Analysis of the Russian mining and chemical branch

The Russian industry of mineral fertilizers is export-oriented in connection with low demand for fertilizers from domestic landowners and the high cost of production in the world markets. In the domestic market of mineral fertilizers there is a limited domestic solvent demand.

Russia consumes about 39 kg of fertilizers on 1 hectare of acreage in comparison with 300 kg in the European countries (data of FAS Russia). At huge agricultural areas, this tendency is negative as forms a lack of production in domestic market for branch. For example, the need for potash fertilizers for full food security of the country makes 2,5 million tons, and supply of potash fertilizers to the Russian market is currently carried out of 0,6 million tons.

The Russian mining and chemical holdings produce about 10% of world volume of mineral fertilizers (in 2013 - 10,3%, growth in comparison with 2012 of 2,7%) are about 18,4 million t of mineral fertilizers in terms of 100% of nutrients (data of the Ministry of Economic Development).

The largest Russian companies producers of mineral fertilizers are included into the list of 12 leading global manufacturers and exporters. In particular, on production of potassium Russia wins first place in the world. Thus, Russia is a considerable part of the world market of fertilizers and dynamics of growth of her influence is observed.

Production of mineral fertilizers is present practically at all federal districts of the Russian Federation. Transportation of production is carried out by all means of transport (130].

On the present in the Russian mining and chemical industry five large vertically integrated groups which provide release of the most part of mineral fertilizers in Russia (table 1.5) are created.

The first sales level of mineral fertilizers - sale by the manufacturing plants. The realization of mineral fertilizers is enabled through the large wholesale sales companies which demand is formed on the basis of demand of end users [130].

It is predicted that the Russian market will surpass many others as in recent years insufficient application of fertilizers was observed in growth rates.

In 2013 which became the difficult period for branch of fertilizers the Russian agricultural producers have got about 2,4 million t of fertilizers (in terms of the item of century (nutrients)) that is 3,1% less, than in 2012. In total in the Russian market in 2013 about 14% of the fertilizers produced in the country have been realized that is 0,9% lower than an indicator of 2012 [126,131].

The main producers of mineral fertilizers in Russia

Company

Production assets

Добывающие активы (P205)

PhosAgro

Ammophos; Balakovo mineral fertilizers; Cherepovetsky Azot; Agro-Cherepovets

Apatit

Akron

Akron; Dorogobuzh Hunzhi-Acron (China)

Northwest phosphoric company

EuroChem

Nevinnomyssk Nitrogen; Nitrogen (Novomoskovsk)

EuroChem-BMU; Lifosa (Lithuania); Phosphorite

Kovdorsky Mining and Processing Integrated Works

UralChem

Nitrogen (Berezniki); Kirovo-Chepetsk Chemical Works; Mineral fertilizers (Perm); Voskresensk Mineral Fertilizers

UralPotash

UralPotash

UralPotash

Despite a tendency of the last year, purchase of fertilizers by domestic agricultural producers have increased in comparison with 2002 by 1 million tons (from 1,4 to 2,4 million tons) in 2013.

Domestic manufacturers of the mixed and nitrogen fertilizers manage to hold rather high sales level in foreign markets (figure 1.14). Export of potash fertilizers has significantly decreased in 2013.

In general domestic mining and chemical holdings adapt to adverse conditions of the world market of fertilizers.

So, one of the largest Russian mining and chemical holdings "PhosAgro" thanks to diversification of geography of the deliveries and flexible production model providing hedging of risks could benefit by the volatile market of mineral fertilizers in 2013 [127].

High profitability of sales has been reached due to adaptation to difficult market conditions by the choice of that type of production for sale (concentrated or NPK fertilizers) which has the most favorable price (minus transportation costs) in certain markets. Sales of production of the company, for example, in India where problems with demand and low prices were observed, in 2013 were small (less than 1% of export volume). Sales to the company in regions with favorable market conditions in 2013 have increased: in the European markets - for 72% in comparison with 2012, in Russia and the CIS - for 33% and 46% respectively, having reached record level. The company also expands own marketing network in the markets of fast-growing regions of the world (for example, in 2013 - opening of trade branch in Singapore for ensuring access on the markets of Southeast Asia). Everything listed above has allowed the company to keep almost 100 percent utilization of capacity whereas many mining and chemical holdings reduced production [127] in a year, difficult for the mining and chemical companies.

Fig. 1.14. Export of mineral fertilizers from Russia, one million tons

We will analyze deliveries of the largest Russian producers to various regions of the world [107,127,128]. It should be noted that in case of production of several types of fertilizers (company PhosAgro, EuroChem) of delivery about three segments - nitric, phosphoric and potash are differentiated (table 1.6). However, in spite of the fact that these companies possess access to reserves of potash ores, their production capacities in a potash segment are currently not stalled that leaves the UralPotash company the monopolist in the market. The delay of starts of potash projects in these companies is connected, first, with considerable capital intensity, and, secondly, with the unstable situation in the potash market in 2013 which has entailed essential reduction of prices and demand for potash production.

Table 1.6

Structure of sales of the largest Russian producers on regions of the world

Company

PhosAgro

EuroChem

UralPotash

Segment

Nitric

segment

Phosphoric

segment

Potash

segment

Nitric

segment

Phosphoric

segment

Potash

segment

Potash

segment

Asia

7%

15%

-

13%

30%

-

48%

Europe

6%

23%

-

31%

29%

-

11%

Russia and CIG

22%

30%

-

28%

25%

-

22%

Latin

America

44%

21%

-

10%

8%

-

13%

North

America

1%

2%

-

13%

6%

-

5%

Africa

20%

9%

-

3%

2%

-

-

Australia

-

-

-

2%

-

-

-

and

Oceania

-

-

-

-

-

-

1%

Source: it is made by the author on the basis of these companies

From the table it is visible that the structure of sales of various companies differs a little. At the same time a certain similarity is observed - about 20-30% of products of the companies are sold in domestic market. At the same time if PhosAgro and Eu- roChem sells the products to generally end users, then UralPotash realizes the most part to producers of complex fertilizers for further processing, and only about 30% of all products sold in domestic market are delivered to end users.

On a nitric segment the markets are divided as follows: the PhosAgro company delivers the main part of the production under long-term contracts (about 81% of production), at the same time the main consumers are the markets of Latin America. The EuroChem company sells the most part of nitric products in Europe. At the same time the PhosAgro company realizes only about 6% of production in the European market that demonstrates segmentation of the market by geographical criterion. As for a phosphoric segment, on it a considerable part of realization of both companies is the share of the European markets and the markets of the CIS and Russia. However and here segmentation is observed - the EuroChem company sells about 30% of products in the Asian market while the PhosAgro company - 15%. At the same time in the markets of Latin America production of PhosAgro - 21% in comparison with 8% of EuroChem prevails.

Increase in the internal prices of natural gas which is the major input product can become one of the main threats for the Russian vendors of fertilizers. As for nitrogen fertilizers, the prices of natural gas are a pacing factor of production efficiency and competitiveness of production. In case of introduction of the principle equally profitability of gas price in domestic and foreign market of expenses of the Russian companies will increase approximately for 25% that in a fundamental way to affect competitiveness of production [54].

Upgrade of production and start of new resource-saving productions can become the strategic decision which to some extent can smooth the current situation. So, the 1ST group creates production of ammonia and a carbamide in the port of Ust-Luga (investment capacity of the project - 1,2 billion dollars) where consuming of energy will be 1,5 times lower, and raw gas — is 20% lower than average values on the Russian branch [54].

One more direction of strategic competitive development of the domestic companies - attachment of investments into foreign assets in connection with permanently the increasing prices of resources, low demand in domestic market. Thereby the Russian vendors move closer to end users, cutting transportation costs, get access to new technologies and the qualified work forces, launch productions with higher additional cost. It also allows to bypass tariff and non-tariff restrictions on the imported goods.

One more negative tendency - "pulverization" of strategically important assets of the mining and chemical companies through securities market (table 1.7), sale of the Russian assets to foreign owners [54].

Investments of the Russian mining and chemical holdings abroad [261

Company

Investment transactions

1

2

Euro-

Chem

2002 - controlling stake ABLifosa (Lithuania), production capacities 936 and 150 thousand tons/year, production phosphate diammonium, phosphate monocalcium

2012 - EuroChem Antwerp company (Belgium), 2,5 million tons/year, production of ammonium nitrate, NPK fertilizers, nitric acid

1

2

2012 - trading company K+SNitrogen (Germany), trade in nitrogen fertilizers

ОАО

«Акрон»

2002 - 50% of stocks of the JSC Hudzhiakron company (China), production capacities of 100 and 700 thousand tons/year, production of ammonia, complex NPK fertilizers

2008-98% aktsiylOl 109718 SaskatchewanLtd. PacificPotashCorp companies. (Canada), extraction of potash salts

2012 - 12% of stocks of the Polish company, production of nitrogen and complex fertilizers

The main problems of the Russian mining and chemical companies - not only low solvency of landowners, but also lack of necessary logistic capacities for transfer of mineral fertilizers, and also high tariffs of the Russian Railway, increase in prices for raw materials, slow updating of the production equipment. Competitiveness of the Russian mining and chemical holdings is still based on resource advantages that further development of branch puts at essential risks.

Besides, the prospects of development of the Russian mining and chemical companies in the world markets can change not only depending on internal problems, tactical or macroeconomic factors, but also and from a political situation.

On the basis of the carried-out analysis, the revealed tendencies of development of the market, features of branch on production of mineral fertilizers conceptual bases of development of branch with allocation of parameters of consumption and sales of products are developed (table 1.8) (it is made by the author with use of sources [44] and conceptual bases [70,71,81]).

Conceptual bases of development of branch in production of mineral fertilizers

Table 1.8

Parameter | Characteristic | Strategic importance

Conceptual bases o f development of branch

Main

characteristics of branch

Global scale of the market; maturity; growth rates of the market in 2013- 2014-2,4%, to 2017-2018 - 1,8%

Strengthening of the global competition for a market share; rivalry of the companies is displaced in a services sector

Nature of branch

Cyclic branch; level of demand and the prices poorly gives in to forecasting; the markets of fertilizers have seasonal nature

Dynamics of the market and recurrence of branch defines changes of demand and the prices; monitoring of the current situation is necessary; flexibility of production lines, the wide product range and expansion of geography of deliveries allows to react to changes flexibly

Parameter

Characteristic

Strategic importance

The major macroeconomic factors influencing development of branch

Increase in demand is predicted in connection with:

  • - increase in the population of the planet;
  • - increase in demand for biofuel;
  • - GDP growth per capita;
  • - reduction of volumes of acreage per capita

Fundamental factors define the need for fertilizers, but not solvent demand; decrease in annual rate of a gain of consumption of fertilizers on a global scale will be observed

Character and level of the competition

The market consolidated and sharply competitive; the competition partially constrain limited access to raw materials and high barriers of an entrance exit; the Russian companies work in the conditions of the growing competition

Accumulation of competitive advantages and decrease in prime cost is necessary for rivalry with the world leading companies in the conditions of the price competition for a share of the market and surplus of production capacities

Balance of supply and demand in the market

The main tendency - excess of the offer over demand; decrease in demand due to reduction of import of fertilizers by India and increases in volumes of export from China as a result of decrease in export duties is possible

Surplus of the offer and surplus of production capacities can lead to reduction of prices of fertilizers, fall of the income of the companies and will provide to buyers more advantageous position, than to producers

The major factors influencing demand

Change of volumes of use of fertilizers by agricultural producers owing to macroeconomic factors, weather conditions or the natural phenomena; state policy in the main export countries and the import countries; exchange rates, etc.

Positive market condition, longterm contracts and low level of warehouse stocks can lead to increase in demand for fertilizers

Price level in branch

The raised volatility; the prices of mineral fertilizers directly depend on the prices of agricultural production

Strengthening of the competition and uncertain price forecasts

Conceptual bases of consumption and sales of products

Character of products

Goods of the narrow range; production is rather uniform, differentiation is small

New niche of the market - release of highly marginal products; however it is heavy to develop and bring in a maturity of branch on the market new products

Consumers

Considerable circle of final buyers (several hundreds of thousands), generally farms of various weight

The more small the consumer and the less production share bought by him, the weaker him influence on sellers; possibilities of diversification of deliveries

Interaction with buyers

The price becomes the main factor at making decision on purchases (level of service and quality of production is to a lesser extent important) that causes the market power of buyers

It is necessary to predict the nature of consumption of production; transition to bigger flexibility in relationship with buyers; partnership becomes more and more significant factor of the competition (production of fertilizers to order, deliveries precisely in time, processing of orders, electronic calculations, etc.)

Parameter

Characteristic

Strategic importance

Extent of influence of buyers

High degree of the competitive pressure from the companies consumers connected with standardization and unification of production in branch

The standardization level is higher, the pressure from buyers in connection with ease of transition from one buyer is stronger to another

The main sources of KP in the sphere of sale

Existence of strong distributor network and diversified client base; regional diversification of deliveries, expansion of geographical presence of the companies and approach to end users; optimization of structure of production and range; development of own trading network; expansion of the range and functional purpose of production

The role of logistics and the sphere of sales of products increases; it defines need of investment into development of logistic system and interaction with buyers for ensuring competitiveness

 
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