Visits within Russia

26 january, 2009 14:24

Prime Minister Vladimir Putin chaired a meeting at fertiliser producer Acron in Veliky Novgorod

Transcript of the start of the meeting: 

Vladimir Putin: Good afternoon, colleagues. The Governor and I have been meaning to discuss the performance of Acron and the entire sector. I also promised the shareholders to take a close look at current developments. Acron, a leading nitrogen-fertiliser producer, ranks third in Russia and fourth in Europe. The company, which exports fertiliser to 50 countries, manufactures its products at two facilities in Russia and one in China.

The company employs almost 15,000 workers, including 10,000 people in Russia. Naturally, we are extremely interested in the current performance of the industry's enterprises. I am talking about two aspects: First, the global financial and economic crisis; second, decisions to supply Russian farmers with fertiliser.

I would like to hear your opinion of the company's standing in terms of these two aspects. I know production has been downsized to a small extent. I also know that you want to reinstate 2007-2008 production levels this spring, by March or April. Let's discuss these issues and ways to accomplish social objectives. Do your average per-capita wages total about 20,000 roubles?

Remark: 21,700 roubles.

Vladimir Putin: So, it is 21,700 roubles. This is a leading enterprise in the Novgorod Region. Although the regional industry is currently being diversified, this enterprise is a major employer. Go ahead, please.

Denis Manturov, Deputy Industry and Trade Minister: Good afternoon, Mr Putin and colleagues. First, I would like to review the current situation in the industry. The crisis has certainly had an effect on this sector, but because it is almost entirely engaged in food production, it suffered less than others. Global mineral-fertiliser output has plunged by 10% last year on 2007. We came back to 2006 levels. As of late December and early January, Government decisions to support national farmers also influenced nitrogen-fertiliser purchases because this fertiliser category is in much greater demand than other brands. The Government has therefore supported overall production levels.

Average nitrogen-fertiliser output has plunged by 20%, with the industry posting a 30% recession. This is largely explained by reductions in potassium and phosphorus fertiliser output. Russian companies, namely, Silvinit, Uralkali and a Belarusian state company, together produce 45% of the world's potassium chloride. Silvinit produces 12%, while Uralkali and its Belarusian partners produce 33% of this substance, and are followed by Canada.

China is the main producer of phosphorus fertiliser. Two Russian companies, namely Apatit in the Murmansk Region with 5% and EuroChem, which also has a deposit there, account for 7% of global output. 2008 global prices show that production peaked in mid-2008, and a recession began since past September. In all, production has plunged by 20% on 2007.

Vladimir Putin: Does this concern global prices?

Denis Manturov: Yes, this is the global-price aspect. Naturally, the overall situation has influenced the Russian market. Since September 2007, we started unilaterally reducing prices by about 20%, and we have been maintaining this level.

If we look at phosphorus, nitrogen and potassium fertiliser production, phosphorus fertiliser accounts for the bulk of mineral-fertiliser output, followed by potassium and phosphate fertiliser. Bear in mind the structure of Russian mineral-fertiliser producers. I have mentioned all producers by category. The largest companies are EuroChem, Acron, FosAgro, Uralkali and Silvinit. The division of businesses into mineral-fertiliser producers and raw-materials companies is very pronounced. We believe that mineral-fertiliser producers will eventually have to become self-sufficient in the supply of raw materials. We propose establishing integrated companies that would utilise the state potential, assets, stocks, and production-and-development licenses in order to accomplish this objective.

We are now analysing the relevant Acron proposal and will be ready to submit specific proposals in the near future. Agricultural centres are being established in order to streamline the national corporate fertiliser-sale system, mostly involving EuroChem, Acron and FosAgro. The creation of such centres will reduce outlays with regard to producers and customers. We will abolish intermediaries during the creation of our own chemisation and agro-technical centres.

Slide ten shows current sulfur, carbamide and ammonium phosphate prices. As I have already said, potassium-fertiliser producers and companies implementing incipient investment projects were primarily hit by recession. Although we are still working in this direction, investment resources are limited. This is why the companies are requesting assistance that would facilitate subsequent investment projects.

No more than 5% of fertiliser-industry workers have been laid off to date. As you have correctly noted, the companies concerned will return to 2008 production levels by June 2009. Specific decisions which have been adopted today or which are being proposed in order to support the entire system of easy-term fertiliser prices on the domestic market match current anti-monopoly legislation. This calls for creating incentives to promote the development of agro-chemical centres and to market the products of all the main regional suppliers. We must support all investment projects launched by mineral-fertiliser producers. Naturally, we must promote the creation of vertically-integrated companies in order to rule out conflicts.

At present, monopolies are making it difficult for mineral-fertiliser producers to coordinate long-term prices under five-year and even three-year contracts. Six-month contracts are therefore envisioned. Naturally, we are trying to help producers to reach consensus with raw-materials suppliers. I think we will soon work out a formula to achieve this.

Last year, we introduced customs duties on raw materials and on mineral-fertiliser production. In order to ensure competitiveness of the domestic fertiliser producers, we suggest that these duties should be revoked starting this April; we should return to early 2008 levels. This will induce raw-materials and mineral-fertiliser producers to promptly finalise pricing formulas and allocate investment for modernising production facilities.

Thank you very much.

Vladimir Putin: How will this affect agriculture? I mean our domestic agriculture?

Denis Manturov: This will affect it directly, because we are accumulating this investment at these companies themselves. To begin with, we will streamline production facilities and by so doing reduce prices for agricultural producers.

Vladimir Putin: How will you reduce these prices?

Denis Manturov: Today, additional loans have to be taken. They are a burden for producers. If fewer loans are taken, expenses will be smaller, and money will be saved, thus making it possible to reduce prices for farmers.

Vladimir Putin: What is the difference today between global and domestic prices?

Denis Manturov: For agricultural producers, domestic prices are about 25-30% lower than the global ones.

Vladimir Putin: You suggest cancelling export duties. But then our mineral fertiliser will go abroad. Any commodity will move to where it costs more.

Denis Manturov: In reality, this is how it turns out here, Mr Putin. We are producing all in all 18 million tons of the primary material here. Only two million tons are used at home. Thus, more than 80% are exported. However, if you look at the structure of exports, more than 60% of fertilizer remains at home. This mainly applies to potassium fertilizer, and to phosphorus fertilizer to a lesser extent - about 30% are exported, and 70% remain here. We have facilitated an agreement between the Association of Agricultural Producers and the Association of Mineral Fertiliser Producers.

This is a long-term agreement that has fixed the scale of cooperation for the next five years - that is, in line with the long-term strategy of agricultural development. Therefore, I believe that we will back mineral fertiliser manufacturers without reducing support for our agricultural producers.

Vladimir Putin: It goes without saying that we should support them, and we will do that. However, we should balance out the development interests of different Russian industries. If the measure you suggest is taken, the implementation of the previous agreements should be guaranteed. Let's listen to the head of the company.

Vyacheslav Kantor, chairman of the Acron Coordinating Council: Please, allow me to make a brief comment on Mr Manturov's words. As members of civil society, we are fully aware of our responsibility to our agricultural industry. For us, supplying the Russian countryside with fertiliser is by no means a heavy burden, or something we are compelled to do. Our industry is very diverse, and there is a serious conflict between raw material suppliers and mineral-fertiliser producers, but we are absolutely united on this issue. We will supply the Russian countryside with as much fertiliser as it needs, and on prices approved by the Ministry of Agriculture. This question has never raised any doubts.

I know for certain that in 2007 and 2008, Acron supplied Russia with more than a million tons of our produce a year. Credit for this goes to us, and we take pride in having set a record for supplies to Russia. This figure accounts for 30% of our overall volume, which is more than in Soviet times. Other companies are also trying to increase supplies because this is profitable and not burdensome. There is no contradiction here.

Vladimir Putin: I proceed from the premise that this is profitable because the raw materials mentioned by the Deputy Minister are being bought at domestic prices, which are much lower than the global ones. Meanwhile, the end product is being sold in the world market at global prices, based on global prices on raw materials. For this reason, the rate of profit is very high. Considering that this sector is not fully governed by market relations, other sectors of the Russian economy, agriculture for instance, have the right to expect certain liberties from your department.

Denis Manturov: And it is getting them.

Vladimir Putin: Good. And I'd like us to have agreements for the medium- and long-term perspective, considering the trends that are, of course, linked with raw materials as such. We know them, we understand them, and the industry should not be put in a worse position. This goes without saying. We should come to terms on all these issues. Let's listen to the heads of the company.

Alexander Popov, Acron's Senior Vice President: As the chairman of the board of directors, I'd like to say a few words about our company. In the decade since your first visit to our plant, our company has made a big step forward. Today, Acron is a global company both in the scale of production and in the quality of corporate management. As you rightly noted, Acron is fourth in Europe in production scale. Moreover, I'd like to emphasize that Acron is second in the world in the production of NPK-type multi-nutrient fertilisers. They consist of three major mineral components: nitrogen, phosphorus, and potassium. We are second only to the Norwegian giant Yara in this respect. We account for one percent of the global production, and a mere 13% of the domestic production. It so happens that more than 60% of our costs result from raw materials and services rendered by all kinds of monopolies, such as Gazprom, Russian Railways, and power engineers, as well as branch monopolies, such as potassium and apatite producers.

We don't have any problems with the natural monopolies. Their tariffs are regulated by the Government, and we benefit from them very much. However, our relations with branch monopolies, potassium and apatite producers, have been quite complicated. Under the circumstances, several years ago we decided to build a vertically integrated holding for Acron with its own raw materials, processing, logistics and sales. We have already covered a lot of ground, and have three plants in Russia and China. We also have three mineral fertiliser transshipment terminals in Baltic Sea ports, two in Estonia and one in Kaliningrad. We have our own manpower in Russia and a large labour force in China. In the last few years, we have been licensed to develop apatite deposits in the Kola Peninsula and potassium salts in the Perm Territory, and will be fully self-sufficient in raw materials. We have already received Government permission to build a unit in the Murom Region and are planning to start its construction this year. We are supposed to receive the first apatite raw materials in 2012.

It goes without saying that diversification is our main advantage over our rivals. We have diverse markets. We supply our goods to about 50 Russian regions, and some 50 foreign countries all over the world. We turn out more than 40 types of goods. Needless to say, mineral fertiliser is our number one product. It accounts for more than 70% or even 75% of sales. Multi-nutrient mineral fertiliser makes us more than half of our sales.

As for development factors in the sector, all experts and all investment bankers are unanimous that its fundamental figures are excellent. Despite the crisis in the financial and non-financial sectors, the world's population is growing and the people's diet is improving. At the same time, farmlands are shrinking, there is a lot of talk about biofuels, and urban population is growing. Taken together, this means that we need an increasing volume of foods.

Since farmlands are shrinking, we need to increase the yield, which can be done only with fertilisers. If we look at the chart of agricultural yield depending on the amount of fertiliser used, we will see a trend, if not a direct correlation, showing that the more fertiliser we use, the larger the harvest.

The past year was a record one for us; fertiliser prices were record-high in the middle of 2008. But at the end of the year the prices of some of our products fell by 50% or even 65% due to the global crisis, making the record-high figures history. Today our profitability is at its lowest ever, and our export profitability is now 10%-15% due to the depreciation of the rouble.

Vladimir Putin: That is, changes in the exchange rate have helped you?

Popov: Yes, they did, very much so. The rouble devaluation in 1998 was a second birthday for the sector. In early 1998, the sector was on its dying bed, but then it bounced back and its 2008 production results were better than in the Soviet period.

We are working in different geographical areas and produce different products. We sell some 30% of them in Russia, and some 25% in China, where we have our third plant whose output is marketed in China. We are also exporting our products to the rapidly growing Latin American, African and Southeast Asian markets.

Acron has considerable competitive advantages in terms of expenses, against both its Russian partners and rivals and global companies. The largest of them is low energy prices. But our investment in production modernisation and renovation of fixed assets, which we have made in the past few years, are also producing positive results.

At this point, our monthly production is 15% more effective, on average, than production in any other sector in Russia or the former Soviet republics.

Our plants are strategically located in terms of sales markets. Our Novgorod plant is located close to Baltic Sea ports, via which it exports the bulk of its products. Our plant in Smolensk is located close to the Black Soil Zone, Belarus and Ukraine. Over 70%, or rather nearly 80% of our fertilisers are sold in Russia, in the country's main agricultural regions.

I want to say that our main product - the NPK multi-nutrient fertiliser - does not depend much on gas prices because the gas component is minimal in its production. Even if gas prices grow fast, it will not affect us in a long while.

As for our strategy, we will definitely focus on improving, on strengthening vertical integration, on raw materials security, on creating new jobs and supplying mineral fertilisers to Russian farmers in the required amounts at acceptable prices, which will be considerably lower than global prices.

As for the corporate management structure, I can tell you honestly that today we are the most open company in this sector in Russia. We are listed on both Russian exchanges, the RTS and the MICEX, as well as in London, and we are audited by the leading Western companies according to Russian and international standards of financial reporting. We have added three independent directors to the board, and we will continue to comply with and improve these standards so as to become the leader in the sector in Russia and the world.

This is all I can say now about our production. Our executive director, Vladimir Gavrikov, will report on our social achievements.

Vladimir Putin: Go ahead, please.

Vladimir Gavrikov: I want to remind you that our Novgorod plant has a staff of 5,300 who earn an average of 21,700 roubles a month. However, despite the good pay, they would not have lived so well without the benefit package and the company's social projects. I will explain why.

It is a plant with a variety of potential health hazards. The workers' average age is 44. Of course, we pay much attention to health programmes.

Our medical section has cutting-edge diagnostic equipment. Unfortunately, the occurrence of malignant tumours in the Novgorod Region is higher than the average in Russia, which is why we consider the matter very seriously. We have a resort hotel, which our workers use extensively, and affordable sports facilities. As many as 3,000 of the 5,300 workers at the plant regularly practice different sports, which is decreasing the disease rate.

The sports facilities include a swimming pool, a gym and two lawn tennis courts. We turned an old shop a five minutes' walk from the plant into a sports centre with a gym, a lawn tennis court, fitness equipment, and a universal court for badminton, basketball and volleyball. They are a great help, and enjoy great demand. We also have two resort hotels.

Today we are speaking about growing unemployment, but six months ago we faced the lack of skilled personnel, which is why we are fighting for young professionals on the labour market. Young professionals are attracted by our good pay and housing. Last year we commissioned 84 flats under a mortgage programme. Here is what we do: We sign 4- or 5-year contracts with young professionals, telling them this is the deadline for making some progress, for winning promotion at the plant, after which they can use state assistance or mortgage programmes to pay for their flats without our help.

We also have a special "light work" shop, one of very few in this country, where pregnant women work, sewing and providing other services to the plant. This is very good for their health.

We also have our own food centre. Over the past 10 years we built a sports centre for children, who love it.

These expenses, which are considerable, are not wasted because they make us attractive and viable in the mineral fertiliser market. Sergei Mitin [Governor of the Novgorod Region] always points to this. We have set a good example in the city and the region.

Vladimir Putin: So you haven't resorted to employment layoffs at all?

Vladimir Gavrikov: Almost not at all.

Vladimir Putin: How about planned federal personnel cuts?

Vladimir Gavrikov: No. What I did was tell my employees that I require strong discipline. What was forgiven before might not be allowed to pass any longer. I mean violations of work discipline.

Vladimir Putin: Mr Antonov? Would you like to add anything?

(Ivan Antonov is President of Acron)

Ivan Antonov: I would like to say a few words about the company's development, and its business priorities since it was established in 1993.

In the past eight years, since 2000, we have spent over $300 million on business development and on extensive technological re-equipment. We have built, almost from scratch, five production facilities to make resin and liquid mineral fertilisers. We have also built a simulation class to train our ammonia-making personnel, much in the way they train Boeing pilots.

Over the past three years, we have also bought two important licences, one to use bone raw material in production, and the other to use potassium, for over $700 million.

Overall, we have effectively spent $1 billion of our profits over the past 7-8 years on business development. We do not pay huge dividends in Acron, but they are quite high. We plan to stick to these development policies for the next 25 years.

We have a development plan until 2016, a plan we are consistently implementing. In particular, we intend to nearly double production, to boost the manufacture of compound fertilisers, and to establish and develop our own mining division. Therefore, the Apatit mining and chemical company will no longer be a monopoly after we build a mine and an enrichment factory in 2012. Local companies Valdai and Seliger will also have their market share limited.

Our development plans also include a social programme. We subsidise all local social services. Therefore, we have no social problems at our plant.

Prices have dropped, especially in Russia - down about 40% from last year. This is only natural. Economic efficiency is no more than 10% in Russia today. Competition is strong, and we can understand farmers' problems. We control over 20 regions for the supply of agricultural chemicals to farmers. We have three partner collective farms in different regions - the Saratov, Oryol, and Lipetsk Regions, and we never forget about them.

Our exports have dropped, too, but we hope they will rise again. We have seen high growth rates, which are now down to 10%-15%. If customs duties had been cancelled earlier than April, we could have earned something, for ourselves and for the federal budget.

We have certainly benefited from Government assistance, as changes in taxation were adopted on November 25 or 26. Now we can pay out profit tax on a cash basis, but not in advance.

Vladimir Putin: That's why we did it, so that you wouldn't have to pay in advance.

Ivan Antonov: We appreciate the decision, Mr Prime Minister, and other producers as well. It is extremely valuable support.

Vladimir Putin: Good. Now let's talk in more detail about support measures taken earlier this year, what the state has been doing to help the sector. Then we'll go back to discussing the sector's relations with farmers.