EuroChem Shelves $1.5 Billion U.S. Plant as Sanctions Bite

EuroChem Group AG shelved a decision to build a $1.5 billion ammonium plant in the U.S as sanctions limit access to funds and the Russian ruble’s drop makes projects in the fertilizer producer’s home market attractive.

“The decision on the project is delayed due to changes on the financial markets, namely affected access to credit resources,” Chief Financial Officer Andrey Ilyin said in an interview in Moscow on March 18. “The ruble’s devaluation also made development of such projects more attractive in Russia.”

Russia was sanctioned by the U.S. and Europe last year over the conflict in Ukraine, preventing Russia’s largest lenders and some companies from borrowing in the U.S. and European Union. The ruble plunged 46 percent against the dollar last year, cutting mining exporters’ costs.

PAO Severstal sold its U.S. assets for $2.3 billion last year as the steel industry failed to fully bounce back from the 2009 plunge in demand and the operations’ profit margins were less than half those it gets in Russia. OAO Mechel sold its Bluestone coal unit in the U.S. last month after idling the asset in April 2014 as a demand slump left much of the U.S. coal industry unprofitable.

EuroChem, controlled by Russian billionaire Andrey Melnichenko, said in July 2013 that it planned to build the plant in Louisiana to produce ammonia and urea for the U.S. and for export, creating 200 jobs directly and 1,300 positions in related industries. The company has purchased 2,150 acres (870 hectares) near Carville in Iberville Parish, a site also known as Point Clair Farm, and planned to make the final decision on the plant by the end of 2014.

Financial Capacity

“Our ambitions should be matched by our financial capacity,” Ilyin said. The project still may be developed with the decision on the design work possible even this year, he said. That would be needed to make the final decision on the overall Louisiana project.

The company also has a $1 billion project to build an ammonia plant in Russia’s Leningrad region. As the Russian price of gas, the main raw material for ammonium fertilizers, became cheaper after the ruble’s decline, capital expenditure on similar projects at home is lower, according to Ilyin.

Average gas prices in Russia dropped to as low as $2.20 per million British thermal units from $4 last year because of the ruble’s devaluation, Ilyin said. EuroChem also produces about 1 billion cubic meters of gas annually in Russia.

Should gas prices in the U.S. rise and if exports of liquefied natural gas are allowed, that will make the Louisiana project less attractive, he said.

Potash Projects

Neither EuroChem nor its owner are targeted by sanctions. “If you are not on the sanctioned list, things aren’t so bad,” Ilyin said. EuroChem is able to get financing from international banks, he said.

The company is building $7.4 billion of potash projects in Russia. It needs to invest about $1 billion annually by 2018, when its two mines will start up, while it needs as much as $800 million to refinance debt due this year, Ilyin said.

The ruble’s plunge will help to fulfill EuroChem’s demand for cash, according to the CFO. The company’s cash-flow this year will be $500 million higher than in 2014 due to ruble weakness, he said.

EuroChem may also go for refinancing. Banks became “more demanding of Russian companies,” but EuroChem’s parent company is incorporated in Switzerland and has several assets abroad, according to Ilyin. “Rates rose by about 2 percent. This is not lethal, but sensible.” The company isn’t planning to buy back Eurobonds from the market as it has a large investment program, he said.

The fertilizer market will be challenging this year, with prices either flat or falling for all types of soil nutrients, EuroChem forecasts. The nitrogen market has been affected by sharp cost declines in China and Russia, Ilyin said. While demand may grow as much as 1.5 percent annually, supply is seen increasing by as much as 4 percent, he said. Phosphate markets are seen balanced as India boosts purchases, he said.

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