Firtash new fertilizer king of Ukraine
Once known almost exclusively as a natural gas trader, Ukrainian multimillionaire Dmytro Firtash now has a strong foothold in chemicals. Since President Viktor Yanukovych ascended to the presidency in 2010, Firtash’s control over the domestic production of mineral fertilizers has reached near-monopolistic levels.
Firtash, 47, spent some $261 million on capital expenditures at his four plants in 2011-2012: Cherkasy Azot, Horlivka Concern Stirol, Severodonetsk Azot and Rivne Azot - all part of his Ostchem chemical group headquartered in Vienna.
Ostchem’s parent company, Group DF, said it plans to invest an additional $150 million this year for major improvements at the plants.
Firtash said he invested heavily in the plants because he believes in the potential of Ukraine’s fertilizer market. "We are confident that the Ukrainian fertilizer market will double by 2017. We believe in this forecast that’s why we are making serious investments in our enterprises," Firtash told the management team of Horlivka Stirol in October.
Ostchem predicts that overall nitrogen mineral fertilizer consumption will rise from today’s 950,000 tons to 2 million tons by 2017. Potassium and phosphorus are the two other key fertilizers.
In an interview with Expert Ukraine magazine in 2012, he said he plans to invest $i.5-$2 billion to nitrogen mineral fertilizers over the next seven years.
Having an estimated net worth of $598 million, according to Forbes Ukraine, Firtash has reason for optimism. Analysts say he has a near-monopolistic position by controlling four of the six nitrogen mineral fertilizer plants inherited from the Soviet era.
The fifth chemical enterprise in the country, Odesa portside chemical plant, is state-owned although numerous news reports say Firtash has his eyes on the giant. The Dniproazot plant reportedly remains in the hands of the so-called Privat group co-owned by billionaire Igor Kolomoisky.
The six chemical plants specialize in producing ammonia, carbamide and ammoniac nitre. Tamara Levchenko, senior analyst at Kyiv-based investment bank Dragon Capital, says that 80 percent of the ammonia and 70 percent of the carbamide produced are exported. But 70 percent of ammoniac nitre remains in Ukraine because it is a traditional Soviet-era farming technology.
Another competitive advantage Firtash has is the ability to supply his plants with cheaper Central Asian gas - as opposed to Russian fuel - that doesn’t go through state-owned gas and oil giant Naftogaz , but through his Ostchem Holding Limited.
This year, his four enterprises are expected to account for 6 of the 8 billion cubic meters Firtash’s gas trading company will import, according to Dragon Capital.
The privileged position allows for shifting strategies.
In addition to increasing fertilizer exports, the tycoon said he wants to gain new consumers inside Ukraine. For this reason Group DF purchased UkrAgroNPK, a big mineral fertilizer production and trading company.
Firtash cherishes its nationwide chain of 16 warehouses, which he wants to expand to 36 by this summer.
The acquisition should keep fertilizer importers on a tight leash. "Importers don’t have chains like that and we also beat them because of better logistics as we have the same prices though we are closer to the client," said the chemical mogul.
His ambitious plans include even household fanns and gardeners. In 2012, Firtash outlined his fertilizer distribution policy to include everyone from big agribusinesses to product placement on store shelves.
"My point is that we must come to shelves. We want to sell not only fertilizers but also herbicides and other agricultural chemical products," Firtash told Expert Ukraine magazine.
Ostchem’s deputy general director Maria Bezzubova confirmed that in 2012 the company developed the warehouse chain but without specifying how many Ostchem has by now.
Firtash’s plan appears in line with the Ministry for Agrarian Policy and Food’s program. Agriculture Ministry data shows that the sector is using more mineral fertilizers. The average amount of plant nutrients added by Ukrainian farmers in 2010 was 54 kilograms per hectare, 68 kilograms per hectare in 2011, and 80 kilograms per hectare in 2012. Agriculture Minister Mykola Prysyazhnyuk says that the preliminary figure for 2013 is more than 90 kilograms of fertilizers per hectare.
And experts say Ukraine needs more fertilizer usage. Ukrainian Agribusiness Club general director Volodymyr Lapa says that to boost Ukraine’s agricultural productivity, at minimum plant nutrient usage must double.
"If, in the Soviet Union, there was a norm of 190 kilograms of fertilizers per hectare of arable land, today we average 70 kilograms per hectare," Lapa said.
Levchenko of Dragon Capital says Europe uses up to 120 kilograms of nitrogen mineral fertilizers per hectare, and the U.S. about 300 kilograms.
However, analysts are skeptical the Ukrainian fertilizer market can double by 2017. Financing is a problem, so the soil is left undernourished. Only big prosperous agriholdings can afford sufficient fertilization that yields 5-6 tons per hectare. Medium and small farms, however, can’t access affordable loans.
So this leaves Firtash to focus on 20 percent of Ukraine’s arable land that is farmed by large agribusinesses.
"When this figure grows to 50 percent there can be the increase in fertilizer usage on which Group DF focuses," says Levchenko adding that this will signify the nation’s growing agricultural production.
So as Firtash flexes his muscles, smaller fertilizer traders will be squeezed out analysts said. They predict that in the coming years their number will decrease from 3,000 to just several.
The same happened in Russia not long ago where chemical producers started to distribute their products and traders dropped to single digits.
"This is the way Group DF can make additional money by taking the (fertilizer) distribution service," says Levchenko.
This scenario seems likely given Group DF’s dominant fertilizer production position and guaranteed gas supply, which primarily fuel fertilizer plants.
Bezzubova of Ostchem says the company’s approach is in-line with global trends as fertilizer producers integrate operations.
"There is a stable demand for standard products and manufacturers compete with each other in price. Accordingly, separate producers have the growing problem of maintaining competitiveness. The merging of manufacturing companies is successful from the point of view of international competitiveness and meeting global integrating processes," says Bezzubova.
But there are agrarians who are not enthusiastic about the coming monopolization of the fertilizer market.
Among those who look askance is Viktor Sheremet, head of the Gerkules (Hercules) farm that farms 2,000 hectares in Kyiv Oblast. The farm is rich enough to heavily fertilize its lands mostly with products from Firtash’s Cherkasy Azot that are bought right at the plant. Sheremet says his rapeseeds require 400 kilograms of ammoniac nitre per hectare.
Also the vice president of Ukraine’s Association of Farmers, Sheremet said: "I’d like to have numerous fertilizer producers and traders present on the market. It would be nice if we have products from different manufacturers, from Cherkasy Azot, as well as Russian producers. When there is free competition there will be a fair price on fertilizers. And we will lose with the only monopolist working in our region."