Soaring import prices boost Azerbaijan's hopes for local production Karabakh's industrialisation plays key role

The last two years, marked by global inflation, have had a very negative impact on the local construction materials market, with its prices continuing to soar. This negative situation has only been exacerbated by the Russian-Ukrainian war and the sanctions regime, which have complicated logistics in the Eurasian region. As a result, the price of Russian timber and lumber in Azerbaijan rose once again last week. Rising prices of imported raw materials and components also affect local production costs.

In spite of this, the volume of production of construction materials in Azerbaijan has increased by almost a third in the last year, and in January 2024 the dynamics by 34.5 per cent compared to the previous year. According to Azerbaijan Railways CJSC, exports of domestic construction materials increased significantly last year.

The Azerbaijani market faced a shortage of several construction products due to the outbreak of the Russian-Ukrainian war in February 2022 and the EU sanctions, which complicated transport communications in the Eurasian region. As a result, the prices of timber, fittings, roofing materials, flooring, metal structures, aluminium profiles and a number of other materials, a significant share of which has traditionally been imported by our country's main trading partners, have surged forward.

Currently, Russia, Türkiye, Kazakhstan, the Republic of Korea and China are the main importers of construction materials in our country. Ukraine used to be one of them, but its supplies are now very small.

The devastating earthquake that struck Türkiye on February 6 also contributed to the rise in building material prices last year. Reconstruction work in the southern regions of Türkiye increased domestic demand and prices for building materials, not to mention factors such as inflation and the depreciation of the lira. In addition to the increase in the cost of imported ready-made building materials, the domestic market has been hit by increases in the prices of imported raw materials, chemicals, components and equipment used by local building materials plants.

Due to the dependence of the production cycle on such imports, the cost of producing domestic paints and varnishes, ready-mixed concrete, adhesives and sealants, plasterboard and other products has dramatically soared. In the years 2022-2023, the growth in the prices of local products in these segments was from a quarter to a third.

And since the second decade of February, there has been another round of price growth for lumber and some other building materials of Russian production. On average, the increase was about ten per cent: in particular, the price of 15 and 18-mm plywood rose to $11 and $14, and the price of a cubic metre of boards rose by 8 per cent to $202. Today, the timber market in Azerbaijan is almost entirely dominated by Russian products. However, this trend is prevalent in all post-Soviet and neighbouring countries.

The rise in the price of Russian timber is linked to a number of factors, including a noticeable change in the structure and geography of supplies. According to the Federal Forestry Agency, Roslesinforg, exports fell by 10 per cent last year to 20.7 million cubic metres, 98 per cent of which went to Asian countries. In the past, the lion's share of supplies went to the European market, and today Russian producers are suffering losses due to the reduction in the volume of supplies on the western vector, changes in the structure of demand and, above all, the lengthening of the distance of supplies.

All this forces the sawmills and woodworking factories to compensate for their costs by increasing the selling prices, together with the rising costs of equipment and transport (depreciation of the rouble against the dollar).

Other sectors of the Russian construction industry are showing similar trends. At the end of January this year, Anton Glushkov, the president of the Russian Association of Construction Companies, quoted statistics showing that by the end of 2023 the price of bitumen went up by 43 per cent, reinforcing steel by 34 per cent, sheet steel by 24 per cent, steel pipes by 18 per cent and electric cables by 9 per cent.

Russian producers are also leaders in the import of most of the above-mentioned construction materials to Azerbaijan, which inevitably leads to price hikes in the domestic market as well.

Unfortunately, the Azerbaijani market and local factories are still significantly dependent on imports of finished construction materials or their components, and the most effective way to overcome this dependence and reduce the inflationary factor is the expansion of domestic production on the basis of domestic raw materials and chemical products. According to the State Statistics Committee, more than $647 million worth of construction materials were produced in 2023, an increase of 31.8 per cent over the previous year.

In January of this year, this positive trend improved - the growth rate of the local construction industry reached 34.5 per cent, with the production of construction materials worth $48 million. In particular, the production of cement increased by 23.2 per cent, ready-mix concrete by 21.8 per cent, gypsum by 24.3 per cent, prefabricated concrete structures by 35 per cent, and construction glass by 11.3 times.

Obviously, the driving force behind such a high demand for construction materials on the local market, and which encourages factories to increase production, is the gigantic construction site in the Karabakh region, where more than 2,200 kilometres of roads are being built, energy and utility infrastructure is being restored, an airport is being built, residential and administrative buildings are being constructed, and the first industrial clusters are being formed in Shusha, Aghdam, Zangilan, Fuzuli, etc.

It should be noted that in order to meet the growing demand for construction materials, specialised enterprises are being established directly in the liberated territories. By the end of the first half of 2024, for example, the production of construction materials (piping, metal products, façade rendering, insulation materials, reinforced concrete, roofs) is expected to begin in Aghdam, at the Aghdam Industrial Park.

Last year, the Chinese investor's new ceramic tile production plant was commissioned in the Sumgayit Chemical Industrial Park (SCIP), and the foundation stone for a plant producing various construction chemicals was laid at the same time. In general, SCIP is the core of the domestic construction industry, producing plastic and steel pipes, water and gas fittings, metal structures, copper and aluminium power cables, transformers, and window glass, as well as chemical reagents and other components for the production of construction materials, which have been exported in large quantities for many years.

Indeed, along with the Karabakh construction project, exporting construction materials to the CIS countries is the other most important factor in the industry's rapid development. According to Azerbaijan Railways CJSC, the year 2023 was particularly significant in this respect: exports of Azerbaijani cement alone increased by 27.8 per cent, while deliveries of bitumen and tar sands rose by 22.8 per cent. Together with Georgia, the Central Asian countries, where the construction market is reviving, are seen as promising markets.

"Demand for construction materials is growing in the CIS countries, especially in the Central Asian states and the SPECA region as a whole," says Shahana Sary, General Secretary of the Azerbaijan Association of Construction Materials Producers. This is the main focus of this year's activities. The domestic construction industry will actively promote its products at exhibitions in Kazakhstan, Uzbekistan, Turkmenistan, Russia and neighbouring countries.

In this way, Karabakh construction and exports to the CIS countries will help to overcome the tightness of the local housing market in Baku and other cities, and in time, by opening new factories in the liberated territories with their strong raw material base, it will be possible not only to increase import substitution but also to significantly reduce production costs, which will have an impact on the retail prices of the local market of building materials.