14 апреля 2012

Caustic Soda: post-event report

The long-term spectacular battle between FAS and the producers of caustic soda is coming to an end. The decision of antimonopoly service and new investment projects will change the entire post-Soviet structure of the industry.
On Tuesday, the 6th of March, the international "Caustic Soda 2012" Conference by Creon was held at The Ritz-Carlton Moscow hotel. The event was held in partnership with Galopolymer and was supported by RusChlor. The main goal of the conference, according to Sandjar Turgunov, CEO of Creon, was to discuss the ways of resolving the conflict between Federal Antimonopoly Service on the one side, and the producers of caustic soda and chlorine led by the United Trading Company on the other side. The representatives of UTC, as well as the representatives of Rusal, which had initiated the FAS investigation, were not present at the conference, but almost every company that had worked or continue to work with this trader, visited the forum, and elaborated a consolidated point of view. The main point is that FAS has proved the cartel agreement in the market of liquid caustic soda and decided to impose turnover fines on market players and also to bring the case to court against the individuals involved in the establishment of cartel. The investigation of the possible cartel in other markets of chlorine production (chlorine, PVC, plasticates) is going on.

To our surprise, there was nothing like a constructive dialogue between the market players and FAS representatives. Moreover, the chlorine and caustic soda producers and consumers have once again confirmed that the market lacks healthy competition. Yes it is possible to buy caustic soda not from UTC, the company that FAS considers to be the cartel organizer, but as the representative of `Soda-Chlorat` noted, the producers, when asked about sales contacts, are pointing to the one and only known address. At the same time the price levels, according to the representative of NKNH, remain a matter of consent between the manufacturers.
The data provided by the different market players regarding the production, consumption and the dynamics of caustic soda and chlorine in Russia, and even the retrospective data related to the Soviet period, did not correspond not only to each other, but also to the data by Rosstat and FCS that Creon operates with. According to official data, 2,3 million tons of caustic soda were produced in 1990 when the capacity was 3 million tons. Ten years later the production volume decreased two times to 1,2 million tons and since that time on, the output continued to fall gradually. In 2011, Russian plants produced 1,1 million tons of caustic soda, and 360 thousand tons of these were exported. The import of caustic soda was insignificant until recently, yet it began to grow rapidly in 2008 and reached 60 thousand tons in the past year. So the consumption of caustic soda in the country stands at 767 thousand tons which is 30% less than it was before crisis in 2006 and 2007. It is also important to take into account that caustic soda production not related to PVC production (chlorine is necessary for PVC production, and it is produced jointly with caustic soda) has been decreasing for several years now.

The market of caustic soda is shrinking, though this process may be reversed. The typical example is cellulose and paper industry, where twenty years ago the consumption volumes of chlorine for the production of bleached cellulose were so large that electrolysis shops operated at 5 cellulose and paper complexes. Now only one shop is working, and further change in technology is planned on this plant to decrease caustic soda and chlorine consumption. At the same time, two investment projects aimed at launching new production facilities for caustic soda and chlorine are on the way. Galopolymer plans to produce 200 thousand tons in Kirovo-Chepetsk (90 thousand tons now), Rusvinyl shall manufacture 235 thousand tons of caustic soda in Kstovo (now Kaprolaktam plant of Sibur-Neftechem produces 63 thousand tons). Pavel Rodionov, Head of sales and marketing department of Rusvinyl, said that the company shall be exporting from one quarter to a third of caustic soda output, and the remaining part shall be sold in the European part of Russia. These projects shall totally reshape the market balance, and the old non-competitive production facilities with low capacity shall face the possibility of being shut down.

However, the existing producers of caustic soda do not agree with such realities and perspectives. Boris Yagud, CEO RusChlor Association, referred to the Soviet times with nostalgia, noting that the industry was vertically integrated and was centrally governed, which meant managing the chlorine and caustic-soda production and consumption balances, as well as territorial market optimization for reduction of the dangerous traffic volume. When the transition to market-based relations happened, the system collapsed, and the technological development of the industry stopped. In Russia, the power consumption per one ton of caustic is two times higher compared to Europe, and over the half of equipment is fully worn out. Though in 2002, UTC was established, and according to Mr. Yagud, UTC overtook the functions of managing the industry, which led to solving the problems in the market, and to UTC receiving the commercial benefit. Without UTC, according to the Head of Association, the industry would have collapsed long ago. Mr. Yagud considers that the national program to support the industry is needed, and this has been the topic of his meeting with the Aide of Vice-Premier Igor Sechin. The Government, as Mr. Yagud says, shares the understanding of the problem, but they also say that chlorine "is leaving the market". Sergey Golubkov, Vice-President of Russian Chemists Union still believes that consumption of chlorine production per person is an important indicator of country development level, and instead of decreasing, Russia needs to increase chlorine and caustic soda consumption. According to Mr. Golubkov, "thanks to the plants that still produce chlorine, Russian population does not die from bad water", while the launch of new plants by Rusvinyl and Galopolymer shall lead to the shutdown of 5 producers of chlorine chemicals (at the moment, there are 12 producers of caustic soda in Russia). Mr. Golubkov considers that it is extremely hard to sell caustic soda, and therefore the centralized market operator like UTC is absolutely necessary.
Maksim Doroshkevitch, CEO Galopolymer and Alexander Willemson, Development Director, presented the chlorine and caustic soda production modernization project in Kirovo-Chepetsk. The project is connected with the demand of Galopolymer in chloroforme (feedstock for CFC and fluoroplastics manufacture that company produces). The launch of the new plant is planned for 2014; the volume of investment is 1,5 billion rubles. Additional volumes of caustic soda are to be supplied to the domestic market and to be exported, primarily to the Middle East, but the contracts, according to Mr. Willemson, are not signed yet. The speaker provided data on world and Russian markets of caustic soda with reference to CMAI Global (import - 28 thousand tons, export - 231 thousand tons, consumption - 890 thousand tons in 2011), though the data do not match with the official statistics mentioned above. Nevertheless, the share of Russian market of caustic soda by all accounts doesn`t exceed 1% of world consumption, half of which is in Asia. To correct the situation, Galopolymer offers to encourage the consumption of caustic soda in Russia, but Mr. Willemson mentioned that in Finland, for example, hydrogen peroxide is used instead of chlorine-alkali compounds for cellulose bleaching since quite long ago. As for the cartel and overpricing on the liquid caustic soda on the domestic market, the CMAI figures presented by Galopolymer, showed that prices in Russia were not higher, but much lower than in Europe in 2007-2010 (300 dollars per ton compared to 450 dollars).

Mikhail Baranov, Chairman of the Board of Directors of Nikochem, was categorical in the assessment of actions held by government bodies and FAS. According to him, these official actions resemble conscious "killing" of the industry that remains in stable grave condition. Electric power which accounts for over 70% of caustic soda production cost, according to Mr. Baranov, is more expensive for Nikochem than in the USA or China, and the tariffs are growing constantly. The railway transportation tariffs are growing unpredictably and uncontrollably too, and the transportation cost for delivery of one ton of caustic soda from Volgograd to Novorossiysk is the same as for delivery to Moscow. Road transport is starting to be more often used for transporting caustic soda, and the presentation by Maksim Konkov, Chief of motor transport service Transchemical-Express, concerning the new rules of transportation enjoyed considerable interest among the audience. The dependence of the chlorine industry on the monopolies like RZD is obvious, while FAS, according to Mr. Baranov, pays its close attention to chlorine industry only, where the price growth takes place to compensate the increase of costs and is a matter of survival. The industry cannot follow the example of Khimprom (Volgograd) that is government-controlled, does not pay for electric power for years, and remains in the state of permanent bankruptcy. At the same time, FAS headed by Igor Artemiev, had easily approved the creation of aluminum and then potassium monopolies, meanwhile taking the punishment approach to chlorine industry. According to Mr. Baranov, it is profitable for producers to work with UTC, because the company bought the product on the fixed schedule on prepayment terms. Nikochem worked on such terms with UTC in 2011. The speaker believes that the industry needs regulation, with joint efforts by FAS, largest consumers and industrial association. It would be possible to shut down all industry production even without FAS, Mr. Baranov continues, the tax and technical audits would be enough for that, because the producers are not able to meet all the existing requirements. Andrey Filev, Head of sales department Sayanskchemplast, claimed that the company did not participate in any cartel agreements and was ready to support its position in court, but it was also ready for dialogue and to sign the settlement agreement with FAS. Nikochem is also ready for such solution to the problem.

The possibility of peaceful solution to the situation was confirmed by FAS representatives as well, and they called the market participants for implementation of the FAS instructions and non-violation of antimonopoly legislation. FAS investigation showed that not all the facts and figures, provided by the participants of chlorine industry, meet reality. Head of Anti-Cartel Department of FAS Alexander Kinyov and his Deputy Andrey Tenishev presented the real situation in the industry, which is based on data analysis including the data received during the investigation. In 2006-2010, liquid caustic soda was sold by United Trade Company to Russian consumers at approximately 2 times higher prices than to foreign customers: 400 dollars per ton against 200. At the same time export at this price level was hardly unprofitable for UTC and manufacturing plants, because export volumes by UTC began to decline in 2010 only, and before that date the export was growing constantly. In 2005-2010, UTC was selling from 77% to 62% of all liquid caustic soda in Russia, and gradually UTC`s share was reducing due to changes in the format of cartel activities.

The disclosed plan of territorial optimization of caustic soda deliveries deserves special attention. It led to the increase of transportation costs for the consumers instead cost reduction. For example, Sterlitamak Caustic supplied the product to customers in Kemerovo, Volgograd and Tula regions, where local producing plants were located, while the production of these local plants was transported to other markets. Novomoskovsk Chlorine was supplying caustic to Svetogorsk cellulose and paper plant in St. Petersburg region, while Procter & Gamble plant located in the same Novomoskovsk, was purchasing the product in most cases from Sayansk and Sterlitamak. However, Sayanskkhimplast avoided supplying caustic to the alumina and aluminum plants in Siberia, and their demand was satisfied by caustic from Sterlitamak. Only 58% of consumption of clients located in Volgograd region was satisfied by two local plants; however, this region accounted for less than a quarter of their supplies. Production from distant Kirovo-Chepetsk was arriving to cover the shortage at Volgograd region plants, however, Metafraks, located in the nearby Perm Region, was purchasing raw materials from Sayanskkhimplast. Supplies of caustic soda were arriving from Sayanskkhimplast despite of all the economic geography rules to KuibyshevAzot, a consumer surrounded by 5 producing plants. The goal of this logistics plan was to maximize the revenues of cartel participants in the caustic soda transportation segment, as the tank delivery costs were to be covered by consumers. At the same time, the shortage of specialized rolling stock hampered the import deliveries of caustic. Therefore there were no significant import operations except for the supplies of caustic to Svetogorsk cellulose and paper plant from nearby Finland that has the same railway track as in Russia. The consumers tried to reduce purchases of caustic as much as it was possible.

Almost all producers of caustic soda in Russia participated in the cartel agreement, which was confirmed by FAS investigation: Sayanskkhimplast, Khimprom (Volgograd), Khimprom (Novocheboksarsk), Khimprom (Kemerovo), Sibur-Neftekhim, Novomoskovsk Chlorine, Caustic (Sterlitamak), Caustic (Volgograd) and UsolieKhimprom. FAS instruction ordering free sales of caustic soda, and a separate order for UTC to perform deliveries from the nearest-located plants, were not implemented. Fines shall be imposed on cartel participants (up to 15% of yearly revenue), and personal criminal responsibility may follow for masterminding the agreement (up to 7 years in prison) after the case is transferred to the Ministry of Internal Affairs. It is quite possible to estimate the total profit of cartel participants based on the price difference within the country and abroad, and annual consumption volume. At the same time, the documents signed back in early 2000-s, were announcing the technological modernization of the industry as the main mission of establishing the cartel. However, the modernization did not occur in the reality: either it had not started at all, or it was paused due to non-financing at the majority of plants. Sergey Bakhtov, Business Development Manager at Chemetics, said that the company managed to sell technological units only to 2 plants in CIS - to Karpatneftechem of LUKoil in Ukraine, and to Rusvinyl. Consultant on Federal Target Programs to the Ministry of Industry and Trade Victor Makhov confirmed that chlorine chemicals plants constantly complain of the lack of finance, however, they do not wish to participate in federal modernization programs that are linked with the state`s participation in the equity capital. At the same time the market is under change: the programs are being implemented aimed at non-usage of chlorine in disinfection of drinking water and at transition to more efficient usage of reagents on other plants consuming chlorine and caustic soda.

Chlorine industry in Russia (with rare exceptions) is an example of classic industry of junk companies: with equipment outdated morally and physically, depreciated and not meeting any technical requirements, where the owners invest unwillingly and retard their inevitable liquidation trying to receive maximum profit by all means. Such companies unite in groups and associations; desperately cling to any opportunity to stay in the industry and resist the pressure of importers, strategic investors, and the consumers` community. They are ready to provide cunning figures, invite inexperienced journalists and the elder generation of technologists and scientists, appeal to the state and public interests, complain and at the same time to speak about their own achievements. Fares Kilzie, Head of Creon, states that for all recent years, chlorine industry was under the management of a group of people that replaced the public regulation and put their short-term commercial interests above the technical state of the industry, making use of complexity and lack of transparency in this sector. Now this process is over, though with a delay. Desire of leaders of the country to have modern and developed chemical industry is accompanied by the natural rehabilitation of the industry from such companies and such business model. The industry needs modern large power-effective plants with transparent management and competitive environment, although traditions of limiting competition in Russia are strong historically. Organizations like RusChlor, Russian Chemists Union and The Russian Union of Industrialists and Entrepreneurs should not prevent the process of cleanup, renewal and modernization in this industry. Summarizing, Mr. Kilzie mentions that it is in the interests of consumers that have been asking for help at the Creon`s conferences for years, and that have been supported now by FAS.
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