With its share price shooting up 40 percent since the start of June, indicating speculative interest, chemical giant Stirol may be the latest target of Kremlin-backed Russian acquisition attempts for strategic Ukrainian industrial giants.
Speculative fever around Stirol has driven its share price up around 40 percent since June, including three days where the stock shot up by over 10 percent. The Ukrainian exchange index grew by only around 5 percent over the period.
Traders point to M&A rumours surrounding Stirol as driving the speculation. The loss-making chemical giant is believed ready to sell out to a candidate who can supply cheap gas likely to be a Kremlin-linked Russian company.
The plant is the country’s largest chemical plant by output. Ukraine’s chemicals industry accounts for 15-20 percent of the country’s export revenues and 6-7 percent of gross domestic product. The sector produces mostly nitrogen fertilizers.
However the entire sector has been in deep trouble since Russia started to increase gas prices for Ukraine towards global levels, while world energy prices themselves soared. As a result, the sector has seen a fivefold increase in gas prices starting 2006.
As usual nowadays in Ukraine, the prime candidates are Kremlin-linked companies, in this case Gazprom’s chemicals subsidiary Sibur
In contrast to other industrial sectors, chemical producers use gas not only for energy, but as a raw material, leaving them exceptionally exposed to the price rise. Gas accounts for over 70 percent of Stirol production costs.
As a result of the new gas prices, combined with a sharp drop in global fertilizer prices, Stirol’s losses over 2009 totaled $40 million and in first quarter of 2010 snowballed to 2010 $24 million.
Now, over July and August, the gas price charged to chemicals producers has surged by 34 percent, from Hr 1,633 per thousand cubic meters to Hr 2,187. This clearly took Stirol owner and CEO MykolaYankovsky by surprise, since he was cited early July as expecting the gas price to remain flat.
The unexpected price hike was a direct result of Ukraine’s July agreement with the International Monetary Fund (IMF). As one condition for starting a new $15.2 billion financing program, Ukraine agreed to immediately abolish all gas price subsidies for the chemical and metal sectors, in a bid to restrict the deficit of gas distribution monopolist Naftogaz to 1 percent in 2010.
Adding to the chemical sector’s woes is competition from Russian producers who get far lower gas prices. “Stirol exports nearly 80 percent of its produced fertilizers and thus faces high competition on global markets with other producers who have cheaper gas. Russian nitrogen fertilizer
producers, who are one of Stirol’skey competitors, get natural gas at $ 80-120 per
1,000 cubic meters compared to $ 260 price for Stirol,” pointed out Denis Belov of Astrum Capital.
As a consequence of adverse conditions, Stirol stopped ureaproduction altogether in June-July, ostensibly due to repairs, and slashed ammonia production by 26 percent.
Kremlin candidates
Against this negative background, the explosive growth in share price is indicative of M&A interest. And, as usual nowadays in Ukraine, the prime candidates are Kremlin-linked companies, in this case Gazprom’s chemicals subsidiary Sibur.
ARussian foreign ministry document detailing Kremlin foreign policy aims across the globe, leaked to the press in May, specified for Ukraine and Belarus the Russian goal of obtaining controlling stakes in key enterprises in these countries.
But even without Kremlin backing, analysts see Sibur as the most logical candidate. “It only makes sense to buy Stirol if you can source cheap gas,” said BG Capital’s Volodymyr Nesterenko. “And only a Russian, better Gazprom-related, supplier can do this reliably.”
Sibur, controlled by Gazprom, in turn controlled by the Kremlin, was already a leading contender to acquire another large Ukrainian chemical producer, Odesa Portside Plant, at a privatization auction in August 2009. The auction was however canceled following disappointing bids and accusations of collusion.
With regard to Stirol, although Sibur seems to be way out front, there are also two homegrown Ukrainian candidates, meaning a clash between the Kremlin and Ukrainian oligarchs could be on the cards. Or, they could join forces to divided up Ukraine’s chemical assets.
Russian group has advantage; Ukrainian candidates would struggle to provide the cheap energy support
“The second natural bidder [after Sibur] is Ostchem Ukraine,” believed Serhiy Petrenko of Phoenix Capital. Ostchem is owned by controversial oligarch Dmitry Firtash, owner of gas trader RosUkrEnergo. A ruling by the Stockholm Arbitration Court recently requiredNaftogaz to return 11 billion cubic meters of gas, worth around $3 billion, to RosUkrEnergo, following a dispute in 2009. Firtash, who already owns a number of chemical plants in Ukraine could potentially use this gas and his industry links to supply Stirol.
Privat Group is also potentially in the running, said experts. Privat Group control oil and gas company Ukrnafta, including state-owned gas producers, and has stockpiled gas in underground storage.
However, both Ukrainian candidates would struggle to provide the cheap energy support that Sibur could offer. They would also struggle to secure the financing, with Stirol valued at $400m-$500m by analysts. In contrast, Sibur has easy access to credit lines from Russian state banks.
A Sibur-Stirol deal would not only be yet another mooted Russian-Ukrainian deal following the election of a pro-Russian administration in Ukraine in February 2011.
It would also match recent global developments in the chemicals and fertilizer sector. Currently, global mining giant BHP Billiton is engaged in a $39 billion hostile bid to acquire leading fertilizer producer PotashCorp. And in Russia itself, in mid-June oligarch Suleiman Kerimov acquired major potash company Uralkali, and is thought to be trying to merge the company with Russian and Belarus peers to create a national champion with Kremlin backing.
Kyiv Post staff writer Graham Stack can be reached at [email protected]
