Market Report, "Azerbaijan Petrochemicals Report Q2 2016", published

Slow economic growth in Azerbaijan, compounded by the devaluation of the manat, will limit demand growth for petrochemicals, which has largely been fulfilled by imports. While this may cause a downturn in the sector in 2016, it will not affect the overall long-term prospects for the expansion of domestic production.

Azerbaijan is currently burdened with ageing petrochemicals plants with low levels of capacity and poor productivity. Local market performance is unlikely to provide much uplift, although the 50% depreciation of the manat will favour local production over imports. Nevertheless, high levels of imported inflation will suppress demand growth and could outweigh the benefits of improved external competitiveness.

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The alleviation of sanctions on Iran in January 2016 may offer Azerbaijan entry to the Iranian market for downstream and finished products with potential for petrochemicals investment. At the same time, Iran poses a direct threat to competition on the domestic market. This is unlikely to hold back the country's ambition to build world-scale plants, but until they are in commercial operation, the petrochemicals industry will remain small, dedicated to domestic consumption and operating at low levels of capacity utilisation.

SOCAR's Oil and Gas Processing and Petrochemical Complex (OGPC) will have total gas processing capacity of 10-12bn cubic metres (bcm) and oil refining capacity of 10mn tonnes per annum (tpa). Capacities will include 700,000tpa high density polyethylene (HDPE) and low density polyethylene (LDPE), 550,000tpa polypropylene (PP), 40,000tpa benzene and 110,000tpa styrene.

The SOCAR Polimer PP plant with 200,000tpa capacity planned for the Sumgayit Chemical Technology Park in Azerbaijan is scheduled to start production in H216. A 100,000tpa polyethylene plant is also likely to come on stream at the same time. Beyond that, attention will shift to the massive world-class USD17bn OGPC, which will improve efficiency and provide a wider range of higher-value refined products.

A fertiliser project is planned in Karadagh with capacities of 255,000tpa ammonia and 500,000tpa urea. SOCAR also plans two fertiliser plants, each with capacity of 700,000tpa of urea: one in Azerbaijan and another in Georgia. Construction is due to be completed by end-2016. The objective is for Azerbaijan to raise its fertiliser exports to 1mn tpa.

This quarter, Azerbaijan's Petrochemicals Risk/Reward Index score has increased 4.7 points to 38.5 out of 100 due to the inclusion of the OGPC project in our five-year forecast, as well as an improvement in its Country Risk rating. This puts it 0.1 point ahead of Ukraine, removing it from the bottom place in our Europe rankings.

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