Bill Pradi, Senior Analyst Tim Berg, Analyst

MARKET RISK: Russian Ammonia Suppliers Unstable

1. Introduction

Outcome of the Russian Presidential elections of 2012 did not affect fertilizer industry and omit to bring any changes to ammonia trading regulations. Global fertilizer players consider Russian market to be of highest importance, situation on the market unstable, level of corruption is high. There is a signicant market risk connected to the shareholders conict in Togliattiazot according to the Russian media, current management may face charges for tax evasion and money laundering.

he objectives of this market research report are to describe the current situation of the Russian ammonia market and to provide relevant information on production, exports, imports, consumption and market conditions, changes that occurred in 2011, as well as to assess the risks connected with a fragility in countrys political situation and poor corporate governance within some of the domestic producers. Russia is the world's largest producer and exporter of ammonia with two dominating producers, EuroChem (19% of the market) and Togliattiazot (18% of the market). As regarding the commodity structure of its world consumption, about 79% of it is used in fertilizer production, with 42% of that total consumption being used in the production of urea. Direct land applications use about 3% of ammonia and 14% goes towards the production of ammonium nitrate. The report on the Russian ammonia market contains basic production statistics for all largest domestic producers, analysis of exports and imports, analysis of factors affecting the development of the market and in-depth analysis of market situation and trends which can be classied as potential risks to worldwide supplies. We have talked to the worlds largest ammonia consumers to understand their assessment of current situation on the market and to catch any signs of apprehension.
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19,7 mln. t.
Global ammonia market capacity according to Fertecon
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Bill Pradi, Senior Analyst Tim Berg, Analyst

2. Russian Market in Brief

mmonia is one of the most highlyproduced inorganic chemicals. There are numerous large-scale ammonia production plants worldwide, especially in China which holds 32.1% of the world production, followed by India with 8.9%, Russia with 7.9%, and the United States with 6.3%. Russian production is distributed between ten major holdings with domination of EuroChem, Togliattiazot and UralChem. EuroChem is Russias largest mineral fertilizer producer and ranks among the top three European and top ten global producers by

protability. According to companys management statement, it aims to become a top ve global player within the next 5 years, and maintain competitive cost advantage through better efciency and deeper vertical integration. Togliattiazot which produced its rst tons of ammonia back in 1979 can be named the second largest. Companys main asset is the plant in Samara region which produces various mineral fertilizers: ammonia, carbamide and carbamide-formaldehyde concentrate (CFC). Over 4 thousand employees are working at the

Ammonia production in Russia in 2009-2011, thousand tons

Producer Total Russian Production EuroChem, including:
Novomoskovskaya AK Azot Nevinomissky Azot

2011 13918,5 2658,2

1600,2 1058,0

2010 13294,2 2757,5

1571,5 1186,0

2009 12948,7 2789,0

1656,4 1132,6

2011/2010 4,7 -3,6

1,8 -10,8

Acron, including:
Acron, Novgorod Dorogobuzh

1679,9
1102,8 577,1

1624,3
1108,2 516,1

1622,9
1060,2 562,7

3,4
-0,5 11,8

UralChem, including:
UralChem, Berezneki Kirovo-Chepetsk Voskresensk Minudobreniya

2178,7
1018,9 1159,8 0,0

2077,7
983,0 1094,7 0,0

1998,8
988,3 964,3 46,4

4,9
3,7 5,9 n/a

PhosAgro, including: Cherepovetsky Azot Sibur-Minudobreniya, including: Kemerovo Azot Minudobreniya, Perm Gazprom Neftekhim Salavat TogliattiAzot Minudobreniya Rossosh KuybishevAzot SchekinAzot
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1010,1 1010,1 1604,8 1071,8 533,0 496,4 2513,5 1064,6 649,0 63,3

1043,0 1043,0 1595,5 1011,2 584,3 414,5 2137,8 1056,6 520,5 66,8

1097,3 1097,3 1479,9 994,6 485,3 399,4 1954,5 990,5 557,0 59,2
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-3,2 -3,2 0,6 6,0 -8,8 19,8 17,6 0,8 24,7 -5,2

Bill Pradi, Senior Analyst Tim Berg, Analyst

main production site. Togliattiazot is the only company in the world capable to produce annually more than 3 million tones of ammonia. The factory exports its products to more than 120 countries all over the world. Export share amounts to 85 % of the total production output. UralChem can be named the third largest in Russia with Mineral Fertilizer Plant of KirovoChepetsk Chemical Works and OJSC (MFP KCCW) which are companys main assets and one of the largest producers of ammonium nitrate, NP fertilizers with various ratios of P2O5 and N as well asnew brands of 2component and 3-component mineral fertilizers. In 2010the volume of outputamounted to2.2 million tonnes of marketable products.

In the 9 months of 2012 Eurochems prots corresponds to $4 billion, 27% up compared to the similar period in the previous year. Before the end of 2011 company directed almost $1 billion on shares buy-back procedure what indicates its strong nancial position. In the beginning of 2012 Eurochem started an intensive assets acquisition programme it has bought from BASF the Antwerp agro-chemical plant Antfertia NV for 830 million euro. Belgian plants capacity of 2.2 million tons allows EuroChem to boost its nitrogen fertilizers production by more than 20%. Following its acquisitions strategy EuroChem also purchased Severneft-Urengoy in the 1Q2012 for $403 million. The company concentrates on geological exploration and development of the deposits in Yamalo-Nenetsk region. Vertical integration of gas production assets makes EuroChem less dependent from its suppliers. In autumn 2012 company had problems with potassium chloride production on Gremyachinskoye deposit its initial launch delayed from 2013 till 2015. EuroChem initiated a $800 million loss compensation claim connected to the delay against its object construction contractor Shaft Sinkers, from South Africa. In our estimate, EuroChem has the potential to balance out problems with its potassium project and connected nancial losses compensating by its nitrogen divisions production and nancial reserves company accumulated to date.

3. Eurochem: Increased Diversication

urochem can be perceived as the leading Russian player in the nitrogen fertilizers segment. In the recent years it demonstrates impressive production and nancial indicators.

Largest Russian ammonia exporters

60% 48% 36% 24% 12% 0%
Minudobreniya Perm Kemerovo Azot Kirovochepetsky Azot Togliattiazot Novomoskovsky Azot Acron Novgorod Rossosh Minudobreniya Others Tilde Finance Research
12,3% 3,5% 3,7% 4,3% 4,6% 7,3% 16,0% 59,8%

4. Togliattiazot: The Risk Challenger

wners of the Russian combine Togliattiazot who represent the family of domestic oligarch Vladimir Makhlai has been facing different struggles since they obtained ownership during the times of privatization in
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Bill Pradi, Senior Analyst Tim Berg, Analyst

1992. In the mid-2000s the company was hit by legal challenges and criminal probes allegedly instigated by another Russian mogul Viktor Vekselberg who has acquired the minority stake in Togliattiazot. One of the recent claims has been brought by an Irish registered company Eurotoaz Limited which requested the Supreme Arbitration Court of the Russian Federation to review a case of fraud performed by Togliattiazot management. In 1995 Eurotoaz Limited purchased 44,541 shares in Togliattiazot but then disappeared from Togliattiazot's register of shareholders. Sources report that the company believes that its assets, which are comprised of 10% of the shares of Togliattiazot and investment to the amount of $20 million, were allegedly and potentially illegally misappropriated by management. Also The Investigative Committee of the Russian Federation is investigating the criminal case against Togliattiazot for violating the rights of another minority shareholder - Uralchem. Togliattiazot action prevented Uralchem sell its stake in Togliattiazot, resulting in a loss of $203 mln. Togliattiazot is currently managed by Eugeniy Korolev who reportedly corresponds to Vladimir Makhlai and his son Sergei Makhlai. Vladimir Makhlai lives in London reportedly having obtaining political refugee status. He reportedly faces prosecution for large-scale tax evasion and was apparently put on the Interpol international wanted list, but to date London courts have refused to extradite him to Russia. Also it has became known that his common law wife Valentina Semenova is under investigation managed by The Investigative Committeewhich attracted the attention to payment details to her of approximately $3.3 million from Togliattiazot in 2011.
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5. Uralchem: laim To Leadership

ralchem in 2011 performed the similar to EuroChems mergers and acquisitions strategy. In the end of 2011 company bought 51% stake in OAO Mineral Fertilizers located in the city of Perm. Market sources reported that the stake was valued at $256 million and the deal allowed Uralchem to boost its nitrogen segment capacities by 25%. Company secured its vertical chain by signing in the summer of 2012 the long-term supply contracts with Gazprom and Novatek, main domestic market gas suppliers.

6. Risk Assessment and Worldwide Exposure

lobal ammonia demand, according to PotashCorp data, is forecast to grow at an average annual rate of approximately 3percent over the next ve years, well above the historical growth rate of closer to 2percent. Strong agricultural fundamentals are expected to drive this growth as fertilizer uses account for approximately 80percent ofglobal ammonia demand. Consumption for industrial purposes isexpected to continue its recovery following the sharp decline

Market share of Russian ammonia producers

16,0% 7,6%
EuroChem 11,5% Togliattiazot UralChem 12,1% Acron Sibur Minudobreniya Rossosh Minudobreniya Others
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19,1%

18,1% 15,7%

Bill Pradi, Senior Analyst Tim Berg, Analyst

The pricing level of $705 fob has been recently viewed in the Middle East, while Indonesia prices are around $715 cfr. Producers continue to increase as the higher spot pricing pulls up the formula prices for long-term contract deliveries. Largest ammonia consumers Yara, CF Industries and PotashCorp relay in their longterm consumption plans on volumes exported from Russia, Trinidad and Tobago and Saudi Arabia. Any interruptions of supplies from Russian producers may seriously damage stockpiling plans and affect worldwide pricing. Over the past ve during the economic downturn. Ammonia years, the United States have imported, on capacity additions in China areexpected to average, between 4 and 5Mt/a of seaborne meet rising domestic demand and enable the ammonia, mainly from Trinidad and also from closure of small, inefcient facilities. Given that Russia and Ukraine. the access to cheap natural gas is a key factor in One of the primary factors for prices restrain on determining the competitiveness of nitrogen nitrogen fertilizers is current cautious purchase products, the world's major manufacturers and strategy performed by Pacic-Asian region. This suppliers of ammonia are two regions with the forms a good delayed demand which could be lowest total cost of these raw materials - Eastern realized in 2013. In this case, potential halt of Europe (especially Russia) and the Middle East. Togliattiazot due to technological problems we Among Russian ammonia producers described earlier could lead to stiff prices growth, Togliattiazot was the only one not to benet as the prices despite the existing demand are still from favourable market conditions. Corporate under pressure. and technological problems of the enterprise we 7. Conclusion described earlier are yet oating unsolved and can lead to future loss of its bargaining power. ussian market is very important on global Togliattiazot, while being one of the largest scale and can largely affect variety of global suppliers of ammonia to the international trading factors. Any uncertainty in supplies may market, as the company still holding number be qualied as potential risks for large consumers one position among Russian exporters of this as it will be hard for them to reorient their supply type of raw materials, whether it will decide to chains in order to compensate the shortages. lower its capacities or halt exports due to any frustration can signicantly inuence global ammonia market.

Worldwide prices had signicantly recovered from large drop down in the beginning of 2012. The market continues rm, and according to Fertecon suppliers are seeking $645 fob for new business in the Black Sea region. This is a positive tendency for Russian exporters.
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REFERENCES
Russia's Raiders Spiegel June, 06 2008 http://www.spiegel.de/international/business/aculture-of-lawlessness-russia-s-raiders-a-558096.html Rostekhnadzor Found 558 Violations on Togliattiazot TLT Gorod March, 02 2011 http://tlt.ru/articles.php?n=1932997 Tolling operations: Russia and Switzerland Still Make Fraternal Alliance Tilde Finance July, 12 2012 http://www.tildenance.com/article/tollingoperations--russia-and-switzerland-still-makefraternal-alliance Fertilizer Outlook 2011 - 2015 Eurotoaz Limited to Continue to Defend its Rights in Dispute with JSC TogliattiAzot Bloomberg July, 23 2012 http://investing.businessweek.com/research/stocks/ private/snapshot.asp?privcapId=26442889 Accident on TOaZ could become the largest in history Hubei Yihua Chemical Acquires Production Plant in Russia Demotix August, 15 2012 http://www.demotix.com/news/1389343/hubei-yihuachemical-acquires-production-plant-russia Federal Investigators are Looking Through Vladimir Makhlais Wife Income Statements Searching for Money Laundry Signs Tilde Finance October, 22 2012 http://www.tildenance.com/article/federalinvestigators-are-looking-through-vladimir-makhlai-swife-income-statements-searching-for-moneylaundry-signs Investigative Committee Exposes International Scheme of Theft WEK November, 22 2012 http://wek.ru/ekonomika/83759-sk-razoblachaetmezhdunarodnuyu-sxemu-xishhenij.html anthropogenic disaster TLT Gorod November, 26 2012 http://tltgorod.ru/news/theme-62/news-26468/ IFA, web-ste http://www.fertilizer.org/ifa/HomePage/LIBRARY/ Conference-papers/Annual-Conferences/2011-IFAAnnual-Conference Market Data PotashCorp, web-site http://www.potashcorp.com/customers/markets/ market_data/inventory/ Revenues of oligarchs wife will be checked by the Investigative Committee TLT Gorod October, 15 2012 http://tltgorod.ru/news/theme-62/news-25315/ ToAZ can be brought under bankruptcy Rosbalt August, 23 2012 http://www.rosbalt.ru/business/ 2012/08/23/1025819.html

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