Three other privately owned chemical plants, each valued in the hundreds of millions of dollars, also look destined for the auction bloc.
Faced with more cuts in profits due to rising prices for imported natural gas, Ukraine’s major chemical plants are set to go up for sale to foreign investors, with Russian buyers first in line.
The State Property Fund, the country’s privatization body, recently put forward a plan to privatize the Odessa Portside Plant, one of the country’s largest producers of ammonia and nitrogen fertilizers, by the third quarter of this year.
Three other privately owned chemical plants, each valued in the hundreds of millions of dollars – DniproAzot, RivneAzot and CherkasyAzot – also look destined for the auction bloc.
Ukraine’s chemical business, ranked as one of the world’s top 15 chemical-producing countries, has long been controlled by domestic business groups. If sold to Russian chemical or energy suppliers, Ukraine’s industry would fall further into the grips of its northern neighbor. However, sales could also offer an opportunity for Western chemical groups to sneak onto the market.
The Odessa plant, which includes strategically located ammonia storage and transportation facilities, is estimated to be worth at least $300-400 million, but some officials have argued that the state’s stake could sell at an open tender for as much as $1 billion.
State privatization officials had originally scheduled its privatization for 2004, then again in 2006, but questions arose whether the storage and transportation facilities, highly coveted by Russian chemical producers, should be included in a tender as well.
Ukraine’s otherwise profitable chemical industry has experienced a financial downturn following abrupt increases in the price of natural gas imported from Russia and Central Asia in 2006 (by 50 percent) and 2007 (by around a third).
First Deputy Prime Minister Mykola Azarov confirmed on April 2 that a 100 percent stake in Odessa Portside Plant would be sold, but a firm date has not been set.
The State Property Fund had wanted to sell only a 36.6 percent stake on international exchanges, and 10 percent on the domestic securities market.
The plant exports around 88 percent of its products, while commanding around 24 percent of Ukraine’s fertilizer and carbamide markets.
Russian investors are particularly interested in purchasing it as a vital terminal link in an ammonium pipeline that runs from the Russian city Tolyatti to the Ukrainian seaport of Yuzhniy. From there, Russian chemicals head off into the Black sea.
Oleksandr Ryabchenko, director of the Kyiv International Institute for Privatization, Asset Management and Investments, said that the price and the terms of the sale depend on whether the new owner will gain control over the plant’s transfer and storage complex.
“With the transfer complex, the new owners of the plant will be able to regulate the volumes of chemical shipments exported through the Yuzhniy Port in Odessa,” he said.
Russia’s TolyattiAzot currently supplies 15 percent of the global ammonium market.
Without the transfer complex, the price of Odessa Portside would drop by around $100 million.
The gas-hike squeeze
Tamara Levchenko, an analyst at Kyiv-based investment bank Dragon Capital, said that major Ukrainian chemical plants have seen their profits almost halved due to the hikes in gas prices.
“For example, the net margin of Stirol dropped to 9.1 percent in 2006 compared to 21.5 percent in 2005. The Odessa Portside Plant’s net margin fell to 12.6 percent in 2006, while in 2005 it was 23 percent,” she said.
“This means that despite higher sales, the plants’ profits have fallen because operating costs have grown at much higher rates,” she added.
Similar losses were recorded by other top-six Ukrainian chemical plants, including DniproAzot and RivneAzot.
Levchenko said that the drop in profitability will continue, “because gas prices will continue to rise. Only large-scale costly modernizations aimed at diversifying products toward organics and implementing energy-saving technologies can help eliminate the negative effect that rising gas prices will have on producers’ profitability.”
“Many owners of chemical assets would prefer to sell them to strategic buyers as soon as possible,” she said.
One example is a recent decision passed by DniproAzot shareholders on March 19. They approved the sale of company assets at open auctions, hoping to acquire almost $600 million. The Dnipropetrovsk-based Privat business group controls 86 percent of DniproAzot, while another 10 percent is in free-float on the Ukrainian stock market.
Recently, Russia’s Acron chemical holding has expressed intensions to acquire DniproAzot if parties agree on a price and terms of the deal.
According to Levchenko, RivneAzot and CherkasyAzot may also soon be offered up for sale. RivneAzot falls into the sphere of influential businessman Dmytro Firtash, a 45 percent beneficiary owner of RosUkrEnergo, the exclusive supplier of natural gas from Central Asia and Russia to Ukraine.
According to media reports, a subsidiary of Russian tycoon Viktor Vekselberg’s Renova Group, is in talks with Ukraine’s UkrSibbank for the purchase of a 60 percent stake in CherkasyAzot. Market insiders say the deal will depend on whether Ukraine’s nitrogen fertilizer producers receive subsides for natural gas from the government.
“It is important to sell at the right moment. The market value of Ukraine’s major nitrogen fertilizer producers could decline in the mid-term based on poor profitability forecasts. Moreover, there are interested buyers right now,” said Levchenko.
Sources said the supervisory board of Ukrnafta, a state-owned open joint stock company that extracts and trades 75 percent of all domestic oil and gas, is studying the possibility of purchasing shares in RivneAzot, Dniproazot and Odessa Portside Plant because Ukrnafta could provide cheaper gas that is extracted in Ukraine.
According to Ryabchenko, the sale of Odessa Portside, as well as other planned privatizations, could nevertheless be put off due to Ukraine’s ongoing political standoff between President Viktor Yushchenko and Prime Minister Viktor Yanukovych.
The ongoing political crisis might also make it easier for officials to push through a less-than-transparent auction.
“Since the sale will likely happen after the crisis, it is difficult to predict whether or not Ukraine will have a good and transparent deal,” Ryabchenko said.
But crisis or no crisis, it is in Ukraine’s interest to privatize the plant before Russia delivers another gas hike ultimatum.
The price of gas constitutes 80-90 percent of the cost of ammonium, the plant’s primary product.
