6 June 2011 Inerview to  "Focus"

Chemistry homework. Dmitry Firtash explained why he acquires enterprises

Mr. Dmitry Firtash, owner of Group DF, explained to Focus why he has been acquiring chemical plants in Ukraine and abroad

Over the last six months, Dmitry Firtash became the central figure in the Ukrainian chemical industry. In the middle of 2010, the Ukrainian nitrogen chemical production was divided between one state-owned and five private enterprises with little connection between them. But by the summer of 2011, only the owner of DniproAzot Igor Kolomoiskyi and the seemingly eternal head of Odessa Port Plant (OPP) Valerii Gorbatko are competing with Dmitry Firtash. And the chances of Firtash’s adding OPP to the list of his assets as well are quite high. Currently, one of his main goals is to acquire this producer controlling the shipping of chemicals in the Black Sea. And he’s not going to stop there.
 
- Your company acquired three nitrogen producers over the last half a year. What are your gains in it?
 
I didn’t have much choice. I realized that I had to either buy or sell. But there was hardly anybody whom I could sell to, so the only option was to buy. I decided that it was worth taking the risk. I weighed up my abilities and saw that I could do that. As it turned out, the decision to consolidate was the right one. Let me give you a better understanding by explaining some recent events.
 
When gas prices were low, producers were making huge profits which kept their owners happy. But in 2009, natural gas prices increased dramatically, and business owners started to “suffocate”. About 80 percent of production costs account for gas costs. Whereas in metallurgy it’s around 15-20 percent, in chemical industry natural gas is the primary expense. This is why it is very difficult to compete on this market without having a reasonable gas price, especially when we are talking about competition with Russia. In Russia, the current price is $80 (for 1,000 cubic meters – Focus). At the same time, Ukraine has an unreasonably high price of $450, which was further aggravated by the crisis! The only thing Ukrainian producers were concerned with during that time was how to survive, while Russian producers were able to proceed normally with their reconstruction and capacity expansion plans. As a result, Russian producers flooded the Ukrainian market with their products, and the Government (of Yulia Tymoshenko – Focus) did nothing to stop them. During that time, Ukrainian chemical productions owners made a decision to subsidize their production with their own money. All credit to these people for setting a prominent example of Ukrainians uniting around a common goal in order to survive. At Rivneazot, the subsidy averaged US$2.5-3.5 million per month. We all had to sell our products at a much lower price than the production costs. Russians couldn’t understand why we were doing that. There are six major nitrogen fertilizer producers in Ukraine. Just imagine what would have happened had all of these producers stopped operations at the same time? This would have opened up a huge market for Russians! In 2009, Russians were openly saying to us: “Guys, cut your plants to scrap, or give them to us for free!” We were well aware that if we let Russians enter our market this time round – there would be no second time. It’s like during a war: if you lose a certain territory, you can only win it back at huge costs. But Russians still managed to capture 35 percent of Ukraine’s domestic market! You can imagine how hard they pushed.
 
- Then why did Ukrainian owners decide to sell their assets, after all that?
 
- Even though the owners managed to rescue their enterprises, they were well aware that their prospects were still quite dim. When they saw the new gas contracts with Russia, they realized that in just one year they would have had to give away everything they had earned before. And then the production would have shut down anyway. One should not forget that each producer is responsible for thousands of workers (multiply that by 6 and you get the number of people living around them). Most of those producers are the principal employers and mainstays of entire towns. Water supply and treatment, cultural centers and other infrastructure elements usually depend on those producers. So it would have been a disaster. The owners of Ukrainian producers were no longer able to survive on their own. We had to unite the potential of those producers. And I did that.
 
- Are you in negotiations to acquire DniproAzot?
 
- No. I don’t think that we need to acquire DniproAzot. For sure, Igor Kolomoiskyi wants to participate in the privatization tender for the OPP, just like we do. He has Ukrnafta, which means that he has access to natural gas, so he doesn’t need to sell his company. DniproAzot is not critical for me. But it’s critical to acquire OPP.
 
- In your opinion, who else will participate in the OPP privatization tender? Only three companies participated in the previous tender that was canceled – the companies of Igor Kolomoiskyi, Konstantin Grygoryshyn and Sibur.
 
- The competition will be fierce, and all the major players will be there. Yara will participate, but Russians will be the ones to watch out for. Who will succeed is another question, but we will put up a fight. However, OPP is not being sold yet. I think it would be a right decision for the Government to sell it. There is little sense keeping it in the state ownership; with the current gas prices the Government will have to subsidize it soon enough. OPP’s strengths are the seaport and shipment and reloading facilities, but this doesn’t offset losses from high natural gas prices. At best, the plant will work at a zero margin.
 
- Do you think it is possible that Russians will be ready to offer much more than OPP’s market price?
 
- Russians need OPP as the end of the ammonia pipeline with shipment and reloading facilities. There are three places in the world where nitrogen fertilizers are sold from. OPP’s shipment and reloading is one of those places. But TogliattiAzot is launching its own shipment and reloading facilities in two or three months, so Ukraine will lose some of its advantage as the result. It’s a real fact. Russians try to diversify their markets. Why would Russians want to keep paying Ukraine, when they can build their own terminal on the Black Sea? In short, TogliattiAzot could leave the ammonia pipeline altogether. That would result in OPP’s value falling.
 
- In your opinion, what is OPP’s true market price at the moment?
 
- In my opinion, the most important question is not how much money will be paid, but who will become the owner. Ukraine should remain as a competitor on the global market. I’m afraid the Ukrainian Government will focus on money. But money plays a secondary role here. Selling Kryvorizhstal did not really bring any benefit for Ukraine. Yes, that money fed the state budget, but what’s next in economic terms? Who will eventually become an OPP owner will determine Ukraine’s position on the global markets. I believe that the Government should sell the majority of its assets. Businesses should deal with business, while the Government should regulate, control and lobby the interests of the national economy in the world. We can see that all the British, American and Chinese companies enjoy the support from their respective Governments. This support is especially strong in China. When the Chinese Governmental delegation comes to a foreign country, it’s usually accompanied by around 10 aircraft with Chinese businesspeople onboard. Effectively, their Government acts as salespeople for Chinese businesses.
 
- Representatives of GazProm confirmed that the price of natural gas for Ukraine would reach $400 per 1,000 cubic meters before the end of 2011. But you’ve recently mentioned that your producers receive natural gas supplies not through Naftogaz, but directly from Central Asia. How much lower is its price and what are the conditions of its supplies?
 
- I’m not a portfolio investor, someone who invested in the company and sits back waiting for profits. I do everything myself. I invest, develop, manage, hold meetings and regularly visit my production units. I had to apply all my knowledge and restore my ties with Central Asia, which I never really lost, in order to negotiate affordable gas supplies. We’ve managed to completely substitute the supplies from Naftogaz we had before, because we could no longer operate with such expensive gas. Obviously Naftogaz is not to blame in this case. It’s the Government of Tymoshenko that is fully responsible for this, as they concluded that enslaving gas contract. We still pay Naftogaz for transportation services, obviously. So we’ve signed a one-year contract to purchase Central-Asian natural gas. This has given us a clear advantage in a way that we now have a fixed price, without any formulas, and thanks to this we have secured our main feedstock supplies. Now my producers know exactly which production costs they will incur during the year. We’ve taken away all the redundant chains. Starting from 2012, Naftogaz will lose its monopoly, and there will be numerous natural gas traders on the market. This is exactly what is requested by the EU and the IMF. We insisted on entering the market in 2011.
 
- You’ve mentioned several times that you are looking to acquire nitrogen producers in Russia. Please explain this in more detail.
 
- We should aim to acquire nitrogen producers in Russia, Turkey, and other countries. We are now participating in a tender to acquire a mineral fertilizer producer in Rossosh (Minudobreniya OJSC, Rossosh, Russia – Focus). The starting price was quite high – $1 billion. Now the bids have reached $1.4 billion. It’s a huge enterprise in a very good state. It’s situated only 100 kilometers away from the Ukrainian border and gets natural gas for $80 per 1,000 cubic meters. There are numerous contenders for the purchase of this producer, and I’m not sure if we have a good chance. Besides the money, I think politics will also be involved in this tender, as Russians protect their markets quite well. Among those participating in the tender are several major Russian producers, namely Eurochem, Akron, Sistema and others. We are the only Ukrainian company participating in tender, no one else applied. Apparently, Russians will use their political and lobbying instruments.
 
- You’ve stated that by consolidating the chemical assets, you don’t create a monopoly. Did you manage to convince the Anti-Monopoly Committee (AMC) of this?
 
- We are not monopolists. We are in discussions with the AMC. They say that we own four out of six nitrogen producers in Ukraine. But look at these four producers, OPP, DniproAzot and Russians owning warehouses in Ukraine, not to mention many other companies. When we add up the numbers and calculate the tons, it becomes obvious that we are not monopolists. We live in the times of globalization, when only large companies can survive. There is no other way. Ukraine used to control 17 percent of the global market, but now it’s only 3 percent. The competition is fierce. It was not long ago that China imported chemical products, but nowadays China is one of the largest exporters. It’s estimated that as much as US$80 billion will have been invested globally into expansion of fertilizer producing capacities by 2015! Where will this leave Ukraine? For Ukraine to become a player on the global markets again, we need to consolidate the assets. If we look at what we have already achieved in terms of consolidation, and even consider that we will consolidate OPP, it would still not be enough for Ukraine. I asked AMC why the Russian Government allowed the merger of Uralkali and Silvinit – it’s an obvious monopolist not only in Russia, but in the whole world. But the Russian AMC allowed this and explained that they did it to strengthen Russia’s positions on the global markets. I say the same about Ukraine. What is important for Ukraine? The primary objective should be to have our own strong positions on the global markets. Ukraine should become the force to be reckoned with. We should be able to earn good money, have sufficient foreign currency influx and pay taxes. So consolidation is the only way forward. In my opinion, the AMC should readjust their views to the changing realities of life.
 
- How can Ukraine increase its share on the global markets?
 
- Our plan is to consolidate all the producers around Iuzhnyi (the town where OPP is located – Focus), to balance all the inventories, and to understand the products and the quantities we are able to sell. The second task is to establish a firm foothold on Asia. For instance, India imports 3 million tons of urea per year. They hold a tender, but Ukraine and Russia are losing in it because of high freight expenses. But if we unite our efforts, if we build our own infrastructure and freight fleet, we can become major players. Our strategy is that if we cannot win, we should join forces. Currently, we try to develop a common sales strategy with Russian producers. This will give us more influence on the global markets. Belkali and Uralkali set a compelling example in establishing a joint sales house. By no longer competing with each other, they’ve effectively become the top-2 global potassium suppliers. So we will not lose anything from joining forces with other producers. This will enable us to influence the markets and sell our products at better prices.
Ukraine learned how to sell, but now we must learn to acquire. We should consolidate producers beyond Ukraine to expand the economic borders of our country. Ukraine should realize its potential and become a major player on the global markets.