Ben Aris in St Petersburg
July 5, 2012
Looking to booming global food prices, Russia's second-largest fertiliser company PhosAgro is keen to grow. However, it remains bogged down in a battle with the Kremlin over the privatisation of a 20% stake in sister company Apatit, a situation that casts doubt on the state's promises to push through state asset sales.
PhosAgro was born out of the break up and privatisation of the state's chemicals holdings in 1996, which also threw out the assets that now make up Apatit. “The company was formed with the idea to increase production through modernisation and to build up the facilities," CEO Maxim Volkov told bne at the St Petersburg Economic Forum in June, pointing out that production has risen from 3m tonnes of phosphate to 5m in the last decade.
Whilst modernisation has increased production dramatically, more importantly, it has made the company flexible. There are several types of phosphate fertiliser, but PhosAgro is the only facility in Russia that can make both main ones: NPK and DAP, which offers it a crucial advantage on global markets.
This flexibility is important as typically customers are country-sized and abuse their market power to try to push down prices. For example, earlier this year China played a game of “fertiliser chicken,” delaying its orders from Russian producers. However, the game is only ever temporary; the buyer has to purchase fertiliser eventually, and the seller has only a handful of potential customers - the ultimate price is the result of who flinches first.
PhosAgro's dual production offers it extended wriggle room, claims Volkov. “NPK is the main product in China, but in India DAP is big. If the market is trying to push the price in one or other then we can change to the alternative,” he says.
Despite the games, fertilisers is a booming business thanks to growing demand for food. Last November, Russia laid claim to the birth of the world's seven billionth person, although the title eventually went to Danica May Camacho, who was born in Manila. The point remains that the global population is expanding relentlessly putting continued pressure on agricultural prices.
“This growth is adding to the world demand for food. Land is limited and farmers need to increase their crop yield. We sell a quarter of our fertiliser in Russia where the agricultural market is growing twice as fast as the rest of the world,” says Volkov.
Russian authorities are currently regulating fertiliser prices, as well as subsidizing agriculture companies' expenditures in a programme that cost the state RUB5bn ($152m) in 2011. That's about to change however, with the Federal Anti-Monopoly Service (FAS) announcing in May that it plans to liberalise the phosphate rock market (the basic ingredient in many fertilisers), which will likely lead to an increase in the prices that PhosAgro’s Russian customers pay.
“Until now, we believe Apatit has effectively subsidized certain domestic independent producers, as we were required to sell apatite concentrate at below-market rates,” PhosAgro said in a statement at the time of the FAS announcement. “The rules published by FAS should help to ensure the fair allocation of apatite concentrate volumes for independent phosphate fertiliser producers in Russia, while also establishing a transparent and market-based pricing mechanism.”
Looking to grow
Still, cash rich PhosAgro is still interested in expanding and has its eye on the 20% stake in sister company Apatit that the government is due to auction off. PhosAgro already owns 75% of the company and is in effective control, but the privatisation has proven to be difficult. Volkov says the government is asking too much for the shares, and that although PhosAgro is the natural buyer but it won’t bid in the auction.
“We are interested but at market valuation,” he insists. “If the goal is to stimulate the Russian stock market, modernise the economy and bring in foreign investment to the economy then it should go ahead. But the rules of the tender that is being run by BNP Paribas are disturbing and we don't understand what the goal of the privatisation is supposed to be.
There is a chance that Acron might buy the stake, but PhosAgro's rival is also questioning the details of the sale. “Acron has filed a complaint with the Russian Property Fund saying the tender rules are not based in law, which is another reason we are not participating,” says Volkov. “It is also not clear what will happen to the golden share in the company [which gives the government the right to veto board decisions]. They said they were gong to cancel it, but there is no decision and that affects the valuation substantially."
These problems are particularly poignant given that President Vladimir Putin told delegates in St Petersburg that he is committed to seeing through the privatisation process that Medvedev launched at the same venue a year earlier through. "Honest, fair privatisation, breaking the link between property and the authorities, is a very powerful and real anti-corruption measure,” Putin told the assembled VIPs. “Privatisation is necessary for us to build a modern economy, to reduce the risks associated with poor management, and to ensure equitable conditions of competition.”
Volkov claims that if the tender of the Apatit stake is not conducted transparently, with market-based valuations, it could lead to a corporate quagmire similar to that at Norilsk Nickel. The metals & mining giant has bogged down by infighting between minority shareholders.