TIRANA, March 23 – With international oil and base metal prices at a record low, the Albanian economy has been hit by a series of bankruptcies and suspicious takeovers that could have severe consequences on the country’s exports, employment and government revenue.
The bankruptcy of ARMO oil refiner following a failed privatization, the recent bankruptcy proceedings initiated by Kurum steelmaker and the surprise takeover of the country’s biggest oil producer by a Chinese company has shown how fragile the Albanian economy is to international commodity price fluctuations. While the long-ailing construction industry continues struggling in Albania and the region, several enterprises, including cement and brick and tile production could be endangered. Albania has some 35 large problem borrowers, accounting for two-thirds of total non-performing loans currently at about 17 percent, from a peak level of 25 in mid-2014. Despite restructuring solutions mediated by the authorities, it is believed that a considerable number will not escape bankruptcy.
Both oil and base metal prices at record lows have considerably affected exports, domestic production and government revenue, also leaving hundreds of oil and mining workers jobless.
The poor diversification of Albania’s exports heavily relying on oil and base metals whose prices are currently at a record low is expected to have another negative impact on the country’s exports which dropped by 5 percent in 2015, returning to negative growth rates after a contraction in 2009 soon after the onset of the global financial crisis.
Albania’s exports heavily rely on garment and footwear manufacturing as well as oil and base metals whose share in the country’s exports dropped to 63 percent in 2015, down from 67 percent in 2014 when oil prices embarked on a downward trend.
In a recent working paper, the IMF warns emerging countries should diversify their production and exports base in order to have more alternative sources of revenues, allowing them to deal with the volatility of commodity exports related revenues.
“Lack of diversification may increase exposure to adverse external shocks and vulnerability to macroeconomic instability, while a diversified export base may allow countries to better handle declines in commodity related revenues with alternative sources,” says the IMF.
The slump in commodity prices has already affected investments and productions by oil and mining companies as they wait for a recovery in prices.
Oil prices have currently recovered to $40 a barrel compared to a 12-year low of $27 last January and around $110 a barrel from 2010 until mid-2014 when they embarked on a downward trend.
In its latest Commodity Market Outlook report, the World Bank warns all main commodity price indices are projected to further decline in 2016 due to persistently elevated supplies and, in the case of industrial commodities, weak growth prospects in emerging market economies.
Energy prices are expected to fall 25 percent from 2015, with oil prices projected to average $37/bbl in 2016. For 2015 as a whole, energy prices plunged by 45 percent from the previous year, while non-energy commodity prices declined by 15 percent.
Downside price risks include a further growth slowdown in China and larger than-expected production associated with cost reductions and exchange rate depreciation in producing countries, says the World Bank.
Due to a sharp cut in commodity prices, the mining royalty the Albanian government collects from oil and mineral sales dropped by a sharp 43 percent to 3.6 billion lek (€26 million) in the first 11 months of 2015 compared to the same period in 2014.
While a major oil producer, Albania exports most of its domestic production and imports the majority of its oil needs. Due the high tax burden on oil (at about €0.7/litre), the sharp cut in international oil prices has only been partly reflected on local fuel prices. At a current €1.17/litre, Albania’s has one of Europe’s highest diesel prices, despite the country’s GDP per capita being among the region’s lowest.
Prospects of better reflection of the cut have been recently marred following a government decision to increase licence fees on fuel and gas stations by a staggering 50-fold compared to current rates.
Last December, the government decided the fee on the granting and renewal of licences on oil and liquid gas stations will increase to 5 million lek (€36,000) for retail oil and gas businesses operating in the municipality of Tirana and to 2 million lek (€14,500) for other municipalities. The previous rates on the five-year licences ranged from 130,000 lek (€940) for the municipality of Tirana to 100,000 lek (€724) in Durres.
Fuel imports in 2015 dropped by an annual 3.7 percent to 463,887 tonnes and were down by 20,000 tonnes compared to their peak level in 2010.
ARMO
A Tirana-based private bailiff has failed to sell several key assets by ARMO oil refiner whose minority 15 percent stake is still held by the Albanian government following its botched privatization back in 2008.
Last February, the EPSA private bailiff invited bids for the sale of 26 ARMO assets in its Fier refinery, southwestern Albania, at a starting price of 2.8 billion lek (about €20 million) on behalf of Raiffeisen Bank, the country’s biggest lender, following the refiner’s default on its loan.
The 26 assets include large areas of land, several oil tanks and technological lines.
The company’s auction came more than two years after an Azerbaijani-based company took over the majority 80 percent stake in ARMO and the company’s continued accumulation of debts to creditors and the government in unpaid taxes. ARMO workers have often staged protests over unpaid wages and job cuts.
Back in 2013, Azerbaijani-based Heaney Assets Corporation took over 80 percent of ARMO shares from Albanian businessman Rezart Taà§i for an undisclosed amount, committing to pay off the company’s huge debts.
The refiner was privatized in 2008 when a consortium led-by Taà§i’s Anika Enterprises bought an 85 percent stake in ARMO oil refiner for €128 million. The deal was reportedly financed by the Azerbaijani state bank with 75 million Euros. In 2013, just before the company switched hands, the bank sued Taà§i for failing to pay, demanding the seizure of ARMO’s assets.
In its new privatization plans, the Albanian government intends to sell its remaining 14.9 percent minority stake in ARMO for 22 million euros by 2017.
Experts have recommended the government takeover of the company, the same as it did with the failed privation of the energy distribution operator by CEZ in early 2013, but huge accumulated debts at about $600 million seem a real obstacle.
Kurum steelmaker
Earlier this month, one of the country’s biggest foreign investors, Turkey’s Kurum, filed for bankruptcy in a surprise move which could have severe consequences for the country’s economy and employment.
The huge debts the steelmaker has accumulated and a sharp decline in international base metal prices, in addition to ongoing pollution problems with Albanian authorities, seem to have led the company which employs hundreds of people to initiate bankruptcy proceedings.
Kurum International has been operating in Albania for 18 years mainly in steel production in Elbasan, but recently expanded its activity in Durres Port through a container terminal concession and purchased for small and medium-sized hydropower plants.
Kurum has borrowed €106 million from the World Bank and €20 million from the Black Sea Development Bank in the past five years in the only disclosed deals.
Last September, Kurum cut some 200 jobs in its key Elbasan steel plant as international metal prices hit a record low. Metals prices are projected to decline 10 percent in 2016, following last year’s 21 percent drop, due to weaker demand prospects in emerging market economies and new capacity, says the World Bank in its commodity markets outlook report.
Kurum is the largest employer in the city of Elbasan, central Albania, which suffers high unemployment rates and high pollution levels because of the plant’s operation.
In 2013, Turkey’s Kurum acquired four small and medium sized hydropower plants for €110 million and was awarded a 35-year concession contract to manage the container terminal in Durres Port, the country’s biggest
Bankers Petroleum, TransAtlantic takeovers
Canada-based Bankers Petroleum has signed a preliminary deal with China’s Geo-Jade Petroleum Corporation to sell its major Albania assets and a newly acquired minor oil block in Hungary for a reported C$575 million (€392 mln). The surprise announcement comes as the country’s biggest oil producer has recently been facing tough times after more than a decade of operations in Albania due to a sharp cut in international oil prices, and tax and environmental disputes with the Albanian government.
Earlier this month, U.S.-based TransAtlantic Petroleum also announced the sale of its loss-making Albanian unit to an unknown company named GBC Oil which has undertaken to pay off the company’s huge debts, raising doubts about the transaction.
In an announcement, the U.S.-based TransAtlantic Petroleum, which is also engaged in oil operations in Turkey and Bulgaria, says it has agreed to sell its Albania assets to GBC Oil Company Ltd in exchange for the future payment of a $2.3 million to a local bank and the assumption of $29.2 million of liabilities.
In late 2014, TransAtlantic acquired Canada-based Stream Oil & Gas for $28 million. Its assets include the Gorisht, Cakran and Ballsh oil fields and the Delvina gas field in southern Albania.
TransAtlantic reported losses of about $5 million for the first three quarters of 2015 in its Albania operations.
The transaction has alarmed Albanian authorities who worry that the company is trying to get off with about €13 million in debts to the government.
Mining industry
The sharp cut in international commodity prices is also affecting the country’s mining industry which is one of the top exporters and employs thousands of people nationwide, especially in northern Albania.
Producers complain they have been forced to cut production and staff as the current prices don’t even meet their extraction and transport costs to Durres Port, from where it is exported mainly to China.
The situation is more critical in the Bulqiza chromium mine and Fushe-Arrez cooper plant where hundreds of jobs have been cut to handle the sharp decline in international prices. Earlier this year, the Albanian government said it was considering incentives to the country’s key mining industry after representatives of the mining industry appealed for a review of reference prices on chrome and copper, the two key minerals Albania produces and exports.
Last September, a Turkish-Chinese consortium operating a copper plant in the northern Albanian district of Puka announced the suspension of its activity for one year due to a sharp decline in international prices, leaving hundreds of workers jobless.
Mining has attracted a series of foreign investments to Albania including Canadian, Austrian, Turkish, and most recently Chinese ones.
