MOSCOW - Owners of Uralkali, once Russia's fastest-rising potash miner and now
awaiting a government ruling that may put the company, or controlling
shareholder Dmitry Rybolovlev, out of business, are looking south to
drought-hit China for a possible reprieve.
The company's shares have crashed as potash prices have tumbled and investors
await a ruling on whether it has to pay an up to US$3 billion bill to the
government following formation of a vast sinkhole at one of its mines.
Uralkali's market capitalization has fallen about 90% amid a general
stock-market sell-off to US$2.7 billion, from a peak last June of $31 billion.
Moscow investor sentiment firmed last week, lifting the miner's London and
Moscow-listed share price by 24% to $1.28, after seven months of steep decline.
At the heart of the company's woes is the sinkhole at the company's Mine-1 at
Berezniki, in the Perm region. Deputy Minister for Natural Resources Semyon
Levi held a meeting on February 12 in Moscow to review estimates of the bill
for costs, compensation and liabilities facing Uralkali from the subsidence and
loss of the mine in October 2006. Revival of government claims against Uralkali
began, apparently on the initiative of Deputy Prime Minister Igor Sechin, last
Hints from Prime Minister Vladimir Putin, Sechin and others suggests they are
considering disposing of Rybolovlev, and reorganizing Uralkali under the
control of Vyacheslav Kantor, who currently controls the nitrogen fertilizer
producer and exporter, Acron. For reasons of either their personal security or
comfort, both Rybolovlev and Kantor prefer to live in Geneva, and run their
Russian operations from there.
This Russian scheming is taking place against a background of serious drought
in northern China, threatening the national wheat crop. Chinese press reports
this month, and a report on February 13 by Merrill Lynch, suggest that the
drought may cut China's wheat production at harvest this year by 13% - or about
15 million tonnes. Uralkali and rival Silvinit are the two principal producers
of potash for export to China, Asia's most important consumer.
Henan, Hebei and Shandong are the provinces hardest hit so far by the lack of
rainfall as they suffer the worst drought in 50 years. The winter crop (planted
in August, harvested in May) is more important than the crop planted in the
spring, and it is the one currently suffering from drought. If the spring rains
fail next month, then the drought is likely to hurt both crops.
Chinese farmers do not add fertilizer to rain-starved soil. However, they do
increase the volume of fertilizers to less afflicted fields, in order to
increase their harvest payoff. With ample grain in national reserve to stave
off an increase in the wheat price, and the central government's reluctance to
import the grain, the impact of this drought on farmers is likely to be
increased demand from China for fertilizer to apply to fields unaffected by
According to Merrill Lynch analysts in Hong Kong, "Since 1987, fertilizer
demand in China grew on average 7.9% in drought years, more than double the
3.2% average in non-drought years. As a result, we believe that the chance of a
significant pick up in fertilizer demand is high." This means more imports from
Russia - and rising fertilizer prices. The prospect for farmers improved at the
end of last week - and worsened for Uralkali - when the region received some
light rainfall, with more forecast for the northern provinces this week.
Russian exporters to China say it is too early for them to confirm a pickup in
export orders from China; the spring period, starting next month, will be
decisive for rainfall and for fertilizer imports. Since Chinese demand is one
of the drivers of the global potash price, and this in turn sustains the share
price of Uralkali, the farm troubles in China may provide a windfall for the
Russian exporter. That is, if Uralkali can survive the ill wind blowing from
Government officials say the latest session on Uralkali's future was closed,
and they decline to give any account of what happened. This silence was
interpreted by the Moscow market as positive for Uralkali, whose share price
immediately jumped 16% on the absence of news last Friday.
The closed-door session followed a detailed public statement a few days
earlier, on February 6, by Levi's superior, Minister Yury Trutnev at a press
conference at Berezniki.
Ministry sources confirm that the government has decided that a 2.5-kilometer
section of rail track in Berezniki, costing 2.3 billion roubles (US$64 million)
and part of a detour necessary to avoid the sinkhole, is no longer required, as
the sinkhole has stabilized, and is no longer expected to expand.
Trutnev said further feasibility studies are required before the extended 53-km
railroad bypass can be budgeted for completion. The track, being constructed by
state-owned Russian Railways Company (RZD), has been reported to cost about 13
billion roubles. This forms a large part of the potential liability facing
Uralkali since Rostekhnadzor (Federal Service for Environmental, Technological
and Nuclear Supervision) completed its report last month on the losses and
liability for the subsidence.
Trutnev has been close to controlling shareholder Rybolovlev in the past, when
Trutnev was mayor of Perm City and then governor of Perm region, on the western
slope of the Ural mountains, before his appointment as the federal mines
minister in March 2004. In his latest remarks, Trutnev said there are no
international precedents for making a potash miner liable for loss of potash
reserves due to the type of geological anomaly and incident that caused the
subsidence and flooding at Mine-1.
In its initial post-incident report in 2006, Rostekhnadzor had reviewed the
circumstances, and held Uralkali blameless for the mine collapse. Then, last
October 29, following an order from Deputy Prime Minister Sechin, Rostekhnadzor
opened a new investigation. Its report, leaked last month, claimed that, with
timely geological surveys and early-warning measures, Uralkali "could have
taken measures to prevent" the incident. The company disputes this, but has
proposed several schemes of compensation for the direct, non-reserve losses,
which the government continues to consider.
Rostekhnadzor's report issued a series of estimates and recommendations, but
left to Sechin the decision on Uralkali's liability.Two estimates of reserve
losses were reported - a minimum of $706 million and a maximum of $2.37
billion. Adding the mineral extraction tax that was lost to the federal
government, and the two potential reserve-loss totals, for which Uralkali may
be held liable, are $723 million and $2.5 billion. If Uralkali is levied the
full infrastructure and rail cost, plus a reserve loss charge, the company is
thus facing from $1.3 billion to $3 billion in government-imposed charges.
Trutnev said on February 6 that a final decision on this issue would be made
this month. This was misreported in Moscow with a deadline for an announcement
by Sechin of February 15. Government sources say that no such deadline exists.
They also say that Levi's meeting of officials this week will not make the
final decision, but will continue to assess cost and budget estimates, as well
as compensation proposals from Uralkali and other fertilizer and mining
operations in the area.
Trutnev was asked at his Berezniki conference to say who is "guilty", and
responded that this can only be judged in court. Media reports misunderstood
the answer, according to ministry sources. They have told Minesite "nobody is
going to court this time - everything will be decided by the [Rostekhnadzor]
commission". Sources close to Trutnev and Levi say they have agreed to levy no
more than 2.5 billion roubles in additional costs and charges on Uralkali - an
amount that would leave the company still firmly under Rybolovlev's control.
A report by Anna Kupriyanova at Uralsib Bank in Moscow warns that "we believe a
positive solution to the conflict is unlikely and see a high risk of Uralkali
losing some assets or facing a change in ownership (to finance the penalty), as
the fine may be significant enough to force the company to seek external
financial support from the State. We also see significant risks for minorities,
including valuation and squeeze-out risks, as well as other potential risks
associated with a change of Uralkali's business structure (particularly,
changes in the organization of its export trading operations or domestic
Uralkali officials are making no comment on the situation. They remain in
waiting mode for Sechin's decision. The latter's office doesn't respond to
Sechin's colleague in charge of the farm sector, First Deputy Prime Minister
Victor Zubkov, is also playing coy - this week with Russia's nitrogen
fertilizer producers and exporters. A public warning from him that he may
reinstate the recently lifted export duties on nitrogen fertilizers will be
tested by the domestic industry in the run-up to a cabinet session scheduled
for March 5.
For the time being, Zubkov will neither reiterate his warning, nor defend his
assessment of the domestic price movement for fertilizers.
In a statement released to a state news agency last week, Zubkov reportedly
said that the government may reintroduce export duties if the fertilizer
producers do not reduce the domestic prices of their products "in accordance
with the agreements entered into". Zubkov was referring to last month's
decision by the government to cancel from February 1 the 8.5% export duty
imposed in April of 2008 on nitrogen fertilizers. The duty was due to expire on
March 31. Duty levels of 5% for exports of potash fertilizer and 6.5% for
phosphates and sulfur remain in force for another month and a half. These
measures were taken by Zubkov to encourage the producers to sell to domestic
consumers, instead of export to the higher-priced global markets.
Zubkov, whose remarks were reportedly made in a telephone conference with
regional grain procurement and farm supply officials, claimed the fertilizer
producers had promised not to raise their prices if the export duties were
lifted. but he and his spokesmen refuse to answer questions, referring them to
the government press office. The spokesmen there refer back to Zubkov's office,
thereby refusing to respond without exactly saying so. A discussion of the farm
sector ahead of spring planting and harvest planning has been scheduled for a
cabinet meeting on March 5, but Zubkov will not confirm even the date.
The potash and phosphate producers decline to comment, because they say their
products are still under the export duty regime.
The Russian Union of Fertilizer Produces, an industry lobby group, say they
have been surprised by Zubkov's claims. They claim that in January they
delivered 295,000 tonnes of fertilizers to the farm sector, up 186% on January
of 2008. They add that the price was 15% to 20% below the level reported to the
government in November, and well in line with the earlier agreement with
Because of falling demand and falling prices, both domestically and in the
export markets, the fertilizer producers had lobbied Zubkov for early relief of
the export duties, as they were adding to the downward pressure on sales
revenues. At the start of this month, according to the association, the state
statistics agency Gosstat was reporting that domestic fertilizer prices were
50% below the level of the Zubkov agreement of last year.
Industry analyst Mikhail Frolov of the Finam investment house in Moscow says
the price decline to December 31 was followed by a rise in prices during
January, and that traders, rather than producers, may have been responsible.
Domestic end-users in Russia cannot buy fertilizers directly from the plants,
having to go through trade intermediaries.
The producers are considering dispatching a letter to Zubkov to explain that
the January increase has not lifted prices above the agreed level. "It is
illogical to bring back export duties now," commented Frolov, "when the times
are so tough, and it won't drop prices anyway."
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.