14 February 2020
Leonid Bugayov, Chairman of the Board, PrJSC “SEVERODONETSK AZOT ASSOCIATION” is talking about the peculiarities of company operations in Luhansk region and its prospects
Last year, Severodonetsk Azot was able to resume its operations. What is your outlook for this year?
Leonid Bugayov: In March last year, we partially resumed the production of mineral fertilizers using customer-owned raw materials and launched some of our production facilities during 2019. In a sense, I think this is also an achievement for "Azot", especially so, if we compare the situation with the previous five years. We are now gradually getting out of the crisis and, to the extent possible, we are gaining the momentum. What is out there for us this year? We started out the year in good shape. We are using the same scheme: we process ammonia and produce three basic products - ammonium nitrate, aqueous ammonia technical and UAN. There is a nitric acid production shop that produces the intermediate product required to produce fertilizers. Our repair shops and units that provide for operations of the technological facilities are up and running.
I am not hiding it, we want in the future to get back to the complete working cycle in our company. When the gas is supplied to the company and it is recycled as an input raw material. When the ammonia production facilities are up and running and further process it into mineral fertilizers. However, this depends on many factors.
What are they?
Leonid Bugayov: In short, pricing environment for finished fertilizers in the world and in Ukraine and the gas price.
Being able to supply gas at acceptable and reasonable prices is a very important factor. Gas is the major raw material, it gives the lion's share of the production costs. If we are talking about the prices on fertilizers in Ukraine, a lot will depend on whether the duties on imported nitrogen fertilizers will stay in place. What matters is how well thought-out the public industrial policy is and how effective are the safeguards. The Ministry of Economy and Presidential Office have already paid attention to this issue. They believe that chemical industry can add up a significant share of the country's GDP. There was a big meeting and it seems that they are aware of this issue. I agree with many conclusions. Speaking in simple terms, I am convinced that chemical industry could become a new driver of the economy. Together with metallurgy, agriculture and other sectors. We have a growth potential. It's huge.
What should be the logic behind the actions of the state?
Leonid Bugayov: It's very simple. If Ukraine seals the borders on imported fertilizers, then Ukrainian chemical companies could get a chance to grow, i.e. to invest and to develop. If the safeguards are not effective, then companies would have little chance of increasing their production and creating new jobs. When I talk about the safeguards, I mean duties and quotas.
There are other factors which determine further operations of the company. What are they? What are you up to? Which scenarios do you foresee?
Leonid Bugayov: Of course, we are set for a positive scenario. But for the time being, unfortunately, we face the same issues that are faced by all Ukrainian chemical companies producing mineral fertilizers. The major challenge is the dumping by foreign producers. As you know, an anti-dumping investigation by the Interagency Commission for International Trade was initiated at the request of Ukrainian producers. Allegedly, they sealed the borders. Duties were imposed on the import of fertilizers from Russia. There is an embargo. However, this did not solve the issue completely.
Why? Could you explain it?
Leonid Bugayov: At present, they keep on importing nitrogen fertilizers at dumping prices to Ukraine using various schemes. First, they manipulate with the customs code meaning that they import some fertilizers using codes for other types. Second, the Russians bought stocks of shares in chemical companies abroad in Georgia, Poland and some EU member-states. Now they import Russian fertilizers to Ukraine as fertilizers from other countries. The third scheme is when Russian fertilizers are simply repackaged in Latvia or Belarus and imported to Ukraine as non-Russian ones. The trade war has in some ways taken on the form of a hybrid one. Certificates of origin are forged. Russian fertilizers have actually flooded the Ukrainian market. All this for sure has an impact on the operations of Ukrainian companies and the structure of the market. Those who were engaged in predatory pricing, are working more intricately and take the market share away from Ukrainian producers. This is evident from the customs statistics.
Moreover, Severodonetsk "Azot" has some specific issues. And to overcome them, frankly, it is not always up to us.
What specifically do you have in mind?
Leonid Bugayov: For example, we are very much concerned about the stability and reliability of power supply. At present, Luhansk TPP is the only source of power for Luhansk region. It is located in Schastya. Whereas, we need two independent sources of power for proper operations. At "Azot", we have taken some steps at our level, e.g. we built and prepared for commencement a cogeneration unit that allows to produce electricity. However, this is only a partial solution to the problem. We need a complete and comprehensive solution to this issue; only then we could talk about the stable operations. I am not just talking about the operations of our company; this is an issue for the whole region. I am talking about the industry and infrastructure of Luhansk region. These are all interconnected things. Issues of this kind should be addressed at the state level because it has to do with huge budgets. This requires some willful decisions, investments. The region cannot develop unless the basic issue of energy supply is resolved.
What is the practical solution to this issues?
Leonid Bugayov: The solution of the issue is to connect the region to the unified power grid of Ukraine. Unfortunately, this issue has not yet been resolved for a number of reasons.
Could you tell us by the numbers about last year's results? What did you produce and how much? What is your outlook for 2020? Do you plan to upgrade the production? Which priorities did you identify?
Leonid Bugayov: In 2019, we produced more than 370,000 t of ammonia nitrate, 10,780 t of liquid mineral fertilizers UAN, 296,000 t of non-concentrated nitric acid.
We did some good projects considering our capabilities and price situation. For example, we entered the market of UAN. This is a relatively new type of product for us. We and our shareholders have seen that this liquid mineral fertilizer is becoming more and more popular with consumers. That is why last year we assembled the UAN production plant and launched the production. At the moment, we are bringing this plant to the designed capacity.
We also upgraded the ammonia-refrigeration unit in 1-A ammonia production plant. This is very important for us at present because we work on give-and-take raw material. After this upgrade, we were able to "cool" more imported ammonia into storage and not just more, but several times more than before. This increases our production capacity.
We also repaired the equipment in the plants for nitric acid production, steam supply and general communications of the company.
Could you tell us more about the future projects in 2020?
Leonid Bugayov: First of all, we will pay attention to those lines of operations and projects that will allow for stable operations of the plants and will also allow to reduce the consumption indices. We also plan to install steam turbine as a drive for network pump in steam supply plant and common company communications.
What effect do you expect?
Leonid Bugayov: It would allow us to save about 370 kW/h of electricity and to reduce the cost of producing district heating water for the company.
What other priority projects do you envisage?
Leonid Bugayov: Environmental protection is among the priority areas. This year, we plan to overhaul the equipment in the plant for neutralization and treatment of industrial waste waters. This is important not only for Azot, because our company also treats sewage from all over Severodonetsk.
We plan to invest more than UAH 9.5 million in the implementation of these and other projects.
Do you plan to resume the operations of other technological facilities? What are they?
Leonid Bugayov: We can only talk about different production scenarios. Ideally, when we process the natural gas while “turning on” the ammonia production facilities, we would certainly like to renew the operations of the urea production plant. We regularly carry out the required repairs, take measures to ensure the efficiency of technological equipment for urea production. Also, in the urea production plant, we install the facilities for loading urea into soft containers of big-bag type. Big bags are probably the most popular type of packaging for consumers today. As you can see, we are getting ready for a positive scenario. Time will tell us how it will work out.
Key decisions will be made by shareholders based on the market analysis, market opportunities and, like I said, based on raw material prices.
What are the strategic goals of the company for the near future?
Leonid Bugayov: First, to improve operational performance. Second, to develop production sites. Third, environment.
Another priority for us are people and working conditions. Among obvious priorities are the implementation of a production plan and the production of a certain amount of products. We need the base and prerequisites to achieve good production results in the future.
Our task now is to ensure the stability of operations under the available difficult conditions. When the situation becomes more or less stable, we must be ready to use all our resources for a leap and rapid growth. At the moment, our priority task is to deliver on the contracts, to meet the needs of Ukrainian farmers for quality products. We stand ready to do it.