EuroChem Group President Oleg Shiryaev speaks about challenging market conditions and ambitious plans

In 2023, Russian chemical companies increased their output but experienced reduced margins amid declining global fertilizer prices and higher costs. Oleg Shiryaev, EuroChem Group President, speaks to Kommersant about the 2024 fertilizer market outlook, the company’s international assets and major projects.

— What happened to the chemical sector in 2023? What is its condition at the moment?

— Last year saw a further redirection of the fertilizer supply chain. As a result, some countries started procuring fertilizers from new locations, making it a suboptimal choice in terms of logistics costs. Moreover, production and transportation costs increased, primarily for fuel and freight – all of which led to price peaks in 2022 and early 2023. So, to trim costs, some agricultural producers started to cut fertilizer application rates, causing a drop in sales. This left many traders holding fertilizer products purchased at high prices, incurring losses.

Due to falling demand, overstocking and ongoing production, in 2Q 2023, global fertilizer prices began to drop. Yet, the cost of equipment, services, logistics, etc. showed an upward trend. Many companies, including EuroChem, faced challenges. Right now, we can see that prices for certain products are not much above the production costs. By the end of the year, we expect prices to stabilize at least and, hopefully, to rise slightly.

— So, in 2024, do you expect prices and output to rise?

— I think we might observe more robust growth from 2025.

— How badly did these fluctuations impact your production and financial performance?

— Our production performance was almost unaffected as we barely had any overproduction issues due to the pricing dip. In terms of demand, EuroChem’s portfolio is quite balanced with K, N and P products in the mix. The same is true of our sales geography. Yet, we did experience reduced margins and, consequently, financial results.

At the beginning of 2023, we did not expect prices to fall this much and production costs to rise so considerably.

Eventually, we closed the year slightly above 2020, even though we added significant capacity across our new operations (in 2020, EuroChem’s net income was US$495 million, and EBITDA was US$1.8 billion — Kommersant). To some extent, this allowed us to resist the negative pricing effects.

— Was the performance affected by the export duties and quotas introduced in 2023?

— The current fertilizer prices in the Russian market are quite competitive; there are several big domestic producers and a solid supply. Like any forced supply and demand restrictions, export duties and quotas are associated with extra transactional costs and inconvenience, and reduce the potential investment return for fertilizer producers. So, in terms of the sector’s mid- and long-term development outlook, and given that fertilizer producers fully cover the domestic demand from Russian farmers, avoidance of these extreme measures and a stable operating environment would encourage the business to invest more.

— Market experts expect you to borrow more since you’ve lost part of your revenues. How much might your debt grow in 2024?

— Last year, EuroChem was actively repaying its debt from its 2021-2022 revenues. If we do borrow money this year, these will be target-specific loans to support our investment projects and maintain working capital across our distribution network since we have to replace any bank instruments that are no longer available with our own capital. At the moment, EuroChem is investing more in large-capital projects, so we will need 20-30% more money than the 2021-2023 average. The funds will come mainly from equity since we invest most of our proceeds in capacity maintenance and additions. So, even if we do raise loans, they will be limited.

— How much might your debt/EBITDA ratio grow?

— To approximately 2.5, meaning that, with the decline in financial performance in 2023, we will remain at the current level.

— Which major projects did you complete in 2023?

— The key project completed last year was the Serra do Salitre phosphate complex in Brazil, which we acquired from Yara (Norway) in February 2022. The project consisted of mining operations and a chemical complex under construction, and after almost two years of hard work, in December 2023, we initiated the launch. The full-cycle plant produced its first batch at the beginning of March, and on March 13th, we officially inaugurated the facility. It is an important milestone for us since Brazil is one of the biggest global exporters of agricultural products and consumers of mineral fertilizers, with only 15% of its fertilizer requirements being produced domestically. Annually, we will be producing 1 million tonnes of phosphate fertilizers at Salitre and selling them via our distribution network. Locally mined ore, and delivered ammonia and sulfur will be used as feedstock.

— Did you have to redesign the initial project?

— We made some improvements in terms of production safety and the recovery process.

— How much did it cost to complete the plant?

— We invested around US$ 400 million in finishing the construction. With our highly professional and experienced team, we were able to achieve the set target budget and timeframes.

— Is it now cost effective to operate your own distribution facilities?

— It is essential for us to be physically present in the markets where there is demand as we build plants that produce large quantities and operate at 100% capacity utilization rates. In this setup, only our own distribution infrastructure can reliably guarantee a steady supply of our products. Only a small portion of our output is set aside for spot sales.

— How do you plan to develop your distribution network going forward?

— Right now, it is important for us to make the network we’ve built in Brazil efficient, manageable, transparent, and convenient for customers. This is not easy, given the immense challenges in terms of payments, financing and logistics. Going forward, we see big potential in Africa and are actively exploring South-East Asia. At the same time, we still maintain distribution assets in Europe and North America.

— Do you plan any new acquisitions?

— No, we have enough projects in our portfolio that we will look at developing.

— What do you plan to accomplish in 2024?

— We continue to develop our potash projects. The VolgaKaliy facility in the Volgograd Region is currently being completed with a ramp-up in production set for 2025 – adding more than 2 million tonnes of fertilizers to our production total. We are upgrading phase I and building phase II of the Usolskiy Potash Complex (Perm region) to bring its capacity up to 4.7 million tonnes of KCl. This year, we will complete the construction of new nitrogen-potash fertilizer operations in Nevinnomyssk. In the Leningrad Region, we are continuing construction of the EuroChem Northwest-2 urea and ammonia plant. Last year, we delivered all the process equipment to the site, with plant start-up and commissioning scheduled for mid-2025. The new facility will produce 1.4 million tonnes of urea and 250 thousand tonnes of saleable ammonia. Construction has begun on the second phase of our chemical complex in Kazakhstan.

Thanks to our extensive development program, we expect to increase our total output by 10 million tonnes by 2030.

I would like to emphasize that we strive to minimize the environmental impact of all our projects. For example, last year, we significantly cut direct greenhouse gas emissions by launching a carbon dioxide capture unit and liquid carbon dioxide production at Novomoskovskiy Azot. Our facilities operate closed-water recycling circuits, and we try to use as much waste heat as possible to produce electricity and heating.

— Are there any plans to invest in raw materials assets?

— We are completely self-sufficient in nitrogen and potassium. As for phosphorus, the issue of self-sufficiency will also be settled with the development of facilities at Kovdor, in Brazil, and Kazakhstan.

— Are there any problems with input supplies for your assets in Europe?

— Our Antwerp plant is operating at almost 100% capacity, producing premium compound fertilizers that go both to Europe and to distant markets in Asia. The situation is different in Lithuania, where Lifosa stood idle for 300 days last year. The Company is doing its best to resume operations but, so far, we have not been able to overcome all in-country challenges, including those in the banking sector. If the facility does not resume its operations in the near future, we will have to resort to mothballing it until conditions improve.

— How will Lifosa’s shutdown affect your performance?

— Farmers will be the first to suffer, as the market will be short of 1 million tonnes of high-quality phosphate fertilizers.

— Have you considered the option of selling the Lithuanian plant?

— We do not rule out this option if bids are made that reflect the real value of the facility. For us, Lifosa is, first and foremost, a production site that allows us to supply high-quality phosphate fertilizers efficiently to European and other markets. However, this can be done by facilities other than Lifosa, so the main question is whether the plant can operate cost-effectively and sustainably.

— How are exports organized from plants in Russia? Do you have sufficient transshipment facilities?

— There is, indeed, a shortage of port facilities right now. This problem was aggravated after the Baltic and Finnish ports became unavailable due to geopolitical challenges, and it has recently become much more difficult to ship fertilizers via the Black Sea. We are in the process of developing our own terminals. We have long-term plans for transshipment via ports in the Baltic Sea, the Black Sea, and Murmansk. However, with our growth plans, we see a need to expand our facilities. So, we are now transloading products at third-party ports, primarily on the Baltic coast. Our in-house Baltic port with a transshipment capacity of 8 million tonnes per annum is still under construction. Once launched, we will be self-sufficient in port facilities.

We are also looking at expansion opportunities in the south. But there are no ready projects there that would fully satisfy our needs in view of the growing volume of fertilizer exports from our VolgaKaliy facility. At the same time, there is another equally significant problem – the shortage of railway infrastructure throughput capacity towards both the Black Sea and the Baltic Sea. This challenge is already quite acute on the southern route.

— Do you still face rejections from seaborne shippers?

— Currently, there are three major freight issues. First, not all shippers are ready to take cargo at Russian ports. And those who do accept are asking for a substantial premium. Secondly, it has become more difficult to make payments and work with the foreign banking infrastructure. Thirdly, for a number of vessel types, fleet availability has decreased in general. Although we are addressing all these issues, they do increase the cost of logistics and manhours for the company.

— How much did logistics costs rise in 2023?

— By approximately 40% over 2020-2021.

— What risks do you see in 2024 – for example, geopolitical pressures or a bigger tax burden?

— I would very much like to see the geopolitical pressures start to subside and not affect such vital areas as food security. Moreover, if the geopolitical pressure on fertilizer suppliers intensifies, it will primarily hit the poorest countries in Africa, South Asia and Latin America.

Rich nations will always find a way to purchase fertilizers, and the price of fertilizers – which new restrictions will inevitably hike – will still be acceptable to rich countries. But poor countries will be back in the nightmare they experienced in 2022.

The 2021-22 tax increase was not that impactful as companies did still operate in profit. Now, we’re entering a period where we will at least be able to get back to our pre-2020 profit margins.

— Now, the main trend is a turn towards China. Is this happening at EuroChem?

— We are actively working with China and are now considering Chinese equipment suppliers and engineering companies with relevant competencies for a number of our projects. China is indispensable in supplying such goods as OTR tires, compressor equipment and measuring instruments. There are excellent businesses supplying Russia and the CIS, but they are currently overloaded with orders and cannot ensure the required delivery times. However, there are also some challenges with sourcing in China. The ability to work and control quality is important in supply chain management. So, we have opened our own engineering procurement center in the country to study local companies and control the timing and quality of our equipment manufacturing.

— Are Chinese goods comparable to Western ones in terms of quality?

— It all depends on the particular manufacturer. Products from Europe were also very different in quality, and everything had to be monitored carefully. Historically, we knew European suppliers better; now, we are getting to know new Russian and Chinese manufacturers.

— Does the company have an HR problem?

— At the moment, there is a real struggle for qualified personnel. On the one hand, this restricts us in development and, on the other, results in significant wage rises. Last year, we had several waves of wage increases for different occupation groups at our chemical plants. We have indexed wages for all employees at our facilities by 7% since January 2024 and, over the last three years, wage increases for key specialists at our chemical operations have risen by up to 40%.

Even so, the staff shortage problem cannot be solved by one or just a few companies; it requires joint efforts with active government participation. It is essential to request university training and free places regarding qualifications that will be in demand in the next five to seven years for the most important development projects to ensure the strategic sustainability of the country’s economy. The perception must be changed, the image of engineering and technical professions must be improved, and the teaching faculty must be developed. Supply and support must be provided for departments and engineering schools that train personnel for systemically important companies in a targeted manner.

EuroChem supports EuroChem Classes in six of the cities in which it operates. The company is helping more than 300 schoolchildren take an advanced program in physics, chemistry, mathematics and computer science. We prepare children for admission to specialized universities and colleges, then offer them employment in our company. The company has been participating in the Professionalitet Program in the Leningrad, Tula and Murmansk Regions for several years. More than 1,000 students are being trained under the program in preparation for work at our chemical production facilities.

— Do you expect the domestic demand for fertilizers to develop actively?

— There is no doubt that there is a growth potential in the Russian market, as we are still lagging behind the world leaders in terms of fertilizer application volumes. Yet multi-fold growth of consumption volumes can hardly be expected. At the same time, there are great development prospects for compound fertilizers, water-soluble fertilizers, and the animal feed supplement segment. A more effective use of fertilizers may very quickly result in increased grain production in Russia, and hence increased grain exports. This requires a more integrated agricultural vision based on insight into the needs of all stakeholders: farmers, machinery manufacturers, fertilizer producers, financiers and the government. Recently, we have invested a lot in compound fertilizer R&D. For this purpose, a year ago, we established our own unified research center, which consolidated the work of several research institutes within the company.

— Do you see an increase in competition in the global market?

— There has always been competition, but foreign manufacturers are now starting to make use of the political situation to bolster their position.

We are confident that, in the long run, whoever can supply the best consistently good quality fertilizer at a competitive price will win.

Interview by Olga Mordyushenko