Asia Pulse

ALMATY, July 25 Asia Pulse - Price control over primary needs supplies is on the move in Kazakhstan. Recently, the government started buying options for the purchase of large amounts of wheat and other cereals.

The plan is to build up a national grain reserve of 600,000 tons, managed by the state-controlled agency Prodkorporatsiya. In order to build up stocks, the agency will take opportunity from a temporary grain export ban imposed on April 1 and expiring on September 1 this year.

The export ban was needed to prevent farmers from selling out abroad, leaving the domestic market with shortages and sending local wholesale and retail prices through the roof. Kazakhstan expects a grain harvest this year in the order of 17 million tons, of which about half can be sold outside the country without carrying the risk of a domestic deficit.

High production costs

With the exception of soybeans, much in demand in the world for the production of ethanol, the alternative to petroleum-based transportation fuel, prices of cereal benchmarks have retreated throughthe summer so far. But they still remain relatively high (see table) in comparison with overall economic growth in the world - especially in countries that depend on importation for a large part of their consumption.

For Kazakhstan, however, another type of expensive commodity plays a key role in the markets behavior. Here, the main bottleneck lies in high production costs, mainly due to high fuel prices. The underlying reason is that in most of the agricultural provinces but especially in the south, spring floods and subsequent early summer droughts have cut surface productivity all but in half: from 15.7 centners per hectare in 2007 to 8.8 this year.

Fixed retail prices

This doubles the cost of fuel for tractors and combines - exactly at a time when prices for diesel have become sky-high. In Almatys petrol stations, the price tag of diesel is now in the same order as the average price for A-95 petrol, topping a hundred tenge per liter (1 euro = 190 tenge and 1 US dollar 120 tenge) -- This deals a painful blow to transportation in a country with scant population scattered over an immense territory.

In order to keep up supplies, especially those to farmers during the harvest period, a recent government decree stipulates that the country's three oil refineries -- in Pavlodar in the northeast, in Shymkent in the deep south, and in Atyrau in the northwest -- must deliver a total of 130,000 tons of diesel each month to farmers from July on. The refineries will be paid for through state agencies, while farmers purchase their fuel at fixed retail prices, according to a recent report in the Kazakhstanskaya Pravda newspaper, which does not indicate the level of those prices. The article also points at the fact that of the amount for July only 19,000 tons had reached the farmers in need by the middle of the month.

Traders will be traders

It looks very much as though consumers outside the farming sector such as industries and the transportation sector are going to have to pay the final bill. For the entire harvest, the paper estimates the required volume of diesel at 400,000 tons. Kazakhstans refineries produce 340,000 tons per month on average. This is estimated to be in the order of 90,000 tons short of demand in the country.

The current measure could well increase the deficit to a significantly larger proportion. Whether a recent moratorium on oil products exportation will solve the issue remains subject to doubt. According to an Interfax report dated July 16 and quoting data from the National Statistics Agency, Kazakhstan imported the total amount of 800,000 tons of various oil products in the first five months of the current year, but at the same time exported 1.554 million tons of oil products.

Commodities will be commodities and traders will be traders: the main reason lies in the plain fact that Kazakhs like to buy fuel from Uzbekistan to their south where they can buy it cheaply, and in turn sell their own oil products to Russia in the north and China in the east where they bring in a lot more than they possibly could on the domestic market.

Loss of purchasing power

North Sea Brent, which is the main indicator of Kazakhstans Urals benchmark with the latter following trend with a discount of around 10 US dollars per barrel on average, has retreated in the third week of July following an all-time peak close to $145 a barrel at the end of the previous week. Around the globe, high hydrocarbon prices have triggered soaring industrial and agricultural production costs, which, in turn, has reawakened the specter of inflation.

In Kazakhstan, prices of consumables have gone up by 40 per cent on average in cities and by 25 per cent in the countryside in the first half of 2008 in comparison with the same period of 2007, state officials have been quoted in local media as suggesting. This is much more than the average rise in personal income. If the current trend does not change, loss of purchasing power could well come close to 30 per cent.

Loss in spending by consumers hampers production, and thereby tempers overall economic growth in spite of high national revenues on commodity exports. In all: Kazakhstan is facing a recession that frightfully resembles that of the mid-1990s and once more the authorities resort to emergency measures.

BENCHMARK CLOSURES OF COMMODITIES RELEVENT TO CENTRAL ASIAN EXPORTERS

commodity market/currency unit 31/1207 11/0708 18/0708

OIL/GAS

Brent crude ICE/USDcent barrel 9385 14448 13019

WTL crude NYMEX/USDcent barrel 9589 14508 12888

Henry Hub gas NYMEX/USDcent btu 748.3 1190.4 1057.0

METAL BENCHMARKS

aluminum LME/USDcent ton 235050 329150 302600

copper LME/USDcent ton 667050 849900 832400

lead LME/USDcent ton 253200 200500 194600

nickel LME/USDcent ton 2580500 2165000 2040500

tin LME/USDcent ton 1638000 2332500 2342000

zinc LME/USDcent ton 229000 202400 179050

UK gold LBM/USDcent ounce 83650 96430 95770

US gold COMEX/UDScent ounce 88800 96060 95800

platinum NYMEX/USDcent ounce 143830 204720 185530

palladium NYMEX/USDcent ounce 34625 45780 41660

silver COMEX/USDcent ounce 1492.0 1882.0 1820.0

AGRO-BENCHMARKS

wheat LIFFE/pence ton 16450 14250 13800

maize CBT/USDcent bushel 455.50 680.50 609.50

soybeans CBT/USDcent bushel 1199.00 1530.50 1470.00

white sugar LIFFE/USDcent ton 31500 38780 35810

cotton NYBOT/USDcent lbs 68.01 70.63 70.35

ICE = InterContinental Exchange, UK

LME = London Metal Exchange, UK

COMEX = Chicago Mercantile Exchange, USA

NYMEX = New York Mercantile Exchange, USA

LIFFE = Euronext commodity exchange, UK/France

CBT = Chicago Board of Trade, USA

NYBOT = New York Board of Trade, USA

Source: FT/Reuters

(TCA)