Russia Witnesses More Victims of Gas Strategy

13.05.2010 — Analysis

Open joint-stock company "Uralchem" intended to receive from 500 to 640 million dollars from its placing on LSE global depositary receipts equivalent to 40% of the authorized capital of its parent Uralchem Holding P.L.C. However, the price offered by investors did not suit the issuer: the holding executives stated that "the price of GDR issue does not reflect the company's actual value" and called the IPO off.

Georgy Ivanin, an analyst of Alfa-Bank OJSC, believes that the IPO results were determined by three factors. First, the closing of the book coincided with stock market deterioration caused by the Greek crisis and fraud charge against senior-level management of Goldman Sachs Bank. Second, during the flotation several companies lodged claims to Uralchem. One week before the bid closing, Apatit JSC (a member of the FisAgro Group) filed a lawsuit to arbitration courts, claiming improper performance of the obligations under the agreement for apatite concentrate supplies. Silvinit OJSC also filed lawsuits against companies - members of Uralchem Holding. At the same time, Shades of Cyprus, a minority shareholder of Voskresenskiye Minudobreniya (controlled by Uralchem) made a public statement about contestation of the additional issue of the company, thus, contributing to the impact on the Uralchem receipts floatation on the London Stock Exchange.

Experts also paid attention to the statement made by the Sibur Group three days before the bid closing in relation to selling to Uralchem their share in the authorized capital of Perm Mineralnye Udobreniya JSC. The holding top management informed Uralchem that within the medium term the Group has no intention either increase its share in the company authorized capital, or decrease it: "Being a shareholder of Mineralnye Udobreniya JSC interested in successful development of production, we believe that under present-day conditions the company's profit should be channeled entirely to its growth and modernization". 

The Sibur press service failed to explain to RusBusinessNews why the statement was made just before the bids were closed. Alyona Silina, a press secretary of Sibur-Minudobreniya JSC, said that it was one month after the company executives had learned about the Uralchem's intention to buy shares of Perm Mineralnye Udobreniya that they decided to make some formal statement. The press secretary asserts that the company management sought no other aim.

The Uralchem representatives also deny that Sibur's statement has any connection with the IPO: there is no conflict regarding shares of Mineralnye Udobreniya. To be on the safe side, the Uralchem owners obtained the permit given by the Federal Antimonopoly Service for acquisition of the Perm manufacturer of mineral fertilizers: what if Sibur decides to sell or to buy shares of this company. However, no explicit statements have been made by Uralchem concerning its intention to sell stock of Mineralnye Udobreniya JSC, since closing the deal requires consent of the parties, whereas Sibur stated squarely that it was not going to buy anything. Therefore, according to the Uralchem source, no transactions with Perm shares should be expected in the near future. Experts think that, nevertheless, the status quo had an impact on the placement of depositary receipts on the LSE: the acquisition of controlling interest in Mineralnye Udobreniya JSC just before the IPO could be met by investors with approval - whereas the recommendation of Sibur to channel profit to upgrading of the production, rather than to purchasing of shares due to "present-day conditions", could aggravate adverse sentiments.

Meanwhile, Georgy Ivanin thinks that no matter what sentiments prevailed concerning Uralchem, they were not determining for the IPO outcome. Today, all the manufacturers of mineral fertilizers operate at maximum performance; thus, the competition among does not escalate into a violent confrontation. The third factor - the high price for GDRs - had much more serious effect on the placement results. In the context of the bear market, investors require increased risk premiums, and Uralchem, having 1.4 billion dollars in debt, did not consider such payments possible.

While operating at full capacity, manufacturers of mineral fertilizers still have hard time to clear due payments. Companies have suspended their investment projects that were proclaimed only two years ago. According to Igor Gladnev, Deputy General Director of Media Relations at Mineralnye Udobreniya JSC, all the efforts are focused on repair and scheduled replacement of the overage equipment. No fundamental re-equipment is anticipated in the short term. The company has no plans for new products, as the quality of the traditionally produced urea will be able to support its market presence. The officer states that the construction of melamine production facilities as well as upgrading of ammonia and urea equipment had to be abandoned due to shortage of investment.

Experts, however, point out that the melamine production project was frozen soon after Sibur bought a majority stake in the factory from its top management. The reasons for suspension are still unclear: melamine that serves as the base for urea is the product with a higher value added and, consequently, more expensive. The market was immediately lost: the EuroChem company launched production facilities for melamine.

Olga Kudinova, candidate of economic sciences, believes that Sibur, being a subsidiary of Gazprom, has no economic interest in development of chemistry of deep processing. The strategy announced by the Russian government and aimed to increase the gross domestic product through expansion of the presence on the world energy markets resulted in the eliminated export duty on liquefied hydrocarbon gases and restricted access of Gazprom unrelated structures to raw materials. Consequently, the business community was no longer interested in investment in sophisticated process technology, and the gas monopolist gained an opportunity to make sizeable profits on cheaper exports. The increased investment risks and higher added values prompted chemical holdings to squeeze the maximum profit out of lower value-added production operations. Such economy has no room for investment projects.

The Uralchem Company is just one example out of numerous other victims of the government strategy known as an "energy power" focus.

Vladimir Terletsky