What is Russia going to use to fertilize China's fields?

27.12.2010 — Analysis

Silvinit OJSC and Uralkali OJSC, the largest suppliers of fertilizers, have announced their merger. The Russian government has not only approved establishment of a monopoly, but is also thinking about accession of nitrogenous and phosphate fertilizer producers to potassium producers. The government expects that the super-company will dominate the world market. However, experts anticipate that the Russian expansion will encounter a fierce counteraction from China that is not interested in high prices for fertilizers. As the "RusBusinessNews" has found it out, Celestial China will make every effort not to allow any decrease in mineral production and to cut down prices, thus, creating the risk of putting the non-transparent and modernization-averse Russian business into a difficult situation.

Silvinit and Uralkali companies (Perm Region) develop the world's largest Verkhnekamskoye field and control about 45% of the world's production of potassium chloride. The products are sold through distributors - the Belorussian Potassium Company and International Potassium Company. The BRIC countries account for the major part of the exports: according to Kreon, an analytical and consulting company, in before-the-crisis 2008 the share of Silvinit and Uralkali (together with Belaruskali OJSC) amounted to 60%, 36% and 30% in the Chinese, Indian and Brazilian imports respectively.

The potassium industry is highly monopolized (80% of the assured resources are in Canada, Russia and Belarus) and outstandingly profitable: in 2009, after having halved the mineral production (to 25 million tons), the leading producers of potassium chloride managed to make a 40% profit. The experts think that the actual margin of the companies was likely to be higher: resource-related handle their reports skillfully, relying on uniqueness of natural characteristics. The companies' actual expenses are obscure even to government authorities that regulate prices for their products.

It is extremely difficult to shake the sectoral monopoly: according to the Kreon Analytical and Consulting Company, the infrastructure development of a two million ton potassium mine takes seven years and requires 2 billion US dollars in investment. In 2008, Akron OJSC and EuroChem OJSC made an attempt to compete with the Perm duumvirate, having won the tender for development of prospective deposits at the Verkhnekamskoye field. Through implementation of the intended projects, the new players would be able to gain up to 15% of the world market for potassium chloride. However, the crisis burst out and put off the plans indefinitely.

Taking into account the present situation, the experts offered to increase the number of market players through joint venture agreements: for example, between Akron and Uralkali. On the one hand, it would restore the links between resource companies and mineral fertilizer producers, which were destroyed during the privatization, and, on the other hand, it would facilitate setting up of more efficient companies that would be able to grow during the post-crisis period. However, the Russian government opted for another way.

Back in 2009, the government represented by the Prime Minister Vladimir Putin informed that Akron OJSC was going to be used as a platform to set up a state-owned mineral resource corporation that would be granted preferential loans and independence from raw material suppliers. In December 2010, the merger between Silvinit and Uralkali was announced. The shares of these companies are still owned by private persons, but it, obviously, is not forever. Previously the managers of FosAgro OJSC supported the merger with Silvinit with the subsequent restructuring under the government's wing. Alongside with that, Sergei Chemezov, Director of the Rostekhnologii government corporation, offered the government to combine Silvinit into one company with SIBUR Holding OJSC and Togliattiazot OJSC.

Anastasiya Sosnova, an analyst of the Investcafe Company, thinks that all these mergers have been initiated by the government, which encourages expansion and a dominating position of Russian companies on the world fertilizer market. Producers still have a very vague idea about the way the expansion is going to take place: Philipp Gritskov, the press-secretary of the Belorussian Potassium Company CJSC states that the marketing policy of the merger company can be discussed only after the structure has been built. However, the representative of the Belorussian Potassium Company has no doubts that the company will continue to be the key partner for India and China, with which long-term agreements will be signed in the first quarter of 2011.

The management of the Belorussian Potassium Company looks forward with optimism, as the demand exceeds the supply. However, the deficit of fertilizers has been created artificially: the major companies agree upon the production output, trying to come back to the price level of 2007. The process is in progress, though facing a lot of problems. In November 2010, the Belorussian Potassium Company informed that in the first quarter of 2011, the standard potassium chloride will be supplied to South-East Asia at the price of 430 US dollars for a ton. During the previous spring, it could be bought for 410 dollars on the market. Oleg Petrov, the First Deputy Director of the Belorussian Potassium Company, asserts that the contract prices were quite different: in 2009, India paid 460 dollars for potassium chloride, whereas it paid only 370 US dollars in 2010. Obviously, fertilizer consumers are not happy about the decreased potassium supply, and they will make every effort to break the monopoly of suppliers.

At present, a number of large companies have shown their willingness to take part in the potassium business. For example, BHP Billiton made an offer to PotashCorp, the world's leading producer of potassium fertilizers. The latter, in its turn, offered Chinese Sinochem and Brazilian Vale to buy shares in its capital. The Belorussian government has embarked on presale reorganization of Belaruskali: the company was restructured into an open joint-stock company whose securities were offered to Chinese entrepreneurs for purchase.

Anastasiya Sosnova is sure that none of these transactions is going to take effect, because no one wants to sell the highly profitable business - especially to the Chinese and Brazilians who are large consumers and are not interested in high prices on the world market. It explains the knowingly losing proposals about purchases and sales: suffice to say that the Belorussian Real Estate Institute appraised Belaruskali at 30 billion US dollars.

The future of the leading potassium companies, however, is not as cloudless as they perceive it. The Imperia Information and Analytical Portal forecasts that in the medium term the world market for potassium fertilizers will be demonopolized, as despite the high entry level typical of this business, quite substantial funds are being invested in new facilities located in Argentina, Brazil, Thailand, China, India, Congo and other countries. The experts are confident that China is interested in adding its own new facilities more than any other countries. Celestial China does not have any other alternative: it cannot strengthen the yuan; therefore, it will make every endeavor to decrease prices for mineral raw materials.

The experts think that China's potential should not be underestimated. Its economy is rapidly developing; the yuan is visibly turning into a convertible currency. The recent trading session for the Chinese currency has shown that the yuan is in high demand in the world. Consequently, the experts assume that in the near future it will be the yuan rather than the dollar that will serve as the reserve world currency. This will be another factor that will make business take into account the economic policy of Celestial China. The Russian mineral monsters that lack transparency and flexibility are unlikely to hold their market positions for a long time by ignoring the apparent trends and inflating prices for their products.

Vladimir Terletsky