IVICA TODORIC It is certain that Agrokor has the potential to become a very significant player on the Croatian energy market in a very short timeAgrokor, Croatia's largest company in the retail and food industries is soon to enter onto the energy market. Just last month, the company Agrokor-energy was established and registered for the production, distribution and trade of electrical energy. The company is also registered for other activities in the energy section, from production, distribution and supply of natural gas, to the production of biofuels and the production and supply of heat energy. Adding to this the already announced plan that Agrokor's retail chain Konzum will launch its own network of petrol stations, it is evident that Ivica Todoric's company could quickly become an important player on the Croatian energy market, and achieve significant revenues in that sector.

Agrokor gave a brief statement for Nacional on the establishment of the new company. The statement reads, "The company Agrokor Energy has just been established and its director is Mr. Herman Seidl. The company will deal with the use and application of renewable energy sources from typical raw materials and waste."

However, a source well acquainted with the operations of Croatia's largest company commented for Nacional that Agrokor's decision to enter onto the energy market is a logical one, given the timing and the resources the company has. "Due to its debt load, Agrokor is constantly under pressure to increase its revenues, and that it very difficult to achieve through organic growth when operating in such a small area as Croatia, BiH and Serbia. For the same reason, it is difficult to find high quality acquisitions and so the company is left with no other choice than to expand into other areas. In that sense, energy is the logical choice. This is a sector which could become very profitable in the coming years due to the deregulation process and alignment of prices with those of the European Union. On the other hand, Agrokor has all the necessary resources to develop certain forms of energy production. This primarily relates to the production of biofuel and biogas cogeneration plants, for which the company can secure sufficient quantities of raw materials through its large agricultural and food companies, PIK, Belje and Vupik and Zvijezda in Zagreb."

Though Agrokor's business plans in the energy sector are not yet known, it can be assumed that this will be the first project that Agrokor will launch. This could be implied from the recent interview given by Agrokor's senior vice-president, Ljerko Puljic, to the business publication Poslovni Dnevnik, in which she stated that the market strength and competitiveness in the future of food production and energy will only be held by those companies managing the production of primary raw materials. The start of production of biodiesel or biogas is the logical continuation of such a strategy, and will likely be the first plan of its kind that Agrokor will build within its Vupik company in Vukovar. Namely, prior to acquiring Vupik, that company already had set the production of biodiesel and bioethanol as part of its future business strategy. The company has already planted new crops of the required raw materials, rapeseed and corn, and the production of biodiesel should be carried out in cooperation with the company Europamil, owned by entrepreneur Miodrag Gadze, who intended to invest the money earned from the sale of his chain of petrol stations to Russian's Lukoil into the project.
However, with Agrokor's takeover of Vupik, it could easily happen that the company decides to build its own biodiesel refinery. There has been talk of Agrokor's plans to launch biodiesel production for years, and this comes as no surprise since it also owns Croatia's largest edible oil plant, Zvijezda and the Zadar soy plant, the only soybean processer in the region. In that context, launching the production of biodiesel is significant for two reasons. One, through this kind of corporate development, Agrokor will be able to further strengthen its already dominant position on the Croatian agricultural market. Namely, this company is already the main buyer of individual agricultural crops in Croatia, and through the development of production of biodiesel or ethanol, its need for rapeseed and corn will increase many times over. On the other hand, contrary to popular opinion, Agrokor could achieve a high and stable profit margin with the production of biodiesel.

ZOLTAN ALDOTT, CEO of INA, Konzum's most likely partner in stepping out into the oil businessUntil now, the production of biodiesel in Croatia has not been profitable, due to a lack of raw materials and poor regulations that made this type of fuel uncompetitive on the domestic market. However, there is a formal legal obligation for biofuels to account for 5% of the domestic petroleum derivatives market in Croatia by the end of 2010. If the state decides to abide by the standard it set for itself next year, this will only be possible by introducing the obligation to use biodiesel in public transport. As such, it is possible that the biodiesel market, which does not exist at the moment, could already become a dynamic market next year.
A second type of energy plant that Agrokor is sure to construct is the cogeneration plant for biogas. These are plants in which certain types of biomass are subjected to fermentation and decay to produce methane, which is then fed into a gas generator and transformed into electric and heat energy. As a rule, the main raw material for biogas plants are corn silage, while other raw materials can also be used, such as sunflower silage, silt from wastewater collectors, slaughterhouse waste, manure and biological organic waste.

Today, such facilities are typically in place on large dairy farms and agricultural farms in developed western European states, as they allow for the creation of different types of added value from agricultural material that cannot be used for food and from waste. For Agrokor, another positive circumstance is that the production of electricity from biogas is considered a renewable energy source, and for the first 12 years of operation, the plant will have the right to a privileged high price of electricity buy-off. For that reason, those well acquainted with the market claim that Agrokor could soon invest in the development of other renewable energy sources, such as wind turbines and solar electric plants.

Namely, due to the guaranteed 12-year buy-back period at privileged prices, investments in this segment have been very attractive to domestic and foreign investors, however, the tedious bureaucratic procedure has proven to be a problem. Given Agrokor's well known efficiency at obtaining the necessary permits, and the fact that the company has access to the necessary capital, investments in this sector, given the guaranteed profits in the mid-term period, could prove very attractive to Agrokor. On the other hand, there are speculations that Agrokor could become more involved in the Croatian energy market as a trader in the coming years, as this segment is soon to be largely deregulated. According to these claims, Agrokor would use its network of business partners to build a large client list to whom it could sell energy purchased abroad.

Nacional's source claims that such announcements are exaggerated, but that turning towards energy is indicating an important trend in how the nation's largest company is operating. "It is difficult to believe that Agrokor could appear as an energy trader on the market in the short-term, as the company just doesn't have enough expert people, nor does it know the market. But on the other hand, by entering onto the energy market, Agrokor is clearly expressing its intent to branch out into sectors where the market is liquid. An example of that are its plans to enter into the oil business and develop its own network of petrol stations. It is hard not to get the impression that this move is motivated by the fact that the petroleum derivative market is almost completely a cash business, and by creating such a chain, Agrokor would create a new cash flow channel, like it did with the acquisition of Tisak. From this, it could be concluded that maintaining liquidity is Agrokor's top business priority."

TOP RANKS OF AGROKOR, Tomislav Lucic, Ljerka Puljic, Ivan Crnjac, Ivica Todoric, Piruska Canjuga and Ante TodoricThe announcement that Agrokor's retail chain Konzum will soon expand its operations into the trade of petroleum derivatives aroused many reactions in Croatia's oil industry, as Konzum could be set to quickly become the nation's third largest oil product distributer. At this time, the company has 42 large shopping centres throughout the country, and the majority have sufficient land for the construction of a petrol station. Adding the alternative locations that the Agrokor concern owns, and the Velpro sales centres, it turns out that in a very short time span, the company could create a retail network of some 50 modernly designed petrol stations.

This would quickly make Konzum a serious competitor to Slovenia's Petrol, Austria's OMV, Russia's Lukoil and Hungary's Tifon, companies that have long been fighting for the second place position on the Croatian oil market. Konzum's advantage in this case would certainly be the favourable locations next to the shopping centres, as such a model has long been very successful in developed European countries. Great Britain's retail chain Sainsbury operates in the same way, and is also that country's largest importer of petroleum derivatives. A similar model has recently been developed in Slovenia by the retail chain Tus. On the other hand, Konzum's step into the oil business is very logical, given the potential the company has, and the fact that the company could secure yet another stable source of cash flow.

It should be said, however, that speculations on Agrokor's entry onto the oil market have surfaced several times in the past decade, but never yet proven to be accurate. In fact, the company has rejected a serious of offers by oil companies to be its partner in such a business. For that reason, the key issue is who Agrokor will select as its petroleum product supplier. Considering that Agrokor does not possess any storage capacities, and it is virtually impossible to lease such capacities in Croatia, it is logical that the company will take on a partner in the form of one of the large local companies that own a refinery. In this way, Konzum would attempt to supply its sales locations with road cisterns virtually direct from the refinery. On the other hand, Konzum's oil expansion will depend on the available financial resources. The construction of a single petrol station is estimated to cost about a million euro. Just how much Konzum can invest in a new business at this time, with the other investments it plans to make in other segments of the energy business, is questionable.