JSC Dorogobuzh has requested that the Federal Antimonopoly Service (FAS) initiate proceedings against JSC Apatit and its managing company CJSC FosAgro for alleged violation of antimonopoly legislation. Both companies have refused to supply Dorogobuzh with apatite concentrate.
Dorogobuzh filed its complaint with the FAS after Apatit repeatedly failed to confirm a 2008 supply schedule. As a result, Dorogobuzh is concerned that it may not be able to obtain any apatite concentrate, the raw material used to produce its fertilizers.
Initially, Apatit representatives said they had already allocated all of next year’s apatite concentrate and no supplies would be available for Dorogobuzh. Later, FosAgro representatives announced that, starting in 2008, all apatite concentrate will be sold at an exchange, with the exception of Acron and JSC Minudobreniya, which have long-term contracts with Apatit.
Over the course of 2007, FosAgro leadership has made several attempts to trigger a conflict between Apatit and Acron. This May, the Novgorod-based chemical facility received only half of its monthly shipment of apatite concentrate, and in August Apatit provided only 20% of the 40,000 tonnes due. The last straw was the decision made by the court of primary jurisdiction that the price for apatite concentrate listed in the five-year contract shall be increased 15% for 2007 and fixed unilaterally by the monopolist starting in 2008.
Commentary by Acron’s Vice President
“This is overt blackmail,” says Acron Vice President Aleksander Popov. “Apatit is forcing us to accept their terms, ignoring the contract they already signed. Regarding next year’s supply of apatite concentrate to Dorogobuzh, Apatit is backing us into a corner, jeopardizing the production process and thousands of jobs.
In 2006 the Acron Holding tried to protect itself from Apatit’s monopoly policies, and a court forced Apatit to sign a five-year supply contract with Acron. However, this contract did not imply, as Apatit managers would have us believe, that the price should be fixed for the entire term of the contract. We have repeatedly invited Apatit to join us in negotiations so that we can settle all of our disputes on mutually beneficial terms. However, Apatit leadership is not willing to compromise. They accept only one scenario, one in which they dictate the terms.
What we are seeing now is the establishment of absolute power by a monopoly. If Apatit wins its suit to revise the contract price, it will be able to dictate its own terms. That kind of scenario will have ramifications that go beyond Acron, and even beyond the chemical industry. It will be a problem for the Russian economy as a whole.
The Russian government continues to take a lenient view of monopolists, even as these companies look for new excuses to raise prices and rates every year. But their prosperity comes at a price for other companies. The so-called second tier of the Russian economy is in a deadlock. The state’s tolerance of monopolies has led to ongoing conflicts between monopolists and producers, resulting in suspended production.
Any monopoly is a parasite that systematically destroys everything around it. When there is no competition, a monopoly minimizes its costs by cutting production safety and development and compensates it’s for its loss of efficiency by setting unreasonable price rises. This behavior survives because consumers have no choice. Unlike companies operating on a competitive basis, whose main goal is to increase production volume and cut costs, monopolies adopt a development strategy of intentionally limiting production volume and artificially inflating prices.
We have seen monopolists chose this route on many occasions. For instance, in 2006 Russian and Belarus potassium suppliers manipulated their Asian clients in this manner. These types of anti-market policies lead to lower production volume (for example, in the late 1980s Apatit’s output was roughly 20 million tonnes of apatite concentrate per year; currently it is 9 million tonnes and continues to slide further to 7 million tonnes) or global breakdowns.
Trading apatite concentrate, potassium chloride or any other product with a limited supply at an exchange brings consumers to a dead end. Apatit is intentionally limiting the supply of its products to the market, pushing consumers to buy raw materials at the exchange at an inflated price that is 50 – 100% higher than existing contracts. To my mind, the Federal Antimonopoly Service should impose severe sanctions on players using this scheme. Where market mechanisms do not work, tight state control should apply.”