Ukraine Market Report — Q1 2006
The year opened with a supply interruption and a near-doubling of the gas price. Every cost model in Ukrainian heavy industry had to be rewritten inside a fortnight.
Overview
Gas supply was interrupted in the first days of January and restored within days under a new pricing arrangement that roughly doubled the import price.
The interruption itself was short. Its consequences were not.
The cost shock
Ukrainian heavy industry had been built and priced around gas at a level far below what any European buyer paid. The step change removed a substantial part of that advantage in a single negotiation.
The effect was uneven and that unevenness determined which companies survived the following years. Ammonia and nitrogen fertiliser production, where gas is the principal feedstock rather than merely an energy input, faced an immediate question about whether the business was viable at all. Metallurgy, where gas is one input among several, faced a margin compression rather than an existential problem. Food processing and light manufacturing, where energy is a small share of cost, barely noticed.
The general principle is worth extracting: an input price shock does not damage an economy evenly. It selects, and the selection follows the share of that input in each sector's cost structure rather than the sector's size or political weight.
Macro position
Industrial output recovered through the quarter after the weak previous year, helped by firmer external steel prices. The gas cost increase was absorbed rather than passed through, compressing margins.
The parliamentary election in March produced no immediate governing majority, and coalition negotiations began without resolution.
Sectors
Chemicals — the sector at existential risk, and the one where the following decade's closures were determined by this quarter's arithmetic.
Metals — recovering output, compressed margins.
Banking — credit expansion accelerating, increasingly denominated in foreign currency.
Real estate — prices rising rapidly in Kyiv, financed by the new mortgage lending.
What the quarter settled
That energy pricing was now a commercial variable rather than a political constant, and that any Ukrainian industrial investment case had to be stress-tested against a further step change rather than against gradual inflation.
Companies that did that stress test in 2006 made different decisions from those that did not, and the difference was visible by 2009.
Related in this archive
Share this analysis
Comments