26 Nov '10
Oleg Kouzbit, Online News Managing Editor
A $1bn agreement involving Russian, Japanese and Chinese companies and governments has cleared the way for construction of a state-of-the-art mineral fertilizer factory in Russia’s Tatarstan. The sophisticated ammonia-methanol and carbamide project, resulting from two years of negotiation failures and concessions between partners, is expected to kick off in 2015. The new complex should do a booming export business, but key local buyers may not be so quick to abandon their long-standing relationships with old-guard Russian behemoths like Togliattiazot.
One of the Volga area’s largest state-owned makers of mineral fertilizers, Tatarstan-based Ammoniy, has sealed a government-brokered $1bn agreement with Japan’s Mitsubishi Heavy Industries and Sojitsu Corp. and China’s National Chemical Engineering Group (CNCEG).
The Asian companies are contracted to design and build for Ammoniy a mineral fertilizer plant in Tatarstan’s city of Mendeleevsk—Russia’s first to be constructed from the ground up in this sector of the economy since the demise of the Soviet Union.
Japan is expected to fund the lion’s share of the project cost, Vedomosti reported citing a source in the Tatarstan government. Plans are for Russia’s VEB Bank (a co-owner of Ammoniy) and the Eurasian Bank for Development to provide a syndicated loan and for the Japanese Bank for International Cooperation and Sumitomo Mitsui to refinance the loan later.
The jury is still out, though, on whether the Japanese will cover 100% or only $650m as Vedomosti deduces.
Ammoniy expects a 6-7-year payback period for the project.
Stepping up production
The new plant will reportedly break ground in the late spring of next year. By 2015 the consortium undertakes to launch a two-unit complex using Danish, Italian and Dutch innovative technologies to produce up to 455,000 tons of ammonia and 238,000 tons of methanol a year; the factory will also make granular carbamide with an annual capacity of 717,500 tons.
The current output of ammonium nitrate is expected to increase to 450,000 tons a year as a result.
Mitsubishi, a Japanese leader in mechanical engineering, will be reportedly responsible in the consortium for design, purchases of equipment and installation/commissioning personnel.
Sojitsu, a sizable engineering and project investment company, is expected to take up logistics issues and oversee liaison among the project participants.
CNCEG, China’s largest construction and engineering firm incorporating 17 big assets, will do construction.
Losing the battle, winning the war
Tatarstan and VEB first aired the project in 2008 when a $1.5bn complex was announced. A two-party investor consortium was formed to launch the complex by early 2010. VEB wanted to pony up a reported $870m, with the region shelling out the rest. To minimize its risk, the Russian bank had purportedly secured a $650m loan from Japan’s Sumitomo Mitsui.
The financial crisis derailed the plan and construction stalled. The Russian side had to renegotiate with the Japanese and the new plan slashed the cost by a third and allowed the Japanese to buy a full 25% stake in Ammoniy.
Under the new deal, Sojitsu is believed to be the most likely Japanese shareholder of the Tatarstan company, thus opening for itself and other Japanese businesses broader opportunities in the Russian and CIS markets.
Second largest, 40% more efficient
A regional Gazprom subsidiary will cover 100% of Ammoniy’s need for natural gas, the project planners said. The immediate market for the future plant’s mineral fertilizers and methanol will reportedly be regional agricultural companies and Nizhnekamskneftekhim, a local chemical rubber maker.
Expert Online believes that the deal will eliminate Tatarstan’s dependence on chemical supplies from other regions. Tatarstan has been buying ammonia from the neighboring Samara region and has also been importing carbamide from overseas companies.
When running at full throttle, the new plant is expected to become Russia’s second largest producer of raw material for mineral fertilizers after Samara’s Togliattiazot.
Togliattiazot may still make more products but the Tatarstan government claims the new Mendeleevsk facility “…will be 40% more efficient…” .
Can old dogs be taught new tricks?
Analysts differ regarding Russia’s mineral fertilizer market. Some think it has stabilized at 7.4 million tons of nitrogen fertilizers and 3 million tons of phosphatic manure—still below pre-crisis levels—and will hardly move soon; others feel it is ripe for growth and Russian producers should re-invest in new plant and equipment.
Despite the $1bn investment in Mendeleevsk, its greater efficiency and the bullish sentiments of prime investors, fertilizer is a basic commodity product that can be bought from any producer at pretty much the same price. So while Mendeleevsk will be able to do very well in export markets because of its huge production, key local buyers who have been long-standing customers of Togliattiazot and other old guard behemoths in Samara and Perm may not be so easy to sign up.