By Maria Golovnina
ALMATY, March 17 (Reuters) - A sharp fall in Kazakhstan's industrial output has put Central Asia's biggest economy on course for its worst slowdown in a decade, raising the prospect of social unrest in its crucial mining sector.
Data for the first two months of the year showed the worst year-on-year contraction in output was in the metals sector, the lifeblood of Kazakhstan's export-oriented economy, which has suffered as a result of the deepening global financial crisis.
In Kazakhstan a fall in metals output is particularly worrying as it affects hundreds of thousands of miners in many remote industrial towns that often rely on a single Soviet-era factory for survival.
"People are getting angry," Eduard Poletayev, an independent political analyst, said. "A fall in metals output means that entire cities out there could face social collapse."
Miners around the world are cutting production and jobs as the economic slowdown erodes demand for metals. Copper and aluminium have more than halved in value in the last 12 months.
Kazakhstan, an ex-Soviet republic wedged between Russia and China, is a significant metals producer and home to industry majors Kazakhmys, the world's No.10 copper producer, and ENRC, one of the world's top ferrochrome producers.
Metals account for 20 percent of jobs in Kazakhstan's industrial sector, and more than a quarter of total exports.
Expectations that the economy could worsen pose a test for President Nursultan Nazarbayev's two-decade rule after seven years of double-digit economic growth and rising incomes. Mining, along with oil and gas, was a significant contributor to people's new-found wealth.
"The increasing pressure on metals and mining companies has serious social consequences, as these firms are also the largest employers after the public sector," Kaan Nazli, an analyst with Medley Global Advisors, said.
"The Kazakh population is quiet when it comes to political issues but very vocal when economic issues take them to the streets."
DISCONTENT
Discontent is already rising in regions such as Karaganda, home to the coal mines of ArcelorMittal and Kazakhmys, as well as other mining towns like Pavlodar and copper centre Zhezkazgan, locals say.
"I've been to many mining towns around here. People have enough money and there is enough food to keep them going for maybe another few months," Pavel Shumkin, head of a mining trade union in Karaganda, said by telephone from Karaganda.
"But if the crisis continues, protests are not just possible but inevitable. The government will certainly try to prevent it but its efforts are awkward. It does not know what's going on."
ArcelorMittal's local unit did not respond to a written request for comment.
In the 1990s, as in other mining regions of the former Soviet Union, wage disputes and falling living standards set off riots in Kazakh regions like coal-mining centre Karaganda. Those were eventually settled through talks with the government.
As part of its efforts to deal with the problem this time, the government promised this year to offer tax cuts to mining companies in exchange for pledges not to sack workers.
But the Labour Ministry says up to 350,000 Kazakhs may lose their jobs this year, a large proportion in the mining sector. A breakdown of jobs figures was not available.
"At the moment our priority is to provide people with jobs," Labour Minister Gulshara Abdykalikova told Reuters, adding the government would spend up to $1 billion to create jobs.
Oil revenues, which accounts for 60 percent of Kazakhstan's exports, are still growing, providing a cushion for the economy. But the overall outlook remains bleak.
Official data released at the end of last week showed overall industrial output fell 3.2 percent in January and February, compared with the previous year.
Crude steel output fell 19 percent year-on-year and iron ore 24 percent in the first two months of 2009, official data shows. Copper production, dominated by Kazakhmys, fell 3.1 percent and ferro-alloy output fell as much as 42 percent in the period.
Some units of mining and metals group ENRC have more than halved output due to falling demand, ENRC shareholder Alexander Mashkevich said last month. The government has said it may partially nationalise lead producer Yuzhpolimetall, which halted output last year and sent workers on unpaid leave.
Although an 18 percent devaluation of the Kazakh tenge currency last month has helped exporters, producers continue to bear the brunt of falling global demand.
Some analysts, however, said mass layoffs and signs of discontent could be avoided as long as the government continued to coordinate efforts with producers.
"Politically, this is quite a sensitive subject," Rob Edwards, managing director of metals and mining research at Renaissance Capital, said. "You are not going to see thousands of job cuts you may be seeing at some of the Russian steel plants."
The rich are suffering too.
Kazakhmys Chairman Vladimir Kim, long ranked Kazakhstan's richest man by Forbes magazine, disappeared from the list this year as some of his fortune evaporated. Four other Kazakh billionaires were also dropped from the list. (Editing by Sue Thomas)