Oleksandr Frolov: we are entering a market with giant growth potential

Even during the war in conditions of falling economy Ukrainian companies enter completely new markets. CEO of CO2 Company (part of  nitrogen business of Group DF Dmitriy Firtash ) told about entering carbon dioxide market in Italy.

In interview with “Ukrainian News, the top manager told about "pitfalls" and risks of Ukrainian companies entering the European Union market and about competition in industrial gas market.

 

Group DF introduces C02 Company to the EU market. Why did you make this step? Can you tell us  details of the first supply of carbon dioxide?

We  enter the promising  EU market with a capacity of USD 384 million in 2022 and with a projected growth of 6-7% per year. Our company has delivered its first 20 tons of carbon dioxide to the EU markets in November of this year. The recipient of the first batch was the Italian group of companies JULIA GAS SRL This was preceded by a year of careful preparation, a very difficult year. During this time we have installed the latest equipment at Cherkasy Azot conducted an international audit and  passed all  necessary certification to start supplying "food" CO2. The food sector is the most marginal buyer of CO2. But it is also the most demanding one!

 

 

How was it organized during the war? Did foreign inspectors come to the plant during the war?

In fact  the certification process was carried out in several stages and began even before the war. At the beginning of 2022  we purchased expensive Carboscan-300 equipment. Figuratively speaking it's like Mercedes-Benz in the world of cars. The goal is to ensure quality and quality control. While there are no analogues in Ukraine, there are no other places or industries in the country where they can guarantee that the production and loading of CO2 tankers meets the quality level set by the standards. The quality of carbon dioxide is measured by 24 indicators. The next stage after  purchase and debugging of equipment is obtaining a certificate. And yes, we managed to realize it during the war. There was some delay in terms but in general  I think everything went very well. It is the result of  team's work. I am very grateful for this to the team that got excited about this idea and did the impossible to implement this project. Now we are moving clearly according to our strategy. I think over time we will do the same at other Ostchem plants. Now we’ll see how sales will go, we'll work out all logistics.

 

Is buying a Carboscan-300 an investment you want to recoup?

Naturally. We are moving according to the business plan.

 

I would also like to clarify: how was the decision made to enter the European market for  CO2 company? Have you studied the market, prices, prospects?

It is a part of our 5 year nitrogen business strategy approved in 2022. Of course no such like decision is approved without appropriate research. Deciding to enter the EU markets, we clearly understand that we are entering a developed market with huge growth potential at the right time. The European market is tremendous, carbon dioxide is used here in such industries as medicine, pharmacy, fire extinguishing systems, cooling of server rooms, growing vegetables, preserving meat products, etc. Shutdown of chemical plants in the EU in 2021-22 provoked a shortage of carbon dioxide, which led to some disruptions in the work of a number of industries.

 

As far as we know Cherkasy Azot has been producing liquid carbon dioxide since 1994 and has been working with domestic buyers for a long time. Can you share with us how much the plant can produce at most and which enterprises are buyers of carbon dioxide within the country?

There is no secret here, everyone knows it in the market, it is very narrow, there are few players.

Carbon dioxide has been produced on the basis of Cherkasy Azot since the summer of 2003. It is a by-product of fertilizer production. Today  our total production capacity in Cherkasy for carbon dioxide is 24 thousand tons per year. Also earlier if you know  CO2 was produced at Severodonetsk Azot. But this plant is now located in the temporarily occupied territories. Also this industrial gas can be produced at Rovnoazot . So Ostchem has a very good production potential, our goal is to become one of the largest players in the domestic market.

 

You didn't answer the question - who are your biggest buyers in Ukraine?

Yes Yes. I continue, be patient. Quality of our CO2 meets Ukrainian food industry standards. In Ukraine we supply the product to such enterprises as Umanpivo , ABK DNIPRO, Zmiivska Vegetable Factory, Kharkov Vegetable Factory, etc.

 

Do you negotiate with players like Coca Cola , Carlsber or Pepsi ?

According to our communication rules, we cannot talk about the negotiation process before any contracts are concluded. It is Forward Looking Statement . I can say that working with companies of this level regards a long-term and uninterrupted supply of large batches of CO2. Very huge! If something is not delivered somewhere, it is fraught with large fines. We take only the kettlebell  the weight of which we can lift. 100% fulfillment of obligations is our credo, it is the rule of business. When we are ready, we will contact large multinational players in Europe and Ukraine. It is one of our goals. Sorry, I can't say more  answering your question. If there are big contracts, the media will know about it. We are a fairly transparent company, all our reporting is transparent for partners.

 

 Food industry and other industries have very different requirements for CO2 quality. Will you categorize the product in production? If yes, how will it be implemented?

Of course, the requirements for food and technical carbon are different. Accordingly the cost of food and technical carbon also differs, sometimes by 2-4 times. But we have a competitive advantage over other manufacturers. All our products initially meet the standards of  food industry and, of course, we will not carry out any separation. It is logical that we will focus primarily on  food industry . Marginality there is many times higher, to be completely frank.

 

Are there any difficulties with containers for transportation and storage of liquid CO2? How is its turnover, condition of control, preparation for reuse organized now?

When shipping a batch of CO2 we analyze the condition of  containers for transportation using Carboskan-300, if necessary we clean them with CO2. We supplied CO2 in a tank truck that fully complies with all standards, which after unloading, is returned to Ukraine.

 

 

Are there any special requirements for the transport that carries CO2?

Yes, there are. Due to the specifics of the cargo for transportation it is necessary to fulfill a number of requirements, provide a number of documents, including:

• international license for transportion of dangerous goods;
• barrel certified according to European rules;
• an ADR-approved tractor equipped with two mains interruption points;
• a driver with a permission for international transportation of dangerous goods;
• international technical inspections of the tractor and semi-trailer;
• European adapters for draining liquid and gas;
• cargo and vehicle insurance.

 

Can you explain on your fingers how your logistics chains for supplying CO2 to foreign consumers (mode of transport, routes, duration) look like?

In Europe CO2 is traditionally transported by special tankers, wagons. In Ukraine, so far, transportation is carried out only by tankers. It is clear that routes depend on  destination. Our party was sent to eastern Italy, the city of Fontanafredda . On November 5, they were loaded, on November 7 they were" customized ", from November 8 to November 13 they were in line of  border checkpoint  Chop. November 14-15 we moved along the route: Chop (Ukraine), Hungary, Slovenia, then customs clearance in Venice. On November 15-16 shipment took place at three points in eastern Italy. On November 17, the car began its journey back to Ukraine. So out of 11 days  6 days were spent for  crossing the border. It is a lot, but this first delivery is a trial, now we study carefully all business processes once again, look at all the logistics step by step in order to shorten the delivery time. Everything should work like a Swiss watch, failures are unacceptable. We must deliver quickly and on time. It should be taken into account that CO2 partially evaporates during transportation, the longer the route the greater the losses.Having losses is normal, it is up to standards, they cannot be avoided. We can only influence the speed of delivery. The faster we deliver, the better. It’s a very simple rule.

 

In addition to the EU markets what other export destinations are you potentially interested in?

We will eat the elephant piece by piece (Laughs).  Ukrainian market remains a priority for us, we have already signed many contracts in Ukraine, all of them must be fulfilled. Now we have begun to master the European market gradually.

 

What countries do you regard?

Moldova, Romania, Italy, Spain.

 

Will you go further outside the EU?

Answering your question honestly, I will say the following: we do not consider markets outside the EU during the next two years. We see good prospects in the EU markets and for now it will be enough for us to develop. Ukraine will become a member of the EU sooner or later, so we must be ready for it.. The European CO2 market, after the end of the war will grow even more. If the EU economy grows, CO2 consumption will also grow.

With your release of "food" CO 2 in the EU, have new prospects opened up in the domestic market?

I repeat, Ukraine remains a priority market, and we have already contracted many deliveries here. Here we supply CO2 to a number of companies in  food industry , our market share in this market is less than 20%. Certification will allow us to  increase our share significantly by taking some part of the market from importers. We have ambitious plans, we have good quality and competitive price. We believe in the growth of our market share, but we will not give public forecasts. Do not count your chickens before they are hatched. Let's see how things go. Everything will depend on the condition of  economy, on the solvent demand of consumers. There is a direct correlation between  industrial gas market and GDP.

We are currently negotiating with one very large international player on  Ukrainian market. Of course, I would like to name it, but I can’t, we have signed a confidentiality agreement. After reaching an agreement, we will say it publicly. New and new clients come. If you ask me directly if you have a huge queue of customers, I will answer honestly: no. This is the market where you need to gnaw everything with  your own teeth. We must prove us to be stronger and more efficient.

 

Who do you think your competitors are?

In Ukraine carbon dioxide is produced by Coca Cola , Carlsberg , Obolon, Laila Leon, Krasnoslobodskaya distillery "," Gazinvest -Trust ". But it is only 3% of the market. Everything else is imported by importers - about 80%. Our task and I would even say mission is import substitution . For many year CO2 importers have convinced the market that there is no and there can be no production that meets international standards.Now we have definitively debunked this myth.We have turned this paradigm upside down and are destroying the established DNA of this market.I sincerely believe that imports will decline.We have  price advantage and logistics, we have quality . Ukrainian companies are able to provide CO2 for Ukrainian consumers.The certification that we have passed is, figuratively speaking, such a trump card move in  CO2 market.To win and move the market, you need to be 2-3 times stronger than a competitor.Yes, many market operators did not expect such a move from us, but we did it.

 

And then you have got new customers?

Yes, we have.

 

What are the next moves? How will you change production and marketing strategy?

I will not reveal everything to you so as not to show the way to competitors. In addition to CO2 our company deals with argon, we also produce medical oxygen and other industrial gases. We will not talk about the strategy in details yet, this is a topic for another interview. Let's do something, then we'll talk.

I will say only one thing: we do not intend to reinvent the wheel in this market. It is important in your strategy to go from the needs of customers. Only then will your business strategy play out, and then will you be able to win this difficult game. Competition will only increase in this market, there will be absolutely new industries-consumers of CO2. For example, medicine, metallurgy, agriculture, and other industries. It is only important to set up your business in time for these new niches. Start is always difficult. As we accelerate, it will be more interesting, it will be possible to measure our results.

Business on industrial gases is a special one. It is important to conduct it with a cool head, with a clear pragmatic calculation. We put not only on the best product for our customers. We also put on service and reliability. It is what our clients expect from us. Customer focus is not only the rule of our business, it is a general rule of success in entrepreneurship.