Moscow - September, 15 2008. Major Russian mineral fertilizer producers United Chemical Company URALCHEM and Acron support the resolution adopted by the Russian Federal Service for Financial Markets (FSFM) to halt apatite concentrate trading at the Moscow Stock Exchange and the Umex Universal Trade Stock Exchange effective September 1, 2008. Both companies believe that this resolution is reasonable and well-timed.
The resolution to discontinue trading is a logical implication of FSFM’s position outlined in its Letter No. 08-VM-0216238 dated July 2008 On Exchange Trading in Products Produced by Monopolies. In this letter, the FSFM concluded that exchange trading of goods produced by monopolies is not a fair market practice, as it leads to higher monopoly prices and enables monopolies to use questionable sales schemes to evade restrictions imposed by antimonopoly regulations. The prices for monopoly producers’ products set in the course of such exchange trade may not be considered fair market prices.
The current situation in the Russian mineral fertilizer market is complicated, with more than 80% of Russia’s apatite concentrate, the key input for mineral fertilizer operations, produced by the monopoly Apatit. Apatit is a member of the PhosAgro Group and clearly dominates the Russian apatite concentrate market.
Since November 2007, Apatit has been selling its non-contracted output through its sole intermediary, Trust Broker, for further resale through the commodity exchange. Apatit has been reluctant to enter into direct supply contracts with independent consumers. Limited volumes only were sold through the exchange which, coupled with ongoing increase in demand, put significant and unreasonable upward pressure on prices. This practice led to shrinking margins for mineral fertilizer producers. In H1 2008, the price for apatite concentrate at the Moscow Stock Exchange went up more than eightfold, from RUB 2,232 to RUB 18,000 per tonne. These skyrocketing prices were not the result of higher costs at Apatit, meaning that the company was bringing in triple-digit margins while mineral fertilizer producers were reducing prices for domestic farmers.
The domestic market for apatite concentrate is very tight, forcing Russian producers to shut down their operations. In the meantime, Apatit has been exporting most of its output at prices significantly below domestic rates. In essence, the company has been subsidizing European mineral fertilizer producers to the detriment of Russian producers and the Russian state budget.
Given the uncontrollable and unrestricted increase in input costs, mineral fertilizers have had to pass on higher costs to their end consumers. Unlike producers of raw materials, mineral fertilizer producers do not dominate the market and their practices do not contradict antimonopoly regulations. The sole driving force behind higher mineral fertilizer prices is the unreasonable increase in prices for raw materials at the commodity exchange.
In forcing apatite trading on its consumers, Phosagro is aiming at sustaing its monopolistic prices, which violates Russian Federal Law On Promoting Competition. Furthermore, Companies in the PhosAgro Group (Ammophos and Balakovskyie Mineralnyie Udobrenia) have been purchasing apatite concentrate at low fixed prices under long-term contracts, which gives them an unjustified advantage over other Russian producers.
Despite the rapid increase in prices for apatite concentrate and the tight domestic market, earlier this year URALCHEM and Acron froze prices on mineral fertilizers for its domestic customers, thus preventing prices from soaring during the planting season.
URALCHEM and Acron support the efforts of the Russian Government to provide Russian farmers with mineral fertilizers in the required volume and at reasonable prices. Ensuring reasonable apatite concentrate prices for Russian mineral fertilizer producers on a long-term basis will drive down mineral fertilizer prices and increase domestic fertilizer supplies. In light of the above, the FSFM’s resolution to discontinue exchange trading is well-advised. It is fully in line with the Federal Law On Commodity Exchanges and Exchange Trade and puts a stop to the existing practice of monopoly pricing. The resolution will promote long-term contracts at reasonable and justified prices, thus achieving the objective set by Viktor Zubkov, First Deputy Prime Minister.