Ukraine Market Report — Q3 2021
A record harvest against a global energy price shock. The same quarter delivered the best agricultural conditions in the country's history and the worst gas import terms since 2008.
Overview
The grain harvest was the largest recorded to that point, and world prices were high.
Simultaneously, European gas prices rose to levels far above anything seen in the previous decade, driven by global supply and demand conditions unrelated to Ukraine.
Two shocks in opposite directions
The agricultural result and the energy result hit the same economy in the same quarter and pointed opposite ways.
For agriculture: record volumes at high prices, with logistics and storage the only constraint on realising them.
For everything that consumes gas: an import bill several times what had been budgeted, and for the state a fiscal problem in the coming heating season since household tariffs could not absorb the full increase.
For energy-intensive industry — chemicals in particular — the same arithmetic that had appeared in 2006 reappeared. Fertiliser production at these gas prices was not viable, and several plants reduced output or stopped.
What this repeated
This archive has recorded the same mechanism three times: 2006, 2014 and now 2021. A gas price movement selects between Ukrainian sectors according to the share of gas in their cost structure, and it does so within a single quarter.
The difference in 2021 was that Ukraine now bought gas from the European direction at European prices. The exposure was to a global market rather than to a bilateral negotiation — which is a better position in principle and made no difference at all in this particular quarter.
Diversifying a supply relationship removes counterparty risk. It does not remove price risk, and the two are frequently confused.
Macro position
Growth continuing. Inflation rising sharply on energy and food. Currency stable, supported by strong export earnings. Monetary policy tightening.
Sectors
Agriculture — the best year on record.
Chemicals — production cuts on gas costs.
Metals — strong prices, rising energy costs.
Households — facing a heating season with elevated costs.
What the quarter settled
That supply diversification and price exposure are separate problems, and that solving the first does not address the second.
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