201 (19.08.18)


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EXCLUSIVE

At Any Price”

Inside an implausibly aggressive commodities trader: how an unknown mining company in an unmarked headquarters in Casablanca uses stockpiles and secrecy to trade its way through riots and revolutions, which the group has been accused of causing

Port authorities called Interpol after going through a ship's papers in Mombasa in June. “Mykonos Bay” was due to be fast-tracked through customs. It had paid $180,000 in port taxes and said it was carrying clinker, a type of building material. But inspectors went aboard and found it was loaded with fertiliser. The ship pulled off from the dock and disappeared into international waters.
    At the same time, the King of Morocco, Mohammed VI (known as “M6”), was posing for photos at a party in Paris having just been been released from hospital.
    Booms were meanwhile swinging at Boucraa, a mining complex surrounded by landmines in a contested corner of the Sahara desert. Powered by wind turbines, owned by M6 and patrolled by speed boats on the coast, it is the world's lowest-cost phosphate operation, a key ingredient in fertiliser, giving it an OPEC-like dominance over the global food market.
    In an anonymous headquarters in Casablanca, the mine is controlled by a group of civil engineers working for a company called OCP. First among them is Mostafa Terrab, OCP's chairman, a bald, ponderous, bright-eyed technocrat who spends his time ambling into government buildings around the world.
    A fertiliser monopoly opens doors in diplomacy: OCP has 30 to 40 per cent of the global fertiliser market and exclusive rights to Morocco's vast phosphate reserves, pumping tonnage into every breadbasket, from India and Brazil to New Zealand. The World Trade Organisation says it has a “state monopoly”. OCP says it is “geologically privileged”. But when Terrab joined in 2006 the group was technically bankrupt.
    OCP was a government office and was treated like a bureaucracy, with 1,500 staff in its headquarters and 60 signatures on its procurement process. The only chart he found in his office was pointing upwards. “I said, is this our results? No, it's our production.”

The global food industry, Mostafa Terrab later explained in a talk to MIT university in the US, had been under-funded for decades. Cheap food was taken for granted and phosphate had been flat for forty years. OCP's traders were told to sell what it produced, “at any price.”
    He decided to tighten the market a little. Citing “maintenance”, OCP's shipments became less frequent. Terrab also launched a multi-billion dollar investment campaign. OCP planned to spend 70 billion MAD ($7.4bn) building ten new fertiliser plants and a $400m pipeline, soaking-up its own phosphate, taking it off the global market.
    His new strategy started working. Phosphate prices edged higher. So did wheat futures. It was difficult to tell which led the other, but in 2007 and 2008, an unexplained jump in food prices led to rioting and overthrows in 37 countries. Wheat stocks in the US and Canada fell to their lowest level for 50 years.
    OCP's pricing is confidential. All sensitive data is redacted from the filings of its customers in the US. But UN trade data suggests that its prices rose from $49 to $198 per tonne within two years of Terrab taking the controls. “The results are there,” he told MIT, pointing to rising figures.
    The next 12 months turned into “a particularly prosperous year”, according to OCP's 2008 annual report. Tonnage fell but revenue doubled to $6.3bn. Profits rose 751 per cent. It was a “spectacular leap”, the company boasted. One adviser from Paris said he had “never seen a transformation carried out with as much brio.”
    The same report included a map of countries in need of food aid. Kenya was labelled “severe”. Droughts in Australia and flooding in the US had pushed the global market into a “boom” and a “bull trend.” The “universal solution”, OCP said: chemical fertilisers. “Their efficiency is irrefutable.”

Underpinning the brio was debt. Terrab had taken loans off French and African development banks and borrowing had gone through $1bn. So he pushed forward.
    OCP's traders had started monitoring not just phosphate and fertilisers, but anything that impacted their customers, from oil and biofuels to dietary habits. By calculating a farmer's expected profit per kilo on a country-by-country basis, they knew exactly what prices they could get away with.
    Terrab also created a new marketing division, which took a global view, splitting cargoes, deciding where they were going. Only then were they handed to traders, plugged into each local market. “In order to arbitrage credibly,” Terrab told MIT, “you have to be able to shift your production almost in real-time to support the negotiations of your commercial and marketing department.”
    The FAO, the food arm of the UN, was forecasting a bumper harvest for 2010. But OCP's traders were picking-up something different. Global wheat stocks were sitting at 70 days. A poor harvest would bring them to 60. But the real situation was worse, because India's monsoon season would cut stocks further and a big chunk of supplies were in China, which was unlikely to start exporting. If dry weather in Russia turned into a drought, and if Russia put a ban on exports, then its biggest buyer, the Middle East, was in for trouble.
    OCP (which has a world population clock on its website) positioned itself for volatile trading. It started moving buyers from yearly contracts to the spot market, cutting its fixed commitments. OCP then launched what was internally referred to as “the shutdown of 2009.” Exports from Boucraa stopped. All OCP's operations were halted. Morocco's fertiliser exports fell to $700m, versus $1.4bn the year before.
    Prices were going to “remain volatile”, OCP noted; fast-moving markets were now

“a permanent parameter” of its business strategy. Instead of a hunger map, its annual report included an unexplained picture of a metal slinky, a trick-like toy, loved by engineers, that can walk itself down stairs.
    Events unfolded exactly as OCP's traders predicted. But they under-estimated the political impact. Wheat prices rose at their fastest rate since the 1970s. A revolution that started in Tunisia spread to Libya, Egypt, Yemen, Syria and Bahrain toppling four governments. There was also rioting in Morocco. Police beat protestors and a broadcast of prayers with the king was interrupted by chanting on state TV.
    OCP was quick to adjust its levers. It slashed fertiliser prices and dug into stockpiles. Morocco's phosphate exports doubled. Russia continued tightening.

Every problem is an opportunity, Terrab believes. Behind closed doors in 2011, at a G20 meeting in Paris, OCP started coming under criticism for having been a little feckless with the fertiliser market. So OCP rebranded. Rather than being a threat to stability it was a “food security player.”
    “There is economics on both sides,” said Terrab at a convention in Vienna. “Are food prices too high today? Some think that they were too low yesterday. Let's keep in mind that there is also the small farmer that benefits from high food prices.”
    OCP's chairman sounded mechanical. He is so commercially-minded that he refuses to discuss budgets, in case it takes pressure off companies tendering for OCP's business, and says his approach to industry applies equally to “plant, process or men.” It is a case of “doing, learning, adjusting.”
    But Terrab is fully aware of the ethical tension in his position. Born in Morocco, he studied at MIT and was a professor in New York, returning in '92 as an adviser to the royal cabinet. He built the country's first telecoms regulator, bringing in foreign operators and breaking up the state monopoly, before clashing with Abdeslam Ahizoune, a former government minister and strongman who is now known as “Mister Telecoms”, having become the country's best-paid executive.
    Morocco was failing to invest in its telecoms network, Terrab complained. “There is only one thing worse than a public monopoly and that is a private monopoly.” He joined the World Bank, promoting mobile phone access for small farmers in poor countries, before jumping to OCP. So has his 12-year stint in the phosphate market been a mission by the World Bank to boost fertiliser stocks, and Morocco's flailing economy?

Boucraa was financed by Spanish banks costing $200m in the 1970s and was expected to fill half the global market, flooding the world with phosphate. But M6's father, Hassan II, known for his red fez and smoking jackets, had other ideas. Soon after a failed coup and a two-hour gunfight at one of his palaces Hassan sent troops to the mine, upping pressure on Spain to retreat from its former colonies.
    40 years on and the land is still a useful point of leverage at the UN Security Council. Mauritania and a nationalist movement both claim sovereignty over the region and pension funds in Europe have sold shares associated with Boucraa, saying it is not rightfully Morocco's under international law. But on OCP's maps, a Moroccan flag is pinned to the mine.
    Every year since it opened, Boucraa has expanded south along tracks laid out in the desert. Bucket-like shovels tip crushed white rock onto the world's longest conveyor belts, traveling 98km to a pier on the coast. It is an engineering marvel. Yet few companies will publicly acknowledge any link to the mine.
    German tyre group Continental AG, which supplies key parts, makes no mention in its annual report of a factory it owns in Morocco. Nor does utility group RWE include the mine in lists of its largest projects. But both companies were critical to putting the operation together.
    RWE's engineers had been getting tired of showing other companies around their coal mines in Germany, explaining how they had replaced diesel trucks with electric conveyors, so they launched a consulting business that built Boucraa and a coal mine in Indonesia funded by the World Bank.
    The cost-savings were obvious: faulty trucks that haul rock over ever-greater distances as mines get older were cut out of the mining process. But only state-owned groups could afford the massive upfront cost of laying out mines on tracks with flexible, telescopic conveyors. RWE won a string of contracts to fit ever-bigger conveyor belt systems in copper mines in Chile. Then Brazilian mining giant Vale unveiled plans to build a $19.7bn iron ore mine using 30km of conveyors and the same design principles.
    Known as “S11D”, the project nearly bankrupted the company. Vale's shares lost 85 per cent of their value whilst the mine was being built. Its dividend was cancelled, net debt hit $28bn and the company sold forward its gold production. But Vale persevered, sending its technicians to train in the same coal mines in Germany that Boucraa was based on. Shipments began last January. And like Boucraa, only restraint will stop the new mine from crushing its own market.
    Its conveyors do the work of 100 trucks, using 77 per cent less energy. Costs are nearly half those of its nearest competitor. Vale's shares are now approaching a record high and gold groups have begun eyeing its 'truckless' technology. “If you think about these big trucks, half the power is spent just moving the machine,” says a director at one of North America's largest gold companies.

In London, bankers advising M6 and his companies say they are “unaccountable.” Decisions are taken arbitrarily and there is

a fuzzy border between private business, government and the royal family. OCP's board includes seven ministers. Mostafa Terrab and the chairman of a bank are its only directors not in the royal cabinet.
    In theory, the king's powers have been dismantled and transferred to parliament. In practice, M6 has a blank cheque in business, delisting companies, voting through dividends and striking-up private partnerships with foreign groups including Lafarge, ArcelorMittal and insurance giant Axa. Entities with government backing are seen as “the king's own companies”, according to US diplomatic cables.
    The royal family's interests include hypermarkets and Renault dealerships. It also distributes Heineken and has a pan-African loan book, plus mining assets in Mali and the Democratic Republic of Congo. “They're very hard-nosed and very good at doing deals,” says an executive at a London-listed mining company who has toured OCP's operations. “They're not going to give away things for free.” Executives at groups that built Boucraa offer a similar story.
    Royal power is though waning: the Moroccan dirham has been sliding as the government overspends and as the country ships in imports, forcing the kingdom to live off an IMF lifeline. The king continues to turn up to OCP's factory openings, and his son (who is named after his ruthless grandfather) has started popping-up at state functions. But M6 spends most of his time at gallery openings in Paris.
    “It is a curious phenomenon in the highest spheres of political power,” one Moroccan commentator has noted. “If the king isn't here then who is in power, who is leading the country, who is calling the shots?”

Back at OCP's headquarters, Mostafa Terrab is tinkering with new ideas, pulling new levers. When he arrived, OCP was selling more phosphate than fertiliser. That figure has swung around: fertiliser and phosphoric acid (which puts the tang in Coca-Cola) now account for three-quarters of the group's revenue, generating $42bn of exports since Terrab's arrival.
    OCP has meanwhile taken on an increasingly political remit. As a former government office it always had myriad interests, from a cinema and hotel to a prickly pear business. But its non-mining projects have become more outlandish: it has built a university, a model town and “1337”, a training centre for coders. It also has a budget for farming subsidies. Debt has edged up to 54bn MAD ($5.7bn).
    OCP now avoids mentioning its trading business, and only publicly discusses the food market in the vaguest terms. Instead, it is pretending to be an ordinary chemical company, with slick corporate reporting and audited accounts, fit for a foreign stock exchange. So is the group lumbering-up for an IPO in 2019, potentially one of the largest the mining industry has seen since trading group Glencore listed in 2011?
    Terrab has added $8bn and five years to OCP's investment programme, but his original campaign, due for completion in 2020, is now coming to fruition. With new docks, warehouses, factories and mines, linked together by two huge pipelines, the group has massive capacity. OCP would be the ultimate stock for investors betting on emerging economies. It is not only Morocco's biggest company, but a long-term play on Brazil, Argentina, India and Turkey, where OCP has opened new offices.
    Terrab also has a vision for Africa: simply by land size it is bigger than India, China and the US combined. Pump the continent full of fertiliser and its young population will soon rival Asia in economic growth. OCP's head of trading unsurprisingly agrees: fertiliser use in Africa is 6 to 10kg per hectare, versus 600kg in Holland. “This shows that more should be done.”
    There's one hitch. African farmers can't afford the product. OCP is trialling new “adequate fertilizers”, it says, using “locally processed” chemicals to quickly adapt to market conditions. Many questions remain unanswered.
    A good strategy, Terrab has pondered, cannot follow a path that is “deterministic.” You cannot know exactly where you are, or where you want to be going, but must “allow for chaos and uncertainty” and then “reflect, almost permanently, on what you're doing.” To understand something complex means more than looking at its components. “It means embracing things that are not self-evident and can, in fact, often be enigmatic.”


 

The king's mine: as close as cameras can get to the inside of Boucraa, which is surrounded by land mines in a contested corner of the Sahara desert


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