Ukraine Market Report — Q1 2017
A trade halt with the non-controlled eastern territories, formalised in March, severed the coal and metallurgical supply chains that had survived the previous three years.
Overview
Trade with the non-controlled areas of the eastern regions was interrupted from January by a blockade of rail links, and formalised as government policy in March.
Until this point, several large metallurgical facilities located in the non-controlled areas had continued supplying Ukrainian plants, and Ukrainian power stations had continued receiving coal from mines there.
The supply chain consequence
The halt severed two chains simultaneously.
Coal. A significant part of the Ukrainian thermal generation fleet was designed for anthracite grades produced in those areas. Power stations built for a specific coal cannot simply switch. The response was import substitution from other origins and, over the following years, conversion of units to burn gas coal — an expensive engineering programme that took years.
Metallurgy. Facilities in government-controlled territory that depended on inputs from plants in the non-controlled areas lost that supply, and vice versa. Production was reorganised around what remained accessible.
The general lesson
This is the clearest illustration in the archive of the cost of a supply chain that crosses a political boundary that later hardens.
Nothing about the arrangement was irrational when it was built — the facilities were in the same country, connected by rail, integrated by design. The risk was not commercial and could not have been priced by any ordinary analysis.
What it argues for is not avoidance of such arrangements but knowledge of them. A company should know which of its inputs cross which borders, including internal ones, because that map is the map of what can be interrupted.
Macro position
Growth continuing modestly. Inflation moderating. Currency stable. The output loss from the trade halt was material but absorbed.
Sectors
Metals and coal — directly affected; substitution and reorganisation underway.
Power generation — facing a fuel supply problem requiring capital investment to solve.
Agriculture — unaffected.
IT services — unaffected and growing.
What the quarter settled
That the industrial integration between the government-controlled and non-controlled areas, which had persisted for three years after the war began, was over — and that the adaptation cost fell on the power sector rather than on the metallurgical one.
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