Our Analytics 26 may — 12:00

Last breath of Azerbaijani metallurgy (Article three)



Enterprises of the handicraft oligarchs - the Zulfugarli brothers and other homegrown sub-masters - caused a systemic production crisis in the metallurgical sector of the country. The government for some reason took the position of a passive observer in this matter. Handicraft oligarchs still continue to earn their secondary capital by predatory accumulation. We discussed this in detail in two previous publications (Article 1, Article 2).

Unlike government agencies, the Zulfugarli brothers quickly reacted to our publications. They explained the metallurgical handicraft by the absence of a free market. The Zulfugarli brothers went even further by announcing the period of the former Minister of Economic Development Farhad Aliyev's being in power a renaissance of the Azerbaijani economy. They say, if Farhad Aliyev was allowed to continue the planned reforms, the situation as a whole in the economy would look somewhat different.

The story of the scandalous Zulfugarovs brothers, who has recently received a lot of attention in the country's media, is pushing for a new look at their activities, and in general at metallurgy, because this production area, along with the fuel and energy complex, constitutes the basic branch of the national industry. And it is not by chance that the world's most advanced countries - the USA, Japan, Germany, Russia and China - retain the first places for the smelting of metals. At one time in the USSR there was a powerful metallurgical complex that produced almost all types of ferrous and non-ferrous metals and their alloys. Not the last place in this metallurgical map was occupied also by Azerbaijan.

(The following calculations were made by the author's collective of Azeri Daily using the data of the State Statistics Committee)

One of the Zulfugarli brothers - Logman

Together with the USSR, metallurgy also died

After the breakup of the USSR, the metallurgical sphere in Azerbaijan almost reached a zero level - metal-intensive equipment found easy access to the markets of neighboring Iran and Turkey, bringing a big jackpot to a new generation of temporary workers. As shown by studies and calculations carried out by Azeri Daily, compared to 1991, in 1996-97 the industry as a whole fell to the level of 31%, and only in 2008 reached the level of 18 years ago. At the same time, an even more depressing picture emerged in metallurgy during this period. Its industry reached this bottom in 1996 (at the level of 2.1%). At the end of 2017, the industry as a whole increased significantly to 109% (9% growth), and metallurgy exceeded 41%. Comments, as they say, are superfluous, because one of the leading industries in the period of independence did not reach half the capacity of the 27-year-ago. Is it possible, in such a situation, to talk about any achievements that the handicraft Zulfugarli brothers boast in their statements?

The indices of production assets in the country's industry also make themselves felt. In 1995, this figure totaled 433 million manat, and only 1.4% of this amount fell to the share of metallurgy. At present, this ratio is 0.7% against 85 billion manats. It turns out that the industry as a whole grew in nominal terms 200 times, and metallurgy - 90 times. Such a deplorable dynamics is explained, among other things, by low investment in this sphere. All these years the share of capital investments in this sphere did not exceed 1% of the total volume of investments in the industry of the country.

Only in 2011-2013, the volume of investments exceeded 1%, getting over 200 million manats in three years, which is most likely played by a new stage in the development of the Baku Steel Company (but to the analysis of the market after the emergence of this perfect technological company we will return). And in recent years, investments in metallurgy have even fallen below 0.1%, that is, they could not even make a thousandth of the total investment in industry.

The results of this attitude towards the strategically important sphere of the economy did not take long to wait. If in 1991 the share of metallurgy in the total industrial output of the country was about 10%, now this figure does not exceed 1%. And this is at a time when prices for metallurgical products reached the highest level. Although, this was preceded by a deplorable milestone - until 2001, even the usual building reinforcement bars were not manufactured in Azerbaijan, they were totally imported! In this case, we can not speak of more complex metal structures. But it was at the end of the past - the beginning of this century was the largest time of consumption of this product in the country, thousands of tons of metal structures were used annually only in the oil and gas and pipeline sectors.

The table below graphically shows the entire dynamics of the decline in the metallurgical sector of Azerbaijan in 1991-2016.

It is well known that investments directly affect labor productivity, which is one of the main indicators of the effectiveness of economic development. After all, this is a truism: labor productivity is the volume of output produced by one worker per unit of time or the time spent on producing a unit of output. The growth of labor productivity makes it possible to produce an additional volume of output or to perform an additional amount of work by the same or even a smaller number of workers. And at the same time it allows you to spend less labor on a unit of production, and, therefore, to reduce its cost under the heading "labor costs" and get more profit from each unit. From time immemorial, the objective economic law of increasing labor productivity is acting - the law of the movement of society forward. The whole history of mankind is, first of all, the history of the steady growth of labor productivity. With the current scale of production, increasing demands for goods, services and limited labor resources, the increase in labor productivity is becoming the main source of economic growth. What is the dynamics of this indicator for the analyzed period?

Why did the government miss metallurgy?

If in 2005 and 2010 the output per worker in this sphere was 16-18 thousand manats, in 2015 this figure increased to 48.3 thousand manats, and in 2016 - up to 73.7 thousand manats. Taking into account the change in the price index, labor productivity in the metallurgical sector has doubled. But at the same time, the average annual number of workers in the industry has more than halved, which has led to even greater growth in labor productivity. It would seem that the only and very important success of the Azerbaijani metallurgy should be rejoiced at - it achieved a strong growth in labor productivity with the same strong reduction in the factors that should lead to this. We will return to the analysis of this problem, but for now we will continue the idea.

In the Soviet years, the metallurgical complex, including in Azerbaijan, was a complete cycle - from the extraction of iron ore to the smelting of steel and the manufacture of products from it. And everything was managed from a single center. Today, this process is so fragmented that it is simply amazing how it still holds. It is difficult to imagine even that 29 companies (5 state and 24 private) and 49 individual entrepreneurs are engaged in the sphere of the collapsed metallurgy in a small country. The biggest issue is the quality of labor productivity. Why do we need so many enterprises that produce low-quality and handicraft products that are not competitive in Azerbaijan? And why did the state leave such a strategically important industry out of control?

Here is the modern face of Azerbaijani metallurgy - the Zulfugarli brothers' enterprise

Unfortunately, the Ministry of the Economy is guided by one goal - to achieve more market participants to improve competition. Although competition in this area is inevitable anyway, as the prices for raw materials and final products, as in the case of oil, are dictated not by internal, but by external factors.

In no event must we forget that metallurgy is a system-forming sphere, to which the state should pay special attention. To focus on privatization of state entities, which brings insignificant income to the treasury, in this case it is not entirely advisable. It is more effective to concentrate small production in several large associations that are actively funded by the state. Moreover, the state should not interfere in the management of the industry, it should only provide support in obtaining affordable and cheap loans. Yes, the importance of this material and financial industry is too great to release it into the hands of individual small private traders. In addition, it requires constant investment, which ultimately pays off with interest. The whole industry should be considered in a complex, as it is observed today in neighboring Russia. The reason for this approach is simple - only raw materials in the cost of the final product in this area is up to 80%.

A question may arise - why raw materials account for three-quarters of the cost of production? The answer is simple - the metal scrap that is today mainly used as raw material is taken at the plants for around 320 manats per ton. For example, ready-made reinforcement bars are sold for 900 manats (including other costs). If to replace scrap with iron ore (its concentrate), the cost price of production will decrease at least twice, consequently, the profit of the enterprise and the sum of means deducted in treasury will increase. And this is not to mention the fact that new jobs will open, the work of related industries will be stepped up, etc. But the State Property Committee cannot decide on the fate of the only iron ore deposit in the country - the Dashkesen ore mining and processing enterprise.

Four investment competitions, held by the State Committee to privatize a strategically important combinate, did not yield any results. And the conditions of this competition cannot interest serious investors. After all, on demand, the investor must transfer at least 100 million manats only to the state budget, and the upper limit of deductions to the state is not established. But it is clearly stated that the applicants must submit a five-year investment program for an amount not less than $600 million, take obligations to open at least 1 thousand jobs. This alone is enough to understand the reason for the investors' refusal to privatize this facility, which can be called a combinate only conditionally. This would attract large investors by granting certain privileges and concessions, but the State Committee in advance wishes to cut off about a billion dollars from them.

Is it reasonable if, after 1991, 391 million manats were invested in the metallurgical sphere of Azerbaijan? After all, the Azerbaijani government can turn to the experience of neighboring countries, at least the same Russia. What concessions did the government of Russia go through when privatizing a multibillion-dollar metallurgical complex, including a mining complex, by the oligarch Alisher Usmanov?! It was transferred to the investor almost for free. Azerbaijani officials should also realize that the main goal is not to sell the ore mining and processing enterprise, the interests of the state should be considered more broadly - the combinate should be involved in the overall metallurgical complex of the country, the contours of which clearly appear on the example of Baku Steel Company...

(To be continued)

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