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Why did Kazan Oil Extraction Plant go to China?, 13.07.17

Producers assure there was not an oil collapse due to Turkey’s sanctions but they also try to enter new markets

The sunflower oil producer is assured that the Turkish sanctions have not affected the export. However, the story with duties on sunflower oil made Russian sunflower seed processors including Nefis Group of Companies pay more attention to possibilities of the Celestial Kingdom whose market is almost bottomless, as one of Realnoe Vremya's interlocutors says.

No collapse?

As it became known last week, the uneasy relations with Turkey might have affected Russian oil export. Chairman of the Board of Directors of the Kazan Oil Extraction Plant Dmitry Samarenkin told about it during the 2017 All-Russian Field Day.

It should be reminded that Turkey cancelled duty-free import of cereals and oil from 15 March. Since then the import duty on wheat and maize has been 130%, rice – 45%, sunflower cake – 13,5%, sunflower oil – up to 36%, beans – 9,7%. In addition, a minimum duty of $1,500 per tonne of products was imposed on exporters, while the current sunflower oil price in world markets was about $800 per tonne.

However, producers officially assure there was not any collapse even if Turkey accounts for 30-57% of the total Russian sunflower oil export, according to different estimates. Including because the duties that were cancelled as fast as they were imposed were in force at the end of the season (its peak is in late December – early January) when sunflower oil supplies in world exchanges were minimum. What is more, the supplies to Turkey were carried out within contracts:

''We did not stop Turkish supplies because the volumes were strictly fixed in the company's contract,'' head of EFKO Managing Company AO Aleksandra Yapryntseva explains (EFKO accounts for 32% of the Russian export of bulk vegetable oil).

The Kazan Oil Extraction Plant also assure that there was not any break of export supplies. According to Director of Sales Department of the enterprise Airat Ismagilov, they continued but were partially reoriented to other markets, for instance, to the Iraqi:

''There were difficulties, but they were short-term and not catastrophic,'' Ismagilov says. ''Our products are purchased by Turkish importing companies that leave in their country or deliver to another market. In other words, during the application of import duties, our purchasers sold the oil to other countries themselves, not to Turkey's market, including to Iraq,'' says the director of Sales Department of the Kazan Oil Extraction Plant.

The Institute for Agricultural Market Studies (IKAR) did not see a catastrophe in the short-term application of import duties on Russian sunflower oil. According to its statistics, in September-May, Turkey bought 450,000 tonnes of oil from the Russian Federation, though this indicator usually is from 500 to 550,000 tonnes.

''Another 15-20,000 tonnes of the product will be delivered until the beginning of the next season,'' leading expert at IKAR Daniil Khotko forecasts. ''But we should remember that the export of Russian sunflower to Turkey has significantly grown: according to last year's data, the country can purchase 220-240,000 tonnes of the feedstock, which is 90-100,000 tonnes of oil. This is why, in general, this year's indicator of oil plus sunflower will be close to previous years,'' Khotko concludes.

The short action of import duties on Russian vegetable oil to Turkey did not affect Russia's positions in this market – the Russian Federation is still the second vegetable oil exporter in the world. Ukraine is the leader whose possesses 54% of the world vegetable oil export. According to APK-Inform info agency's data, in 2016-2017, Ukraine sold 4,9 million tonnes, Russia – 1,8m tonnes from the total export volume of 9 million tonnes, which is 200,000 tonnes more than in the 2015-2016 season. Analysts of APK-Inform forecast a further growth of the export potential of both countries – rapeseed oil products used in the food industry is reducing in the European Union. As a result, demand for vegetable oil is increasing.

Model for Celestial Kingdom

Turkey accounts for about 70% of the Kazan Oil Extraction Plant's export portfolio – the enterprise imports about 100,000 tonnes of bulk unrefined vegetable oil to this country during a season. The rest is divided between Egypt, Iraq and Iran not always successfully. However, China is a more prospective market in terms of volumes.

According to Director of Department of Logistics and International Relations of the Kazan Oil Extraction Plant Rustem Galimov, the enterprise has already supplied vegetable oil to the Celestial Kingdom – there was a lot of 500 tonnes to China several years ago.

If the price offered by the importer is another important factor while selling oil to Near Eastern countries' markets, China is interesting for Russian producers, first of all, because of its volumes.

No expert of Realnoe Vremya dared to evaluate the capacity of the Chinese vegetable oil market in export.

''It is almost bottomless,'' the head of the Sales Department of the Kazan Oil Extraction Plant figuratively said. ''Besides consumer market, fat and oil sector, sauce producers, particularly mayonnaise and confectionery products demonstrate a huge demand for this position.''

To start large-scale sales to China, Russian enterprises and particularly the Kazan Oil Extraction Plant will have to rebuild logistical chains, first of all, to optimise transport costs.

''When supplying to Turkey or Iraq, we have quite small volumes,'' the director of Department of Logistics and International Relations of the Kazan Oil Extraction Plant explains. '' About 6,000 tonnes, that is to say, a small ship, is a standard shipload of oil to Turkey. We will need to send at least 20,000 tonnes of oil to the Celestial Kingdom, so that delivery to China won't absorb the margin. Consequently, at the same time, we send 100 wagons to the Novorossiysk Port in order to supply to Turkey and 300-400 — to China.''

What is more, delivers to Turkey or Iraq are based on FOB scheme (Free On Board) when the seller just needs to deliver a good to the port and load it to the ship mentioned by the purchaser. Meanwhile, supplies to China presuppose CIF shipping (Cost, Insurance and Freight). In this case, the seller must pay the costs and freight of the ship needed to deliver to the port of destination.

''If we worked with Turkey on CIF, the costs would be another $20 per tonne, with Iran or Iraq — $30-35. CIF shipping to China is $50-70 per tonne of freight,'' the director Department of Logistics and International Relations of the Kazan Oil Extraction Plant presents the report.

Paperwork of the oil lot supplied to China is another difficulty that is considered unbearable in the enterprise. As Galimov says, if ''Turkey needs just three documents, China needs 18-20'':

''China is crazy about quality. This is why their requirements for documents are very strict – production quality, veterinary and phytosanitary norms and so on,'' Realnoe Vremya's expert explains. ''However, it is difficult to arrange these processes, though it is possible.

But China has grown

As it was mentioned above, Turkey was and remains the major Russian vegetable oil consumer if we believe the calculation of the Agro-Industrial Union of Russia. In 2015-2016, it has 46,6% of Russian export bulk vegetable oil market.

Egypt gets 15% of foreign supplies being second among importers like last year. But China was remarkable last year – it immediately occupied the third position from the seventh and 1% world import and started to own 7% of Russian vegetable oil import. 133,000 tonnes were supplied to the Celestial Kingdom (there were just 23,000 tonnes one year earlier). This year is unlikely to be record – in the 2016/2017 season, Russia is to supply 120,000 tonnes to China.

Daniil Khotko from IKAR says it happens because China opened state reserves of rapeseed and soya oils, so the need for Russian oil considerably reduced. What is more, in the analysts' opinion, the requirements for products are impossible for many enterprises. Nevertheless, Russia has the example of Ukraine in front of its eyes. The latter supplied 460,000 tonnes both last and this year. Considering the volume of sunflower plantings in Russia is two times less than in Ukraine, Russia is still able to sell 200-250,000 tonnes to China.

As for perspectives of the Kazan Oil Extraction Plant in the Chinese market, Khotko thinks the company can occupy its niche in this market even with difficulties and remoteness from ports. In addition, the analyst thinks the company is able to supply bottles to the Celestial Kingdom – a more marginal product than bulk unrefined oil.

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