By John Helmer in Moscow
In the Russian fertilizer business, the days are gone when you could make enormous profits mixing fertilizer ingredients into sacks; loading the sacks aboard ship; and earning your profit margin between the rising export price of the sack, and the government-fixed price of its constituents in the home market.
Today, manufacturers of these mixtures, known in the fert trade as complex fertilizers or NPK, must restructure, or die. That’s in part because the export prices of nitrogenous fertilizers, phosphates and potash (NPK, with K the chemical symbol for potassium) have collapsed worldwide. In part, it’s because the Russian government has imposed export taxes to reduce the spread between external and internal prices, and cut the profit. Finally, it’s because Russian gas and other energy prices have been deregulated, and must rise towards the international level.
It is also commonsense for state administrators to reason that there is greater profit for the state, and for themselves, in regulating domestic fert supply prices to the farm sector within one or two vertically integrated fert companies, instead of the existing collection of competing gas refiners, phosphate and potash miners, and intermediary traders and distributors.
In circuses these days, the crowds pay to see the lady tame the lion. It’s been two thousand years since the Romans paid to see the lion eat the lady. Naturally, vertical integration of nitrogen-refined ammonia, phosphate and potash production into a single corporate structure makes more pleasant sense if you are on top of the incorporation, rather than on the bottom. The reason Dmitry Rybolovlev, controlling shareholder of potash miner Uralkali (URKA:LI), has been feeling so uncomfortanble for months is that he suspects the Kremlin is preparing to subordinate his company, and buy his shareholding out, in favour of the NPK producer, Acron (AKRN:LI).
Acron’s new mining unit, Salt of the Earth (real name, no joke), has been created to consolidate phosphate and potash mining licences which Acron has acquired since 2006, and which, for the time, it lacks the cash to develop. Whether it also absorbs Rybolovlev’s chunk of Uralkali remains to be seen.
This is a tale that is already well-known in the mining markets, because Uralkali and Acron are both London listed and traded shares. But the unlisted, privately owned Uralchem and Phosagro are engaged in a parallel struggle of their own for supremacy in Russia’s phosphate mining sector. Uralchem, which postponed a London share placement after the global markets collapsed in the September quarter, appears to be winning over PhosAgro, at least in the Russian industry media, though PhosAgro may have the heavier financial punching power. Whoever survives is a candidate for the London bond and IPO markets.
At stake in this contest is the lion’s share of profit in one of the most globally concentrated mining industries on earth. US Geological Survey (USGS) data indicate that in 2008, Russian phosphate output of 11 million tonnes ranked fourth in the world producers’ table; China was first with 50 million tonnes; the US second with 30.9 million tonnes; and Morocco and Saharoui third with 28 million tonnes. The world market amounted, altogether, to 167 million tonnes. In terms of phosphate reserves, the USGS ranks Russia 7th with 1 billion tonnes. Morocco, China, US, South Africa, Jordan, and Australia hold larger tonnages. As mineral cartels go, phosphate mining is what the experts regard as highly conducive to cartel price arrangements.
In the Russian market, here’s what has happened so far. Fertilizer assets have been part of the booty that was divided up after the collapse of the two early Russian feedstock empires — the Gazprom empire controlled by Rem Vyakhirev, and the oil empire controlled by Mikhail Khodorkovsky.
Dmitry Mazepin, a government privatization official, emerged to take control of Sibur in 2003, when it was being purged of Vyakhirev allies. But he then clashed with the new Gazprom leadership, and he was removed from Sibur in 2004. He went on to consolidate a collection of fertilizer assets as free of Gazprom control as he could manage. At the end of 2007, he called this Uralchem, and was planning to list its shares in London six months later. The equity and commodity price collapse beat him to it.
Before that could happen, in June 2008, Uralchem announced that it had bought a 71.72% stake in Voskresenskiye Minudobreniya (Voskresensk Mineral Fertilizers), the fourth-ranked phosphate producer in Russia, and a dominant supplier of phosphoric acid to the Russian market. The sellers were a number of foreign and Russian owners, and the deal cost Uralchem $358.6 million; that price valued Voskresensk at $500 million. A report by Renaissance Capital estimated that, on the basis of mid-2008 prices, Voskresensk’s output could generate up to $650 million in annual sale revenues. Production, according to Uralchem’s release at the time of the takeover, was 750,000 tonnes of mono-ammonium phosphate (MAP) and di-ammonium phosphate (DAP); 200,000 tonnes of ammonia; 320,000 tonnes of phosphoric acid; and 1.1 million tonnes of sulphuric acid.
Voskresenk doesn’t dig the phosphate rock for itself. Instead, it buys from Apatit, which mines it in the Murmansk region, more than a thousand kilometres to the north. Apatit, with the largest phosphate deposits in current production in Russia, has enjoyed virtual monopoly status in the market — and a controversial history. It was first privatized and taken over by Mikhail Khodorkovsky and Platon Lebedev, the Yukos oil company founders. When they were convicted asnd imprisoned by a Moscow court in 2004, a successor holding, Phosagro, managed to hang on to the fertilizer assets, despite a range of prosecution threats directed at the Senator from Murmansk, andrei Guriev. The federal government then sought to recover a 20% stake in Apatit.
In parallel, two of the downstream buyers of Apatit’s phosphates, Acron and Uralchem, complained that they were being disadvantaged by monopoly trading practices of Apatit, which was accused of supplying its own downstream NPK plant, Balakovskiye Mineral Fertilizers, at low fixed prices on long-term contracts; rigging high domestic prices for Acron and Uralchem, and exporting to keep the profits offshore. A press release by Uralchem last September claimed: “Apatit has been exporting most of its output at prices significantly below domestic rates. In essence, the company [Apatit, Phosagro] has been subsidizing European mineral fertilizer producers to the detriment of Russian producers and the Russian state budget.”
There was tit for tat. Buyers of phosphoric acid from Voskresensk complained to the Federal Antimonopoly Service (FAS) that the plant, and then its controlling shareholder Uralchem, were abusing their dominant market position in refusing to sign supply contracts. Uralchem defended itself, saying the problem started with Apatit’s manipulation of the supply and price of the feedstock. Uralchem applied to the FAS to assess the sharp rise in apatite prices, and order Phosagro to back down. A press release from Voskresenk, issued in September, requested the FAS to “instruct Apatit to cease its violations of the competition law”… and to cut the offer price by about two-thirds, or roughly $270 per tonne.
While Uralchem skirmished with Phosagro and Apatit, Uralchem was also planning to add its own phosphate mine to the integrated production chain, eliminating thereby the dependence on a hostile source. This is the Sordinsky project in the vast Vyatsko-Kamsk phosphate deposit in the Kirov region, 1,400 kilometres to the southeast of Voskresensk. The mining licence for Sordinsky was acquired in 2007. Last month, Uralchem issued a press release announcing it is ready to start constructing the mine this year. The announcement said the deposait holds 850 million tonnes of reserves; will mine 6 million tonnes of ore per annum; and produce 1.8 million tonnes of phopsphoric concentrate.
Acording to the mine licence terms and conditions, the start-up of the mine has been planned for 2011, at a capital cost first estimated at $700 million. On current indications, Uralchem has invested about $29 million already, and is seeking state budget funding for $300 million. An Uralchem source confirmed the application, but told Minesite the government has yet to respond.
Until the Sordinsky mine comes onstream, Uralchem’s fight with Phosagro is bound to become more and more ferocious. Last September, Uralchem lobbied for a government ban on apatite concentrate trading through the two Russian commodity exchanges in the belief this was forcing the price too high. It also issued a call to replace the head of the Russian Fertilizer Produces Association, Dmitry Steznev, on the ground that he favours the monopoly mineral suppliers, Apatit and the two potash miners, Uralkali and Silvinit. Uralchem went to court to force Phosagro to lower Apatit’s phosphate supply price, and guarantee delivery volumes.
Phosagro applied to the Kremlin for an order to include Apatit on the national list of natural monopolies, whose prices are regulated by federal regulations and by a government tariff fixing agency. The government turned Phosagro down , and the courts have decided in Uralchem’s favour. The last reported ruling, at the end of last October, nullified a year-old contract between Apatit and Vosklresensk, and ordered the two companies to sign a new 3-year agreement, fixing a low delivery price of Rb2,232 (then $84, now $66) per tonne, and indexing it over the contract period for inflation only. The new price was 78% below Apatit’s offer price the month before. The court also ordered Apatit to commit to deliveries of 835,000 tonnes per annum — roughly one-tenth of the mine’s annual capacity.
Phosagro has told Minesite it is appealing this ruling, and has won an order from the higher court to stay execution. A statement from the company says the court-ordered contract terms “contradict the interests of the state, which is a shareholder of the enterprise…Besides, the specified judgement contains crude infringements of thew relevant standards and procedural rights.” The company said that while the appeal is pending, it is prepared to deliver 76,000 tonnes of apatite concentrate to Voskresensk at Rb3,050 per tonne. A Phosagro spokesman was critical of media reports in Uralchem’s favour as a “PR campaign planned to put pressure on the court and public authorities.”
Phosagro has also gone to court to block and reverse Uralchem’s takeover of Voskresensk. Failing that outcome, a Cyprus-registered company linked to Phosagro, called Shades of Cyprus Ltd. (real name, no joke), has launched a suit in Moscow against Sberbank, the state savings bank, obliging it to implement a guarantee it had earlier issued for the high-priced minority share buyback, which — Phosagro alleges — Uralchem had legally undertaken to complete. The claim values a 28% shareholding in Voskresensk at Rb3.09 billion (about $90 million).
Uralchem charges that Phosagro failed to apply in time, and the buyback price has expired. Phosagro claims that Uralchem illegally manipulated the record of acceptances, and now hasn’t the cash to make good on its obligations.
Uralchem insists in remarks to Minesite that neither charge is true. It has also announced the restructuring of its loan repayments for this year, cutting the amount due from $333 million to $130 million. A report by Uralsib Bank analyst Anna Kupriyanova acknowledges that “the company’s financial liquidity was significantly threatened in 4Q08 and early 2009.” But now, she adds:”We see no difficulties for the company servicing this portion of debt payable, as we estimate the company will generate $422 mln in EBITDA in 2009.”
International analysts say that though still unlisted, Uralchem is worth tracking, because its political fortunes point the way forward, and its financial results set a comparative benchmark for its listed industry peer, Acron.
In revenue and earnings terms, Phosagro appears to be significantly larger than Uralchem. In a briefing for Moscow analysts this week, Phosagro reported that in 2008 it generated revenues of $3.8 billion, and that its current debt stands at about $200 million. A report of the briefing by Troika Dialog, a Moscow investment bank, claims that PhosAgro is operating “at close to 100% capacity, as 50% of its sales go to India under the annual contract until March 2010 concluded early this year. The funding situation at PhosAgro is extremely robust…we would estimate that EBITDA should have been at least $1.8-2.0 bln for the year.”
The latest financial report from Uralchem, released in February, was for the nine-month period of last year to September 30. The official but unaudited revenue total was $1.6 billion, and EBITDA $643 million.
Leave a Reply