Congress of the Union of Chemists of Ukraine

Dmitry Firtash’s Speech at the Congress of the Chemists Union of Ukraine

Let me welcome this esteemed gathering of the Chemists Union of Ukraine. For us, this year features quite a few benchmarking dates and events. First, the UN proclaimed 2011 the Year of Chemistry. Second of all, this year marks the 20^th anniversary of Ukraine’s Independence. We have a lot of things to talk about, a lot of subjects to discuss. 
 
I like the fact that conventions like this do take place, I like the fact that the Union of Chemists exists and allows us to get together and discuss matters and challenges we are facing in the industry. This is a great platform for our shop talk as present here are representatives of all major plants, all business arms within the sector.
 
Chemistry is a fundamental sector for Ukraine. It ranks third in the national export volumes rating. It is a strategic sector of the national economy. In Russia, you can often hear them argue that Gazprom is a national wealth. I think it wouldn’t be an exaggeration to say that the chemical sector is a national wealth of Ukraine.
 
Today I will be talking about the prime subject of my professional activity – the nitrogen chemistry. If you recall our President’s speech at the UN, he quite clearly outlined Ukraine’s development priorities, one of them being agriculture. The President said that Ukraine would become a breadbasket of the world. This is the main thing Ukraine can do for the world. Perfectly clear messages were sent, primarily for nitrogen chemicals producers. Agriculture can’t do without us. No fertilizers, no agriculture.
 
The population of the globe has virtually doubled over the past 40 years and growing. Foodstuffs production will have to be increased by 70 percent and this goal may only be achieved with the help of the chemical industry. The sector faces the fantastic future, chemistry business is one of the most lucrative investment targets.
 
Let’s recall the 2009 crisis. We have learned quite a few lessons. Many enterprises shrank their outputs, investors put their capital infusions on hold, many didn’t know how to make ends meet. At the same time however, a lot of Ukrainian businesses entered the stock exchange. Those we the ones that dealt with agriculture or food production.
 
And mind you, this is all happening in the environment where soils fertilization level is not even 50 percent of the standards recorded in the Soviet Union. Today our nitrogen chemicals producers are export-oriented as export is a core of our business. But we should keep in mind that our domestic agribusiness will be rising, it is simply bound to rise, its outputs are estimated to eventually double. In this case, we will be simply short of ammonium nitrate. Whenever the demand goes up, it will meet with a shortage of mineral fertilizers.
 
It is important that chemicals producers be able to lend a helping hand to the agriculture, keep up with the pace of its growth without losing export edges. And there is no alternative to the only way of mineral fertilizers output increase – it is the industries consolidation. Consolidation is a safeguard of success in the global competition.
 
We have to consolidate enterprises to become global players. If you count the companies that our Group has integrated they all account for as little as 3 percent of the world capacity. This admittedly is very little.
 
In essence, there are 15 countries that make up a core of the world’s chemical sector. And unfortunately, Ukraine is lagging behind here. And it is true not only for Ukraine: it refers to the whole ex-USSR which used to account for a major proportion of the global market. Because the previously established production chains spread from the Central Asia all the way to the Baltic had broken up, the post-Soviet states yielded their very significant competitive edge.
 
Clearly, re-establishing this global leadership will be a very difficult job but the market is really worth fighting for. And consolidation is not the only tool. What matters is how we are going to position ourselves in the distribution market, say, in Europe or worldwide. We have to devise the joint sales strategy, come to terms with our Russian and international counterparts. I, for one, like the way potassium producers Uralkaliy and Belaruskaliy have structured an excellent sales program whereby the distribution is performed by one sales house. That is to say, no matter whose company it is and who owns it, they’ve come up with a perfectly logical scheme putting in place a single trader maintaining a strong market position. They’ve set the company’s margin at 3 percent and upon selling the outputs, this company pays the money back. And that helped them enhance the distribution dramatically.
 
Obviously, it would have been great if we were able to achieve this kind of an approach. However, in our case there are more bosses than those who are being bossed and coming to terms with each other is tough – starting from initiating the talks all the way to the sales point.
 
Nevertheless, when we start to negotiate, we should remember this saying – the job scary for eyes gets done by hands. This is precisely the case when we have to get this job done no matter what. The other day we spoke with our Russian colleagues, quite a big chemical group. And I think we will attain a good degree of understanding. They occupy quite a big market share. I think we will be able to distribute some things jointly and it will be a force to reckon with.
 
As far as the domestic market is concerned, chemical producers are already providing a lot of support to its development. Agrarians have received the needed volumes of fertilizers with a discount unseen before. This audience is all about professionals and you all know that there are two seasons in fertilizers production. Or rather a high season and an off-season period. When the high season is over we launch all kinds of repairs or what have you as we have to think how to keep our employees busy. The real production is halted. Then, when the high season starts again, problems with the government pop up. Why? Because it suddenly occurs to the government that our agribusinesses do need fertilizers! Somehow, no one appears to care about it in the off-season time.
 
Previously, when all businesses were on their own, it was a lot easier to pick each and every one of us and tell us what to do, where to ship our outputs under governmental orders. And no one could care less about the contracts we had, about the commitments before our counterparts. The message was simple: ship it out, full stop. For us it meant that we had to renegotiate with our partners you had already sold products to and who you had already received a down payment from. You had to think real hard about how you get by. Your partners had contracts with yourselves clearly stating the shipments deadlines…
 
This year, we had a lot of debates with the government. We offered concessions but in exchange we got our voice heard, we reached an important understanding, this has become a two-way traffic. After all, we all understand that we live in Ukraine and we do care about whether or not there will be a harvest and agriculture at large. So, we agreed to concessions.
 
If our agriculture doesn’t develop, nor will our business. We are interconnected, we don’t have a choice. We must care about the agriculture, we must develop our market and our agribusinesses. As it is them who are end sellers. They reap cash for the end product – grains and other agricultural produce.
 
This being said, I think we reached a very convenient arrangement with the government. 2011 is an experimental year – we agreed to offer a pretty big discount both in March and in April, that is at the very peak of the season. This decision didn’t come easy given all the market circumstances and especially the gas prices. This is not a discount you can afford when abundance is the only problem you have, when the discount doesn’t matter for your business. We within the group had to think more than twice. Anyway, we agreed with the government on a 20-percent discount and supplied products to agrarians in full. We shipped 650 thousand tons of ammonium nitrate and 250 thousand tons of urea. Alongside that, we agreed that a reasonable trade-off must be found with chemical producers to make sure that agrarians receive part of fertilizers inventory during the high season and bulk of it – in an off-season time, between May and early August.
 
What are our gains? It makes a perfect sense for the government as it enjoys the benefit of free storage: we are responsible for it, for the product, for shipping it according to their instructions. From them nothing is required, all they have to do is issue this instruction to us explaining where exactly the product needs to be shipped to. In essence, we proposed to set up agricultural chemicals storage facilities similar to the state reserve. The state reserve system was acquiring at its own expense and took care of the storage. In our case we agreed that we will store the product while it doesn’t need to be paid for in advance. All we want is a clear understanding of when and where this product must be shipped.
 
This helped address the nitrogen chemicals producers’ problem of production decline. I hope that all plants during this year will work at a 100-percent level of their workload capacity. And the government ends up with not only a discount but also with uninterrupted supplies.
 
Another subject I’d like to raise (and I think that R&D people and academics present here will endorse me) is advanced processing. Let’s take a look at the world practice, example – the German concern BASF which in essence is withdrawing from the nitrogen fertilizers business. Nitrogen fertilizers is a very tough business heavily dependent on gas and other fuels. BASF is getting focused on advanced processing primarily. We are urging our R&D partners to develop new advanced processing technologies. The future of Ukrainian chemical industry belongs there. We discussed it with Kharkiv Polytechnic University, with Kiev Polytechnic University, with some sectoral institutions in cities housing our enterprises seeking their support and they did lend their support to us.
 
Just recently I was in Cherkassy. The plant is in a good shape, a really good plant indeed. There is a problem however – advanced processing is missing. I mean, there are all those old workshops, production sites that are immensely underloaded. And we think that a massive upgrade which essentially is about an added-value product is a must these days.
 
Our chemical sector is 78 years old. Unfortunately, over this time we didn’t come up with anything new in the business we all belong to. We can improve the production, we can invest money but we never came up with anything special. And I find it a problem. If we started to develop more advanced processing on the current premises, I am sure we would attain something tangible in some 10 or 15 years.
 
Of no lesser importance is an issue of chemical specialists training. We must support universities and see to it that they train professionals with adequate skills and qualifications – the people production needs. But while recognizing the importance of university training we shouldn’t leave behind the secondary school learning. We have our young generation in Ukraine, our kids who, in the past 16 years, have won 62 medals at International Chemistry Olympiads. That’s where our strength is obvious. Especially given that our school students, while having excellent theoretical knowledge, often time lack practical experience. It is important for us to support these kids, as they form our image. I will be doing it and I want to call upon everyone to take care of our young generation, the gifted youths that embody our future in chemical science and industry. It would only be fair if each chemical industry in respective regions could reach out neighboring schools donating 2000, or 10000, or 20000 – as much as you can – to help them buy essentials, the technical resources they need to improve their skills. I don’t think we will end up beggars if we help kids. Great brains are out there – 62 medals against the backdrop of real poverty our school are living in means a lot. If we join to support this initiative I think we would be paid back with knowledgeable specialists helping us build up our industry. We should all bear this in mind. We have to recreate the school we used to have back in the Soviet Union. Technical and vocational training was extremely efficient in the USSR. And we won’t address this challenge on our own, too. I have set a meeting with the Minister of Education to discuss ways of systemic assistance to chemical education.
 
Now, if we recognize that the chemical industry is a strategic sector of our national economy, it should be looked at not only from the production perspective, not only from consolidation perspective, not only from the market perspective but also from the standpoint of academic support and personnel training.
 
It is my firm belief that Ukraine must have this motto: “Uniting potentials”. What are our strengths today? Ukraine faces perfect chances to preserve and build up its national asset of the chemical sector. All prerequisites for it are out there. And we have to learn to unite our potentials and capacities. As a motto for our next year’s convention, I would suggest the same wording: “Uniting potentials”.
 
Often times not only do we lack a frank and candid conversation, but even simple communication with each other is rare. Everyone is spinning within his or her orbit. If you look at enterprises belonging to a holding you’ll see that even within this holding where corporate management is structured things are far from being perfect. Because each CEO is a little king in his little kingdom and wants to reign there unilaterally. He would sit at the meeting, nodding to what I say, looking at me with an I-couldn’t-agree-more sort of look but thinking: “you keep talking, I’ll do it my way anyway”.
 
This means that the problem with articulating and addressing common goals can be traced not only across the sector but also within integrated business-groups. And I know exactly what I am talking about.
 
It would be really great if we could meet not once a year but at least on a quarterly basis. But meeting in a format which has nothing to do with hollow declarations and chit-chat. We want to have a brainstorming ground to make decisions on. I think that it would be a good idea to expand this ground breaking into focus-specific task forces – R&D, legislation, production. For way too long we had been acting on an everyone’s-for-himself basis – some are stronger, others – weaker. But if we, as one industry, structure our position in a concerted fashion it will be easier to talk to the government. One man no man, as the saying goes. Individually we won’t matter. But if we, chemical industrialists pursuing common goals, stand up in one voice in our dialog with the government, then many tasks will be easier to solve, everyone would be better-off.
 
This is about all I wanted to talk about. Sorry if I took too much of your time and thank you for your attention.