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 KAZAKHSTAN International Business Magazine №4, 2012
 The Moment of Truth for Mining and Metallurgy
ARCHIVE
The Moment of Truth for Mining and Metallurgy
 

Sergey Gakhov

In early July the capital of Kazakhstan has once again hosted the annual meeting of miners and metallurgists from all over the world. More than 1,150 representatives from 24 countries took part in the work of the third International Mining and Metallurgy Congress named Astana Mining & Metallurgy 2012 to discuss a wide range of issues facing the industry: from exploration, mining and ore processing to metal working and production of finished goods.

Opening the event, the first deputy Prime-Minister Serik Akhmetov emphasized that today the mining and metallurgy sector (the MMS) of Kazakhstan undergoes significant structural changes. While until recently the industry was mostly focused on export of raw materials and primary metals, nowadays there are new processing smelters gradually appearing in the country aiming at promotion of highly technological products and their expansion to the domestic and external markets.

Qualitative transformation of the industry is especially important considering its contribution to the Kazakhstani economy. Today the MMS accounts for 7% of the GDP and 17% of the total industrial output of the country. It stands to reason that the development of the industry has become one of the priorities of the state-run Accelerated Industrial and Innovative Development program (the AIID), which sets complex challenges to domestic miners and metallurgists: effective usage of available mineral potential, implementation of innovations to production and transfer of leading technologies. The increase by the year 2015 of the gross value added in the industry by 107% as well as doubling of exports of mining and metallurgical products will serve as base indicators of their successful implementation. “These are quite significant and ambitious tasks but I’m sure that with the existing mineral resources potential and with such people-enthusiasts they will be achieved”, – stated Mr. Akhmetov.

The Minister of Industry and New Technologies Asset Issekeshev reported on the status of implementation of the set goals. He placed a special emphasis on the fact that the MMS of Kazakhstan adheres to the global mainstream in industry’s development – regular increase of the added value, maximizing of recycling, attraction of investments and new technologies, environmental friendliness, reduced energy consumption, and growth in labor productivity. At present, 61 metallurgical projects to the total investment amount of ten billion US Dollars are being implemented in the framework of the Industrialization Map. Over the past two years a number of new enterprises have been established and modernization of production facilities of such industry giants as ArcelorMittal Temirtau, ENRC, Kazakhmys, Kazzink and others has been launched. In general, modernization programs adopted by the Ministry provide for investments of up to 1.7 trillion tenge, creation of 3,000 jobs, usage of 20 new types of products and increase of the manufacturing output by 600 billion tenge a year. Along with the above, Mr. Issekeshev noted that some enterprises show deceleration in their modernization processes and asked the management to improve this sphere “as it is very crucial for the increase of the overall competitive ability”.

At that, in his opinion, a special consideration should be given to energy efficiency as industry accounts for 70% of the total electricity consumption of the country. According to the estimates of the Ministry of Industry and New Technologies, only at Kazakhmys and Aluminium of Kazakhstan the energy consumption could be reduced by one billion kW/h, and a 32% energy intensity reduction is planned at Kazphosphate. Transfer of these enterprises to new energy saving technologies will not only ensure significant reduction of production cost but will considerably increase the sustainability of production.

Comparing notes

The speeches of participants from other countries lend credit to the statement of the Head of the Ministry of Industry that the MMS of Kazakhstan is in line with the global trends.

Thus, the President of Association of Financial and Industrial Groups of Russia Oleg Soskovets told about the opportunities offered to the domestic MMS by the integration processes within the Customs Union (the CU). According to the Institute of Economic Forecasting of the Russian Academy of Sciences, it is expected that in 2015 a net increase in economic activity due to the establishment of the CU can be not less than $400 billion. Metallurgical industry will also receive significant advantages. “Under the CU it does not matter where the productions are established. Frankly, previously it was sometimes disadvantageous to deliver finished products to the territory of the former Soviet republics from Russia or Kazakhstan... but today several structures complementing each other in terms of development, mining and mineral processing have already been established on the basis of Russian and Kazakh companies.” In addition, Mr. Soskovets deems it wise to strengthen the domestic sale market as the competition in the external markets is too high. Thus, in the previous year China produced 720 million tons of steel and Russia – 70 million tons, while Kazakhstan produced only 3 million tons of steel. The situation is aggravated by the accession of Russia to the WTO and, as a result, the opening of customs borders. The only solution is in improving product quality and reducing its output costs.

Director of the European Association of Mining Industries, Metal Ores and Industrial Minerals (Euromines) Korina Hebestreit said that Europe now is also trying to implement additional industrialization. At that, part of the efforts provides for the development of mining industry which, she believes, fully contradicts the policy of the last 20–30 years. “It is considered that in Europe mineral resources reserves are already fully developed, however, they are not. The only problem is that they are limited and their development is economically expensive – that is why we need new technologies. Nowadays, many EU countries adopt new exploration development programs to attract investors in this sphere.”

The theme of new technologies was followed up by the Chief Operations Officer of the Australian company Micromine Kevin Fitzpatrick, who presented his vision of the challenges facing the mining industry worldwide. According to him, in the climate of the commodity boom, many mining companies decrease their first-rank stock reserves, which force them to move to the development of deeper and complex deposits, as well as increase the exploration as a whole. Environmental issues when stakeholders want mines to produce as little harm as possible are of immediate importance. For example, in Australia it is becoming more and more difficult to obtain an environmental permit for the development of deposits. However, strong demand from emerging economies requires increase in production, which in turn means increase of demand for labor and equipment. At that, over the past five years, the access to labor resources has become more complex, and therefore the companies now are actively seeking innovations to solve these problems. Moreover, today the mining industry is entering upon a new age in its development to be held under the motto “less people – more technologies”. In this case, the emphasis will be placed on developing innovations to reduce costs while increasing production.

However, the introduction of new technology should be considered not only in terms of cost reduction, but also in terms of more care for the resources. Thus, the Chief Executive Officer of ENRC Felix Vulis believes that the traditional approaches to the development of mineral resources are not economically viable. “There comes a clear understanding that the mining and metallurgy industry can only be developed in a qualitatively intensive way. This requires the implementation of sustainable development at all stages of the projects, including planning, approvals, exploration, production and elimination of the consequences of a company’s activity.” In ENRC, effective usage of mineral resources is seen in the professional expansion of the resource base, the interaction of production and science, and complex processing, resource conservation and environmental protection. As an example, Mr. Vulis mentioned a successful solution for processing low-grade bauxites at Aluminium of Kazakhstan JSC, which is now considering the usage of new processing method – a combined technology “Bayer – hydrochemistry”.

It stands to mention that the dedication of the MMS enterprises to the interaction of production and science is in compliance with the state policy, which includes the recently adopted legal requirement for subsoil users for obligatory payment of not less than 1% of the total annual income for financing of scientific researches. At the same time, Mr. Fitzpatrick believes, this share should be increased to 4–5% in order to significantly influence the innovations development sphere in Kazakhstan. As an example he mentioned the experience of Australian companies which allocate up to 8% for these purposes.

Along with the above, differences in the opinions of international and local experts were observed, especially in terms of the exploration development. According to the Vice-President of the Canadian company Metals Economics Group David Cox, geological explorations are the key component of successful functioning of the MMS. Thus in Canada, for example, every dollar invested in exploration brings $10 invested in capital development, $88 as income, $6–12 as taxes and $2–3 as royalty. At that, in accordance with the global trends, more than 60% of investments to exploration activities account for the juniors. As for Kazakhstan, the most significant investments to geological explorations are made by large and medium businesses. Moreover, with the introduction of a moratorium in 2008 on issuance of licenses, a significant decrease in the volumes of primary exploration was observed. In this regard, Mr. Cox said, Kazakhstan needs to minimize the barriers to facilitate small businesses’ entering the sector of geological explorations.

Indeed, the level of exploration in our country in recent years is not fully covering the dwindling resources, causing worries to the state authorities. “We are at the cusp of adopting a long-term concept on exploration development and will create all conditions for investors to enter this sphere and develop new technologies to work at great depths with solid minerals”, – stated Asset Issekeshev in this regard. The program provides for organization of detailed and complex geological exploration activities by state authorities to provide developing mining productions with new raw material reserves. Moreover, the most favorable conditions will apply primarily for those companies that will be able to provide comprehensive processing of raw materials within the country. “We are able to provide investors with mine deposits avoiding tender procedures. Directly, without involvement of national companies, but in exchange for the implementation of large projects in Kazakhstan… This provision already exists and subordinate legislative acts are being developed, so we believe that the first steps in this direction will be announced in autumn”, – pointed Mr. Issekeshev.

Vice Minister of Industry and New Technologies Albert Rau was even more specific: “We are running out of good raw materials and we cannot just say to investors – explore and take it away. And we also have mono-industrial towns. So in any case, all available resources should primarily aim at supply of large backbone enterprises”.

Setting priorities

Considering the comments of government officials, the state does not intend to take a hands-off approach in terms of the development and exploitation of mineral resources. Mazhit Turmagambetov, Chairman of the National Mining Company Tau-Ken Samruk, an organization possessing a preference in signing contracts and purchasing mineral rights, told about the new approaches to working with potential investors and partners. According to him, there are 838 objects of solid minerals in Kazakhstan; of this number 392 objects are already under contract and 446 – still free. The latter form “priorities list of attractive mine fields” and Tau-Ken Samruk will act as a sole operator on behalf of the state. “Applications for mineral rights were received for 23 free facilities and negotiations on five of them were already held with the authorized body… Target structure of Tau-Ken Samruk JSC involves development of copper, lead, zinc, gold and iron ore divisions, division of rare metals and coal deposits.” In the course of its activity the company plans to use the mechanism of state-private partnership. The important factor in the distribution of shares and the financing scheme in joint projects will be the ability of private investors to attract new technology.

However, certain problems in terms of administration, as it turned out, are not alien to even a national player. According to Mr. Turmagambetov, signing of contract may take up to 2 years. Most of the time is spent on preparation of a technical feasibility study documentation, which, given the lengthy approval process in state agencies, can take up to 8 months. This is especially critical in the area of exploration. Representatives from Tau-Ken Samruk believe that the time required for the procedures for obtaining the rights for exploration shall not exceed 3 months.

Private business has also provided its suggestions. In Mr. Vulis’ opinion, provision of potential investors with the access to geological information on a free of charge basis as well as the restoration of privileges exempting exploration works of VAT may become significant incentives to increase the volume of exploration.

However, the most burning issue was perhaps the adoption of a separate sector-specific legislation. The logic of the industry representatives is quite clear – the MMS was the first to respond to the call of the government to the forced industrialization and has already achieved significant results. Over the past year, the volume of industrial production in the sector exceeded $20 billion, of which about $13 billion accounts for metallurgy. Total direct investment in the MMS in 2011 totaled 55.6 billion tenge. Mining companies are constantly increasing tax revenues making the industry budget-making. Thus, in 2011, payments under the tax on mineral extraction and excess profit tax to the budget exceeded 193 billion tenge.

All of the above, according to the miners and metallurgists, gives them the right to expect special treatment from the state authorities. The Executive Director of the Association of Mining and Metallurgical Enterprises (AMME), Nikolay Radostovets said directly and explicitly: the industry has grown out of short trousers and cannot work under the parameters of the Law On Subsoil, which is mostly tailored to the oil sector. “The practice is that we really have problems with the law, because it is insufficient and resulted from a merger of the two laws, and, primarily, the Law On Oil. And the specifics of production in the oil industry and the mining industry are different – I will not discover America saying that in many countries where there is a developed MMS, there is a proper mining legislation available as well.”

According to Mr. Radostovets the current law has a number of items not taking into account the specific conditions of the mining enterprises and the factors that influence the activities of the industry. Therefore, the current legislation hinders development of the mining sector and, as a consequence, the whole metallurgical industry, not allowing investors to build long-term plans for ten years or more.

In this regard, the AMME companies took the lead in developing the concept of the Mining Code of Kazakhstan, which shall become an immediately applicable legislative act, brief and understandable to investors, covering all aspects of the mining sector – from obtaining geological information to closing of the deposit. According to Mr. Radostovets, the thesis that subsoil payments shall not be treated as taxes requires careful study, and that is why the Mining Code should determine all issues relating to the reasonable withdrawal of income for royalties.

Taking advantage of the presence of Albert Rau, the Head of AMME asked the government to pay close attention to this issue and adopt the Code not later than next year. “In the year 2013 we would like to have the signed Mining Code on our tables. To do this, we have all the conditions: we have large companies that are interested in it, we have an understanding of the position of the ministry, and we have the World Bank, which is ready to assist in this issue.”

Speaking of the effects from the adoption of the Code, Mr. Radostovets noted: first, multiple investment growth, second, reducing the administrative burden on business entities, and third, the growth in exploration. As a final argument the AMME Head said that the association is ready to assist in developing the project and attracting relevant co-financing from the market.

However, not everyone in the industry shared the optimism of AMME. Thus, Mazhit Turmagambetov said that the existence of the Mining Code as separate legislation act is possible. “But I am embarrassed that existing Law On Subsoil Use was adopted only two years ago and it still has not shown itself. We have not yet identified all of its good and bad sides. Therefore, the development of the Mining Code can be accepted on the condition that its adoption is the prospect of five years.”

But still very emotional and assertive speech of Mr. Radostovets appeared to have reached its goal. Thus, Albert Rau, representing the Ministry of Industry and New Technologies, in his response has first recalled that “the procedure does not provide for the associations to come up with legislation initiatives, and therefore, in any case, it must be resolved in the government”. However, he acknowledged that as a result of adoption of uniform legislation, strict and “serious” procedures in the oil sector have been applied to solid and even common minerals. As a result, “we actually almost stopped construction of the Western Europe – Western China road”.

The only thing he asked the AMME for while lobbying the Mining Code – is the fulfillment of certain conditions. First, as a document of the highest level, it must absorb a number of laws. So, Mr. Rau said that the Senate of the Parliament took the initiative to adopt the Law On the Methane, which includes tougher requirements for processing methane at coal deposits. And thus “it probably should also be included in the Mining Code”.

Second, “the document must represent the interests of both government and business in terms of transparency, cost reduction and all that is related to anti-corruption issues”. However, the Vice Minister has immediately warned that all taxation issues are described in the Tax Code, and therefore their transfer to the Mining Code is impossible.

Awarding the best

Summarizing all seen and heard on the forum we can state that the mining and metallurgical complex in Kazakhstan, which at a time appeared in the shadow of the booming oil industry, is again gathering momentum.

This is evidenced by the changes in the format of the AMM. In 2012, as part of the “Days of MMS in Kazakhstan”, apart from the Congress itself, thematic round tables and exhibitions, the Third Congress of the Mining and Metallurgical Industry Employees was held, which brought together the heads of industrial enterprises and the MMS and coal industry trade unions, as well as representatives of the state agencies and development institutions. At the Congress, such ad-hoc issues as the strengthening of control over work safety, improvement and promotion of social partnership, creation of new jobs and staffing were discussed. Following the results of their work, the delegates of the Congress decided to appeal to the President of the country Nursultan Nazarbayev with the proposal to determine the mining complex as a priority economy sector for 2012–2014.

And, of course, the bright part of the 2012 AMM was the ceremony of awarding the winners of the annual national industry competition “Golden Hephaestus” organized by the Ministry of Industry and New Technologies and the exhibition company Iteca, while ENRC was the general partner. This year, the awards made as a gold-plated statuette of the god of fire and the blacksmith's art, received the winners in the following 11 categories: “Geologist of the Year" (Sergey Shepelev, geological expedition №7, branch of Volkovgeologia), “Miner of the Year” (Muhamdzhan Turdahunov, SSGPO), “Metallurgist of the Year” (Askar Akhmetov, ArcelorMittal Temirtau), “Project of the Year” (ArcelorMittal Temirtau), “Innovation Leader of the Year” (Institute of High Technologies, NAC Kazatomprom), “Local Content Leader of the Year” (Kazakhmys Corporation), “The Best Energy Saving Solution” (Kazzinc), “Researcher/Teacher of the Year” (Marzhan Nurpeissova, KazNTU named after K.I.Satpayev), “Best Thesis of the Year” (Albert Dileyev, KarSTU), “The best Journalism Work in Print” (Alexey Bantsikin, Mining & Metallurgical Industry magazine) and “Best Journalism Work on TV” (Olga Shret, Irbis TV channel). From my side, I also want to congratulate all the winners and wish them further professional success.

 


Table of contents
Telecom KZ: Always in Reach  Saken Sarsenov 
Maintaining Leadership  Kuanyshbek Yessekeyev 
Fast and Generous  Alexander Vassilyev 
· 2016 №1  №2  №3  №4  №5
· 2015 №1  №2  №3  №4  №5  №6
· 2014 №1  №2  №3  №4  №5  №6
· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
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· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3





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