Western sanctions could bite on Russia chems refinancing

12 May 2014 13:01 Source:ICIS News

Interview article by Tom Brown

Pro Russian Rally in DonetskLONDON (ICIS)--Intensifying sanctions on Russia from the US and EU over Ukraine could have an impact on the capacity of Russian chemicals companies to tap into international financial markets, according to a senior analyst for ratings agency Moody’s.

While the threat of sanctions poses limited impact for Russian producers in sales terms, due to a significant proportion of exports going to emerging markets, the prospect of reduced access to capital could have repercussions for companies looking to refinance debt, according to Moody’s assistant vice president and analyst Sergei Grishunin.

“The issue is now the refinancing of these companies, because if we see any kind of strengthening sanctions from western countries, there may be some restriction in accessing financing for some of these companies, and this is a real threat,” he said.

“We don’t worry too much about the possibility of further sanctions impacting the sales of the those companies, as we see 10-20% of all sales are made to western countries” he said.

The danger is predominantly based on sanctions intensifying and remaining in place beyond the medium-term, as local finance and the deep pockets of many Russia-based producers reduces the immediate impact of any further measures from the US and EU.

“Companies’ continued access to financing from Russian state banks, healthy cash cushions and moderate amount of refinancing needs for the next 12 months partly mitigate this threat,” Grishunin said.

Numerous western nations have placed economic and trade sanctions on Russia as a result of the crisis in Ukraine, with the EU reportedly considering tougher measures including account freezes and travel bans on specific individuals seen to be key to Russia’s government or trade activities.

Concern spread through the European gasoil market in late April after the US extended its programme of sanctions to include Igor Sechin, head of state-owned energy company Rosneft, intensifying caution among gasoil traders towards doing business with Russia-based suppliers.

The crisis in Ukraine has caused the value of the rouble to tumble, but that has proven so far to have an upside for domestic producers, as in many cases production costs are rouble-denominated and products are sold in dollars.

“[The depreciation has recently] worked more as a positive than a negative because costs were in roubles but products were sold in dollars for the majority of exporters including PhosAgro, Acron and SIBUR,” Grishunin said.

The benefits of a weak rouble may only hold true up to a certain point, Grishunin added, as a continuing slide in the value of the currency could lead to intensifying cost inflation effects.

“If the rouble continues to depreciate, it could develop significant cost inflation, which is not good for all producers in Russia including chemical companies such as Phosagro, SIBUR and Uralkali,” he said.

Another domestic affair leading to ripples beyond Russia’s borders is the move by local fertilizer producer Uralkali to break up potash distribution cartel Belarusian Potash Company in 2013, which it joint-owned with Belarus-headquartered producer Belaruskali.

Intended by the company to address subdued market demand and oversupply of potash by shifting from a price-based strategy to prioritise volumes, the move has sent global potash prices tumbling, leading analysts to raise alarms over the capacity of higher-cost western European producers to remain competitive.

The economic slowdown for emerging economies is also limiting upside potential, according to Grishunin, with 2014 prices likely to stick at the low $300s/tonne.

“We understand that the cost of slowing down economies in the emerging world - we see buyers are bargaining for low prices. The price for potash in China and India is quite low, and we don’t see a lot of upside potential,” he said.

“Our forecast potash price for the year is about $320-350/tonne. $320 may be a more realistic amount in my opinion,” Grishunin added, stating that Uralkali’s forecasts of 56-58m tonnes of global potash demand for the year seem reasonable.

The heads of Uralkali and BPC convened in Moscow in early 2014 but said at the time that no discussions of a reunification of the two businesses had taken place.

On the basis of Uralkali’s strategy, the odds of an olive branch being extended by Uralkali in the near future is unlikely, according to Grishunin.

“For the next 12-24 months I don’t see any significant developments on [a resolution], the price is already low. Uralkali will have 90% of capacity utilisation, which will be sufficient to demonstrate good results,” he said.

The price constraints of the post-break up potash market mean that only large players with low production costs can operate, but Grishunin noted that there are a number of players who will be able to operate profitably within that space.

“Canadian producers are also low-cost producers, and they will continue to operate efficiently. Another fertilizer company in Russia, Acron, has now decided to postpone their potash project and the reason is clearly low price. Only large companies with low cost of production can now produce efficiently,” he said.

Despite the current international tensions and the threat of additional measures against the sale of Russian  product to the west, domestic producers remain in a relatively strong position due to cheap feedstock availability and strong backwards integration into mining.

“Chemical companies are usually very strong in Russia due to access to cheap feedstocks. Integration into mining -  which applies in the case of Uralkali and PhosAgro - also helps build up margins. Companies have access to quite cheaply priced feedstock prices, and if you compare Sibur’s margins to US commodity producers’, they are very close,” Grishunin said.

“All [Moody’s rated Russian] companies are currently adequately positioned, I would not expect them to become weaker or stronger, they will continue to operate quite efficiently. The only problem is if the tensions between Ukraine and Russia intensify, but so far [they] all... have favourable cost structure and a good market position,” he added.

By Tom Brown