Publication

I’D TAKE UP TRADING. WHAT’S IN GRAIN EXPORTS FOR RINAT AKHMETOV

SCM Group is banking on creating an agricultural trading entity. However, the new line is not based on HarvEast, its specialized agricultural holding.

21 August 2015

Rinat Akhmetov wants to become a grain trader. According to the official website of United Minerals Group (UMG, part of SCM), the company is looking for an Agricultural Trading Specialist. The Specialist’s responsibilities include liaising with grain elevators and purchasing grain.

LIGABiznesInform wanted to find out why SCM is getting into agricultural commodities trading and why it was not opened at its dedicated ag holding, Agricultural Holding HarvEast.

REFERENCE

UMG was founded by SCM in 2006 and operates clay extraction, flux and dolomite, and promising commodities businesses.

In 2013, UMG started to expand by creating a holding. Within five years, the company plans to propel its clay extraction, flux and dolomite assets to a new level of development and create at least five new lines in its commodities business. In 2014, almost all structural units of the Holding improved their financial results. According to the securities and stock market disclosure system, Novotroyitske Ore Mining increased its net profits to UAH 55.53m in 2014, or three times more than in 2013. In 2014, Dokuchayevsk Flux and Dolomite Plant increased its net profits four times to UAH 83.37m, Druzhkovka Ore Mining reported a 75.6% increase in net income to UAH 248m over 2013, and Vesko (clay extraction) doubled its net income in 2014 to UAH 1,430m compared to 2013. However, Ogneupornerud’s net profits fell from UAH 10.37m in 2013 to UAH 3.78m in 2014.

Promising Sector

Sergey Melnichenko, Sales Director of United Minerals Group (UMG), confirmed to LIGABiznesInform that the company will pursue trading, and its first projects will be associated with the agricultural sector.

According to Melnichenko, agricultural trading was selected for diversification of UMG’s business because the Ukrainian agricultural sector is dynamic and exports are growing year by year. A quick reference: in the previous marketing year (July 2014 — June 2015), Ukraine exported 34.8m tonnes of grain, making it a top-three global supply. This year, Agricultural Policy Minister Oleksiy Pavlenko expects grain exports to exceed 36m tonnes.

Melnichenko noted that the company has already made its first test export deliveries of wheat and barley to Mediterranean countries (Italy, Greece). The company plans to export corn soon, which is the main export crop of Ukraine.

Melnichenko explained that agricultural trading will be pursued through UMG rather than via HarvEast Agricultural Holding because HarvEast is focuses on producing and selling its own products, while UMG plans to operate exclusively as a trader within the entire agricultural market.

“We have been successfully operating internationally for a long time. Several million tonnes of our company’s products (clay, coal combustion products) are exported every year to more than 30 countries worldwide. I think the experience we have gained can be effectively put to use in agricultural trading,” the UMG Sales Director said.

This opinion is shared by Ivan Dzvinka, an analyst at the investment company Eavex Capital: “UMG’s business is export-oriented, so it is easier for this company to operate as a trader than for the agricultural holding, which is focused on growing crops”.

Finding a Niche

Apart from grain exports, UMG wants to distribute resources needed in farming, like mineral fertilizers. Melnichenko was evasive about whether or not the company plans to create its own logistics hub — building infrastructure facilities for grain handling like grain terminals. “Like most traders, we don’t have our own logistics and transport infrastructure. We are currently operating in test mode, aligning our team, probing the market, looking for our niche and designing an effective strategy for the company’s agricultural trading line,” he said. Melnichenko also refused to disclose the projected level of investment into the project because the precise sort of facilities and volumes of the business are not yet known.

According to Aleksandr Sokolov, General Director of the consulting company Pro-Consulting, creating a new business line that would be directly involved in trading agricultural products is a logical solution for cost optimization. “Grain trading is a promising field. It helps to bring foreign currency into the country and earns more compared with producers who sell domestically,” Sokolov said. He added that the recent devaluation of the hryvnia offers additional benefits to Ukrainian exporters, which makes investors more interested in entering this business.

Guaranteed Earnings

Dzvinka says that it is possible to make money even now in the business of agricultural commodities trading, when grain prices have hit historic lows. “Why not enter this niche and put pressure on your competitors? The xport leaders include such ag giants as Nibulon, State Food and Grain Corporation of Ukraine, Kernel, Louis Dreyfus, Noble, Ukrlandfarming, Cargill, and Glencore. This goal is ambitious, but still reasonable in terms of business,” he explained.

Igor Ostapchuk, an agricultural markets expert at the Ukrainian Agribusiness Club Association, points out that grain traders’ margins on international business contracts are up to $5–10 per tonne.

Dzvinka does not rule out that SCM can use UMG’s trading line to offset tax credits and liabilities. “For example, if traders get a VAT refund for exports, which was discussed recently in parliament, exporting grain will be even more profitable than growing it. On the other hand, fertilizer imports are also profitable because of the shortage on the market. If we put the pieces of the puzzle together, then we see that the company might be aiming at cooperation with China in both grains and fertilizers,” Ostapchuk said. In 2014, traders who were selling their own crops received VAT refunds. However, this provision was canceled with the 2015 state budget. Ukrainian officials and MPs are considering revoking the preferential tax treatment for farmers (cancellation of VAT accumulation on individual accounts of the State Treasury) and, instead, returning the mechanism for refunding export VAT for both producers and traders.

Source - www.liga.net