Antimonopoly agencies are trying to liquidate the United Trade Company, which had monopolized sales of chlor-alkali products to save the market from destructive competition.

Andrei Vinkov and Dmitri Sivakov

At the very beginning of April, the Federal Antimonopoly Service (FAS) initialed legal proceedings to liquidate the United Trade Company (ETK; Edinaia torgovaia kompania), which now controls almost 100% of caustic soda sales in Russia. ETK has no ownership ties to producers and factories, only contracts. From the outside, ETK looks like a caustic soda cartel and the FAS seems completely justified in its interest in the company’s activities. ETK’s activities have led to higher caustic soda prices, after all, and customers have registered complaints with the regulatory agency on more then one occasion. But there are other reasons besides the vaguely defined term “natural monopoly” to describe why ETK exists.
We spoke with General Director Konstantin Selinvanov about the economic appropriateness of ETK, the company with the exclusive right to buy everything produced by the main manufacturers of PVC and caustic soda.

How it all began

- From the outside, it looks like ETK is a consciously created monopoly. Who would be bothered by a little competition on the chemical market?
- ETK was founded in 2003 according to a completely transparent economic concept. A month before that, China levied an 80% anti-dumping duty against Russian PVC producers. Sayankhimplast, located on the Chinese border, only had one choice, which was to move its supplies to the European part of Russia. Russia, by the way, produces 450,000 tons of PVC a year, but only uses around 300,000 tons. In other words, we overproduce by 150,000 tons. The Siberians, by moving their product to European Russia, tore the market to pieces and started a price war. That was when we got the idea to create the United Trade Company and avert disaster.
- How serious would the consequences of such a war be?
- Prices would have been cut in half, I think. That’s a lot less than cost.
- But after falling rapidly, they could have risen fairly rapidly to their previous levels and the situation would have returned to normal.
- How could it have returned to normal when, to put it crudely, there is one buyer and three sellers? By organizing ETK, we balanced the market in our first few months. We took the place of some of the European customers for the suppliers from Sayansk, took care of logistics, and regulated the overproduction problem, as well as fixing exports to the NIS and other countries. If the main producers hadn’t come to an agreement, they would have also faced tough competition on foreign markets. The Middle Eastern market has also been headed downward. Companies that gave their products over to ETK as a sales coordinator saved themselves from a price war and from profit losses.
- Isn’t that similar to a cartel agreement?
- Not in the least. ETK concluded normal purchasing contracts with producers. ETK buys their products using its own funds. And that’s it. There are no other agreements between us. The factories are in tough competition with each other and would never make any agreements with each other.
- And prices went down?
- They went up.
- How can that be right: you have limited the market and overproduction is increasing, but you are raising prices?
- There were objective economic factors behind the increase in prices. ETK had nothing to do with it. We only prevented a price war and saved four companies from bankruptcy.
Why did prices start to rise? First of all, this year, just like last year, prices for ethylene are increasing, which is the main input for making PVC. Don’t forget that ethylene is made from oil, and oil prices are rising. The ethylene prices for Kaustika in Sterlitamak, for example, have already increased by 30%. In addition, a major percentage of the costs when making PVC come from electricity and rail transport rates. Those are growing, too. Secondly, we began to fight to make these companies profitable. Today this issue has been solved and the factories are making 15-20% profit. I think that this is an economically justified amount, as companies need to reinvest those profits into their development. Before ETK, their profitability was close to zero.

PVC, chloride, and caustic ash

- Why do these factories need that level of profitability?
- Compared to other industries, this one demands maximum attention. We are talking about basic chemicals and the most complex and dangerous types of production. When making PVC, in addition to ethylene, factories also use chloride. And chloride is so dangerous that it can’t be exported and imported in large quantities. It has to be produced next to where it will be used. Environmentalists pay very close attention to all those plants. In the industry, there are a couple companies in relatively good shape, while the others are fully depreciated and require serious renovation.
- But weren’t safety issues dealt with way back in the Soviet era when these plants were built?
- Sure, but that was almost fifteen years ago. There are problems with safety and they must be solved immediately. That is precisely why they need a certain level of profitability, in order to modernize production. The need for modernization is really acute.
Most caustic ash is made via electrolysis using what is called mercury technology. This is outdated technology from fifty or sixty years ago, which is also horribly toxic and extremely dangerous. If chloride leaks and poisons people, that’s one thing: somebody will get sent to jail. It’s a whole other thing if mercury gets into the water supply. A whole region could be poisoned for decades. There is a new membrane technology to make caustic ash. But it’s very expensive. It will only be possible to finance the replacement of mercury technology with membranes if companies earn enough profit.
But that’s not all. All the companies are working on a non-stop production cycle. What would happen if, you reduce output in the morning and increase it in the evening, to put it bluntly, due to market demands? This production cycle would not meet GOST and equipment usage standards. Wear-and-tear will increase, as will the threat of industrial accidents, even quite serious ones. A lopsided rhythm increases the risk of emissions, explosions, and other negative events.

The downward spiral

- In the Soviet era, production of caustic soda, as a strategic commodity, was balanced. Only enough companies were built to meet the needs of the planned economy. Back then, there wasn’t enough of it and everybody was concerned, because if you didn’t have caustic soda today, you were finished tomorrow. Caustic soda is the entire economy’s lifeblood and it’s used everywhere: cellulose and paper production, energy, aluminum, and so on. And it’s a mono-product; only occasionally can soda ash be substituted. So what now? Every year, Russia produces 1.1 million tons of caustic soda solution. The companies need 300,000 tons for their own internal use, and the yearly consumption on the open market is 700,000 tons. That leaves 100,000 tons. At the same time, Russia needs more PVC, which means it needs more chloride. But it’s illegal to import chloride. And to produce more chloride you need to make more caustic soda.
- Why don’t we just export the rest of the caustic soda?
- Russia produces a lot more oil than it needs. But the country has ports, it has the Transneft pipeline system, and it has the railroad. In other words, it has an infrastructure that allows it to increase capacity and export what the domestic market can’t handle. The appropriate infrastructure for caustic soda has been lost. The specialized terminal in the Caucasus has been refitted for oil, as has the one in Vyborg.
- And what about the railroad? To export to Europe, for example.
- The price in Europe is $80, less than in Russia. There is a gigantic PVC market there, because there’s a building boom. Of course, if you use a lot of PVC, you also produce a lot of chloride and, naturally, extra caustic soda.
Though in principle you could export it, just in solid, not liquid, form. Why is solid caustic soda better than liquid? Because you can a) store it b) produce it for less, and c) you don’t have the problem of having to unload it immediately.
- It seems that competition is a curse…
- All the companies in the industry are competing brutally. Caustic soda is a cheap product and you can’t make a lot of money from it. It you leave it at the factory, you lose profits, because PVC output drops. How did the paper mills used to work? They would get, say, 2,000 tons from Sterlitamak one month, and then go to Volgograd or Sayansk and buy caustic soda cheaper than from Sterlitamak. Volgograd and Sayansk were happy for all the reasons explained above to get rid of their caustic ash. You can pull this trick a couple times, until the price goes below cost. With this kind of competition and market structure, the problems build up, but don’t get solved. Caustic ash in Russia today is a superfluous commodity. Companies are forced to think up sales schemes like ours.
How does ETK work? We calculated the cost of production and added mark-up for the companies and for ETK. It turns out that the minimum price we can sell for is 6,000 rubles a ton without VAT. We were supported by producers in the Ukraine and Belarus, where prices also went up sharply. Also, Europe reacted to our policy and prices there increased.
We gave factories the opportunity to make some money or at least not to operate at a loss. Producers who participate in our program get paid in advance, and we take on the responsibility of transporting the caustic ash in time. This is very important because if there are transportation problems the plant can grind to a halt and that means huge losses.
- But still, nobody like cartels.
- This isn’t a cartel. Even informally. A cartel is when businessmen get together in a room and agree on prices. This could never happen here, because the companies are in such stiff competition with each other. They would never be able to agree.
By creating ETK, we proposed they use a market approach. They agree to only sell their soda to us and we pay them up front. What ends up happening in the end- that we dominate the market - is economically justified.

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