FAS opens case against Gazprom because of high sulfur prices

If the anti-monopoly authorities find basis in the complaints of EuroChem and Fosargo that the prices for sulfur to produce mineral fertilizer are artificially inflated, Gazprom could face a fine of up to 15% of its turnover. The Federal Anti-Monopoly Service (the “FAS”) once again suspects that Gazprom and its subsidiaries are overcharging for sulfur to produce compound fertilizer. In spite of the fact that the FAS has already fined Gazprom for violations in this market and has instructed the Company to cease these illegal actions, consumers have once again filed complaints about Gazprom’s “anti-market” actions. Consequently, an additional violation of anti-monopoly legislation would be considered to be an aggravated circumstance, and Gazprom could be fined up to 15% of turnover from the sale of sulfur.

As reported by Izvestia, the FAS has opened proceedings against Gazprom for violating anti-monopoly legislation in the sulfur market and for inflating prices for the period of March to June of this year. The commission’s first meeting is scheduled for 26 August.

The proceedings were opened following the complaints made by the consumers. At the end of May, the anti-monopoly authorities received such complaints from EuroChem in respect of Gazprom’s actions. Not long thereafter, the FAS received another complaint; this time jointly from EuroChem, Fosagro and Schekinoazot Trading House. The three parties have requested that the FAS personally take control of the situation in the sulfur market.

Even though the FAS has recommended a pricing formula for sulfur that is set to the minimum export price, Gazprom’s sulfur subsidiary, Gazprom Sera, since March of this year has used an “inexplicable mechanism to set its own price”, as described in the letter from the above-stated consumers, which Izvestia has in its possession. Moreover, although there has been a 20% decrease in prices in the worldwide market, Gazprom and its subsidiaries have announced an increase of 38% in the selling price for its Russian clients. By comparison, according to Argus FMB, the minimum price charged by CFR North Africa decreased from USD 170 to USD 135 per tonne from January to May of this year, while Gazprom subsidiary Gazprom Orenburg Production has increased its price for granulated sulfur from RUB 2,753 to RUB 3,808 per tonne, excluding VAT for delivery to Cherepovets. UralChem (one of the three largest domestic users of sulfur, along with Fosagro and EuroChem) has stated that it is also dissatisfied with the pricing in the sulfur market, and that it had previously sent a complaint to the FAS on this matter; however, there has been no required response to the FAS’s instructions.

-“Officially, as Gazprom has informed us, the price is based on netback (world prices minus customs fees and transport costs). However, the consumer companies have informed us that world prices for sulfur have fallen, while domestic prices have risen”, says Anna Mirochinenko, head of the Chemical Industry Monitoring Department of the FAS. “We are currently checking whether this is the result of a change in export policies or games being played there, given that the price includes transport costs. Gazprom has a monopoly on transporting liquid sulfur; therefore, we need to figure out just how justifiable these transport costs are”.

“If the misuse of a dominant position has a negative effect on competition, the party in violation could be fined up to 15% of its turnover”, reiterates Yaroslav Kulik, Senior Associate at Art de Lex. “In addition, the consumers may file for proceedings to seek compensation for the overcharge on sulfur sold at such a high price”, he added.

Gazprom Group had previously come under the scrutiny of the FAS in March 2011, when the price for liquid sulfur jumped two and a half times, and more than three times for the entire period in 2011. The FAS ruled that Gazprom had violated anti-monopoly legislation and ordered the Company to pay a fine of RUB 17.5 million, and the courts of three instances upheld the position of the FAS. In 2012, mostly because the FAS intervened, the price of sulfur returned to its previous level. Schekinoazot reports that following an increase of 95% over 2011, the price it paid for sulfur over 2012 decreased by 44% to RUB 1,563 per tonne; while Fosagro reports that the average price it paid for sulfur in 2012 decreased by 25% to RUB 2,442.

“If the FAS once again finds that Gazprom has violated anti-monopoly legislation, then the Company could face even more serious sanctions, given that a repeated offence of the law is considered an aggravated circumstance”, warns Mr. Kulik. “Under the criminal code, even the directors of companies that have repeatedly misused their dominating positions could come under the scrutiny of the law enforcement authorities”.

“We do not have any information on how Gazprom sets its pricing, given that the Company does not have a written pricing policy that would designate which figure would be used for calculating the price. Let that figure remain undisclosed; however, it should be clear what it entails. For example, does it cover the previous quarter or month, or is it the price under current contracts. In our instruction to Gazprom, we wrote that the Company must establish a pricing policy, and the deadline is approaching”, says Anna Mirochinenko. “The Government has obliged the FAS to analyse the practicality of drafting rules for non-discriminatory access to sulfur. The FAS has had several meetings with market players, and they have decided that this is not necessary; however, it remains necessary to draft the rules of pricing policy”.

Gazprom has declined to comment.

Based on sulfur, the resulting sulfuric acid is used to produce phosphoric acid that, in turn, is used to produce phosphorus fertilizer of various brands. For example, sulfur is 14% of the cost of producing di-ammonium phosphate, says an official from Fosagro. In 2012, the Company spent RUB 3.6 billion on sulfur and sulfuric acid, which was more than it spent on electricity. UralChem bought USD 24 million worth of sulfur over the same period, according to the Company’s documents. The overall volume of the Russian sulfur market, according to modest estimates, exceeds RUB 10 billion per annum (under 2012 prices); and Gazprom has around a 90% market share domestically.