Downturn shows nation's reliance on steel exports, heavy industry
The economic crisis has once again exposed Ukraine’s steep reliance on dirty, energy intensive industries such as steel and chemicals, which together account for about a third of the nation’s gross domestic product and a large share of exports.
Both sectors, along with the rest of manufacturing, are facing tough times in the global recession and their recovery will be slowed by many factors, including lower export demand and a rise in the price of natural gas imports from Russia.
In a Jan. 19 report, ING bank said Ukraine’s export-oriented industry posted its “worst result since 1997” last year, ending a decade of growth. ING warned that the “slump” will continue in 2009.
Industrial production dropped 3.1 percent in 2008 from the previous year, according to the Ukrainian State Statistic Committee. But it will be worse in 2009, if analysts’ forecasts of a 10 percent decline in industry come true.
The downturn threatens the jobs for hundreds of thousands of citizens working at steel mills and chemical factories. It will also curtail Ukraine’s hard currency earnings, putting further pressure on a national currency which lost about half of its value last year.
Ukrainian steel exports were down by 53 percent in the last half of 2009, according to the Iron and Steel Statistics Bureau. But the metallurgical sector is expected to rebound with the help of a devalued hryvnia and decreases in the price of some raw materials.
The chemical industry, providing fertilizer for agriculture and components for other sectors, may have the most difficult time ahead because of heavy dependence on natural gas, and thereby sensitivity to the higher prices. With the construction industry in shambles, 40 percent of the nation’s cement enterprises have halted production, according to Ukrcement.
Ukrainian industry will have to become more efficient and price-competitive to rebound, experts say.
“Under conditions when there is sharp decrease in demand for metallurgical goods, only those who have low prices survive. The cost of Ukrainian metal roll is 20 percent to 25 percent higher than Russian or Chinese competition,” Serhiy Matvienkov, deputy director general of the Illich Metallurgical plant in Mariupol, told Kommersant newspaper.
But after a sharp decline in November, steel production rebounded in December. January’s numbers are still a question mark. But Delo newspaper reported that “January production will be smaller compared to December. There is no stable demand for the products…”
However, the chemical industry looks shakier and more uncompetitive on the world market, especially against lower-priced Russian and Chinese competitors.
“Storage facilities are overloaded as no shipment is taking place,” said Nataliya Burym, a department head at Severodonetsk-based Azot, one of the three biggest chemical plants in Ukraine. Roughly 70 percent of its production is exported. The plant’s production lines grinded to a halt late last year; salaries have been cut.
Burym said that her plant is sensitive to the price of natural gas. “We can handle no more than [a price of] $280 per 1,000 cubic meters,” Burym said referring to the final price the factory pays including taxes and transit fees. The government promises that the average gas import price this year will not exceed a rate of $235, and that domestic prices will be kept at a single rate throughout the year. But it remains uncertain what this price will be. Thus factories such as Azot, which alone employs 10,000 Ukrainians, are nervous about the 2009 price increases outlined in the recent 10-year agreement between Kyiv and Moscow.
“Our products were non-competitively expensive already last year. A decline in world oil prices, predicted in the third quarter of 2009, should allow the gas price to drop. However, if the price is more than $280 [before then], we may not last till that time.”
Providing a glimmer of hope, Oleksandr Shlapak, a top presidential aid said on Jan. 20: “I think the Ukrainian economy will survive this gas price. We prepared for this $250 price. This price is manageable for most of Ukraine’s industry.”
On Jan. 20, Dragon Capital predicted that the average gas price for consumers in Ukraine would increase by 20-30 percent to a rate of $300-330. It remained unclear what discounts, if any, would be offered to chemical factories and other consumers unable to afford this price.
