18 December 2019
Vitaliy Sklyarov, Chairman of the Board, PJSC “Azot” (Cherkasy): “Fast-paced development of Ukrainian agriculture is contingent only on stable and reliable operations of Ukrainian manufacturers of fertilizers”
According to available information, in recent months PJSC "Azot" (Cherkasy) has been working at full capacity. The manufacturers we have been able to talk to even say they experienced some stability. They hope that the company will keep on working this way. However, according to some expert opinions it would be complicated to really revive the chemical industry without the state support. Although we know that the Government repeatedly took steps to ensure the work of chemical industry enterprises. Do you think they are enough to address the issues of the industry in general and our company in particular?
Yes, there have been some significant steps on the part of the Government to support the operations of the chemical enterprises and CJSC "Azot" (Cherkasy), in particular. By all means, they played a role at a certain stage. For example, Interagency Commission for International Trade (ICMT) initiated anti-dumping investigations against countries exporting mineral fertilizer.
Could you, please, be more specific?
This May, sanctions were imposed against the import of fertilizers from Russia, which came into force on July 1. It allowed Ukrainian producers of mineral fertilizers to get back up and running, in particular, our company. Of course, this was the support of domestic producers, but is it sufficient? No.
The country imposes duties on products from Russia. But what do we observe? The products of Russian origin still reach the Ukrainian market across the borders with other countries: Turkey, Belarus and others. It implies that the schemes are used when fertilizers produced in the Russian Federation are simply repackaged and enter the customs territory of Ukraine, as if they were manufactured in other countries. And this poses some reasonable questions: who checks the certificate of origin of goods and how they do it? How good are these checks? Therefore, it is necessary not only to impose duties on fertilizers imported from Russia, but also to control the certificates of their origin. At the moment, this is an extremely important issue. Another mechanism to circumvent customs restrictions is when fertilizers are imported under different CN codes. In addition, according to our information, a large amount of fertilizers enters the country without customs clearance through uncontrolled territory. At this point, the Ministry of Economy has two options: whether to efficiently protect the Ukrainian chemical industry, or to open the borders and to allow Russian manufacturers to dictate the terms on Ukrainian market. You know what? This is the question of quality industrial policy. Look at how the developed countries now protect their markets! We need to learn from them. Would you like a small example about the market for fertilizers? Did you know that, for example, under French laws, their farmers are obliged to buy 50% of the fertilizers exclusively from French producers? That's an example of quality industrial policy. I am not talking about the comprehensive system of state support for agriculture in the EU, where for every hectare a farmer receives a subsidy, which he then spends on purchases, including the fertilizers. I am not even talking about the tax breaks for agricultural producers that exist in many countries. This is the responsibility of the Government and the Ministry of Economy.
What are the first and foremost steps that the Government should take right now in order to reassure producers of fertilizers in stability and opportunities for further development?
We have repeatedly raised the question of the natural gas prices, which is the main raw material in the production of fertilizers. In our company, the natural gas accounts for up to 70% of the cost of production. On numerous occasions we appealed to the Government to set the tariff that is acceptable both for the industry in general and for chemical enterprises, in particular, that are using the natural gas as a raw material for the production. Because as the natural gas prices go up, our company will again enter the "turbulence" zone, i.e. the price spikes for the main input, which would again lead to the inevitable stand still. We would not be able to compete with the Russian producers of mineral fertilizers because the natural gas price they pay is several times lower than the one that we pay. Reducing the natural gas price would not only ensure the stable operations of the enterprise, but would also allow us to accumulate the funds for the development of production, reconstruction and major repairs in full.
Could you tell us more about it?
For example, next year we will have to make a major overhaul of the reforming furnace in the A-5 ammonium production facility. We also plan a long shutdown maintenance in M-6 urea production facility that would include the replacement of a high-pressure condenser with a new one brought from Severodonetsk. These are quite impressive projects with significant financial expenses. At the moment, the natural gas price allow us to keep our production working more or less at full capacity, to produce fertilizers and provide them to the farmers; however, you should understand that we also need to maintain and upgrade the equipment that is too expensive and specific because it is used exclusively in the process of chemical production. Moreover, we should not just maintain this equipment. We have to invest in expansion of production, new technologies and research in order to remain a strong and competitive manufacturer. At present, we develop a business plan for the next year. Implementation of the planned programs for major repairs and reconstruction would cost us approximately one billion hryvnias... This is a very large amount of funds… Although we are looking for ways to ensure the implementation of the planned technical programs and use all reserves available to us, without the state support it would be extremely difficult to achieve. It is for this reason that the Government should not stand aside, but suggest a strategy for the development and support of the domestic producers, which would be aimed both at domestic consumers and producers, and therefore would be implemented in the interests of the whole country. It is necessary to analyze each industry and determine what is needed to grow the industrial production and increase the number of jobs. For example, what is required for the stable operations of the Ukrainian agriculture? First and foremost, to satisfy the demand for fertilizers in full. If we look at the bigger picture, sustainable agriculture is a matter of the national food security. Does this make sense? Absolutely. Getting back to the presence of Russian fertilizers and the protectionist policy of the Ukrainian Government, I would like to say that we could not afford their dominance in our market because this is a direct threat to Ukraine's food security. We are deeply aware that without the fertilizers of own production, agriculture will not grow. Agriculture is very important for the country and its GDP. It has a significant growth potential. We would need to increase crop yield, to develop animal husbandry and gardening. These are the major lines of effort and they determine the agricultural policy. Not only in Ukraine but on the global scale. The world would not survive without food. That is why, when implementing reforms, including land reform, over which parliamentarians are now racking their brains, one should take into account interests of domestic producers because only domestic producers would be working in the interests of their people and the country. On our part, we are not sitting idle and assist farmers with practical solutions.
Could you give an example?
Absolutely. Let's take sales and marketing policy. There is, for example, a new line of nitrogen business, OSTCHEM RETAIL, that is a part of Group DF. They are supplying mineral fertilizers from our company and other OSTCHEM producers directly to the end consumers, i.e. Ukrainian farmers. The slogan of OSTCHEM RETAIL, "from the plant to the farmer", concisely and aptly describes the major focus of their activities.
Sorry for interrupting you, but would you mind describing in more details what exactly they did?
For example, in cooperation with the partner banks they developed and launched targeted and exclusive credit programs for the farmers and other buyers to purchase mineral fertilizers.
Could you name those banks? or is it a secret?
There is no secret. Partner credit programs for purchases of mineral fertilizers at the concessional interest rate has been launched in cooperation with 5 partner banks: PUMB, Alliance bank, Procredit bank, Agroprosperis bank and MTB Bank. In the future, the list of partner banks would expand as will the line of targeted financial instruments for purchases of mineral fertilizers by Ukrainian farmers. At the moment, one could secure financing to buy fertilizers not only in hryvnia but also in USD and euro. Within the partnership programs and in parallel to the classical asset based lending the farmers now can secure financial resources to buy mineral fertilizers without collateral as well as loans secured by agrarian receipts at the interest rates below market. OSTCHEM RETAIL has a sound objective, i.e. in cooperation with the banks to make the purchase of mineral fertilizers of Ukrainian origin as much affordable and efficient as possible as well as to make producer-farmer relationships as much useful for their business development. You know, we are just a plant producing high quality fertilizers. But it's not enough. Because there must be sales policy in place, marketing, we need to build relationships with the farmers, we need to clearly know what they want. These issues fall within the responsibility of different people; but together we need to work as good as the swiss watch. Like I said, first and foremost, we need to clearly identify current needs of our consumers. According to Dmytro Firtash, our major shareholder, our whole business of nitrogen fertilizers can only be successful when our clients succeed. I totally agree with him. This is the foundation and philosophy of our business. This is, if you will, our value. We put our client above all.
On a number of occasions, you stressed that capacities of enterprises in chemical industry could satisfy the needs of agricultural producers in mineral fertilizers in full…
Look, out of all plants producing mineral nitrogen fertilizers in Ukraine, only one, Stirol (Horlivka) is not working. It is located in the occupied territories. Other plants continue to manufacture their products. Available capacities of domestic producers could completely meet the demand of domestic market in mineral nitrogen fertilizers. Let's take our company for example. We produce ammonium nitrate, urea and urea ammonium nitrate (UAN). In addition, our company accounts for the largest share of the total output of ammonium nitrate produced by Ukrainian producers, and somewhat lesser share of urea. To the extent that the market gets saturated and competition increases, it's not the output that determines the volume of sales, but the other way round, potential volume of sales forms the basis for planning and development of the production program. We see that in the last few years the UAN demand has rapidly gone up. At the moment, our UAN sells well. That is, the market condition forces us to respond immediately to the processes that take place on it. We must promptly adapt to the market demand. Therefore, when developing the production program, for example, we have identified it as a priority to increase the UAN output capacity from 500,000 t to 1,000,000 t per year. All nitrogen fertilizers that we produce today are shipped exclusively to the domestic market. In Ukraine, there are two plants producing phosphate fertilizers. These are Sumychimprom and Mineral Fertilizers Plant in Kamianskiy. On average, these companies produce 600 000 - 650 000 t of phosphate fertilizers annually which makes almost 50% of demand. The shortage was covered with supplies from Russia. But after Ukraine imposed an embargo on the import of mineral fertilizers from Russia, the issue of supplying the domestic market with phosphate fertilizers was addressed at the expense of supplies from other countries. I cannot say unequivocally at the moment whether there will be enough of compound fertilizers or not, but there will definitely be no problems with other fertilizers. Therefore, when answering your question, it is safe to say that the capacities of our enterprises are enough to provide the farmers with the required amount of nitrogen fertilizers.
What are your plans for the coming month?
The key task for the enterprise is to keep up with the pace and to ensure the performance of production plans. November is almost over and, as the indicators show, the result will be quite good. The last month of the year is also very important and indicative for us, because depending on its outcomes, we would be able to predict the future work of the company in the coming months of the new year. We will clearly know the natural gas tariff set for our company and whether our work will be stable during the winter. Once we receive the confirmation of the price decrease, then we would have guarantees that the plant would work in a sustained manner. At a reduced natural gas price, we would also be able to fully finance the major repairs and continue to implement large-scale programs for the reconstruction and upgrade of production facilities. We are committed to this kind of work and believe that it would yield results.