INTERVIEW: We're always ready to compromise - PhosAgro CEO
MOSCOW. Feb 6 (Interfax) - PhosAgro, Russia's largest producer of phosphate fertilizers, last summer became the first Russian chemical company with a focus on phosphate fertilizers to carry out an initial public offering. PhosAgro CEO Maxim Volkov spoke in an interview with Interfax about how the company is handling its new status, new projects and plans for the future.
You have headed PhosAgro for a long time. During your tenure PhosAgro has transformed itself from one of the most closed companies into a public one. What has changed since then?
I can say that it has become more difficult to work, but more interesting. We need to often meet with the investment community, explain our plans and actions. Now we assess every decision from the point of view of its possible impact on our share price. Consequently, we need to be more careful in our phrasing, so as to avoid unfounded market hopes. But overall this doesn't change anything, because the company should always, above all, be careful in its actions and fulfil its promises.
With what kind of results did PhosAgro close 2011?
We plan to disclose production results in the first half of February, and financial results at the end of Aril. Until then, I cannot, unfortunately, give exact figures. But speaking in general, the year was not bad. By volume of production and sales, the company exceeded the results of 2010. We significantly increased production of NPK [nitrogen, phosphorous and potassium]. For the year, the company expects to become one of the largest producers of this type of fertilizer in Russia.
Our specific advantage is the ability to change our production program, and produce various types of fertilizer on the same production lines. This helps us a great deal at certain times. For example, this helped us at the beginning of this year, when we reduced production of diammonium phosphate (DAP) and monoammonium phosphate (MAP) by more than 18%, but the workload of our facilities did not suffer, because we simply switched to production of other types of fertilizer. We are now thinking about switching all of our production facilities to such a work regime.
So NPK is currently selling better than DAP and MAP?
Yes, because the market for these fertilizers is far broader. While the DAP market is primarily influenced by the position of Indian buyers, on the NPK market the situation is the reverse - India's position has no impact whatsoever.
In what countries do you sell NPK?
In the countries of Western Europe, Central and Latin America, Asia and Africa - in other words, virtually throughout the whole world.
Prices for phosphate fertilizers fell fairly hard at the end of last year. What does the situation look like now?
We believe that the last drop in prices for DAP and MAP has more of a speculative nature, rather than any fundamental reasons. The hysteria about the looming second wave of the crisis led many buyers to take a wait-and-see position and put off decisions to buy fertilizer as long as possible. This led to a temporary oversupply on the market. Nonetheless, producers reacted fairly quickly to this situation. The leading global producers - Morocco's OCP, North America's Mosaic - reduced production, and we also announced a reduction of phosphate fertilizer output. Consequently, the speculative factor has now largely been eliminated, and prices have stabilized at a level of about $530-$540, FOB Baltic.
What are your forecasts for phosphate fertilizer prices throughout 2012?
It's still early to tell. The main element of uncertainty is India, the biggest consumer of DAP. Indian fertilizer producers are now holding negotiations with the Moroccans concerning purchases of phosphoric acid. Phosphoric acid is used for production of diammonium phosphate and, consequently, its price determines the production cost of this type of fertilizer in India.
In addition, the level of new government subsidies for fertilizer purchases in India has not been determined yet. The issue of the subsidies, we expect, should become clear in March-April.
In general, we don't see fundamental reasons for a decline in demand for fertilizer and we don't expect serious shocks on the world market. World prices for agricultural products are currently at fairly high levels - they rose by 5% in the last ten days of January.
In addition, the Chinese authorities in 2012 imposed tough restrictions on exports of virtually all phosphate fertilizers, which could also have a positive impact on world trade and prices. For exporters, the significant decrease in freight rates that has taken place is also good.
In your view, we are not headed into a new crisis?
No, the situation right now is not as sad as in 2008. Then there was no demand for fertilizer at all, now there is. In January we are operating with a 100% workload, in February and March we also don't expect any problems. So the current situation on the market can't even be compared in terms of stress to the fourth quarter of 2008.
At the end of the year the company announced a reduction in production. Still earlier you conceded to the requests of Indian consumers and lowered DAP prices for them. What tactics do you intend to pursue in future?
We always try to find a solution that should satisfy all parties. Our last reduction of prices for India was not simply a reduction of prices, but more the purchase of an option that would allow us to sell additional volume of product at a fixed price. But when we saw that our Indian colleagues were trying to further knock down prices, we made the decision to adjust our production program, since we believe the price proposed by India is inadequate.
Is there a chance that you will have to further adjust your production program?
Right now, prices are stabilizing, the situation is recovering. Therefore, we believe that this is unlikely.
Have you thought about the benefits of creating a joint trader with a major producer of phosphate fertilizer, along the lines of the Belarusian Potash Company (BPC) on the potash market?
Periodically, these issues are raised and discussed. But here it is necessary to understand the restrictions imposed by antitrust legislation in each specific jurisdiction. We are a law abiding company and understand that some things you can do and some you can't.
PhosAgro's board of directors in December approved a long-term development strategy. What will the company be focusing on in the next few years?
We will continue to invest in the flexibility of our production lines, increase the energy efficiency of production, the comprehensive use of apatite-nepheline ore to produce products with high added value. We also plan to develop technology to recover rare-earth metals from apatite concentrate and implement it at the company's enterprises, increase production of aluminum fluoride. We are also working on the expansion of our product line, particularly on increasing the number of brands of NPK fertilizer.
How is the consolidation of Metakhim going?
We hope to consolidate Metakhim by the end of the year. More precisely, those production facilities that are core businesses for the company. This refers to facilities that process apatite concentrate into phosphoric acid, production of sulphuric acid, fertilizers and sodium tripholyphosphate.
Has a development program for this plant been approved already?
We're working on this now. We're considering the possibility of setting up production at the plant of NPK fertilizer, pure phosphoric acid. We're also thinking about production of phosphate-potassium fertilizer. This is a new segment for us that opens new markets. For example, one of the key crops in Latin America - soybean, which above all needs phosphorous and potassium.
Production of sodium tripholyphosphate will probably stop in the medium-term, as more and more countries, including Russia, are stopping the use of or intend to stop using this product in detergents.
I think that by the end of the first quarter we will complete drawing up the development program for the plant.
When will the joint venture with BaselCement-Pikalevo be formed?
We are making every effort on our part to reach an agreement as soon as possible. But not everything depends on us. We are now at a very advanced stage of negotiations, we have literally a few parameters left on which we have been unable to find a form of cooperation that is acceptable to both parties. We have prolonged the contract for supplies of nepheline for the next six months, and I hope that in this period we manage to resolve all outstanding issues.
What is the scale of PhosAgro's investment program for this year? In what projects will most of the funds be invested?
Investment in fixed assets in 2012 is planned at the level of $400 million. These are funds for modernization and development of existing production facilities, ensuring industrial safety, improving the reliability of equipment and the environment.
This figure could be adjusted. If an agreement is reached with Gazprom , the company is prepared to begin the implementation of a project to build a new ammonia line in Cherepovets in 2012 already.
What stage is this project at now?
We've asked Gazprom to allocate additional amounts of gas starting in 2015. If Gazprom confirms, we'll build a new ammonia line in Cherepovets, which will enable us to subsequently expand capacity for production of DAP and other fertilizers. We believe that for a producer it is far more lucrative to be at the level of vertical integration that we are at now - we have our own phosphate raw material, our own ammonia. However, after the launch of the new carbamide facility in Cherepovets this year we won't have any of our own commercial ammonia left to expand production of DAP, so we will need new ammonia volumes.
The new line could become the most efficient in Russia. Its daily productivity could amount to about 2,200 tonnes of ammonia per day. There are no lines with such productivity in Russia at the moment.
There was discussion earlier of building a major gas chemical complex in Cherepovets. It was thought that Sibur might take part in the project. Does the new configuration mean that you will implement the project without the petrochemicals group?
Initially, we said that we were prepared to build a gas separation line at our facilities - that is, separate liquid fractions, so-called C2+ from gas. But in any case, stripped gas needs to be used somehow - either put into the pipeline or processed into ammonia onsite. So the project in its current configuration can be viewed as the first phase of a larger project.
We are in constant dialog with Sibur, including on this project. We hope that the issue of Sibur's possible participation in the project will be resolved in the near future.
The construction of the ammonia line could take about four years. If Gazprom confirms the gas volumes, we could decide on a licenser within two weeks.
What kind of production increase could PhosAgro see if this project is implemented?
Up to 3.5 million tonnes of additional DAP could be produced from about 800,000 tonnes of ammonia, given the resources.
The approximate cost of the whole project for the gas chemical complex in Cherepovets - at least 53 billion rubles - was announced in September. How much could it cost in its current configuration?
We estimate that the project to build a new energy efficient ammonia production line at Cherepovets Azot will cost at least $500 million. And theoretically we could carry out this project with our own funds.
It could be carried out separately, as well as in conjunction with the planned construction of the gas processing complex in Cherepovets under the Transvalgaz project.
When will the company transfer to its books the blocking stake in Cherepovets Azot that was bought from Sibur at the end of the year by entities friendly to the company?
It is premature to talk about the dates for completing the consolidation. It will be possible to discuss this after the completion of the merger of Cherepovets Azot and Ammophos .
The alignment of forces at Cherepovets Azot has not changed fundamentally, because Sibur was also an entity friendly to PhosAgro, like the current shareholders, who support our ideology and philosophy of doing business.
Does the company still have plans to implement a project based on gas from the Shtokman field? Has its configuration been determined?
We're considering the possibility of acquiring gas from Shtokman for production of fertilizer next to an apatite concentrate production facility and the gas field.
What amount of gas are you counting on?
We are counting on 1.5 billion-2 billion cubic meters of gas. We have already sent a request to Gazprom so that they take into account our needs in the balance. But we are already working out the idea of switching Apatit's production system to liquefied natural gas instead of fuel oil. This will enable us to fairly quickly switch to using natural gas right after the launch of Shtokman. This is still a fairly raw idea, but we are working on it.
Where will you get the LNG?
We need about 300,000 tonnes of LNG to supply Apatit. Perhaps an LNG plant will be built for this purpose in Arkhangelsk. We are also considering the idea of separating C2+ fractions in Cherepovets and shipping propane butane mixture to Apatit for use as fuel.
Is PhosAgro talking to the government about working out a solution for the privatization of the state stake in Apatit?
We are still prepared to carry out our proposal to swap Apatit shares for PhosAgro shares. The company is also prepared to take part in an auction if this stake will be offered for sale. But the appraisal of the state stake has not been completed yet, and final proposals for how to privatize it have not been formulated.
On the eve of its IPO, the company said it does not rule out the possibility of acquiring new assets. Are there any interesting assets in sight?
We are constantly analysing various options for deals, but we don't have anything specific in mind at the moment. If lucrative and interesting proposals come up, aimed at the company's development, increasing competitiveness and growing shareholder value, we will certainly discuss them.
Have you made a decision on acquiring an equity stake in Gomel Chemical Plant?
We are at the stage of studying this proposal. But we still don't understand on what terms an investor can acquire an equity stake in this company, and what guarantees he will receive. And then, the decision on the actual privatization of the shares has still not been made.
PhosAgro's board of directors has asked management to work out the issue of a possible buyback offer. Do you already have an idea of whether this program will be launched?
This question can't be answered unequivocally. On one hand, we understand that PhosAgro is currently significantly undervalued compared to comparable companies. And we have no doubt that if there is a buyback of shares from the market, after some time we will be able to sell them at a higher price.
On the other hand, we are not quite satisfied with the current liquidity of our shares. Theoretically, a buyback limits liquidity, but in practice this is not always the case. If the shares are sold by long-term investors, this might not affect liquidity. Therefore, we are now trying to analyse who might sell shares if a buyback were announced and what results we could achieve.
I hope that we will be able to report on the results of our analysis at the next meeting of the board of directors, which could be held in March.
Is PhosAgro thinking about increasing its free float in future?
We don't rule the possibility of holding an SPO in future. But right now the situation on stock markets, in our view, is unfavorable for share offerings. However, we understand that the company's free float should be increased and consequently, once the situation improves, this issue will be considered without delay.
You are a shareholder of the company and have recently increased your stake. Do you plan to continue buying shares?
In general, I think that PhosAgro is very undervalued by the market, so I don't rule out buying shares in the company in future.
What is the current situation with PhosAgro's debt? Does the company still have no need of borrowing?
We still have fairly large limits for borrowing - the company's current debt to EBITDA ratio is 0.6. This is one of the lowest figures in the industry. But we are not planning major borrowing at the moment.
How will Russia's accession to the World Trade Organization affect PhosAgro's business?
There are clearly more pluses than minuses, but there will be a significant impact for companies whose products are subject to antidumping measures, trade barriers.
For our core product - phosphate mineral fertilizers - there are currently no duty barriers. There are antidumping duties on ammonium saltpetre for shipments to certain countries in the European Union and North America. But the share of this product in our total exports is not significant, and this barrier does not have a major impact on the company's business. And these antidumping duties will not be lifted as a result of Russia joining the WTO.
In addition, there is still a special mechanism for pricing apatite concentrate on the domestic market. In particular, it is sold to Akron far more cheaply than, say, to Norway's Yara, which operates on the same technology and sells its fertilizer on the same markets as Akron.
In regard to requirements for product safety, we already comply with the requirements of the European system of registration, authorization and access to the market, and monocalcium phosphate has a European GMP+ certificate.
Are you concerned about rising prices for gas?
We'll see how the situation develops. For us this is not that critical, as we are not a purely nitrogen company. We are more a producer of fertilizers, which depend on phosphate raw materials, and expenses on gas do not exceed 10% of the group's total production costs.
