.9% to KZT494bln. This can be explained by the seasonal factors.

Construction output increased by 6.6% to KZT1,041bln in first half of 2016 supported by state programs.

GDP Growth Breakdown by Sectors, %

GDP components 1H16 1Q16 2015

GDP 0.1 -0.1 1.2

Short-term indicator 0.7 -0.6 0.4

Mining -3.4 -1.4 -2.5

Manufacturing 0.5 0.3 0.2

Electricity, gas, steam and air

conditioning

-0.7 -0.7 -1.6

Water supply -5.9 -6.6 -8.9

Construction and warehousing 6.6 6.0 4.3

Freight turnover 0.9 0.3 5.5

Passenger transport 1.9 1.0 1.8

Communications -4.1 -3.6 0.6

Wholesale trade -6.6 -7.4 0.0

Source: Ministry of the National Economy

GDP Growth Forecasts for 2016

Ministry/ Institutions GDP growth, %

Previous Revised

Ministry of National Economy 1.2 0.5

Fitch Ratings 3.5 -1.0

Standard & Poor’s 2.8 0.0

Asian Development Bank 3.3 0.7

International Monetary Fund 2.2 0.1

European Bank for Reconstruction and Development 1.5 1.1

World Bank 1.2 0.1

Source: Ministry of the National Economy, multilateral organizations, rating agencies

7


Fiscal position

The consolidated budget for 2016 was revised earlier this year due to overall economic slowdown and

the introduction of floating export custom duties on crude oil. Adjusted revenues forecast (excluding

transfers from the National Fund) for 2016 was reduced by KZT400bln and now amounts to KZT7.1tln.

Meanwhile, guaranteed transfers from the National Fund are expected to be KZT3.7tln, an increase of

KZT720bln due to the depreciation of the tenge and the revision of expenditures within the Nurly Zhol

program. Nurly Zhol provides counter-cyclical spending on infrastructure while the government reduced

or delayed other non-priority budget capital expenditures.

Budget expenditures projection was increased by KZT700bln to KZT9.7tln. The overall deficit of the

republican budget for 2016 is expected to be KZT2.58tln (increased by KZT1.1tln), or at -5.8% of GDP

(previous estimate was -3.3%). In 2015, budget deficit was at 3% of GDP. Non-oil deficit of the

consolidated budget (excluding oil revenues and expenditures on national debt service) was higher by

KZT666bln and is now expected to amount to -10.3% of the GDP.

Consolidated budget for 2015-2016, KZT bln

Budget items 2015 preliminary 2016 revised forecasts

Consolidated budget

Revenues 7,207.8 7,123.9

% GDP 17.4 16.1

Oil revenues 2,277.6 1,956.0

Non-oil revenues 4,930.3 5,167.9

Expenditures 8,639.1 9,705.6

% GDP 20.9 22.0

Consolidated deficit -1,431.2 -2,581.6

% GDP -3.5 -5.8

Non-oil deficit -3,708.8 -4,537.7

% GDP -9.0 -10.3

National Fund

Revenues 7,297.9 2,021.3

Expenditures 2,468.6 3,700.3

Balance of the National Fund 4,829.4 -1,678.9

National Fund assets, end of

period 21,258.7 20,829.6

% GDP 51.4 47.2

USD bln 62.5 57.9

Source: Ministry of Finance

Despite falling oil revenues and the overall economic slowdown, Kazakhstan’s fiscal position remains

resilient to support fiscal stimulus programs. Resources of the National Oil Fund allow the government

to execute massive infrastructure projects (assets of the National Fund stood at USD64.72bln as at

end-July 2016). According to official projections, even with oil prices at a conservative level of USD30pb,

the National Fund will still amount to USD58bln or 47.2% of the GDP as at end-2016. This provides

some fiscal space, since government debt including government guaranteed debt remains relatively

low at USD12.9bln as at end-1Q16.

8


Inflation and monetary policy

In line with our earlier expectations of monetary policy for stimulus, National Bank of Kazakhstan (NBK)

cut its base rate by 200bps from 17% to 15% on 5 May 2016, as the USD-KZT exchange rate and

inflation risks subsided. A second rate cut followed on 11 July 2016, whereby the base rate was further

reduced by 200bps to 13%. The decision on the base rate was taken premised on the following factors:

Inflation currently corresponds to the expectations of the NBK, with the risks of acceleration

being minimal under current circumstances. NBK anticipates inflation to achieve the upper limit

of its official target of 6%-8% band by end-2016. Taking into account the time lag effect of the

base rate on inflation, usually up to one year, the decision to cut the base rate reflects NBK’s

confidence that inflation will remain within the target band over the next 12 months and up until

end-2017.

The USD-KZT exchange rate has stabilized since March 2016, reflecting the combination of an

improved external and domestic environment in the past few months, with the exception of the

short-term turbulence in the global financial markets created by the UK exit from the European

Union. Direct risks of Brexit are estimated to be limited on Kazakhstan. Global oil prices

improved between March and mid-July 2016, providing the added support needed by the tenge.

Similarly on the domestic front, improved economic stability reduced the negative expectations

on currency risks. These developments have contributed to the conversion of foreign currency

denominated assets to tenge-denominated assets in both the foreign exchange cash market

and the bank deposit market.

Total deposits in the banking sector grew by 7.6% in first seven months of 2016 to reach

KZT7.40tln as at July 2016. Even though foreign currency denominated deposits more than

doubled the amount of tenge deposits, tenge deposits grew by 65.0% in the first seven months

of 2016, while FX deposits fell by 7.5%. Tenge and FX deposits stood at KZT2.37tln and

KZT5.04tln respectively as at July 2016. The rebound in tenge deposits since February 2016

was supported by recovery in global oil prices and the changes in interest rates in favor of local

currency deposits (interest rates on tenge deposits were raised from 10% to 14%, while FX

deposits were reduced from 3% to 2% effective 1 February 2016).

KZT vs. Foreign Currency-Denominated Deposits, KZT bln (2013-July 2016)

Source: National Bank of Kazakhstan, Samruk Kazyna

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The domestic money market has been experiencing structural liquidity surplus condition, with

the NBK continues to actively conduct operations to absorb excess liquidity since March 2016.

The net volume of tenge liquidity injected into the financial system amounted to KZT1,278bln

in December 2015 and KZT1,438bn in January 2016, before declining to KZT849bn in February

2016. This was followed by the excess of tenge liquidity in March 2016 leading to an absorption

of KZT1,224bln. NBK’s volume of operations in the money market in the form of withdrawn

liquidity continued to grow to KZT1,545bn in April 2016, KZT1,874bln in May, KZT2,112bln in

June 2017, and KZT2,260bln as of 29 August 2016. NBK absorbs liquidity from the market

through notes, repo auctions and deposits.

Open position of NBK’s operations, KZT bln (2015 – 29 August 2016)

Source: National Bank of Kazakhstan, Samruk-Kazyna

Despite this, excess liquidity however did not result in credit growth. High dollarization level of deposits

and ensuing currency risks prevent banks from expanding loans to businesses and individuals. On a

monthly basis, the amount of tenge-denominated credit grew by KZT86.44bln in July 2016 after NBK

cut the base rate in the previous month. Despite this, credit to the economy fell by 1.9% year-to-date to

KZT8,242.83bln as at July 2016 vs. KZT8,401.11bln as at December 2015. Credits are mostly

concentrated in sectors such as retail, transportation and other sectors, while industry only holds 12.8%

of the aggregated credit portfolio. Lack of long-term financing is one of the major obstacles preventing

growth of non-oil industries.

Loans Breakdown by Sector (7M16)


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Standing facility, net Open market operations, net

Other operations Net

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Industry

Agriculture

Construction

Transportation

Telecom

Retail

Other sectors

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NBK highlighted that further actions on the base rate will depend on the actual inflation, its deviation

from the forecast, inflation expectations of population and market participants and currency preferences

of economic agents. Further easing of the monetary policy moving forward would depend on the

presence of sustained signal indicating the convergence of inflation to the target range. The next

decision on the base rate will be on 3 October 2016.

Overall, we welcome the NBK’s move in cutting the base rate which would bode well for domestic

demand, business investments and the general economic activities. The index of business sentiment,

based on the survey of top management of real sector enterprises, moved into positive territory,

signaling a gradual recovery in economic activity. The cut in the base rate has stimulated banks to lower

market rates since July, which will be crucial in lifting the demand for resources and the expansion of

credit activities in 4Q16.

On the general price level, inflation has stayed at record highs of 16.4% average in 8M16.

Consumer prices are only expected to ease significantly in 4Q16 when the base effect diminishes in

the fourth quarter. As such, we expect inflation to remain elevated, with a more realistic projection

of 13%-14% average for 2016. Take note that official projection for inflation is based on a one-point

expectation i.e. the level anticipated as at December 2016 (6%-8%), and this does not reflect the

elevated levels of CPI in the first seven months of 2016.

Monthly Inflation Trends, % YoY (2010-August 2016)

Source: Bloomberg, Samruk Kazyna

Note: CPI in 7M16 – January 14.4%, February 15.2%, March 15.7%, April 16.3%, May 16.7%, June 17.3%, July

17.7%, August 17.6%

USD-KZT exchange rate

Between early-March and end-June 2016, volatility in the USD-KZT exchange rate has reduced

significantly compared to the trends observed in January-February 2016. The USD-KZT exchange rate

was last traded at 339.18 on 30 June 2016, having averaged at 335.37 in 2Q16. These compared to

the closing rate of 344.59 as at 31 March 2016 and average of 346.11 in 1Q16. Factors that contributed

to stabilization of the USD-KZT exchange during these period include the following:

Stabilization in oil prices have mitigated downward pressures on the tenge - Global oil prices

have rebounded from their lows in January 2016, encouraged by a slew of data releases. The

US dollar weakness has also provided some support to the oil markets between March and

mid-July 2016.

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CPI Food Non-food Services

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US interest rate expectations – Investors have pushed back the timing on an interest rate hike

to late-2016, with fed funds futures pricing in the 50% probability of a rate hike in December

2016. Global economic uncertainty, exacerbated by Brexit, and erratic readings on domestic

job creation are pushing policymakers to wait for further clarity and confidence that domestic

economic health and inflation are firming. Delay in the US monetary policy normalization makes

emerging market assets attractive for now vs. dollar assets.

Catching up with the declines in global oil prices that started since the third week of July 2016, the

USD-KZT exchange rate however fell by 5.1% to close at 354.12 on 26 July 2016, after touching

an intraday high of 354.45. This was the biggest decline since December 2015, and the weakest level

in five months. The tenge’s slide in late-July prompted a statement from the NBK, which reiterated that

the tenge is subject to a free float and is influenced mainly by oil and the exchange rate of the country’s

main trading partners.

USD-KZT Intraday 26 July 2016

USD-KZT Trend (2015-2016YTD)


We caution that decline in global oil prices may cause the tenge to weaken. However, any weakening

of the tenge would not be sharp as the regulator plans to participate in FX market to smooth out

significant fluctuations. In July 2016, NBK sold almost USD199mln on the exchange market. As at 31

August 2016, the USD-KZT exchange rate closed at 340.50, almost unchanged from end-December

2015. We expect the USD-KZT exchange rate to range at 350-355 average for 2016.

USD-KZT Exchange Rate Projections 2016

Price 1Q16

average

2Q16

average

Average YTD,

as at 31

August 2016

2016f average 2016f average

USD-KZT 346.11 335.37 344.75 360* 350-355^

Source: Bloomberg, the Ministry of National Economy, Samruk Kazyna

* represents official projection (by Ministry of National Economy), average price expected for full year 2016

^ represents in-house projection by Samruk Kazyna, average price expected for 2016, projections were based on

data as at 31 August 2016.

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External positions

The contribution of net exports to GDP fell significantly to 4.0% in 2015 compared to 13.9% in 2014.

This was due to reduced export revenues (fuels and energy account for 72.7% of the country’s exports

in 2015) and generally weaker trade environment. Devaluation in the currencies of key trade partners

also reduced Kazakhstan’s trade competitiveness, further impacting export revenues. In US dollar

terms, exports decreased by 42.3% and imports fell by 22.7% in 2015 compared to 2014.

In 2Q16, preliminary estimates showed that total exports rebounded by 2.7% QoQ to USD8.67 billion

vs. USD8.45 billion in 1Q16. This was an improvement from the -16.7% QoQ recorded in the first

quarter, supported by higher global oil prices in the second quarter (Brent averaged at USD48.01pb in

2Q16 vs. USD39.33pb in 1Q16).

Similarly, imports turned around to increase by 13.0% QoQ to USD6.53 billion in 2Q16 from USD5.78

billion in 1Q16, mainly due to low base effect of the previous quarter and as the tenge stabilized in the

second quarter. This compared to a decline of 29.6% QoQ registered in 1Q16. As a result, trade surplus

narrowed by 19.7% QoQ to USD2.14 billion in 2Q16 from USD2.67 billion in 1Q16. Given a narrower

trade surplus and increased services trade deficit, current account deficit widened to USD1.87 billion in

2Q16 vs. USD1.02 billion in 1Q16.

The country’s current account first showed deficit of USD955.2 million in 3Q14, returning to a marginal

surplus of USD14.1 million in 4Q14. Combination of weakening exports and declining trade

competitiveness resulted in current account deficit of USD5.82 billion in 2015, the first since 2009, and

compared to a surplus of USD6.38 billion in 2014. This trend is expected to continue in 2016, with

official projection of current account deficit being 4.4% of GDP.

External Trade Trend, USD bln

(1Q14-2Q16)

Current Account Balance, USD mln

(1Q14-2Q16)

Source: National Bank of Kazakhstan, Bloomberg, Samruk Kazyna

On reserves, Kazakhstan’s official international reserves comprise of foreign-exchange assets at the

NBK and in the National Oil Fund. Total international reserves grew by 4.2% or USD3.86bln in 7M16 to

USD95.24bln as at July 2016. This was attributed to a 9.5% or USD2.65bln increase in FX reserves at

the NBK to USD30.52bln, and a 1.9% or USD1.21bln rise in FX reserves to USD64.72bln at the National

Oil Fund. NBK’s repayment of FX swaps to commercial banks in 7M16 (at KZT1,000bln or

approximately USD2.84bln) improved the quality of these reserves.

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Exports Imports Trade balance (RHS)

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International Reserves Trend, USD bln (2005-July 2016)


Foreign direct investment

Gross inflows of FDI fell to USD14.83bln in 2015, from USD23.73bln a year earlier, reaching their lowest

level since 2006, due to regional and global economic slowdown. Over 1Q16, foreign direct investment

to Kazakhstan increased by USD4.28bln and accumulated at USD226.67bln since 2005. Inflow of

investments went to traditional sectors, such as mining with total investments of USD59.98bln or 26.5%

(mainly in the extraction of crude petroleum and natural gas), as well as investments into professional,

scientific and technical activities at USD83.57bln or 36.9% (majority relates to geological exploration

and prospecting activities). The oil and gas, natural resources and extractive industries continue to

remain the most attractive sectors for investments, comprising more than half of Kazakhstan’s

accumulated FDI inflows to-date. Nonetheless, the manufacturing, wholesale and retail trade, financial

services, and information and communication attracted commendable investments of USD26.71bln

(11.8%), USD19.49bln (8.6%), USD11.89bln (5.3%) and USD4.61bln (2.0%) respectively, reflecting

relative success of Kazakhstan’s efforts to diversify the economy.

Gross Inflows of FDI, USD mln (2005-1Q16)


Netherlands remains the largest investor in Kazakhstan with investments amounted to USD65.64bln as

at 1Q16, while the US has USD24.68bln investments in the country. Other major investors include

Switzerland, France, UK, China, and Russia. Kazakhstan has increasingly been receiving FDI from

China namely within the Chinese “One Belt, One Road” initiative.

New Asian partners such as China, India and even Iran are replacing Kazakhstan's traditional

investment partners. However, they have not been able to fully substitute Russia and western investors,

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International reserves National Oil Fund assets

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16

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many of which have been deterred by lower oil prices, weakening domestic and regional economic

cycle.

Kazakhstan has a high ranking in terms of investor protection, according to the Doing Business report.

Index of transaction transparency, Index of manager’s responsibility and Index of investment protection

are well above the average for Eastern Europe and Central Asia. Government policy has been

encouraging foreign investment with measures such as reduction and in some cases waiver of taxes

for five years, state subsidies, partial or total exemption from duties and taxes on equipment and other

materials.

FDI by Sector (as at 1Q16)

FDI by Country (as at 1Q16)

Source: National Bank of Kazakhstan, Samruk Kazyna

Global oil and metal markets

Crude oil prices plunged and closed at USD39.51pb on 2 August 2016, the first time that prices have

dropped below USD40pb in four months. The selling pressures have been driven by realization that

global oil oversupply remains intact, compounded by increasing production and stockpiles from the US

and OPEC members.

Brent vs. WTI Price Trend, USD pb (2014-31 August 2016)


Global oil prices have staged a strong recovery since their January 2016 lows, gaining up to 56% to

their seven-month high of USD53.26pb on 8 June 2016. Delay in the US interest rate hike contributed

to the dollar weakness this year, providing some support to the oil markets up until mid-July 2016. The

26%

12%

9%5%

37%

3%8%

Mining &quarryingManufacturing

Wholesale &retail tradeFinancialservicesProf, science &techConstruction

Others

29%

11%

7%6%6%

5%4%

4%3%2%

23%

Netherlands

US

Switzerland

China

France

UK

Russia

BVI

Italy

Japan

Others

0

20

40

60

80

100

120

Brent WTI

14 15 16

15


WTI for September delivery closed at USD49.01 per barrel as at 30 June 2016, upped 17% from

USD41.90pb as at end-1Q16. Meanwhile, Brent for October settlement last traded at USD50.16 per

barrel as at 30 June 2016 and was 18.7% higher compared to USD42.27pb as at end-1Q16.

Significant upside potential to global oil prices moving forward will be limited by the following factors,

mostly supply related:

US oil explorers have boosted the number of active rigs by 90 since early-June to 406 as at 19

August 2016, with 32 being added during the first three weeks of August.

US crude stockpiles were at 523.59 million barrels for the week ended 19 August 2016, more

than 100 million barrels above the five-year average. Meanwhile, US crude production

increased to 8.55 million barrels a day for the week ended 19 August 2016, as drillers put rigs

back to work.

Official data showed that US gasoline stockpiles rose in four of the past five weeks, sending

supplies to the highest levels since April. A report from the EIA showed gasoline inventories

have increased by 452,000 barrels for the week ended 22 July 2016, adding on to the swelling

fuel stockpiles. The addition to gasoline stockpiles was less at 32,000 barrels for the week

ended 19 August 2016.

Oil output from OPEC members, especially Iraq and Iran rose to a record high in July 2016,

with oil production above 31mln barrels per day for a fourth consecutive month. As such, the

Middle East market share of global oil supplies rose to 35%, the highest since 1970s.

The Bloomberg Dollar Spot Index, which measures the dollar vs. major currencies, advanced

by 1.4% since end-June to reach 1,202.2 as at 25 July 2016, before easing to 1,187.91 on 31

August 2016. A stronger dollar reduces the appeal of dollar-denominated commodities.

OPEC Oil Production (2010-July 2016)

US’ Oil Inventory (2014-19 August 2016)


Expect global oil prices to remain volatile in the near-term, underpinned by oversupply concerns and

moderate global demand. Oil demand has picked up since January 2016, but the take-up pace has

been slower than before compared to supply growth. Demand was then driven by China’s oil purchases

for its strategic petroleum reserves, which has now reach full capacity and hence has seen demand

tapering off. According to the IEA report, refinery runs growth was 60% higher than refined product

demand growth in 1Q16. Despite regular upward revisions to oil demand growth, there are signs that

demand momentum is easing, putting downward pressures on oil prices. Furthermore, Bloomberg

database indicated that money managers have raised their short positions by the largest amount since

2006, which will drive the oil market lower. As at 31 August 2016, WTI for October closed at

USD44.70pb, an increase of 4.3% year-to-date. Meanwhile, Brent for October settlement last traded at

26

27

28

29

30

31

32

33

34

Jan

-10

Ap

r-1

0Ju

l-1

0O

ct-1

0Ja

n-1

1A

pr-

11

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2Ju

l-1

2O

ct-1

2Ja

n-1

3A

pr-

13

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4Ju

l-1

4O

ct-1

4Ja

n-1

5A

pr-

15

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6Ju

l-1

6

mln

bp

d

0

100

200

300

400

500

600

14 15 16

00

0 b

pd

16


USD47.04pb, rising by 9.0% year-to-date. We expect oil price to range at USD43pb-USD45pb

average for 2016.

Oil Price Projections 2016, USD per barrel

Price 1Q16

average

2Q16

average

Average YTD,

as at 31 August

2016

2016f average 2016f average

Brent 39.33 48.01 44.62 30* 43-45^

IMF - - 35 -

World Bank - - - 43 -

Fitch - - - 42 -

Source: Bloomberg, Multilateral Organizations, Fitch Ratings, Samruk Kazyna

* represents official projection (by Ministry of National Economy), average price expected for full year 2016

^ represents in-house projection by Samruk Kazyna, average price expected for 2016

Projections were based on data as at 31 August 2016

In June 2016, base metal and mineral prices were up by 0.3%, while precious metal prices increased

by 1.2% as compared to May 2016. The average base metal prices advanced by 1.1% except copper.

The increase in metal prices was supported by a weaker dollar following May’s significantly weaker

payrolls data and continuing improvements in China’s property sector. In May 2016, prices of China’s

newly constructed residential buildings increased in 60 of the 70 largest cities. Zinc prices increased by

8.2% on concerns of tightening supplies. Nickel prices were up 2.8% supported by the prospect of an

environmental review of the mining sector by the new government of the Philippines.

In 2Q16, all base metals prices increased during the quarter except for lead (-1.27%) and iron ore (-

0.6%) as compared to 1Q16 price levels. In April-June 2016, zinc and tin prices advanced the most, by

14.3% and 9.5% respectively. Other base metal prices also improved during this period - aluminum

(+3.7%), nickel (+3.6%), and copper (+1.2%). Among precious metals, platinum price jumped by 10%

and gold rose by 2%, while silver price dropped significantly by 33.8%.

In 1H16, prices for all base metals and precious metals except for gold dropped as compared to the

same period of 2015. Gold price increased by 1.2% in 1H16. Other precious metals prices as silver and

platinum fell by 4.2% and 8.5% respectively in 1H16. All base metal prices dropped in 1H16 as

compared to 1H15 i.e. nickel (-37%), copper (-21%), aluminum (-13.6%), zinc (-10%), lead (-7.9%), and

tin (-4.8%). Uranium price in 1H16 fell by 19.6% as compared to 1H15.

17


Uranium, pound (2015-31 August 2016)

Gold, troy ounce (2015-31 August 2016)


As at 31 August 2016, the average iron ore price YTD was at USD53.04 per ton. The average iron price

for 1H16 was at USD51.42 per ton, which is 8.4% lower than average price level seen in 2015. As at

1H16, the world average hot rolled steel price stood at USD486.91, which is 5.7% higher than average

price for 2015.

Steel, ton (2015-31 August 2016)

Iron Ore, ton (2015-31 August 2016)


Metal Price Projections 2016, in USD

Price 1Q16 2Q16 1H16 Average YTD,

as at 31

August 2016

3Q16f 4Q16f 2016f

average*

Gold 1,232.8 1,258.5 1,221.72 1,251.58 1,335.0 1,338.0 1,225.0

Iron ore 53.2 52.87 51.42 53.04 54.41 50.23 52.0

Silver 25.4 16.81 15.86 16.84 19.86 19.9 18.0

Steel 352.5 565.11 486.91 498.33 600.0 575.0 500.0

Uranium 28.1 27.6 30.12 29.66 32.5 37.0 30.0

Zinc 1,684.06 1,926.64 1,806.32 1,916.01 1,958.00 1,965.00 1,850.00

Source: Bloomberg, Market consensus, Samruk Kazyna

* represents in-house projection by Samruk Kazyna, average price expected for full year 2016

Projections were based on data as at 31 August 2016

20

25

30

35

40

45

1000

1050

1100

1150

1200

1250

1300

1350

1400

385

435

485

535

585

635

35

40

45

50

55

60

65

70

75

15 16

15 16

15 16

15 16

15 16

18


Regional economies

Global economic growth is expected to be modest in the medium-term, with global GDP growth

projected at 3.2% in 2016 and 3.5% in 2017, according to World Bank’s economic outlook released in

July 2016. Meanwhile, the International Monetary Fund revised downward its expectations for global

growth by 0.1% each year to 3.1% in 2016 and 3.4% in 2017. Global growth will be driven by major

developed economies and emerging markets of China, India and ASEAN-5 and despite this,

weaknesses remain within this group. Uncertainty associated with the strength of global economic

recovery has raised volatility of the global financial markets and undermined confidence.

GDP Growth Forecasts of Selected Countries, % (2015-2017f)

Source: International Monetary Fund, World Bank, market consensus

Similarly, growth prospects have remained uneven among Kazakhstan’s major trading partners, which

could negatively impact the country’s exports. Being Kazakhstan’s largest oil export market, economic

recovery in Europe is progressing at a lackluster pace despite aggressive and unconventional monetary

policy measures, low oil prices and expansionary fiscal policies. Weak global trade and manufacturing

activity, renewed domestic uncertainties and broader geopolitical risks continue to weigh on confidence

and economic activities. In March 2016, the European Central Bank cut the deposit rate further below

zero while long-term refinancing operations for banks were offered at below-zero interest rates. EU’s

GDP growth is expected to remain moderate at 1.4%-1.6% over 2016-2017.

China, being Kazakhstan’s largest export market for oil and metal products, witnessed economic growth

of 6.7% in 2Q16, unchanged from 1Q16, as the still buoyant property market and government spending

on infrastructure cushioned the slowdown in the manufacturing sector. Second quarter growth was

slightly above market estimates of 6.6%, and was in line with the government’s official target of at least

6.5% for full year 2016. This suggests that the economy is responding to stepped up monetary and

fiscal policy support, and reduces the pressure on policymakers of having to increase fiscal and

monetary stimulus in 2H16. Market expectations are that China’s GDP growth is likely to moderate

further to between 6.2% and 6.5% over the medium-term as the economy rebalances and reforms are

being implemented and calibrated by policy easing.

Russia’s GDP growth contracted at a slower pace of 0.6% in 2Q16 vs. -1.2% in 1Q16, with industrial

production, transport and agriculture being the factors supporting growth during the quarter.

Construction and retail sales continued to have a negative impact on growth. Meanwhile, the ruble

appreciated by 4.8% against the USD in 2Q16 after rising by close to 10% in 1Q16, and is currently

trading at levels seen in mid-2015. A stronger ruble has contributed to easing inflation from 12.9% as

at end-2015 to 7.9% average in 1H16. The central bank cut the interest rate for the first time in a year

by 50bps to 10.5% in June 2016. Despite these, economic recession is expected to continue with GDP

1.5 1.6 1.42.5 2.2 2.5

-3.7-1.8

0.8

6.9 6.5 6.2

-5

0

5

10

2015 2016f 2017f

EurozoneUSRussiaChina

19


of -1.8% in 2016, recovering gradually to 0.8% in 2017. President Putin however warned that the

Russian economy may stagnate near zero next year if no new growth drivers are found. Russia is a

major destination for Kazakhstan’s metal exports.

As such, future performance of China and Russia will have spillover effects to Kazakhstan through trade

and weaker commodity prices, as well as through diminishing confidence and increasing volatility in

financial markets. China and Russia account for 12% and 9% respectively of the country’s total exports,

and more-than-expected slowdown in China’s economy and prolonged economic recession in Russia

will put downward pressure on Kazakhstan’s GDP growth. In addition, devaluation of the currencies of

key trade partners especially the ruble will weigh on the competitiveness of the Kazakh exports and

may result in downward pressure on the USD-KZT exchange rate with the risk of increased dollarization.

Exports by Region (5M16)

Exports by Country (5M16)

Source: Statistics Committee, Samruk Kazyna

Ruble and Yuan outlook

Similar to the tenge, the USD-RUB exchange rate strongly correlates to movements in global oil prices.

The RUB-KZT exchange rate last traded at 5.30 on 30 June 2016, strengthening by 2.9% on the quarter

from 5.15 as at end-1Q16. Mirroring its strengthening trend vs. the USD, the ruble appreciated by 15.6%

against the tenge in 1H16. As at 31 August 2016, the RUB-KZT exchange rate closed at 5.2050, gaining

13.6% year-to-date.

In contrast, the CNY-KZT exchange rate closed at 51.07 on 30 June 2016, weakening by 4.4% on the

quarter from 53.44 as at end-1Q16. Yuan weakened by 2.6% against the tenge in 1H16, mirroring a

similar trend against the USD during the same period. As at 31 August 2016, the CNY-KZT exchange

rate last traded at 52.54, a decline of 2.8% year-to-date.

52%

5%2%

3%

13%

10%

1%

14%

Europe

CIS (excl Russia)

Iran

Asia (excl China)

China

Russia

US

Others

21%

17%

14%13%

13%

7%

5%

4%3% 3%

ItalyChinaSwitzerlandNetherlandsRussiaFranceSpainGreece

20


RUB-KZT (2015-2016YTD)

CNY-KZT (2015-2016YTD)


RUB-KZT, CNY-KZT Projections 2016f

Exchange

rate

1Q16 2Q16 2016 avg as

at 31 August

2016

3Q16f 4Q16f

RUB-KZT 5.15 5.30 5.03 5.34 5.38

CNY-KZT 53.44 51.07 52.54 53.80 55.01

Source: Bloomberg, market consensus

2016 outlook

In summary, Kazakhstan’s GDP growth increased by 0.1% in 1H16 as compared to a revised -0.1% in

1Q16. Despite registering a marginal growth rate in 1H16, the economy has rebounded gradually from

a contraction of 0.5% in January 2016 to achieve a small positive recovery as at June 2016. Declines

in private sector consumption and investment have been cushioned by the government’s fiscal stimulus

packages (transfers from the National Fund to the budget amounted to 6% of GDP in 2015 and 8% of

GDP in 2016).

At this juncture, the official forecast for 2016 GDP growth remains at 0.5%, premised on lower oil price

projection of USD30pb. Continued decline in export revenues (expected at approximately 31% on the

year) will contribute to current account deficit of 4.4% of GDP in 2016. Our expectation is that GDP

growth will remain in positive territory in 2016, though growth rate is likely to be marginal, at

0.8%-1.0%, with in-house oil price expectation of USD43pb-USD45pb average this year. The

Ministry of Economy highlighted that upside potential of 1.0% to GDP is possible provided that the funds

allocated under the Nurly Zhol program and anti-crisis funds are disbursed fully for the remaining of this

year.

In line with our earlier expectations of monetary policy for stimulus, NBK cut its base rate by 200bps for

a second time this year, from 15% to 13%. Inflation currently corresponds to the regulator’s expectations

and the USD-KZT exchange rate has stabilized since March 2016, reflecting the combination of an

improved external and domestic environment in the past few months. Further easing of the monetary

policy moving forward would depend on the presence of sustained signal indicating the convergence of

inflation to the target range. The next decision on the base rate will be on 15 August 2016.

Overall, we welcome the NBK’s move in cutting the base rate which would bode well for domestic

demand, business investments and the general economic activities. However on the general price level,

we expect inflation to remain elevated, with a more realistic projection of 13%-14% average for

2

3

4

5

61

5:J J

16

:J J

25

30

35

40

45

50

55

60

15

:J J

16

:J J

21


2016. Inflation has stayed at record highs of 16.4% average in 8M16. Take note that official

projection for inflation is based on a one-point expectation i.e. the level anticipated as at December

2016, and this does not reflect the elevated levels of CPI in the first seven months of 2016.

On currency, we caution that decline in global oil prices may cause the tenge to weaken. However, any

weakening of the tenge would not be sharp as the regulator plans to participate in FX market to smooth

out significant fluctuations. In July 2016, NBK sold almost USD199mln on the exchange market. We

expect the USD-KZT exchange rate to range at 350-355 average for 2016.

On regional economies, growth prospects have remained uneven among Kazakhstan’s major trading

partners, which could negatively impact the country’s exports. Russia’s GDP growth contracted at a

slower pace of 0.6% in 2Q16 vs. -1.2% in 1Q16, with industrial production, transport and agriculture

being the factors supporting growth during the quarter. Despite these, economic recession is expected

to continue with GDP of -1.8% in 2016, recovering gradually to 0.8% in 2017. China, being Kazakhstan’s

largest export market for oil and metal products, witnessed economic growth of 6.7% in 2Q16,

unchanged from 1Q16. Second quarter results suggest that the economy is responding to stepped up

monetary and fiscal policy support, and reduces the pressure on policymakers of having to increase

fiscal and monetary stimulus in 2H16. Market expectations are that China’s GDP growth is likely to

moderate further to between 6.2% and 6.5% over the medium-term as the economy rebalances and

reforms are being implemented and calibrated by policy easing.

Future performance of China and Russia will have spillover effects to Kazakhstan through trade and

weaker commodity prices, as well as through diminishing confidence and increasing volatility in financial

markets. China and Russia account for 12% and 9% respectively of the country’s total exports, and

more-than-expected slowdown in China’s economy and prolonged economic recession in Russia will

put downward pressure on Kazakhstan’s GDP growth. In addition, devaluation of the currencies of key

trade partners especially the ruble will weigh on the competitiveness of the Kazakh exports and may

result in downward pressure on the USD-KZT exchange rate with the risk of increased dollarization.

22


KEY SECTORS

Oil & Gas

The oil and gas industry accounted for 21% of GDP and 53% of total exports in 1H16. In 1H16, Kazakh

producers slowed down their production in reaction to the price decline due to natural decline at some

mature fields (Petrokazakhstan fields), decrease of drilling activity and maintenance works at some

fields (Karachanganak). Crude oil production declined by 2.9% YoY to 32.8mln tons in 1H16, while

condensate gas output tumbled by 9.9% YoY to 5.8mln tons. In June 2016, oil output decreased by

4.1% MoM to 5.3mln tons, the lowest level since October 2015.

Monthly oil production, mln tons

(2014-June 2016)

Drilling activity, 000 meters (2009-2016f)

Source: Agency of statistics, Kazenergy, Samruk-Kazyna

Total drilling activity decreased to 1.5mln meters in 1H16 from 2.5mln in 2015 and is expected to decline

further by 50% YoY in 2016. Although drilling activity does generally match declining production, the

presence of other factors also influences oil extraction trends such as global prices.

Since 1991, Kazakhstan almost tripled its oil output to 80mln tons per year in 2015. Much of the

expansion of oil production has been driven by two large projects, Tengiz and Karachaganak. However,

oil production growth has faltered since 2011, largely due to delays and maintenance works at these

major projects. During 1H16, volumes at the Karachaganak field were lower, due to maintenance that

started in late April and reduced Caspian pipeline consortium loadings in June. Further oil production

growth depends upon both the expansion phases in Tengiz and the start of production at Kashagan.

Oil production in Kazakhstan, ‘000 tons (1991 – 2016f)

Source: Agency of statistics, Ministry of Energy, Samruk-Kazyna

5.5

6.0

6.5

7.0

7.5

8.0

Jan

Feb

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

Dec

2014 2015 2016

0

500

1000

1500

2000

2500

3000

2009 2010 2011 2012 2013 2014 2015 2016f

Production Exploration Total

010,00020,00030,00040,00050,00060,00070,00080,00090,000

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

f

Decline in oil output due to maintainence works at major fields

23


Over 90% of the oil reserves in Kazakhstan are concentrated in the fifteen largest fields – Tengiz,

Kashagan, Karachaganak, Uzen, Zhetybai, Zhanazhol, Kalamkas, Kenkiyak, Karazhanbas, Kumkol,

North Buzachi, Alibekmola, Central and Eastern Prorva, Kenbay, Korolevskoye. The key strategic

projects – Tengiz, Karachaganak and Kashagan jointly hold almost 70% of Kazakhstan‘s oil reserves.

Tengiz and Karachaganak are already producing almost half of the country’s total oil output, while

Kashagan is expected to start production in 4Q16 and to boost the country’s output by at least 9% by

2017. A number of smaller fields are still at the exploration stage. In almost of each of these exploration

projects, Kazmunaygaz NC holds 50%. Those fields which are already at the production stage are

operated in the form of joint ventures with foreign ownership.

Kazakhstan’s 2P oil reserves by operator, mln barrels

Source: National Energy report 2015, IHS Energy

The production profile of Kazakhstan depends heavily on major projects, and trends in output have

become increasingly uncertain as growth became contingent upon the expansion plans and pending

patterns of just few big projects.

Oil production in terms of value shrank by 36% YoY to KZT5,894bln in 2015 as a result of oil prices

decline. Despite lower oil production volume in 1H16 compared to 1H15, oil production value amounted

to KZT3,372bln which was 19% higher than YoY mostly thanks to tenge deprecation.

Oil production in terms of value, KZT bln (2005- 6M16)

Source: Agency of statistics, Samruk-Kazyna

40%

21%

8%

5%

5%

3%

18% North Caspian Operating Co (NCOC) BV

TengizChevroil Ltd

Karachaganak Petroleum Operating Co

KazMunayGas EP

CNPC-Aktobemunaygaz

MangistauMunayGaz

Others

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 6M16

24


Kashagan to ramp up oil production in 4Q16

Kashagan is expected to finally start its oil production in 4Q16. In December 2016 the initial production

is expected at 35,000 tons, equivalent to about 8,500bpd according to Ministry of Energy. The annual

initial production at the project is expected to be at 7mln tons and with further growth to 11-13mln tons.

The field is expected to be a major source of oil growth over the next two decades.

According to the World Bank, the country’s GDP is forecasted to be near zero in 2016 and to rise to

1.9% in 2017 and 3.7% in 2018 partly thanks to the ramp-up of oil production in Kashagan and oil prices

recovery. Current account deficit is expected to shrink significantly with an increase of oil prices and

Kashagan starts production in 2017. The increase in oil production will boost consumer and investors’

confidence.

Based on our conservative assumptions, oil output from Kashagan will be at around 1.4mln tons in 2017

and 2.8mln in 2018. This will result in an increase of oil revenue by 2.0% and 1.8% in 2017 and 2018,

respectively, assuming average oil prices at USD44pb and average USD-KZT exchange rate of 353.

Consequently, this will contribute about 0.4% annual growth to the GDP in 2017 and 2018, respectively,

ceteris paribus.

Expected oil production growth in 2017-2018

Key indicators 2014 2015 2016f 2017f 2018f

Oil production, mln tons 80.8 79.5 75.0 76.4 77.8

Contribution of Kashagan, mln tons - - 0.1 1.4 2.8

Average Brent price, USD/b 97.9 45.4 43.0-45.0 44.0 44.0

Average USD-KZT 160.0 223.0 350-355 353.0 353.0

Oil production, KZT mln 9,281,625 5,894,570 8,526,623 8,698,106 8,857,496

Source: Agency of statistics, Ministry of Energy, Bloomberg, Samruk-Kazyna

The key question for Kazakhstan’s oil production profile in the long-term is the implementation of the

second phase of the project, which is designed to drive output to over 47mln tons per year. The Phase

2 has not yet been approved and any decision will be taken after the Phase 1 restarts and is operating

smoothly. IHS Energy expects the Phase 2 production to start up after 2025, so that Kashagan’s 2030

output amounts to 35.8mln tons, to 48mln tons in 2035 and to reach 52mln tons in 2040. If the Phase 2

is never approved then Kashagan production reaches only 17.5mln tons in 2025 and stretches only to

18.5mln tons.

Tengizchevroil to boost production in 2022

Tengiz field holds around 6.4-10.7bln barrels of recoverable oil reserves or about 20% of Kazakhstan’s

total reserves. Tengizchevroil (TCO), the largest oil producing company in Kazakhstan, produced

27.2mn tons in 2015, a new annual production record, which represented 34% of total country’s output.

In 1Q16 the company produced 7.37mln tons or 58.8mln barrels. It does not publicize its production

forecasts for 2016. The majority of TCO’s crude oil production was exported through the CPC pipeline,

while the rest was exported by rail to Black Sea ports and via the Baku-Tbilisi-Ceyhan Pipeline to the

Mediterranean.

Tengizchevroil plans to invest about USD37mln to increase production capacity by 13mln tons annually

or 260,000 bpd. The recent final investment decision of the Tengiz Future Growth Project by the

25


Chevron-led consortium will only see first oil around 2022. According to the IEA, Chevron’s

announcement was a good news, but the fact that the project will partly utilize existing infrastructure is

key to making it viable at today’s oil prices. The investment is the single largest since the downturn of

2014, and the first investment of more than $10 billion this year.

The Ministry of Energy forecasts TCO’s production to reach its peak at 37.8mln tons in 2021 and then

to be flat at 38.8mln tons from 2026-2031, after which the production begins to decline quite rapidly,

falling to 29mln tons in 2035. In contrast, IHS sees TCO production to rise only after 2021 when the

Future Growth Project expansion is launched, reaches a maximum of 42mln tons in 2030 and then

declines slowly to 36mln tons in 2035.

Oil production at Kazmunaigas EP continues to decline

Total crude oil production for Kazmunaigas EP (KMG EP), including its stakes in Kazgermunai (KGM),

CCEL (Karazhanbasmunai) and PetroKazakhstan (PKI), was at 6.1mln tons or 246,000 bpd in 1H16,

0.7% lower than over the same period of 2015. Ozenmunaigas (OMG) produced 2.8mln tons or 112,000

bpd, 2% higher than in 1H15. Embamunaigas (EMG) produced 1,4mln tons or 57,000 bpd, 2% higher

than in 1H15. The company’s share in production from KGM, CCEL, and PKI for 1H2016 amounted to

1,9mln tons or 77,000bpd, which was 6% less than in the same period of 2015, mostly as a result of

the reduction of production at PKI.

Oil production breakdown (3Q15-2Q16)

Source: Company’s data

In 1H16, 129 wells were drilled at OMG and EMG compared to 162 in 1H15. Currently, 179 wells

planned for drilling in 2016 at OMG and EMG.

KMG EP’s production results in 1H16

'000 tons 1H16 1H15 YoY

Total crude oil production 6 078 6 122 -0.70%

OMG 2 779 2 722 2.10%

EMG 1 407 1 385 1.60%

KGM, CCEL, PKI 1 892 4 018 -52.90%

Sales of OMG and EMG 4 168 8 305 -49.80%

Export 2 464 4 647 -47.00%

Domestic market 1 704 2 742 -37.90%

KGM, CCEL, PKI 1 875 3 943 -52.40%

Export 922 1 707 -46.00%

Domestic market 953 2 167 -56.00%

Source: Company’s data, Samruk-Kazyna

26


Karachaganak’s oil output declines due to maintenance works

Karachaganak Petroleum Operating (KPO) is the second largest oil and gas producing company in

Kazakhstan. In 2015, KPO produced 11mln tons oil and 18.2bln cm of gas. This was equivalent to about

14% of Kazakhstan‘s total oil production and to over 40% of its gas production. Roughly 23% of

Kazakhstan‘s proven oil reserves are attributed to Karachaganak field.

Over 1H16, KPO produced 66.9mln barrels of oil equivalent in the form of stable and unstable liquids,

gas and fuel gas. In addition, 3.52bln cm of sour dry gas were re-injected to maintain the reservoir

pressure, a volume equivalent to approximately 42.4% of the total gas produced.

Karachaganak’s oil output in 2013-1H16

Key indicators 2013 2014 2015 1H16

Total production, mln boe 136.0 142.5 141.7 66.9

Total oil production, '000 tons 10,492 11,004 10,796 N.A.

Total gas production, mln cm 17,531 18,248 18,234 N.A. Source: Company’s data, Samruk-Kazyna

The Ministry of Energy forecasts Karachaganak output to decline from 12mln tons in 2015 to 7.2mln

tons in 2025 and to only 4.8mln tons in 2035 (average annual decline of 4.5%). It assumes that no

further field expansion. In contrast, IHS forecasts a generally flat production profile with output declining

slowly after 2025 following another expansion phase.

Oil production forecasts

Kazakhstan’s oil production is expected at 75.5mln tons in 2016, 5% lower than in 2015, according to

the Ministry of Energy. The IEA forecasts Kazakh oil production to get a boost later this year or in 2017,

once the giant Kashagan field resumes production. Further ahead, additional volumes are set to come

from the Tengiz field.

OPEC forecasts on Kazakhstan oil supply,

mbpd (2015-2017f)

IEA forecasts on Kazakhstan oil supply,

mbpd (2014-2017f)

Source: OPEC, International Energy Agency (IEA), Samruk-Kazyna

OPEC forecasts Kazakhstan’s oil supply to decrease by 50,000 bpd over the previous year to average

1.55mln bpd or 78mln tons in 2016, revised down by 10 tb/d from the previous MOMR. Kazakhstan’s

oil production in May dropped to 1.46 mb/d, but recovered in June by 100 tb/d to average 1.56 mb/d

after seasonal maintenance in Karachaganak ended.

1.4

1.5

1.5

1.6

1.6

1.7

1.7

1Q 2Q 3Q 4Q

2015 2016f 2017f

27


Mining & Metals Industry

Mining and metallurgy represent a large chunk of Kazakhstan’s economy. In 2015, mining industry

accounted for about 7% of the country’s GDP. Kazakhstan has about 8.1% of the world reserves of

uranium, 2.0% zinc, 1.2% iron ore, and 10.9% lead and 8.0% silver. Today, the country is the world’s

leading producer of uranium (39% of the world output in 2015). The country also produces and exports

significant quantities of zinc in concentrate and ores (324,000 tons in 2015), lead (120,000 tons in 2015),

iron ore (37 396 tons in 2015), refined silver (1.3 tons in 2015). In 2015, the country increased production

of uranium (+2.0% YoY) and refined silver (+32% YoY). The production of zinc stayed unchanged YoY,

while production of some commodities declined in 2015: lead (-5.6% YoY), iron ore (-27% YoY).

Kazakhstan’s major mineral reserves

Mineral, '000 tons Reserves % of global Ranking

Iron ore 2,500,000 1% 11

Uranium 373 8% 4

Zinc 4,000 2% 9

Lead 10,900 11% 3

Silver 53 8% 6

Sources: US Geological Survey 2016, National Energy report 2015, Association of Metals & Mining companies

Kazakhstan’s uranium deposits are concentrated in the Chu-Sarusy region. Easy to leach underground,

the sandstone deposits of this region yield one of the lowest cost yellow cake in the world. All of the

output ultimately is exported, primarily to China, but also to the EU, South Korea and the US.

Kazakhstan’s 2015 mineral commodity production and exports, ‘000 tons

Mineral Production Exports Main producers Main export destinations

Iron ore 37,396 15,224 ENRC, Arcelor Mittal Russia, China

Zinc 324 282 KAZ Minerals, Kazzinc China, Turkey

Uranium 24 23 Kazatomprom, Uranium One China, EU, US, South Korea

Lead 120 108 Kazzinc Spain, Russia

Silver 1.3 1.3 KAZ Minerals Switzerland, US

Sources: USGS, Statistics agency of RK, World silver survey 2016, ILZSG

Kazakhstan proven reserves of silver are located in more than 100 deposits, the majority of which are

polymetallic (copper-lead-zinc) deposits. The level of silver content in these deposits ranges between

40 -100 g/t. In 2015, refined silver output was around 1,300 tons.

As of July 2016, there are over 190 large and medium-size mining and metallurgical companies in

Kazakhstan. The five largest are ENRC, Kaz Minerals, Kazzinc, Kazatomprom and Arcelor Mittal

Temirtau. ENRC is the largest producer of iron ore in the country. Kazatomprom is a state-owned

uranium miner and a joint venture partner with all foreign companies mining uranium in Kazakhstan.

Kaz Minerals produces zinc, gold and silver as by-products. Kazzinc is the leading producer of zinc and

gold in the country. The large share of extracted mineral resources is exported mainly to China, Russia,

and Turkey.

28


Resources, production and exports of uranium in Kazakhstan

Global reasonably assured resources of uranium are estimated at 4.6mln tons. With 8% of this amount

is located in Kazakhstan, the country is fourth largest resource holder trailing only Australia, Canada

and the US. In terms of inferred resources the country holds a total of 0.5mln tons (17% of the world’s

total), which is the second to Australia’s 0.6mln tons.

Although Kazakhstan’s uranium resources are characterized as low grade, they are of the sandstone

bedded infiltration type. This allows resources to be mined using an in-situ leaching (ISL) method, which

is more cost-effective and involves less exposure to the radioactive materials than the traditional

underground and open pit mining.

Kazakh uranium production by mine, tons

Province and Group Mine 2010 2012 2013 2014 2015

Chu-Sarysu, Eastern

Tortkuduk (Katco) 2,439 2,661 3,558 both

4,322 both

4,109 Moinkum (northern, Katco) 889 1,000

Southern Moinkum (Taukent/GRK)

443 500 1,129 both

1,174 both

1,192

Kanzhugan (Taukent/GRK) 562 575

Chu-Sarysu, Northern

Uvanas (Stepnoye-RU/GRK)

300 215 1,192 both

1,154 both

1,154 Eastern Mynkuduk

(Stepnoye-RU/GRK) 1,029 1,019

Central Mynkuduk (Ken Dala.kz)

1,242 1,622 1,800 1,790 1,847

Western Mynkuduk (Appak)

442 1,003 998 870 1,000

Inkai-1, 2, 3 (Inkai) 1,637 1,701 2,047 1,922 2,234

Inkai-4 (South Inkai) 1,701 1,870 2,030 2,002 2,055

Akdala (Betpak Dala) 1,027 1,095 1,020 1,007 1,019

Budyonovskoye 1, 3 (Akbastau)

740 1,203 1,499 1,594 1,642

Budyonovskoye 2 (Karatau)

1,708 2,135 2,115 2,084 2,061

Syrdarya, Western

North and South Karamurun (GRK)

1,017 1,000 1,000 941 948

Irkol (Semizbai-U) 750 750 750 700 750

Kharasan 1 (Kyzylkum) 260 583 752 858 1,110

Kharasan 2 (Baiken-U) 262 603 888 1,135 1,400

Syrdarya, Southern Zarechnoye (Zarechnoye) 778 942 931 876 826

Northern, Akmola region

Semizbay (Semizbai-U) 224 470 411 400 453

RU-1 (Vostok, Zvezdnoye) 352 370 331 298 0

TOTAL 17,803 21,317 22,451 23,127 23,595

Source: World Nuclear Association (WNA), Samruk-Kazyna

Based on the geological structure of ore body and the geography of the deposits uranium resources of

Kazakhstan can be subdivided into six provinces (Northern Kazakhstan, Caspian, Balkhash, Illi,

Syrdarya and Chu-Sarysu). Resources of Chu-Sarysu province account for 60.5% of total Kazakhstan’s

resources, with the presently producing mines being Akdala, Budyonovskoye, Inkai, Kanzhugan,

Moinkum, Mynkuduk, Uvanas.

29


Since 2009, Kazakhstan has been the top uranium producer in the world. In 2015, its share in global

uranium production from mines was at 39%. The country’s uranium output increased by 2% YoY to

23,595 tons, with the share of the national uranium mining company, Kazatomprom, in the total

production at 54%.

Uranium production by country, tons (2008-2015)

Source: WNA, Uranium 2014: Resources, Production and Demand ("Red Book"), Samruk-Kazyna

The uranium deposits are explored either solely by Kazatomprom, or through the joint ventures

established with the industry’s major players. In 2015, Uranium One accounted for 18% of domestic

output, while Areva (11%) and Cameco (6%) closed the top four.

Leading world uranium producers Kazakh uranium producers in 2015, tons

Source: Companies’ data, Samruk-Kazyna

All of the produced uranium is exported, primarily under long-term contracts, as Kazakhstan does not

presently possess nuclear power generation capacity. The country is expanding exports as rapidly as

it can grow production. China is the largest importer of Kazakhstan’s uranium and accounts for over

half of total exports (56%). Major importers are China Nuclear Power Corporation and China Nuclear

Energy Industry Corporation. However, in the future, export situation looks more complicated for

Kazakhstan, as a demand surge in China may not be sustainable over the longer term.

0

20,000

40,000

60,000

2008 2009 2010 2011 2012 2013 2014 2015

Kazakhstan Canada Australia Niger RussiaNamibia Uzbekistan US Others

21%

18%

16%13%

5%

5%

5%

17%

Kazatomprom

Cameco

Areva

Rosatom

CNNC&CGN

BHP Billiton

Rio Tinto

Others

12,717

4,132

2,704

1,340

2,703 Kazatomprom

Uranium One

Areva

Cameco

Other

30


Kazakh uranium export routes in 2015

Source: The national energy report 2015, Samruk-Kazyna

Nuclear fuel bank in Kazakhstan

Kazakhstan proposed an initiative to host an IAEA Nuclear Fuel Bank1 on its territory to provide open

access to low-enriched uranium for the countries developing nuclear power industry, to build a fuel

inventory, and to strengthen the nuclear nonproliferation regime. In 2015, Kazakhstan and the IAEA

reached an agreement on locating the Nuclear Fuel Bank at Ulba Metallurgic Plant. The first such fuel

bank was established in Angarsk, Russia which became operational on 1 December 2010.

Kazakhstan’s willingness to host a nuclear fuel bank is a significant indication of its commitment to be

a responsible actor on the international stage.

Global uranium demand

Currently, demand for uranium is generated by 437 nuclear reactors in 30 countries, with a total net

installed electricity capacity of 380 GW. In 2015, 28% of global demand was from the US, which

remained stable compared to 2014. China and South Korea accounted for 12% and 8% of global

uranium demand.

World nuclear reactors and uranium requirements

Country

Nuclear electricity generation bln kWh

Reactors operable, MWe net

Reactors under construction, MWe gross

Reactors planned,

MWe gross

Reactors proposed,

MWe gross

Uranium demand,

tons

US 799 98,792 6,018 6,063 26,000 18,692

France 418 63,130 1,750 0 1,750 9,230

China 124 23,144 27,393 49,970 153,000 8,161

Russia 169 25,264 7,968 33,264 16,000 4,206

South Korea 149 21,677 5,600 11,600 0 5,022

Japan 0 40,480 3,036 12,947 4,145 2,549

Others 752 106,508 18,342 72,860 164,025 19,023

Total 2,411 378,995 70,107 186,704 364,920 66,883

Source: Uranium miner 2016, Samruk-Kazyna

The world’s overall nuclear generation capacity is expected to increase. More specifically the OECD

projects a net increase in global capacity from the current capacity of 379 GW to 400 GW by 2035 in

low demand scenario and up to 680 GW in the high demand scenario. This will result in an increase of

reactors’ demand for uranium to 72Mt and 122Mt tons under the respective scenarios. The OECD

1 The IAEA LEU Bank is a physical reserve of up to 90 metric tons of low enriched uranium suitable to make fuel for a typical light water reactor, which is the most widely used type of nuclear power reactor worldwide. Such a reactor can power a large city for three years.

56%

18%

11%

4% 11%

China

Europe

South Korea

US

Others

31


projections are lower than those offered by the International Atomic Energy Agency (IAEA). Global

capacity is expected to reach 400 GW by 2030, five year earlier than the OECD forecast.

It is expected that very few mines will be developed at today’s low prices level. Thus, the shortages of

supply combined with rising future global demand may support uranium prices. China will focus on

investing in mines to satisfy domestic demand and on maintain long-term supply contracts with select

few trading partners, such as Kazakhstan. Russia can invest directly in domestic uranium assets as

needed to support its own generation needs rather than resorting to the spot market. These two major

players are increasingly inclined to take actions outside of the world spot market by investing in mines

in other countries or by insulating their domestic markets from market price and supply fluctuations.

South Korea and regions such as Middle East, where uranium demand is expected to grow as new

nuclear generating capacity is added.

Although prices are unlikely to return to the low levels of the late 1990s due to the escalation of the

costs of mine production, it is likely that producers who can remain competitive in a low price

environment through their own low costs of production, including Kazakhstan, will have the best

prospects for maintain or increasing production.

Resources, production and exports of zinc in Kazakhstan

According to the US Geological Survey, Kazakhstan has zinc reserves of 4mln tons or 2% of global

reserves. In 2015, the country was the ninth largest zinc producer globally with zinc output of 324,000

tons. The country produces and exports both zinc concentrate and unprocessed zinc.

World zinc production by country in 2015,

‘000 tons

World zinc resources by country, ‘000 tons

Source: USGS Mineral commodity report in 2016, Samruk-Kazyna

The country has more than eighty zinc deposits, of which about thirteen are producing. Kazakhstan’s

zinc ore has low-quality characteristics resulting in higher than average mining and processing costs,

on a global scale. All the zinc metal in the country is produced by Kazzinc. Kazzinc with annual output

of 305k tons of zinc metal is the largest zinc producer in the country, accounting for 90% of Kazakhstan’s

annual zinc output. Kazakhmys is the second largest producer with an output of 94k tons zinc

concentrate.

1,580

4,900

1,370660

850

830

300

3242,530

63,000

38,00025,000

15,00011,000

10,000

6,200 4,000

31,700

Australia

China

Peru

Mexico

US

India

Canada

Kazakhstan

Others

32


Select zinc deposits in Kazakhstan, tons

Deposit/mine Company Measured resources

Mining method

Maleevsky Kazzinc 651 OC

Ridder-Sokolny Kazzinc 150 UG

Tishinsky Kazzinc 784 UG

Shubinsky Kazzinc 320 UG

Shaimerden Stockpiles

Kazzinc 927 OC

Obruchevskoe Kazzinc - UG

Akzhal Chelyabinsk pipe

works 439 OC

Shalkiya Shalkiya Zinc 3,200 UG

East region mines Kazakhmys 3,600 UG, OC

Source: Companies’ data, Samruk-Kazyna

In 1H16, the production of unprocessed zinc amounted to 162k tons (+1% YoY), zinc concentrate at

291.7k tons (-10% YoY), zinc contained in zinc concentrate 148.2k tons (-8% YoY). Major zinc

concentrate export destinations are Uzbekistan (41%), Russia (37%) and China (22%). 62% of

unprocessed zinc is sold to China and 29% to Turkey. The rest of produced zinc is used domestically

primarily by Mittal Steel Temirtau for production of galvanized steel sheets.

Zinc production (2011-1H16), ‘000 tons Unprocessed zinc and zinc

concentrate export routes, ‘000 tons


Global zinc demand

The urbanization and industrialization of China will result on a continuing increase per capita zinc

production. Long-term demand will be supported by zinc’s first use of galvanizing and final use in

construction. Zinc demand is expected to grow at an average rate of 2.2% per annum until 2035.

Majority of global zinc consumption growth will be from China, which is expected to increase to over

50% of market share by 2020. The use of galvanized steel in Indian automobiles has started picking

up, with less than 3% in a typical car to 7% currently, and is expected to increase to 20% by 2020. Solar

energy is another avenue which may demand an additional 50-350t of galvanized steel/MW of installed

capacity.

0

200

400

600

800

2011 2012 2013 2014 2015 1H16

Zinc in zinc concentrate Unprocessed zinc Zinc concentrate

China241

Russia135

Uzbekistan 127

Turkey83

33


Zinc demand by region (2011-2016f), ‘000 tons Zinc demand by country (2016f)

Source: ILZSG, Samruk-Kazyna

Resources, production and exports of lead in Kazakhstan

According to the US Geological Survey, global known lead reserves stand at 89mln tons, while the data

on Kazakhstani lead reserves is not available2. However, according to the National Geological

exploration company Kazgeology, lead reserves in Kazakhstan stood at 11mln tons.

2015 world lead production by country, ‘000

tons

World lead reserves by country, ‘000 tons

Source: USGS 2016, Kazgeology, Samruk-Kazyna

Lead production dynamics in Kazakhstan,

‘000 tons (2010-1H16)

2015 unprocessed lead export routes, ‘000 tons


2 Lead reserves in Kazakhstan amounted to 5mln tons in 2008, according to the last available data.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2011 2012 2013 2014 2015 2016f

China Europe US India Other countries

China47%

Europe17%

US 7%

India 5%

Japan3%

South Korea 4%

Other countries 16%

2,300

633

385

300

240

38 814

China

Australia

US

Peru

Mexico

Kazakhstan

Others

35,000

15,800

10,900

9,200

6,700

22,300

Australia

China

Kazakhstan

Russia

Peru

Others

0

50

100

150

20

10

20

11

20

12

20

13

20

14

20

15

1H

20

16

Unprocessed lead Lead in lead concentrate

85

22

2

Spain

China

Russia

34


According to the Agency of Statistics, in 1H16 production of unprocessed lead amounted to 68k tons

and of lead contained in lead concentrate stood 31k tons. Major unprocessed lead export destinations

are Spain (78%) and China (20%).

In Kazakhstan, there are about 80 lead deposits, while only 15 are producing. Lead ore has low quality

characteristics, as volume of lead in lead concentrate amounts to around 25-50k tons compared to

copper and zinc.

Global lead demand

Global demand of refined lead metal declined by 3.3% YoY in 5M2016 primarily due to a decrease in

Chinese apparent demand of 12.4%. Demand in Europe rose by 9.8% but fell by 1.2% in the US and

7.5% in South Korea. Chinese imports of lead contained in lead concentrates totaled 286k tons, down

by 19.9% compared to the same period in 2015. Auto sales in China remained stable during 2Q2016,

while car registration in Europe rose strongly for 34th consecutive months and increased by 6.9% in

June 2016. US auto sales rose in June at annual rate of 16.6 mln, but the growth is slowing down.

China, which accounts for 39% of the world's refined-lead consumption, may propel the recovery with

its use of lead in industrial batteries and automobiles. In the mid-term with pollution concerns

aggravating in China, market share of electric is likely to get a boost, thereby increasing demand for

industrial batteries. India’s growing telecom industry and ongoing infrastructure development will also

support industrial battery demand, as should an expanding photovoltaic market.

Resources, production and exports of iron ore in Kazakhstan

Kazakhstan’s iron ore reserves are estimated by the US Geographical Survey at around 2.5bln tons, or

1.3% of the total world reserves. The production of iron ore in 2015 declined by 27% YoY and accounted

for almost 1% of the global iron ore output.

World iron ore reserves by country, mln tons 2015 iron ore production by country, mln tons

Source: USGS 2016 Mineral commodity summary, Samruk-Kazyna

According to the Agency of Statistics, in 1H16 the country mined 17.2mln tons of iron ore (-21% YoY),

while production of iron ore concentrate amounted to 5.1mln tons, iron ore pellets 1.5mln tons, and iron

ore sinter 5.0mln tons. Main export destinations are Russia (70%) and China (30%).

54,000

25,000

23,000

23,00011,500

8,100

6,500

2,500

6,300

25,200824

112

4281,380

43

129

68 25 39

275AustraliaRussiaBrazilChinaUSIndiaUkraineKazakhstanCanadaOther countries

35


Kazakhstan iron ore production by product type,

(2010-1H16), ‘000 tons

Kazakhstan iron products export

routes, ‘000 tons


The country’s iron ore reserves are mainly concentrated around Rudniy city in Kostanay region

(Sokolovsky, Kasharsky, Korzhinkol’skoye, Sarbaisky and Lisakovski deposits), Karaganda region

(Kentobe, Atasu) and Akmola region (Atansore).

Global iron ore demand

The iron ore market is driven by demand for steel, which in turn is linked to developments in the global

economy and its growth. China accounts for more than 50% of seaborne iron ore imports and almost

half of the world’s total steel production.

Demand dynamics in China have substantially affected the global steel business. After growing strongly

since 2000, Chinese steel demand has started to decline because of weaker real estate sector

construction (31% of steel demand) and machinery production (22%). This decline in domestic demand

has led to a surge in Chinese steel exports, which increased by over 30mln tons from 2013 to 2014,

and then by an additional 18mln tons from 2014 to 2015. This increase in Chinese exports is greater

than the growth in world ex-China steel demand over the past two years, and has had the effect of

curtailing domestic production in countries outside of China over the period.

Steel consumption in China and the world, mln

tons (1980 - 2015)

Iron ore supply and demand, mln tons

(2010 – 2015)

Source: Wood Mackenzie, World Steel association, Samruk-Kazyna

Iron ore demand growth is expected to fall 3% YoY in 2016, but grow 3% in 2017 and on average 1.6%

in 2018-2020. The main growth is projected to come from CIS, European countries and India, while in

China iron ore demand is forecasted to grow only in 2017-2018 and to decline thereafter.

0

20,000

40,000

60,000

2010 2011 2012 2013 2014 2015 1H2016Concentrate Sinter Pellets Other

Russia10,592

China 4,632

0

500

1000

1500

2000

2500

1980 1985 1990 1995 2000 2005 2010 2015

China Rest of world

0

500

1000

1500

2000

2500

2010 2005 2010 2011 2012 2013 2014 2015

Supply Demand

36


Resources, production and export of silver in Kazakhstan

According to the Association of Metal & Mining companies, Kazakhstan has 53,204 tons of silver

reserves. This accounts for 9% of world total reserves. Kazakhstan proven reserves of silver are located

in more than 100 deposits, the majority of which are polymetallic (copper-lead-zinc) deposits.

World silver reserves by country, tons (2015)

Source: USGS 2016, Samruk-Kazyna

According to the Agency of Statistics, refined silver output in Kazakhstan rose by 32% YoY to 1,303\tons

in 2015. Silver production dropped slightly by 0.1% YoY to 621tons in 1H16. Kazakhstan exports 80%

of its refined silver output to Switzerland, and the rest to the US.

Refined silver production in Kazakhstan, tons

(2010-1H16)

Refined silver export routes, tons (2015)

Source: Statagency, Samruk-Kazyna

Global silver demand

Total physical demand rose to by 3% YoY 1,171Moz in 2015. Coins and bars were the largest

contributors to the demand increase rising by 24% YoY to 292.3Moz. This was driven by strong North

American and Indian purchases. Jewelry fabrication also contributed to the demand increase reaching

226.5 Moz. Strong growth in Indian and North American fabrication offset a near one third drop in

Chinese fabrication. Industrial fabrication declined by 22.5Moz YoY to 588Moz in 2015, including

electrical and electronics, photovoltaic, photography and for other industrial uses. Meanwhile, demand

in silver for ethylene oxide more than doubled from 5Moz in 2014 to 10.2Moz in 2015. The biggest

consumers for industrial fabrication are Asia, North America and Europe, with 97% of the global market

share.

China and the US were the leading consumers of silver for electronic production in 2015, 70Moz and

54Moz respectively. Main investors into coins and bars are the US and Canada. They invested into

49Moz and 36Moz of the silver respectively in 2015, representing 60% of the market share globally.

120,000

85,000

85,00077,000

43,000

37,000

124,000 Peru

Australia

Poland

Chile

China

Mexico

Others

0

200

400

600

800

1000

1200

1400

2010 2011 2012 2013 2014 2015 1H16

US 244

Switzerland 792

37


Global silver demand components, mln ounces

(2006-2015)

Main investors in coins & bars

Source: Thomson Reuters, Samruk-Kazyna

The silver market realized an annual physical deficit for the third consecutive year in 2015. The market’s

deficit of 129.8 Moz (4,038 tons) was more than 60% larger than deficit of 78.6 Moz (2,445 tons) in

2014 and the third largest on record.

Silver physical surplus /deficit, mln ounces (2006-2015)

Source: Thomson Reuters, Samruk-Kazyna

0

500

1000

15002

00

6

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Jewellery Coins & BarsSilverware Electrical & ElectronicsBrazing Alloys & Solders PhotographyOther Industrial Uses

36%

27%

9%

8%

7%

13% United States

Canada

Australia

China

India

Others

-180

-140

-100

-60

-20

20

60

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

38


Infrastructure

Kazakhstan continues to invest in infrastructure and logistics to support economic growth and improve

its transit potential. These include internal projects to promote regional growth as well as projects aimed

at improving logistics and transit between major trading partners, such as China, Russia, EU and

Central Asian countries.

Most of the projects are incorporated into the Nurly Zhol plan, announced in the end of 2014. Nurly Zhol

is a USD9bln domestic economic stimulus plan to develop and modernize roads, railways, ports, IT

infrastructure, and education and civil services in Kazakhstan over 2015-2019. Since then the amount

of spending in tenge has been revised upwards. It targets seven areas of infrastructure development:

transportation and logistics infrastructure

industrial infrastructure

energy infrastructure

public utilities infrastructure

housing infrastructure

social infrastructure

small and medium-sized enterprises

Consequently, spending on infrastructure under the Nurly Zhol program will be disbursed as follows:

Project area Project name Financing

Auto roads projects (KZT296.7bln).

Construction and reconstruction of Central-South route (Astana-Karaganda-Balkhash-Kurty-Kapshagai-Almaty).

KZT57bln in 2015, KZT35bln in 2016.

Construction and reconstruction of Central-East route (Astana-Pavlodar-Kalbatau-Ust-Kamenogorsk).

KZT77bln in 2015, KZT43bln in 2016.

Construction and reconstruction of Central-West route

KZT2bln in 2015, KZT6.4bln in 2016

reconstruction of other roads of republic importance

KZT42bln in 2015, KZT34.3bln in 2016

West Europe–West China and Beineu–Aktau

USD763mln, joint financing by IFI’s

Kurty-Burubaital, Usynagash-Otar, Aktobe-Makat, Zhetybai-Zhanaozen

KZT4.6bln in 2016, joint financing by IFI’s

Railway projects (KZT46.3bln)

construction of the second line Almaty-1-Shu

KZT27.7bln

Civil aviation projects Reconstruction of Astana Airport runway and terminal of Astana city

KZT29bln, with possible co-financing by IFI’s

Development of industrial infrastructure and tourism infrastructure

Development of Khorgos-Eastern Gates Special Economic Zone (SEZ), Pavlodar SEZ, Aktau port SEZ, Innovation technologies park SEZ, Astana SEZ, ChemparkTaraz.

KZT68.5bln in 2015

Other projects including tourism, subsidizing business activities, export support and new anti-crisis measures

Over 2015-2019, 50 projects are going to be implemented creating 17,000 workplaces

Source: Baiterek National Holding, Samruk Kazyna

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Overall, KZT349.8bln was allocated in 2016, including KZT171.3bln from the National Fund. Due to the

devaluation of the tenge in 2015 and the fact that National Fund assets as well as foreign financing are

denominated in USD, the amount of funds allocated for the projects is constantly being revised, mainly

upward.

Key performance indicators for the program include estimated contribution to GDP of 0.87% in 2016

and 1.18% in 2017. Multiplier effect from the infrastructure spending in the long-term should bring

economic growth up to 4.1% in 2019. Over the course of its implementation, the program should create

405,600 jobs, including 91,400 permanent workplaces. Investments in infrastructure are expected to

improve Kazakhstan’s ranking to 57th position in the World Economic Forum competitiveness rating in

terms of infrastructure. However, according to the latest 2016 Global Competitiveness Report,

Kazakhstan has already improved its rank from 62nd place in 2014 to 58th place in 2016, which is one

of the highest rankings among landlocked countries.

Key infrastructure projects

Kazakhstan has embarked on key infrastructure projects to improve its transit potential. These include

new rail connections in inner regions of Kazakhstan, such as the 293km-long Zhetygen-Khorgas line,

which reduces the route from China to the port of Aktau on the banks of the Caspian Sea to 500km

(project cost is KZT153bln). Another major project that was launched in 2014 is the 1,036km Jezkazgan-

Beineu line that cuts transit through Kazakhstan to only 1,000km. Combined with the 400km highway

between Aktau and Beineu and the expansion of the port of Aktau to handle cargo flows up to 25mln

tons per year, these lines allow Kazakhstan to connect with such countries as Azerbaijan and Iran. In

addition, construction of the ferry complex in Kuryk port (60km away from Aktau) will allow cargo

shipment without unloading them from wagons. Project cost is KZT32bln and handling capacity will be

four million tons of ferry cargo per year.

Another wide scale international project is Western Europe-Western China international transit corridor,

the total length of the corridor along the route St. Petersburg-Moscow-Nizhny Novgorod-Kazan-

Orenburg-Aktobe-Kyzylorda-Shymkent-Taraz-Korday-Almaty-Khorgos-Urumqi-Lanzhou-Zhengzhou-

Lianyungang is 8,445km. Approximately 2,233km are on the territory of the Russian Federation,

2,787km belong to Kazakhstan, while 3,425km belong to China. Its total cost is estimated at USD20bln,

and the Kazakh section will be completed by end-2016. The project has high importance and multiplier

effect for the economy of Kazakhstan, since significant regional development will be allocated to five

major regions of the country (Aktobe, Kyzylorda, South Kazakhstan, Zhambyl and Almaty) with a total

population of 7.5mln people or nearly half of the country's population.

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Railway corridors going through Kazakhstan

Source: Kazakhstan Institute for Strategic Studies, Samruk Kazyna

To get more benefits from the expected increase in cargo traffic passing through the new routes,

Kazakhstan is establishing and developing 10 SEZs, all with different sectorial focus and priority,

including the USD3.5bln Khorgas-East Gate SEZ. This SEZ, located on the border between China and

Kazakhstan, has fast become one of the anchor projects for transforming Kazakhstan into a major

commercial and transportation hub of the Eurasian continent. The zone hosts several facilities:

International Center for Boundary Cooperation (ICBC), a dry port, logistics and industrial zones, ready

connection with the Zhetygen-Khorgas Railway and West Europe-West China Highway and a package

of attractive fiscal benefits, including exemption from import tariffs, land tax, property tax and value-

added tax.

The construction is proceeding with DP World, a major UAE logistics company. Khorgos’ capacity

currently is 200,000 containers per year and is expected to reach 500,000 by 2020. China was a major

supplier of funds, whereby China’s Jiangsu province recently invested more than USD600mln for

developing the surrounding infrastructure in Kazakhstan.

Khorgos is five times bigger than Bishkek’s Dordoi, previously the largest Central Asian market, and is

expected to redraw regional trade routes in favor of Kazakhstan. Direct railway that crosses the entire

territory of Kazakhstan and reaches Iran is expected to additionally boost the country’s infrastructure.

Cargo trains have already begun running from China to Iran through Kazakhstan and Astana is hoping

to modernize its own available locomotives and repair 800 km of rails. The project’s total cost amounts

to USD2.7bln.

KTZ Express, a subsidiary of Kazakhstan Railways, opened an international development office in

Hong-Kong. It aims to build a platform to promote multimodal freight logistics between Europe and

China, via Kazakhstan. KTZ Express has also invested in a 21-hectare intermodal freight and logistics

center at the port of Lianyungang in China. It’s intended to provide direct access to Central Asia for

cargo coming from Japan, Korea and Southeast Asia. By 2020, KTZ plans to raise the share of transit

in the structure of revenues from rail freight from 23-25% to more than 50%. According to market

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estimates, more than 700,000 containers per year will be transported via the transcontinental railway

"China-Kazakhstan-Turkmenistan-Iran".

In February 2016, a demonstration container train departed from China to Iran, through the new line in

Kazakhstan. Total length of the train route was more than 9,000km, however travel time was only 10

days, which is significantly less than by sea (25 to 30 days).

Another big railway project is Uzen-Bolashak-Bereket-Gorgan, which has length of 928km and is one

of the most important international infrastructure projects in the region. It is a strategic link in the North-

South railway corridor, providing cargo transportation between Russia, Kazakhstan, Turkmenistan, Iran,

Turkey, Pakistan and Afghanistan.

New infrastructure projects already allowed to increase the volume of freight traffic by 26% over the first

half of 2016, potential traffic on this line only is estimated at more than 1mln tons in the current year. At

the same time, in the first half of this year 429 container trains went between China and Europe through

Kazakhstan. This is 2.4 times more than in the same period of 2015. In 2016, the volume of transit

container traffic between China and Europe will be 100 times higher than in 2011, and by 2020

Kazakhstan intends to increase the volume of container traffic to 800,000 TEU. Overall transit railroad

traffic in 1H16 amounted to 679 trains, which is 13% more than the same period last year.

The share of revenues from transit reached 35% of total revenues. Five million tons of cargo was

transported using new railway lines Shalkar-Beineu, Zhezkazgan-Saksaulskaya, Arkalyk-Shubarkol

over 1H16. "Dry" port handled 11,500 TEUs of containerized cargo while the terminal of Aktau port

handled about 180,000 tons of grain cargos, transport-logistics center "Astana" handled 47,800 tons of

cargo.

Besides investment in railways and roads, Kazakhstan will spend KZT75bln on modernization of

municipal infrastructure in 2016 under Nurly Zhol, which will also have a positive impact on the growth

of the economy and social well-being of citizens.

Role of Kazakhstan in the One Belt One Road initiative

China is looking for ways to stimulate sustainable growth and find new markets. One of the key initiatives

under this policy is One Belt, One Road (OBOR). Since its announcement in September 2013, the One

Belt, One Road initiative has become an integral part of the Chinese policy in Central Asian. All this fits

into China's short- and medium-term development plans. Indeed, one of the immediate objectives of

China's Belt and Road construction projects is to use excess production capacities left by slowing

manufacturing industries at home.

In 2015 investments of Chinese enterprises into 49 countries along the OBOR initiative amounted to

USD14.82bln. This is 18.2% higher than a year earlier. According to the Ministry of Commerce of China,

investment flows were directed to Singapore, Kazakhstan, Laos, Indonesia, Russia and Thailand. 2016

is likely to see further trade, transport and investment integration between these countries.

Kazakhstan, as the largest economy in Central Asia and a crucial logistics link between China (world’s

largest industrial producer), and Europe (world’s largest consumer market) is going to play a key role

in the successful development of the One Belt, One Road initiative. In particular, two of the six

international economic co-operation corridors developed and modernized under the initiative will pass

42


through Kazakhstan, before branching out to West and East Europe, Central Asia and the Middle East.

A new direction of the Silk Road was launched in January 2016 and included the Ukraine-Georgia-

Azerbaijan-Kazakhstan-China route.

Each year more than 6bln containers transit between Europe and the Asia Pacific region, 98% of which

are transported by sea. According to estimates and preliminary data, cargo routes through Kazakhstan

are more than twice shorter, up to three times faster than traditional sea routes, and up to 4 times

cheaper than air transport. By upgrading infrastructure, Kazakhstan aims to capture a part of the

USD600bln trade volume between China and Europe.

China-Central Asia-West Asia Economic Corridor is also a very important step in enhancing connectivity

for Kazakhstan, the largest landlocked country in Central Asia. It will link with markets in Iran and Turkey

in West Asia, the Persian Gulf, the Mediterranean coast, Central and Eastern Europe, the Arabian

Peninsula, as well as other countries in Central Asia. This gives Kazakhstan access to the worldwide

ocean logistics business and has the potential to make the country a key player in global logistics.

Aside from being a strategically important player under the OBOR initiative, as well as a founding

member of the Asia Infrastructure Investment bank (AIIB), Kazakhstan is also committed to creating a

more business-friendly environment and developing several massive industrial projects.

China is heavily involved in several infrastructure projects in Kazakhstan. JSC Baiterek and CITIC

Group signed an agreement on joint participation in Kazakhstan Infrastructure Fund. The target

capitalization of the Fund will be USD600mln. Moreover, JSC Samruk-Energo, Development Bank of

Kazakhstan and the State Development Bank of China reached an agreement on conditions for

financing the construction of a wind farm with a capacity of 60MW (possible expansion to 300 MW).

China's State Development Bank will provide a loan of USD120mln for the development of green energy

in the Almaty region.

In November 2015, the third 1,303 km-long C line of the gas pipeline Kazakhstan-China, that connects

Turkmenistan, Uzbekistan, Kazakhstan and China, started operating. The designed capacity of the

entire Kazakhstan-China pipeline is 55bln m3. The main gas pipeline Kazakhstan-China is part of the

cross-border gas pipeline Turkmenistan-Uzbekistan-Kazakhstan-China, having total length of more

than 7,500 km. The Central Asia-China gas pipeline predated the new Silk Road but forms the backbone

of infrastructure connections between Turkmenistan and China.

Expo 2017

Kazakhstan is the first former Soviet state to host Expo in 2017, an international universal exposition

that will attract tourists and potential investors from more than 100 countries and receive 2-3mln visitors

between June and September 2017. The Kazakh government views this as an opportunity to establish

Astana as a regional hotspot for tourism and business.

The theme chosen for this event is "Future Energy" with the subtitle "Solutions for Tackling Humankind’s

Greatest Challenge". Therefore, the Expo will showcase future energy solutions for tackling social,

economic and environmental challenges. Twenty five hectares are planned for the pavilions of Expo

2017. The site has a convenient access to Astana’s city center, the international airport and the railway

station. The Expo Site is also linked with a network of Kazakhstan’s inter-city roads to ensure a quick

access from all the country.

43


In preparation for the Expo 2017, the administration of Astana launched several "smart city" projects.

The projects imply introduction of digital technologies in such areas as payment, education and

healthcare. The Ministry of Investment and Development intends to implement at least 100 energy

efficiency projects with total investments of KZT20bln before the start of Expo 2017 in Astana.

JSC NC Astana EXPO-2017 and the Chinese Office international tourism signed a memorandum of

cooperation. JSC Astana LRT, a company responsible for modernizing transport infrastructure for the

Expo in Astana signed a loan agreement with the State Development Bank of China, and an EPC-

contract with a consortium of Chinese companies. Chinese company Huawei is working with the

Government of Kazakhstan in creating 4G networks in 33 major cities of Kazakhstan. This will greatly

enhance the quality of mobile communication in the country.

Due to the growing number of passengers, two new bus terminals will be built in 2015-2018. The

capacity of each will be 135mln passengers per month. Rapidly growing population of the capital also

raises the question of railroad transportation. A new station with a capacity of 35,000 passengers per

day is already being built. Together with the current station it will fully cover passenger traffic in the long

term, as well as during Expo 2017.

In addition, to meet the growing demand for air transportation, Astana Airport is being reconstructed

and expanded to increase capacity by 2 times. The European Bank for Reconstruction and

Development has provided a loan for KZT8.5bln. Astana Airport, where a new international terminal will

be built, is planned to become a major distribution center for Eurasian freight and passenger traffic,

while other airports in Kazakhstan will also be modernized. Kazakhstan’s Airport Management Group

together with strategic partners, Zurich Airport International and Swissport International, will improve

the quality of services by implementing the best international practices and competencies for airport

management.

The international exhibition is expected to generate positive impact on the regional and domestic

economies. Expo projects to-date have created more than 5,000 new jobs, including 1,500 in 2016.

Meanwhile, domestic businesses and enterprises supplying products for Expo have employed about

30,000 workers.

More than USD14bln will be allocated for the construction of infrastructure facilities in Kazakhstan in

the next three years. A huge portion of these funds will be invested in Astana - in building highways,

promoting tourism, developing SEZ, housing, objects of Expo 2017. About a third of these funds is

provided by international financial institutions.

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Disclaimer & Disclosures

The Research and Knowledge Management Department Strategy and Portfolio Investment Block of

JSC “Samruk-Kazyna” (hereinafter referred to as “the Research Team”) is responsible for the analysis

of this report. The Research Team certifies that all views expressed in this Research report (hereinafter

referred to as “Report”) reflect the Research Team’s personal views.

The Report is based on the information taken from the sources which the Research Team considers

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the Report or otherwise, and it should not be relied on as such. The Research Team may change the

information contained in this Research at any time without notice.

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for any losses or damage that may result from use of the information contained in the Report as a

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