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Uzbekistan Is Crowding Kazakhstan in Its Main Export Market of Flour

This is forcing Kazakhstan to search for new delivery routes

Photo: Kosalism / Depositphotos.com

Exporters of Kazakhstani flour are going through dubious times. Uzbekistan, Kazakhstan's second largest importer, reduced flour import in January through July 2020 by 37 percentage points down to 207,000 tons. Uzbekistan also started participating actively in the Afghanistan market where Kazakhstani millers are currently leading. At the same time, China has sharply increased its import of Kazakhstani flour by 64%.

On the grindstone

If we have a look at Uzbekistan’s import tariffs, it becomes obvious that its authorities are clearly signaling to importers: “Bring us grain, and we can mill flour ourselves.” For at least the last decade, grain has been supplied to Uzbekistan at a zero rate. At the same time, in 2011, the republic introduced a 15% excise tax for Kazakhstani flour which in 2014 was lowered to 11%.

In 2017, Uzbekistan got even more “generous,” lowering the excise to 5%. But in early 2020, it doubled the tax and it is now 10%.

Over the years of this practice, the southern neighbor of Kazakhstan has built up its own flour milling “muscle” and has become a solid competitor for Kazakhstan both in Uzbekistan and in Afghanistan. The thing is, Uzbekistani millers produce flour from Kazakhstani grain and not only sell it at home, but also export it.

As a matter of fact, Uzbekistan is starting to play on Kazakhstan’s field: after all, right now Afghanistan is the #1 importer of Kazakhstani flour. The country purchased 459,000 tons of Kazakhstani flour in January through July 2020. To compare, in the same period, the #2 importer, Uzbekistan, purchased 207,000 tons of flour from Kazakhstan.

In the Afghanistan market, Kazakhstani flour occupies about 60%.

But on the way to Afghanistan, Kazakhstani exporters face obstacles: Uzbekistan sets high transit tariffs. Rail transit tariffs and associatedchargeson the territory of Uzbekistan (Tashkent –Termez/Galaba) to the border with Afghanistan are about $60 per ton. Meanwhile, rail transportation from the northern regions of Kazakhstan to the Uzbekistani border costs $20 per ton.

To make it cheaper for Kazakhstani exporters to enter the playing field, National Management Holding Kazagro JSC is developing alternate routes for flour delivery to Afghanistan through Turkmenistan.

“According to data from Kazakhstan’s Union of Grain Milling Companies, Turkmenistan is interested both in the development of transportation on its territory and in the creation of a route that competes with Uzbekistan. Turkmenistan is offering a 30% discount on the transit tariff which is equal to the domestic transportation tariff,” said Eldar Zhumagaziev, first deputy chairman of the National Chamber of Entrepreneurs Atameken.

In his opinion, to maintain its flour export positions, Kazakhstan needs to immediately take measures to create equal access for Kazakhstani goods to the Uzbekistani market. In particular, Kazakhstan should reciprocate with equally high tariffs for transit of Uzbek goods through Kazakhstan and equal import tariffs for all Uzbekistani goods.

“Unfortunately, we have to admit that for many years, Uzbekistan has been creating unequal access for Kazakhstani wheat and flour to its market. Due to this, the volume of flour export to Uzbekistan decreased from 1,243,000 tons in 2012 to 388,000 tons in 2019. Meanwhile, export of Kazakhstani wheat increased from 658,000 tons in 2012 to 2,187,000 tons in 2019,” Zhumagaziev pointed out.

In late July, he reported that the prime ministers of the two countries were planning a meeting to discuss various issues, including this one. However, the Ministry of Trade and Integration of Kazakhstan explained to Kursiv.kz that the meeting was postponed “due to objective reasons.”

“At the same time, there are major bilateral events planned for October with the participation of heads of government: the 19th meeting of the joint Intergovernmental Commission on Bilateral Cooperation between the Republic of Uzbekistan and the Republic of Kazakhstan, as well as the Forum of Interregional Cooperation between Kazakhstan and Uzbekistan. The dates are being coordinated with the Uzbek side,” said the ministry.

Sluggish exports

Kursiv.kz asked the national railway operator, Kazakhstan Temir Zholy JSC (KTZ), to provide operational data for seven months of 2020 in order to understand the dynamic of the milling products export (namely, of flour). It turned out that the general growth of railroad deliveries to all countries has been minimal: by 5,000 tons up to 975,000 tons. Grain processors could have exported more flour this year, but they have faced administrative barriers. This refers to the ban on flour export which was in effect from March 22 to April 1, and export quotas of 170,000 tons in April and 150,000 tons in May.

The authorities introduced these measures out of… fear.

“The Ministry of Agriculture of Kazakhstan does not have information on the actual grain availability in the country. It was afraid that the development of export amid an increased demand due to the pandemic would lead to exposure of the domestic market and, accordingly, create a threat to national food security,” said Yevgeny Gan, president of Kazakhstan’s Union of Grain Milling Companies. He added that such decisions should be more careful.

Export quotas for April and May, by his calculations, were almost completely exhausted. Only in early June, the millers had to fulfill their previous contractual obligations for export, including those from March.

Internal issues were accompanied by external ones. Gan pointed out that the current grain pricing isn’t conducive to flour exports. This is due to grain prices being kept at a fairly high level, in his opinion.

“Consequently, we have fairly high flour prices. At the same time, in recent months, potential importers have started gathering their own harvest; hence, they expect much lower prices than ours. Exports are rather sluggish,” he noted.

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Refreshing projections

Recent rains have improved projections for the grain harvest. If before the rejuvenating rains, the Ministry of Agriculture expected 18.5 million tons of grain (last year, 17.4 million tons were harvested), in late July the projection improved to 20.5 million tons. Vice Minister of Agriculture Nurbek Dairbekov estimated 52% of crops as good and 42% as satisfactory, noting that the country’s grain silos contain 2.1 million tons of food-grade wheat.

Currently, grain harvest is in full swing in the Aktobe, Almaty, East Kazakhstan, Zhambyl, West Kazakhstan, Kyzylorda and Turkestan regions. Agriculture Minister Saparkhan Omarov reported at a government meeting that as of August 10, those regions harvested 929,400 hectares (about 2.3 million acres), or 37.3% of the harvesting area. With an average yield of 1,910 kilograms per hectare, 1.8 million tons of grain have been threshed.

“By the same time last year, 1.4 million tons of grain were harvested. The major grain-growing regions of the republic have also started harvesting a new crop. To date, 93,300 hectares have been harvested. The northern regions will begin mass harvesting by August 20,” Omarov reported.

The Ministry of Agriculture noted that they are taking measures to develop deep grain processing which calls for attracting foreign investment and making projections for consumer trends in the domestic and foreign markets (cereals, pasta, starch products, bioethanol and other products).

Under the “economy of simple things,” the government of Kazakhstan approved the roadmap for development of the food and processing industry for 2019-2021. For implementing projects on processing agricultural products, 200 billion tenge (about $478.47 million) have been allocated.To ensure that flour milling plants are loaded, the program provides preferential loans for working capital financing.

According to the ministry’s data, there are about 300 flour milling plants in the republic with a total capacity of 10.3 million tons of grain per year. At the same time, in 2019, Kazakhstan produced 3.1 million tons of flour, and the flour milling plants were loaded by 29.1%. Last year, Kazakhstan exported 1.6 million tons of flour while importing 3,800 tons.

In January through June 2020, Kazakhstan produced 1.67 million tons of flour.

“To develop the export potential of domestic producers under the State Program for Agroindustrial Development of the Republic of Kazakhstan for 2017-2021, we envisage an increase in the export of flour, pasta, cereals and starch products. So, by 2021, we plan to export flour to the traditional importing countries in the amount of about $420 million,” the Ministry of Agriculture reported.

To try and feed China

With the unfavorable export situation in Central Asian countries, Kazakhstani millers are eyeing China hopefully. In January through July, flour export to China increased by a whopping 64% up to 90,000 tons.

But the expansion is limited by infrastructural issues and the need to transfer cargo at the Dostyk and Altynkol border stations.

KTZ sees opportunities to speed up the process in containerizing the flour and grain export, as well as in delivering grain to China in soft containers or bags, for example, bulk bags for 1.25 tons which can then be loaded onto automobiles and covered or open train cars.

“At the moment, the Chinese side transmits 12 trains a day through the Dostyk station, 10 of which are container trains. Taking this into account, we recommend that exporters load the cargo in bulk bags and containers,” said Kanat Almagambetov, first deputy chairman of the board at KTZ, during an online conference dedicated to containerization of grain and flour exports.

To increase the level of containerization, in 2020, decreasing coefficients have been established for the maximum level of tariffs for services of the mainline railway and locomotive traction. This refers to transporting grain and leguminous crops, flour and cereals in containers through the stations Aktau, Kuryk, Altynkol, Dostyk, Saryagash, Bolashak, Oasis and Lugovaya.

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