Russian potash in suspended animation By John Helmer
MOSCOW - The failure of senior Russian government officials to decide whether
to create a powerful new fertilizer monopoly continues to delay release of the
results of a commission of inquiry into fault, penalties and costs of a
two-year-old collapse of a potash mine in the central Urals region town of
Berezniki. The longer the delay, the firmer potash prices are likely to become
in the Asian market, dominated by China and India.
Mine-1, owned and operated by Uralkali, was forced to halt operations, and was
abandoned, after a massive sinkhole opened at the surface in October 2006.
Initial government investigations
ruled that the loss of the mine and its potash reserves was force majeure.
In the geology of potash deposits, such events are not unusual.
However, over the past 10 weeks, the incident has been exploited by officials
in Moscow seeking to engineer a takeover of the Moscow and London-listed
Uralkali (ticker URKA:LI).
Uralkali and Silvinit are the two principal producers of potash for export to
China, Asia's most important consumer, India and the palm-oil plantations of
Malaysia.
Although linked by a minority cross-shareholding, the two companies trade
independently of one another. Uralkali is joint owner of Belarusian Potash
Corporation (BPC) with Belaruskali, the Belarus potash exporter. Together, they
control 25% of the world's potash production, supplying about 12 million tonnes
of potash to the international market per annum. As a result, BPC has become
the swing producer and market-setter for the global potash fertilizer trade,
taking over from Canpotec, which trades for North American potash producers.
Uralkali says 40% of its exports went to China in 2007. This was cut in 2008 to
15% as the company sought to take advantage of higher spot and short-term
contract prices in the Southeast Asian, Indian and US markets.
For 2009, Chinese importers have been delaying contract commitments on imports
of potash, as they seek to lower prices for imports. Uralkali has responded by
lowering potash supplies, cutting about 500,000 tonnes from production in the
fourth quarter of 2008, and planning for a first-quarter cut of between 20% and
30% from annual capacity of about 5.5 million tonnes.
Meanwhile, Uralkali has come under pressure of a different sort. Moscow rumors
of a takeover of the company, which is controlled by Geneva-based Dmitry
Rybolovlev, has added to the downward pressure on Uralkali's share price and
dramatically cut the company's market capitalization - and thereby its asset
takeover price. At peak, in June 2008, Uralkali was valued at US$34.3 billion.
It ended the year's trading on December 31 at $3.8 billion. The free-float in
Uralkali's shares amounts to about 30%.
At the start of the two-week Russian New Year holiday on December 31, there was
no announcement from the Ministry of Natural Resources of a ruling from the
special commission, which had been ordered into action on October 29, to
reassess Uralkali's liability for the subsidence at Mine-1 and the loss of the
associated potash reserves. Nor was the ministry, or the investigating organ
Rosteknadzor (Federal Environmental, Engineering, and Nuclear Inspection
Service) commenting on the commission ruling, which had been promised before
the month closed.
The government also remains silent on whether the commission decision is a
preliminary to a state reorganization of the fertilizer sector, and the
consolidation of Uralkali and Silvinit, the two potash producers, with
PhosAgro's Apatit, a phosphate producer in which the government took over a 20%
stake by a court ruling in early December. Apatit is Russia's dominant producer
and exporter of apatite concentrate (phosphate). According to the federal
government's position in the courts, Apatit was illegally privatized in the
mid-1990s by Mikhail Khodorkovsky and Platon Lebedev, who were convicted and
sent to prison in 2004, principally for offences relating to the oil company
Yukos and their Menatep banking group.
Uralkali itself has not commented on the takeover speculation; the company has
been officially silent since December 25.
On December 26, Russian industry reports indicated that Uralkali had agreed at
a meeting at the Ministry of Natural Resources in Moscow that it is ready to
cover 3 billion rubles (US$103 million) of state budget expenses associated
with the flooding of Mine 1, at Berezniki, in Perm region, since October 2006.
At the December 26 meeting, it has also been reported that Rosteknadzor
reported its preliminary conclusions into the reasons behind the mine
subsidence and flooding, and the potential fault or liability of the mine owner
and operator, Uralkali. No word of these conclusions has so far leaked.
Industry analysts judged that the signals from the meeting were positive for
Uralkali.
But the failure of the Russian government to announce anything definitive
before the Russian holiday commenced on December 31 is anything but positive,
at least for Uralkali's controlling shareholder, Rybolovlev.
Both Uralkali and Silvinit had announced earlier that they were each ready to
contribute 1 billion rubles to the cost of construction by Russian Railways
(RZD) of a 53-kilometer rail line that must be constructed to skirt the area of
subsidence and ground risk. Ongoing negotiations with RZD have also been held
since the October 29 meeting, when Deputy Prime Minister Igor Sechin initiated
the new commission.
Sechin reportedly said at that meeting that the cost of the new rail line would
be 13.4 billion rubles. An RZD source says that the estimate of cost by RZD
ranges between 9 billion and 11 billion rubles. The difference in estimates, he
explained, is that the larger one includes what RZD has already spent on
bypassing Uralkali's Mine-1 sink-hole, after the subsidence began two years
ago.
Sechin is the most powerful figure in the Russian government after Prime
Minister Vladimir Putin and the key official responsible for supervision of
major mining and metal concessions. In 2003, he had led the government's attack
on Khodorkovsky. He now chairs the board of the Rosneft oil company, the
state-controlled concern which took over Yukos's oilfields after it had been
broken up, following Khodorkovsky's conviction and government tax claims.
Sechin's interest then extended to the transportation of oil to Russia's export
markets as he backed the ouster of chief executives of Russia's two largest
tanker fleets, reorganized the management of the state oil pipeline company,
Transneft, and promoted a costly new oil terminal on the Baltic Sea shore, plus
a new pipeline to load it.
In expanding his supervision of the Russian oil sector, Sechin has clashed with
Gazprom chief executive Alexei Miller and Miller's prominent Kremlin supporter,
President Dmitry Medvedev.
Sechin's interest in restructuring the Russian potash sector had been limited
until the October 29 meeting. Before that, he had an interest in the court and
shareholder conflicts over Apatit; and also in claims against Russia's leading
ammonia producer and exporter, Togliatti Azot (ToAZ), which is controlled by
Vladimir Makhlai. Gazprom, which supplies the gas for Togliatti Azot to convert
into ammonia, has also had its own internal arguments over the company's
future.
Makhlai was able to fight off a challenge from the Renova group of Victor
Vekselberg, an oligarch with interests in the TNK-BP oil company and its
gasfields, winning a recent appeal against lower court rulings to annul the
privatization of a 6% stake in ToAZ dating from 1996. The pressure on Makhlai
then intensified from other directions, and under threat of prosecution and
arrest, he reportedly fled to London, where, according to London sources, he is
seeking political asylum.
Not a word has been said officially, or speculated in print in Moscow, to
suggest there is a link between Makhlai's predicament and Rybolovev's future.
The only evidence that a parallel is suspected is in the dramatic fall in
Uralkali's share price between October and November. Since then, however, the
share price has drifted modestly upwards on the reassurances issued from the
Ministry of Natural Resources.
If the new government commission rules to limit the financial exposure of
Uralkali and other companies using the new Berezniki rail line, then
Rybolovlev's shareholding can be expected to be unaffected. Uralkali's share
price and market capitalization should rise once share trading resumes this
month. The company is being supported by Minister of Natural Resources Yury
Trutnev, who was mayor of Perm city and then governor of Perm region before
taking his federal post in 2004.
However, the opposition to Uralkali surfaced just before the December break,
with a Russian wire service report attributed to unnamed government officials.
This claimed that the government was considering the formation of a single
fertilizer holding, buying Rybolovlev out and combining Uralkali, Silvinit and
Apatit.
Uralkali and Silvinit appear to be unaware of the proposal, while industry
sources believe that the publication may have been prompted by efforts of
domestic fertilizer consumer groups to persuade the government to take a
stronger role in regulating sector output, supply and pricing.
In a report by Troika Dialog analyst Mikhail Stiskin, it was noted that the
idea of forming a state-owned company in the fertilizer industry has been
discussed in the government many times over several recent years, "but it has
never led to anything, as its realization was fairly complex and mechanics
unclear". The relative smallness of the sector and the recent high market
capitalization of the listed companies have also deterred state action.
According to Stiskin, this "has markedly changed recently, warranting increased
interest from the state. A merger between Uralkali and Silvinit would make
perfect economic sense, as both entities mine the same ore body and used to be
a single company in Soviet times. A merger with Apatit is a less
straightforward idea, though one that is also reasonable, as it would enable
the creation of a diversified fertilizer holding with exposure to potash and
phosphates, an essential emulation of the strategy implemented by Canada’s
PotashCorp and Mosaic."
Since the shareholders of the three companies are rivals, they are unlikely to
agree to merge along the lines reported as under government consideration. For
this reason, market speculation has focused on Sechin, and on the outcome of
the commission of inquiry into Mine-1, to determine what will happen next.
If the Moscow market is right in suspecting Sechin of an ulterior motive, then
it is near-certain he will run into the rivalry from Medvedev and the Gazprom
group, to whom, it is likely, Rybolovlev has applied for help. There has been
just one public sign of this. This came in a press conference by Medvedev's
front man, Deputy Prime Minister Igor Shuvalov, who claimed in November that
the government was interested in having "strong business", and no one wanted to
bankrupt Uralkali. But Shuvalov, who has so far not dared to challenge Sechin
directly, equivocated. Rybolovlev and Uralkali had been exonerated by the first
government commission, Shuvalov said. However, if the second commission ruled
differently, he said that a "new proprietor will be found".
The longer the suspense, the further Sechin's shadow is cast.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
