30 June 2017

Andrey Melnichenko speaks at St Petersburg Economic Forum

Interviewer: We continue our conversation with guests of the 2017 St. Petersburg Economic Forum. We now welcome Andrey Melnichenko, the major shareholder of EuroChem, to our studio. Andrey, good afternoon.

Andrey Melnichenko: Good afternoon.

Interviewer: I am glad to see you at the Forum. Please tell us about your agenda. I am aware you had meetings with representatives of business circles from Russia and abroad. Have you reached any agreements, and if so, on what?

Andrey Melnichenko: EuroChem has two interesting partnership agreements, which were signed and announced at the Forum.

One is a partnership project with ChemChina, the largest Chinese chemical company. We are considering the option of building a new production facility on the territory of Novomoskovskiy Azot, which is part of EuroChem. We are also looking at the possibility of constructing production facilities for MDI and TDI, which are used to produce many basic chemical products, such as polyurethane resins and foams, etc. They are not produced in Russia and the market is big, representing about 150 thousand tonnes today, and growing, which is important. We plan to commission production facilities with 200 thousand tonnes of capacity. This is the first project. The amount of investments is half a billion dollars at the initial stage, but the scope of the project will likely expand. We are looking at total investments of around one billion. ChemChina could join as a project shareholder; this option is being considered now.

The other project, which is very important for us, is linked to our cooperation with the China National Tobacco Corporation, also one of the largest companies in China. At the moment, our company owns production facilities in China, where we produce specialty fertilisers. The China National Tobacco Corporation is among our largest customers. We are considering having the China National Tobacco Corporation join as shareholders of this company and thinking about possibly investing to increase our production volumes. This would allow us to offer our Chinese partners a wider range of locally produced products in addition to imported products from our plants in Russia (Nevinnomysskiy Azot) and Belgium.

Interviewer: So, out of this half a billion dollars that you would invest together with ChemChina, what is your part of the investment?

Andrey Melnichenko: Half a billion is the total investment for the first stage of the project.

Interviewer: Will this be the declared funds, or will you invest ...?

Andrey Melnichenko: These will be the company's funds, which consist of both earnings and borrowings.

Interviewer: Overall, as far as I know, you are an active investor, not only via EuroChem, but also through other major companies, such as SUEK and other assets in Russia. How much investments have you already made in recent years, if you can provide such figures?

Andrey Melnichenko: From 2009 to 2017, three companies (EuroChem, SUEK, SGK ) have invested a little more than 16 billion dollars in Russia.

Interviewer: 16 billion dollars... I know that you have an exciting investment, a project in the Volgograd region, if I am not mistaken, where you are building a city, production plants, and the entire infrastructure around them, from scratch. Is it true? What is it?

Andrey Melnichenko: Yes. This is one of our biggest projects... Speaking of EuroChem, the company is implementing three major projects right now. These include two potash projects. Indeed, from scratch, these are two greenfield potash plants. One of them is in the Volgograd region, in Kotelnikovo, where we are looking forward to achieving considerable production volumes. We currently plan to manufacture about 4.6 million tonnes a year. Production is expected to start next year. The commissioning of operations could begin in February, with commercial operations perhaps starting in the second quarter of next year.

The other major project we are implementing is the Usolskiy Potash Complex in the Perm region, where production operations should start this year.

These are long-term projects. We initiated the Volgograd project in 2008, whereas the Perm project was launched in 2011. Ten years of construction, but completion is around the corner. Together, both projects represent slightly more than 7.5 billion dollars. These are EuroChem’s two main projects.

The third large project is in the Leningrad region. We are building an ammonia plant, which represents investments of about a billion dollars. This will be a completely new production facility for the region.

Interviewer: The projects we are talking about now are the potash projects; it is the production of potassium chloride, potash fertilisers, as far as I understand it. There, in the market, we have a very interesting situation. It is clear that you began to invest before all those memorable events. This is the well-known story of Uralkali and Belaruskali, the market as a whole and changes, so to speak, in its landscape. Are you not afraid that your volumes may be excessive, thus having a negative impact on the price?

Andrey Melnichenko: The potash market is estimated at approximately 63-64 million tonnes. We plan to bring in about 8.5 million tonnes of potassium in the next six years, that is, our volumes are quite significant. However, at the same time, the potash market is growing 2-3% a year, this means 1.5-2 million tonnes per year in expected growth. We feel that we will see a more or less balanced market in the next 8-10 years. At the same time, our projects have the following characteristics: they are new, modern, and low cost. We hope to find our place in the market.

Interviewer: Do you already know your key buyers?

Andrey Melnichenko: Today we are ourselves a large consumer, that is, we utilise potash ourselves. EuroChem is not only involved in the extraction of raw materials, but its structure also includes chemical production facilities, as well as a large distribution network. We roughly understand how we will sell the products using our own distribution network. We have a good distribution network in Europe and in Latin America, are well represented in North America and have a successful and growing business in China. We will try to act smart.

Interviewer: Andrey, if we talk about SUEK in more details. This is about coal. In this field you, too, have investments either in upgrade, or in greenfield projects. What are your plans related to coal?

Andrey Melnichenko: Last year, SUEK achieved a new production milestone: we extracted 105 million tonnes of coal, which is a great achievement for us. Our export volumes amounted to approximately 45 million tonnes of coal, which is also a great result. By the way, the global thermal coal market is estimated at approximately 800 million tonnes. In other words, SUEK now has a share of around 6% of the global market, which we are proud of, because these are large volumes.

The main investments made by SUEK are both investments in extraction and in coal processing, since current environmental requirements are very strict, that is, quality requirements from customers have become higher. SUEK heavily invests in improving the quality of its products and commissioning new processing plants. We also actively participate in investments in transport infrastructure. SUEK built a new port on Russia’s Pacific coast completely from scratch. Our current transshipment capacity is 21.5 million tonnes. This is a port in Muchka Bay, Vanino, a large, impressive project. SUEK is successfully implementing a project to upgrade the Murmansk Commercial Seaport. We have reached unprecedented volumes compared to what was achieved in the past. Considerable attention is also given to environmental issues. Our main investment areas are transport, processing, and mining.

Interviewer: Could you describe the state of the coal market today? With potash fertilisers, everything is more or less clear: there are few players, some information leaks out, which creates a certain vision. The coal market is slightly more peculiar, you have different coal grades and so on. In general, is supply in excess? What are the price dynamics? What do you expect in the coming years?

Andrey Melnichenko: Quite recently, the coal market experienced a difficult period. The last four years saw coal prices fall very low as supply exceeded demand, which resulted in market imbalance.

The largest customer and producer of coal in the world is China, as such, the domestic policies aimed at its national coal market have a resounding impact on the global coal market. The Chinese coal industry recently went through difficult times. The national companies suffered considerable losses and the Chinese Government adopted several measures primarily aimed at balancing the domestic market. These helped improve the situation in the global market. Higher Chinese coal imports positively affected the global trade balance with prices recovering and a short-term rally in prices. Over the medium-term, we see the situation as relatively stable.

Interviewer: Andrey, well, we wish for the successful commissioning of new production facilities and further expansion. Thank you very much for this interview.

Andrey Melnichenko: Thank you.

Interviewer: Here in our studio at the St. Petersburg Economic Forum, we were talking to Andrey Melnichenko.

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