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Production and market of malt in Russia

Production and market of malt in Russia

Trade balance
Complex price
Regulated Beer
Leading malt producers

Brewers' malthouses
Trade companies
Appendix

Trade balance

By the end of 2012 the malt production in Russia grew sharply. According to operating data from Rosstat, the dynamics of the growth reached 26% or 1 220 thousand tons. The production started growing in February 2012 and even during the traditional period of waiting for the new harvest barley, Russian malting companies had rather heavy workload. On the one hand, such rates can be explained by the low base of 2011. On the other hand, the production volume approached though did reach the before-the-crisis rate for the first time since 2009.

High malt production dynamics was connected to the situation on the market of malting barley rather than to beer production. The crop of the current year is gathered in autumn and processed next year. Particularly, poor results of 2011 were conditioned by both lower beer production and torrid summer 2010 when agricultural producers failed to supply enough malting barley to malthouses - and this product realization amounted to only … thousand tons. During 2010-2011 the stocked malt of producers was melting, and the deficit was set off by import.

In 2011 agricultural producers aimed to supply enough raw materials by increasing areas arable under malting barley. The weather was in general favorable for sowing and right barley aging. As a result, its realization grew by … times, having slightly exceeded … tons and the raw material deficit was almost eliminated. However the agricultural producers did not hurry to sell barley at low price, in spite of the producers' demand for materials. For example in 2011 the official realization fell to extremely low level, having amounted to … thousand tons. Obviously, the main volumes of materials were neither traded nor fixed and their realization took place after New Year. This drew the growth of malt output in 2012. The production started growing only in February and that can be explained by the fact that after the high season the brewers were able to expect lower prices.

In 2012 agricultural producers gathered even more malting barley. According to Alexander Mordvin, president of malt and barley producers' union, the crop reached 1.5 mln of tons. Obviously, this volume will fully satisfy the demands of malt producers. The realization of malting barley in 2012 practically …, having reached … thousand tons.

The deficit of qualitative malt which appeared due to poor crop of 2009 and 2010, resulted in a wave of import supplies. In 2010 supplies from abroad increased by …% as compared to the previous year and comprised … thousand tons. In 2011 the import volume slightly declined, … being the main supplier of expensive malt and … delivered most of the inexpensive malt. In 2012 many other countries of the European Union were added to the list. The import grew from … to … thousand tons. Though … malt remained unquestioned leader by the volume of deliveries, …, …, … and … made the top five. Other countries of far abroad also increased the volumes of their deliveries to Russia.

Malt export from Russia has been comparatively small for the last three years and does not much influence the general production level. While in 2009 its volume amounted to … thousand tons, by 2012 deliveries abroad fell to … thousand tons according to the data of State customs service. Thus, despite the big production potential and growth of production, Russia has not showed itself to be a malt supplier in the international market. Though overproduction and full satisfaction of domestic demand can force the producers to try to boost deliveries abroad.

Against the import growth, the trade balance reflected a little more positive dynamics than the production. Let us consider the trade balance total to be equal to the malt consumption. Then in its dynamics one will be able to see a correction phase which started in 2009 against the background of the crisis phenomena and the beer production decline, but it lingered for too long - till 2011 because of problems with supplies of malting barley. The growth of malt consumption in 2012 as well as its production was connected to good harvest of malting barley.

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Complex price

As mentioned above, in 2012 the crop of malting barley increased by … times to … mln. tons under expert assessments. This volume should be enough to supply Russian malthouses with raw materials even provided the current high growth rates. In our opinion the growth was mostly driven by favorable weather conditions for malting barley ripening, the limitations on unmalted materials content in brewing, wider usage of forward contracts and closer cooperation of brewers and agrarians.

The trouble for brewing companies here is that the considerable growth has not so far led to malting barley the prices slump. On the contrary, the prices have been strengthening since … if we judge by the data of the official statistics. The situation in the world market can explain such "paradoxical" price growth.

advertising RastalAs import barley and malt are always available for Russian brewers, they markedly affect the prices in the domestic market, usually by limiting their ceiling. However, in this case price growth for Russian malting barley contradicts price slump in Europe. One of the reasons can be connected to the situation and prospects of the new crop in European and world markets due to sudden change of the business climate.

In 2012 severe drought in the USA led to dramatic reduction of feed grain supply, which resulted in the price "rally" in the market of feed grains all over the world. The world prices for grains in 2012 hit record high. Besides, the US Ministry of agriculture raised forecast inflation for food to 4% in 2013, which is the highest figure since the recession start.

According to RMI Analytics, in 2013, farmers in the European Union will reduce malting barley output, after growers planted more feed grains.

Production of malting-grade barley, usually planted starting in March in the EU, may drop 13 percent from a year earlier to 8.8 million metric tons in 2013, according to Matthias Wree, managing partner at RMI, a Lucerne, Switzerland-based research company specializing in raw materials for breweries. Output of winter barley, typically used in livestock feed, may rise 7.8 percent to 25 mln tons, he said.

Farmers planted more feed barley after spot-market prices rose in the past year, while malting barley futures traded in Paris dropped 9.9 percent over the same time. The premium for malting barley over feed in western European spot markets is the lowest since 2003, Wree said.

"The premium of malting barley over feed is historically low," Wree said in the interview to Bloomberg. "We had an extremely tight feed market and also a very good malting barley crop in Europe in 2012, so both things came together at the same time."

Malting barley futures by the end of February rose to 245 euros ($328) a ton on NYSE Liffe in Paris. Spot-market feed barley in Creil, France, a European benchmark, was up 6.6 percent in the past year as of Feb. 12, according to the U.K. Agriculture & Horticulture Development Board, a Kenilworth, England-based researcher that tracks grain prices.

EU barley stockpiles may slip to 6 mln tons by the end of the 2012-13 marketing year on June 30, the lowest in 10 years, according to the European Commission. Total spring barley production, including malting and feed varieties, may be about 30.4 mln tons in the 2013-14 season, down from 31.7 mln a year earlier, Wree said. Malting barley production in the EU was 10.1 mln tons in 2012, compared with the previous three-year average of 8.4 mln tons, Wree said. Farmers planted more crops than usual last year after a cold snap killed some winter grains, leaving more fields available to be replanted in spring. Feed barley prices rose last year after drought in the U.S. damaged corn supplies and boosted global demand for feed, he said.

Malting barley in western Europe commands a premium of about 10 euros to 15 euros ($13 to $20) a ton over feed-quality barley on the spot market, less than the normal price difference of about 35 euros to 40 euros a ton, according to Wree.

Brewers typically contract grain six months to a year in advance, so higher costs may not be passed to consumers until 2014, said Francois Sonneville, an associate director for Rabobank International's beverage team in Utrecht, Netherlands. EU countries produced 37.6 mln tons of beer from barley in 2011, compared with global output of 184.9 mln tons, according to the latest data from the FAO UN.

"If I were a brewer I would be quite worried about what farmers are going to plant this year," Sonneville said by phone on Jan. 30. "If you look at prices at the moment, feed barley might be more attractive to grow than malting barley."

Heineken NV Chief Executive Officer Jean-Francois Van Boxmeer said Feb. 13 on a call with reporters that he expects a "small increase" in input price inflation this year after an 8 percent increase last year, mainly driven by malting barley

"Malt costs for brewers will remain relatively high in 2013," Wree said. "There's not really a reduction foreseen against 2012."

Returning to expert assessment concerning the price difference, let us refer to the national statistics in Russia. We should say that in Russian market unlike European exchange, the barely cost was changing more dynamically. The statistics show the convergence of price for feed and malting barley, which was observed in 2010. Interestingly, even the levels of the average prices in … 2010 and …2013 were approximately the same. But in 2010 the situation was cardinally different as then a considerable fall of barley output was observed. After that, in 2011-2012 there again arose price differences for different barley types, among other reasons, due to the abrupt slump of feed grain prices.

advertising SekadoThus, the low margin against feed barley can be taken as the main reason for the waiting attitude of agricultural producers. Though the bulk of barley has been already processed into malt, they think that qualitative products will be demanded in spring and summer 2013. The more so because, at the moment the premium for malting barley growing is very low. On this ground there can be reduction of malting barley planting in favor of feed. Perhaps brewers should take care of stockpiles when they purchase barley, keeping in mind future needs and like western companies sign futures with agricultural producers.

The cost of Russian malting barley varies from region to region. The highest selling prices are in the regions where malting barley is not planted and transport costs are especially high. For example malt producers in the Sakhalin buy barley at the price of more than … thousand a ton. In the Primorye, Khabarovskiy kray and Kaliningrad region the average price for a barley ton exceeds … thousand. One of the biggest consuming regions is Saint Petersburg having bought barley at RUB… thousand.

Republic Bashkortostan and Tatarstan where Efes company is located, late in 2012 bought barley for about RUB… thousand/ton. The regions where Baltika plants are located (Tula and Yaroslavl regions) purchased barley for nearly RUB… thousand in autumn 2012. The price reached approximately the same level in Lipetsk region where malthouse Ochakovo works. Comparatively low purchasing prices for barley, RUB… thousand/ton were effective in the regions where AB InBev plants are located, namely Omsk and Ivanovo regions, Perm kray and Republic Mordovia.

The price ceiling for Russian malting barley is lower than the price of import grain in dollars. One can say that during the second half of 2012 their cost convergence was in progress. The limiting role of import comes in the foreground when comparing prices. Thus, the average price for Russian malting barley in December 2012 amounted to RUB…a ton, which equaled … euro. Calculated customs price for import malting barley at that time totaled … dollar a ton (approx. … euro). However, this price can reflect contract cost, which was formed in other market environment. But December prices on French exchange under FOB condition from Creil were approximately the same, taking into account the transportation costs, more exactly, … euro for a ton of two-row barley. Besides there was a tendency for price decline, for example by March 2013 it has already gone down to … euro.

Alongside with the situation in the grain market, anticipation of new regulation of Customs Union, which will determine the volume of malt in beer, can be a subjective reason for the barley price growth.

Regulated Beer

During the period of deficit and expensive raw materials, brewers learnt to economize on mat by using unmalted materials. The economy scales become obvious as beer production decline from 2008 to 2011 reached …%, and malt production fell by …% over this period. One can also cite some indices: in 2008 one decalitre of produced beer (excluding brewing waste) corresponded to … kg of produced malt while in 2011 - … kg of malt. Certainly, these figures are not real utilization rates of malt consumption, but reflect the tendency of their change, that is, in general about …% less of malt was used in brewing.

Malt production growth in 2012, lower prices and big volumes of new crop grain can encourage producers to enlarge the rates of malt used in the production. Public officers, who have been long trying to regulate the consumption of unmalted materials, can also stimulate this process. Until 1 July 2012, there was no limitations as to the consumption of unmalted materials in Russia. According to amendment to the legislation on state regulation of alcohol production and turnover in Russia, on 1 July previous year, requirements concerning substituting brewing malt for grain and (or) its processing products were established while the total substituted malt mass must not exceed 50%. And since 1 January 2013 this rate has become 20%. Interestingly, the public officers took into account the absence of such rule in other countries, so import beer does not come under the limitations.

The main lobbyists of the legislation are Ministry of Agriculture and Russian alcohol regulation department (RAR). The brewers proposed and still propose to mitigate the consumption rate of unmalted materials to 50%.

However, the communication of Ministry of Agriculture concerning the adoption necessity of 20% rate, said: "According to the malthouses, malt (a traditional raw material of brewing) substitution will negatively affect the drink quality. Besides, this situation will lead to reduction of area under malting barley by 335 thousand hectars and the number of agricultural workers will decrease by nearly 35 thousand people, which can mean losing of RUB1.6 bln of taxes for the state budget of RF".

The key role in adoption of new requirements to the beer formula was played by Russian malthouses, which were interested in increasing the demand for their products, according to newspaper "Izvestiya". "Many malthouses have only 50% workload, barley and malt remain unclaimed. Introduction of new rates in beer formula will allow getting a healthier product and giving a chance for good economic results both for brewers and malt producers" - says Lyudmila Zharkova, general manager of company Russkiy Solod.

At the same time when the rules on new beer formula were adopted, the sate started considering ways to control their implementation. Currently Russian Alcohol Regulation department is working on a method of determining technological violation in beer production, which would reveal spirits in beer, quantitative ratio of malt to substituting raw material as well as other characteristics. A sum of RUB 4.7 mln is meant to be spent on designing a method of distinction beer from beer drinks. As the department explained, analysis will take place on the basis of samples sent to the controller.

At the moment consumer fraud, that is, mispresentation of beer drink under the guise of beer is subject to a fine of RUB 40 000-50 000. Moreover, the State Duma has already devised a draft law stipulating severer punishment, as Viktor Zvagelskiy, the author of the law on alcohol state regulation, vice-chairman of the State Duma committee on economic policy said to "Izvestiya". If the amendments are accepted, the fine will grow to RUB 0.5 mln. Besides, production of beer drink labeled as "beer" can subject its producer to a criminal penalty, as such actions can be classified as fraud.

However these initiatives are taken skeptically by market players as stated in "Izvestiya". "I do not believe in possibility of fast settlement of this issue, - says Lyudmila Zharkova. - Such investigation can take decades." Kirill Bolmatov from Efes Rus also considers the attempts to work out such methods to be futile. "The formula control is easy to carry out, it would be enough if an inspector comes to a brewery and check even by consignment note, the delivery of raw materials ".

Though the legislation stipulating 20% rate is adopted, the raw material level can still be changed. The document, which eventually will regulate the usage of unmalted materials, will become Technical regulation of Customs Union "On safety of alcohol production". The document that is being prepared is expected to determine the production technology of all kinds of alcohol for all countries of the Customs Union. Its adoption was planned for June 2011, but its certain provisions are still under domestic negotiations (their terms are settled by each country of CU individually).

Certainly, the position of RAR and Ministry of Agriculture was taken into consideration when forming summary proposals of Russian party according to the project of technical regulation. But the positions of other countries much differed from Russian one. In Belarus beer does not belong to alcoholic drinks at all, that is why Belarusian party suggests beer to be exempt from the new technical regulations. Kazakh representatives proposed to set unmalted material limit at the level 50%.

According to newspaper "Vedomosty" the project of technical regulations, which was sent out for inner state negotiations, already had a summary position, where RAR agreed to the ratio 50-50%, as Andey Yerin, InBev corporate affair director told to the periodical. The announcement about mass staff reductions in malting branch, were in his opinion unsound, as the worst to thing that can be expected is underutilization of capacity. Vladislav Skrebtsov, executive manager of the union "Gildia pivarov Belarusi" says that the ratio 50-50% suits Belarusian party and that they would like to keep it in the text of the technological regulations.

However, as "Izvestiya" writes, some Russian beer producers do not consider the current limitations to be immoderate. According to Sofia Sonina, press office chief of "Ochakovo", enlarging the minimum malt share in beer formula can increase the cost of beer of a number of producers by 10-15%. But this step will in her view make beer a healthier product, as only when enough malt is used (80%), the feminization in wort goes on naturally. Otherwise, the producer has to employ different industrial ferments which can negatively affect the consumers' health.

According to Sonina, Ochakovo is not afraid of the new standards as they abide by the rules which were set as far back as in the Soviet Union, when all-Union State Standard did not allow unmalted materials in beer to exceed 20 %.

Members of Efes Rus hold their own opinion concerning this issue. Kirill Bolmatov, director of communication with state and public organizations of the company considers that the obligatory increasing of malt to 80% in the beer formula will rather reduce the range in Russian market than affect the cost of the drink. He says that the danger of ferments usage in beer production is greatly overestimated, as all these ferments are processed in the course of brewing.

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Leading malt producers

The structure of malt consumption in Russia can quite easily be divided by two parts. These are the consumption of own malt and purchased malt, that is, malt market. While in the majority other eastern Europe countries almost all raw materials are traded on the market, Russian specific feature is that brewers own large capacities for malt production.

Until …, there was a tendency of the brewers' share growth in the total volume of malt production. Previous two lean year and high prices for raw materials stimulated expansion of their own malthouses. In this connection and also due to unmalted materials used by brewers, the volumes of traded malt were rapidly decreasing for several years. However, by the end of …, the share of the malt output by trade companies remained approximately at the level of …%. In the total volume of malt consumption, the share of Russian traders and importers of malt slightly exceeded …% by our rough estimation. In the same year the tendency changed to the opposite, that is, specialized malt producers began restoring their market weight. Their share growth was promoted by better control over technological chain of malt production and the transfer of one of two Ochakovo malthouses under the control of Malteurop group. During the recent two years the relation of malt output by brewing and specialized producers comprises about …

Brewers' malthouses

Since 2009 Baltika has been the leader among Russian malt producers. Though the company owns only two malthouses, their heavy workload makes it possible to outdo other producers with bigger aggregate capacity. The position of the biggest producer depends on its malting barley endowment, that is why, Baltika share can fluctuate. But if we take into account Baltika's 30% participation in the share capital of Soufflet Russian subdivision, one can say that Baltika is likely to lead the pack in the nearest future.

Two Baltika malthouses with a capacity of 110 thousand tons located in Tula and Yaroslavl provide for most of the company malt needs. If necessary the plants can exceed their production capacity under the condition of the increased workload. For example in … Tula malthouse produced … thousand tons of malt. About … thousand tons or about …% of Baltika's demand is covered by its partner, company Soufflet.

We do not have exact data for 2012, but judging by the data of regional statistics, Baltika has substantially raised its malt production. The aggregate output of the two malthouses by our rough estimation reached about … thousand tons. Yaroslavl malthouse in 2012 again exceeded its design level, having increased its output by …% to … thousand tons.

Accordingly, we can consider that in 2012 Baltika has remarkably increased the malthouses weight in the total volume of its consumption. This share by our estimation could have grown from …% in 2011 to nearly …% in 2012.

The growth rates of malt output by two Baltika branches under our estimation were approximately at the level with the average for the region. Accordingly, its share remained practically the same, that is, …% of the total output volume.

In the future, Baltika weight among other Russian producers will grow. Baltika branch in Voronezh is repairing a malt grain elevator block which is located there. These capacities were not in exploitation for a long period of time. By the end of November 2012 dismantling of the malt block, elevator tower and malt-kiln was completed.

The structure of malt consumption by Baltika has been changing over the recent years. In 2009 resulting from clashes between companies Russkiy Solod ceased production deliveries as shown by statistics of rail transport provided by Information Agency "Kominfo". It should be reminded that the conflict arose because of the contract stipulating that in 2008 Baltika was to purchase no longer needed large volumes of malt at a high price (set at the time of malt deficit). This situation occurred due to the sudden change of the conditions on the materials and malt market. However, after long court proceedings, and yet another market situation change, the companies resumed cooperation.

In 2011 Russkiy Solod was the key supplier for the company. It satisfied about … of the company's needs having dispatched about … thousand tons of malt according to railway transport statistics. And the share of Russkiy Solod in the general volume of deliveries by outside companies (including Soufflet) under our estimation reached about …%. In our opinion, the supplier dispatched raw materials practically to all company's branches, excluding the one in ….

Malt delivered in 2011 by ..., ... and import ... weighed much in the structure of supplies to Baltika.

Soufflet according to Baltika report in 2011 sold "malt to the sum of RUB … thousand (excluding VAT), which corresponded to …% of the total cost of purchased and own malt, and … tons which equaled …% of the total volume of purchased and own malt". Soufflet divided the supplies between many branches of Baltika almost proportionally, according to railway statistics.

Import malt was sent mainly to the … factory in …, where expensive license marks are bottled. The main directions of import material deliveries were …, …, … and ….

Malteurop, judging by railway transport statistics supplies Baltika with about … thousand tons of malt, though this number could have been bigger. Belgorod malthouse mainly delivered its products to … and …, and the volumes of supplies were not large.

As mentioned above, Baltika demand for materials in 2012 reduced considerably due to own resources, thus the purchase volumes decreased too. In 2012 the key supplier was not … but … company …, basing on the data of railway transport statistics.

Baltika has practically ceased purchasing from Russkiy Solod. Alongside with malt from …, Baltika covered its demand with malt from …, which has significantly enlarged its supplies to … and started delivering malt to …. Thus the volume of railway transport dispatches for the company grew twofold, to … thousand tons.

We also should note that the consumption volume of import malt by "Baltika" increased not only due to Belarus but also to far abroad countries. Most of Baltika branches started using more malt from … and …. At the same time east branches of the company, namely those in …, … and … received … thousand tons of malt from … in ….

From the point of view of malthouses number and aggregate capacities, AB InBev was the major malt producer among brewers. The company is fully provided with its own malt. Under our estimate, the total capacity of the company's malthouse amounted to more than … thousand tons of malt per year. For example, in 2007, when the company reached its beer production peak, namely … mln dal, the malt production comprised … thousand tons. Under our estimation, based on the maximum output the potential capacity of the malthouse in Saransk amounts to … thousand tons, of the plant in Kursk - to … thousand tons, Omsk branch of AB InBev can produce about … thousand tons, Volgograd branch - up to … thousand tons and Perm and Ivanovo branches - about … thousand tons.

However, if we judge by the regional statistics, today AB InBev capacities have only …% workload. On the one hand, in 2012 the company after tentative growth of beer production, started losing it again. Under our assessment, 5 company plants * saw …% output decline. But on the other hand, the arrival of good crop after a period of long-run decline on the market of malting barley boosted the output growth of the company, which restores the diminishing stockpiles.

* The beer production at branches in Novocheboksarsk
and Klin is not included in our estimation

Besides, if we judge by regional data, AB InBev produces malt not at six but at four plants - in …, …, … and …. … branch suspended its operation in 2012. The need for materials of not large … branch could be met by other malthouses. Collectively, the operating malthouses under our estimation raised production by …% to … thousand tons. Though the output dynamics was positive, the growth rates of malt production were behind the average for Russia. Accordingly, AB InBev share in the general volume of malt output declined by … p.p. to …%.

In August 2012, when it became known that the company's brewery in … was closed, regional authorities claimed they were looking for an investor or a renter for the plant. As the Committee of food and processing industry in Kursk region informed, early in 2013, the sale of malt production of AB InBev … branch was officially completed. … was the purchaser. The malthouse resumed operation in February. While the plant works not to the full capacity, more than 50 people are employed there. In the future, the malt production staff will expand to 100 people.

The structure of railway transport deliveries reflects the processes described above. … branch is still the main malt supplier to AB InBev branches in the eastern part of Russia. In the general volume of malt dispatches to AB InBev branches the share of … branch in 2012 was expectedly lower. However, … malthouse started dispatching more at new directions, which can be attributed to stockpile sale or the plant's new owner. About … thousand of malt was sent to regional medium sized breweries, namely, … plant in Kirov, … (..., Irkutsk region), … (Penza) and … (Saratov region) and others.

Efes and SABMiller assets merger turned to be one of the most important events in the beer market of Russia in 2012. As one remembers, 7 March, 2012 SABMiller handed its business in Russia and Ukraine over to company Efes, having received in return 24% of Anadolu Efes share based in Turkey. However if we look at the statistics of railway transport, we cannot say that the merger had any effect on the material supply to the two companies' capacities. It can be connected to the contracts between SABMiller company and its malt supplier. That is why so far it is reasonable to consider malt supply of Efes and SABMiller separately.

By 2009 company Efes managed to provide itself with malt, which was significant due to large volumes of economy beer sorts and even more significant in view of the raw materials price growth. Sizable investments into modernization of the company's four malthouses allowed expanding its net capacity to 176 thousand tons of malt per year. In particular, three malthouses Vostok Solod in Tatarstan experienced considerable potential growth. The malthouses were designed viewing beer production development and were able to fully satisfy Efes needs during the growth period, when beer production was much bigger than today, if taken apart from SABMiller plant.

If we base on the regional statistics, malt production in Kazan shrank by …% to … thousand tons in 2012. Such negative dynamics is especially striking against the background of the pronounced positive all-Russia results. This reduction can be explained both by delay due to efforts to economize on lower barley prices and by cut-back in beer production at Efes company in 2012.

SABMiller in contrast not only to Efes but to other major market players, remained the only brewery with no raw materials base of its own. The main malt supplier for Russian branches of SABMiller was and still is diversified company … Its … malthouse was able to meet SABMIller needs, which under our estimation reaches … thousand tons yearly.

However over the recent years SABMiller has diversified material supplies, having started purchasing considerable volumes from other Russian producers and from abroad. Under our estimation in 2011-2012 these sources accounted for … of the general supply volumes. In particular, if we judge by rail transport statistics, … took on a bigger significance, supplying about … thousand tons of malt per year. Company … became one of the main suppliers for Ulyanovsk SABMiller branch. The malt is mostly imported by Kaluga branch which produces expensive sorts of Russian portfolio of the company. For the most part malt is bought in … and ….

As the new crop arrived, Efes started supplies of own materials to … branch of SABMiller. The location of Efes malthouses is optimal for all plants of the alliance. Obviously, the three Kazan malthouses can fully satisfy the needs for raw materials of Kazan plants as well as breweries in …, … and …. Though Moscow malthouse Solodovnia Mutena is capable to only partially meet the demand of … and … Breweries.

By the way the regional statistics perhaps do not reflect the output volumes of Solodovnia Mutena. The capacity of this malthouse amounts … thousand tons per year. The malt output volumes in 2012 under our very rough assessment could average … thousand tons with … growth as compared to 2011. And Solodovnia Mutena increased its railway transport deliveries to … and … from … to … thousand tons.

Due to decline of malt output at Kazan branch of Efes company, its share in the total volume of Russian malt reduced from …% in 2011 to …% in 2012 under out rough estimation.

Company Ochakovo, having sold Belgorod malthouse to Malteurop group, still owns a malthouse in Lipetsk region, which is capable to produce more than … thousand tons of malt per year. The output reorientation resulted in sharp production growth at Lipetsk malthouse in …. However, as early as in … the malt output fell by 27% to …thousand tons, and in … by next …% to … thousand tons. From April to July … the plant was working to half of its capacity, and the output volumes started recovering first in November. Apart from worse situation of malting barley, company's beer sales fall led to malt production decline in …. At that time Ochakovo company practically suspended delivering malt to outside producers, but it obviously supplies raw materials to its own production sites. At least in … about … thousand tons of malt were sent by railway transport to …, …, … and ….

In … Lipetsk malthouse saw almost threefold production rise to …thousand tons under our estimation. From February till July and from October … the plant had large workload. But the deliveries by railway transport increased only by …%, which obviously means substantial stockpiles. According to market players, Ochakovo cooperates with other beer producers, …

Though the volumes of outside supplies are not large so far, under our assessment they amounted to … thousand tons of malt in 2012. Production of Lipetsk malthouse was mainly sent to three plants, namely to …, … and … (Izhevsk).

In accordance to the dynamic production growth, in 2012 there was a considerable uprise of Ochakovo share in all-Russian malt output volume, that is, by … p.p. to …%.

Trade companies

There are several large specialized producers in Russian malt market, namely Russkiy Solod, Malteurop, Soufflet and Cargill. These plants are constantly exposed to growing competition. Besides, the list of their clients is changing all the time as brewers strive to increase the number of suppliers and sign contracts with several producers for large volumes of raw materials.

Company Russkiy Solod despite having four large malthouses has not returned the status of the leading malt producer for brewers. Since 2009 this largest independent malt market player had been outrun by Baltika which has malthouses working to the full capacity.

The company's production growth peak was attained in 2007, when the company output … tons of malt. More than a quarter of Russian malt for brewers was produced by the company. But later, after supplies suspension to Baltika and difficult market conditions, the production of Russkiy Solod started falling rapidly and reduced more than … - to … thousand tons. The company share in the total output volume went down to …%. New active market players who occupied their niche in the falling market in 2009 also affected the company operation.

Two main economic directions of the holding, namely malting and agricultural, exchanged precedence. The agricultural project of the company came to the foreground. In August 2009 Kirill Minovalov, owner of Russkiy Solod said: "… at the moment barley gives us our main income and the malthouses are simply means to process our own product…". However, Russkiy Solod is still the key market player, and not only due to having large capacities for production and storing, but in the first place thanks to vertical integration and the control over the malt production cost.

In 2010 the company's malt production started growing. In 2012, under our estimation, the output grew by …% to … thousand tons. But because of the outrunning general dynamics of malt production in Russia, the company share fell to …%.

According to the company's information a new plant of "Russkiy Solod" has been operating since November 2011. The plant construction started as far back as during the expansive growth of the company. But the start-up was postponed perhaps because of the recession and controversies with Baltika. In 2008 the construction was frozen, but resumed later. Meanwhile it was used for malt storing and dispatches.

The plant in Kursk has equipment from leading world producers and its capacity reaches … thousand tons of malt per year. There is also an elevator of … thousand tons for storing barley and malt. Besides the plant has purification works, artesian wells, boiler department, automobile roads and railways. Most part of raw materials is grown in the region by company "Avangard-Agro". By mid November the first 10 consignments of malt were output, but the mounting of technological equipment was still in process, and the malthouse laboratory was getting ready for licensing procedure.

The statistics of railway transport deliveries by Russkiy Solod probably do not completely reflect the structure of its supplies. But one can see that the list of the main purchases has changed considerably. In 2011 about … thousand tons of malt was sent by rail to different branches of Baltika and in 2012 the supplies to this company practically stopped. As we mentioned above … preferred to buy large volumes of malt in ….

Besides, under our estimation, Russkiy Solod malt deliveries to company … reduced sharply. This major … producer got about … thousand tons of malt in 2011, if we base on the data on railway deliveries to different regions (Information agency "Kominfo").

As Russkiy Solod has not cut its production and deliveries by value, one can assume that a big part of its production was sent to other clients. For example, … or … can be purchasers of Russkiy Solod.

In our view, company Russkiy Solod can attain a remarkable growth of its market weight in the nearest future. Specialization and control over the whole production chain will allow the company to reinforce its positions, provided there is a mass reorientation of agricultural producers to feed grain growing in accordance to the current world situation and small premium for barley quality. In this case brewers due to lack of qualitative materials will have to buy from Russkiy Solod.

Judging by the regional statistics, company Soufflet has considerably increased its production. Thus in 2012 malt output in Saint Petersburg grew by …% to … thousand tons. The positive dynamics can be in the first place explained by growth of beer production in the city, which in 2012 amounted …% to … mln dal. We should note that beer production in Saint Petersburg shrank dramatically - practically halved. Despite the …production growth, the regional statistics data show only a …% malt delivery increase, i.e. to RUB… bln.

Under our estimation, Soufflet capacities were practically fully loaded during almost all 2012, which allowed achieving the designed production level. The steady workload could have been provided due to import barley supplies till new crop arrival. Focusing on import supplies can also be the reason why barley is almost the most expensive in Saint Petersburg.

A considerable part of Soufflet malt is supplied to Baltika with which the company is partially connected by property rules. Thus according to Baltika's report, in 2011 the brewing company purchased malt from Soufflet (Saint Petersburg) to the sum of RUB …thousand net of VAT), which amounted to …% of the total cost of purchased and produced malt.

However the results of 2012 are likely to show Soufflet share decline in the structure of Baltika purchases. Firstly, the brewing company expanded own production, secondly, there was a considerable decrease of railway deliveries of malt to regional branches (not including the plant in Saint Petersburg). While in 2011 the plants in regions received about … thousand tons of malt, in 2012 this figure shrank to … tons under our estimation.

Besides, Heineken branches in the region also saw a … fall of deliveries (again, except for the plant in Saint Petersburg). In 2011, according to our assessment, they totaled about … thousand tons and in 2012 - less than … thousand tons. Heineken preferred purchasing malt from Malteurop and from abroad.

Instead, Soufflet was more successful working with independent regional producers, who got … times more malt than in 2011 by railway transport, i.e. nearly … thousand tons of raw materials. The biggest partners of Soufflet if we rely on regions receivers were companies … and … (Naberezhnyie Chelny, Rupublic Tatarstan). The first company received about … thousand tons of malt, and the second one received nearly … thousand tons to our view.

2012 turned out to be the third year of dynamic growth of company Malteurop. Judging by the data of the regional statistic, the production grew …% to … thousand tons. During almost all 2012 Belgorod plant operated with heavy workload. Thus, the malthouse virtually reached its full production potential and exceeded it as at the moment of purchase its declared capacity totaled … thousand tons.

In 2012 Malteurop considerably increased supplies to two major Russian malt consumers. According to our assessment, railway transport deliveries to Baltika grew twofold, i.e. from …to …thousand tons. Practically all malt was supplied to three branches, namely in …, … and ….

Another key client is company Heineken which, under our estimation also got more malt than in 2011, that is, the supplies grew from 12.8 to 22.8 thousand tons. About 10 thousand tons was sent to small Novosibirsk branch of the company. Approximately the same volume of malt was supplied by Malteurop to Patra, Yekaterinburg.

However against this background one can see substantial decline of malt supplies to two other big clients. In particular, there was a sharp decrease of deliveries to branches which came under the control of Efes company resulting from the merger with SABMiller. Under our estimation, Kaluga plant of the company in 2012 did not receive any more malt by railway, and the plant in Ulyanovsk cut the malt volume by 37% to 3.7 thousand tons. Although a sizable volume of malt, i.e. about 12 thousand was sent to Rostov region. It is possible that the raw materials were sent to Rostov plant of Efes company.

By 2012 the supplies to Tomsk region, where the main malt consumer was probably Tomskoe Pivo, were stopped. This supply direction was important for Malteurop in 2011, as … thousand tons of malt was sent there.

Company Cargill in 2012 increased malt production considerably, if we judge by the regional statistics data. Under our rather rough estimation, the output volume could grow twofold and much exceed … thousand tons. Historically … was the main partner, buying almost all malt volume produced by Cargill. That is why the output dynamics of the companies were connected. But in 2012 Cargill sent large volumes of malt to other major beer producers as well.

As … receives its malt via automobile transport, we cannot evaluate the supply volumes to the plant of … located there. One could assume that the volume of supplies there did not increase as resulting from reorganization, competition and beer market decline, its production went down by …% to … mln dal under our assessment. However in spite of the beer production cut-backs at Ulyanovsk plant by …% to … mln dal, the railway deliveries there doubled to … thousand tons. The brewery in … retained its output volume at the level of 2011, under our calculations, but also received more malt. By the way if we base on these correlations, then the total volume of supplies to … plants in 2012 can be estimated at … thousand tons.

In our opinion, in 2012, there was a considerable growth of railway deliveries to Heineken company, i.e. by …% to … thousand tons. Nearly … of deliveries to the company were made to its biggest plant, namely Volga in Nizhniy Novgorod. Under our estimation, this plant expanded beer production from … to … mln dal, which seems a good result, provided the declining market.

However, the main contribution into the growth of railway supplies, as well as into the general growth of malt production was made by a new client, namely company …. In our view, in 2012 nearly … thousand tons of malt was sent to the independent … producer.

Basing on the regional statistics data one can expect production increase at the plant of company Nevskiy Bereg. However currently it is managed or owned by Baltika malting company.

According to BMC information, it provides services both to federal companies such as Heineken, Baltika, Efes Rus group and to regional producers of European part of Russia and the Siberian region. Besides, they still focus on import barley using.

Under our estimation, one of the key partners of this producer was …, which received about 5 thousand tons of malt by Nevskiy Bereg sent by railway transport (statistics data given by Information Agency "Kominfo"). Nearly … thousand tons was purchased by … in Novgorod and about … thousand tons was bought by company … in Cheboksary, besides, the next 3 thousand tons was purchased by other regional producers.

The transfer of the company under another owner's control accomplished a long-term process which started in 2009 with disputes between owners of Nevskiy Bereg. According to RBC, in January 2013, a legal claim to declare malthouse Nevskiy bereg bankrupt was registered. The applicant party was Orel grain company, unsatisfied with the conditions of the peace agreement which accomplished the previous bankruptcy case of the malthouse. According to the materials, the debt of Nevskiy bereg comes out at about RUB 43 mln. The bankruptcy peripetia of Nevskiy bereg began long before that claim. As far back as in October 2010, the company was sued by Vilion company. In January 2011 the producer was declared bankrupt and bankruptcy proceedings were started, and in mid December the proceeding was stopped resulting from the peace agreement between the debtor and the creditor.

In spite of the difficult competitive situation, new players producing malt enter the market. Though they mostly produce special sorts of malt. Thus by 2013, Novoaltaysk bread-baking complex completed reconstruction of malting shop floor.

Resulting from the modernization the production capacities of the Siberian plant specialized in rye malt grew by 2.5 times. At the present moment, bread-baking complex can output about 500 tons of malt a month. Besides, the modernization program stipulates the product range expansion. Now Novoaltaysk bread-baking complex can output not only rye but brewing malt as well. All necessary permissions have been already obtained as well as the first production consignments.

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Appendix

The materials of the article were prepared using Rosstat data and statistics of railway transportation, provided by Information Agency "Kominfo" (www.kominfo.ru) Besides, publications of Bloomberg, "Izvestiya" and the companies' reports data were used.

In case when the source is not specified, the data on the companies' volumes of output and production, financial and economic indicators of enterprises of RF after 2010 as well as their interpretation are our assessment based on the regional indicators and the current trends.

We do not guarantee that the given information is absolutely correct, though it is based on data obtained from reliable sources. The article content should not be fully relied on to the prejudice of your own analysis.

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