Browse the complete Report on: Ukraine Oil and Gas Report Q3 2010
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The latest Ukraine Oil & Gas Report from BMI forecasts that the country will account for 5.36% of Central and Eastern European (CEE) regional oil demand by 2014, while providing just 0.46% of supply. CEE regional oil use of 5.42mn barrels per day (b/d) in 2001 rose to an estimated 5.81mn b/d in 2009. It should average 6.03mn b/d in 2010 and then rise to around 6.69mn b/d by 2014. Regional oil production was 8.88mn b/d in 2001, and in 2009 averaged an estimated 13.35mn b/d. It is set to rise to 14.57mn b/d by 2014. Oil exports are growing steadily, because demand growth is lagging the pace of supply expansion. In 2001, the region was exporting an average of 3.46mn b/d. This total had risen to an estimated 7.54mn b/d in 2009 and is forecast to reach 7.88mn b/d by 2014. Azerbaijan and Kazakhstan have the greatest production growth potential, although Russia will remain the key exporter. In terms of natural gas, the region in 2009 consumed an estimated 668.5bn cubic metres (bcm), with demand of 780.0bcm targeted for 2014, representing 13.7% growth. Production of an estimated 830.3bcm in 2009 should reach 1,025.7bcm in 2014, which implies net exports rising from an estimated 162bcm in 2009 to 246bcm by the end of the period. Ukraine’s share of gas consumption in 2009 was an estimated 8.04%, while its share of production is put at 2.47%. By 2014, its share of demand is forecast to be 7.76%, with the country accounting for 2.05% of supply.
We are sticking with our forecast that the OPEC basket of crudes will average US$83.00/bbl in 2010. Wide variations in crude differentials so far in 2010 make forecasting tricky for Brent, West Texas Intermediate (WTI) and Urals, but we believe the three benchmarks will average around US$85.11, US$88.22 and US$83.62/bbl respectively, with Dubai coming in at US$83.14. By 2011, there should be further growth in oil consumption and more room for OPEC to regain market share and reduce surplus capacity through higher production quotas. We are assuming a further increase in the OPEC basket price to an average of US$85.00/bbl. For 2012 and beyond, we continue to use a central case forecast of US$90.00/bbl for the OPEC basket.
For 2010, the BMI assumption for premium unleaded gasoline is an average global price of US$96.83/bbl. The year-on-year (y-o-y) rise in 2010 gasoline prices is put at 38%. Gasoil in 2010 is expected to average US$92.45/bbl, with the full-year outturn representing a 37% increase from the 2009 level. For jet fuel in 2010, the annual level is forecast to be US$95.58/bbl. This compares with US$70.66/bbl in 2009. The 2010 average naphtha price is put by BMI at US$82.46/bbl, up 39% from the previous year’s level.
Ukraine’s real GDP is assumed by BMI to have fallen by 15.0% in 2009, followed by forecast 5.0% growth in 2010. We are assuming average annual growth of 4.1% in 2010-2014. Beyond the weakness of 2009/10, reasonable and consistent growth in oil consumption seems likely, averaging up to 3.0% per annum. This suggests that the country will be consuming around 358,000b/d of oil by 2014. With oil production likely to slip below 70,000b/d, Ukraine will require imports of at least 292,000b/d by 2014. BMI forecasts that gas demand will rise from an estimated 53.7bcm in 2009 to 60.5bcm by 2014. Domestic production, largely in the hands of state-owned Naftogaz Ukrainy but with some international oil company (IOC) involvement, should also increase, from an estimated 20.5bcm in 2009 to at least 22.0bcm in 2010-2012.
Between 2010 and 2019, we forecast a decrease in Ukraine oil and gas liquids production of 31.4%, with volumes falling steadily from the estimated 2010 level of 75,000b/d to 51,000b/d by the end of the 10- year forecast period. Oil consumption between 2010 and 2019 is set to increase by 29.8%, with growth slowing to an assumed 3.0% per annum towards the end of the period and the country using 416,000b/d by 2019. Gas production should peak at around 22bcm in 2010-2012, then fall to 17bcm by 2019. Gas imports are set to reach 51bcm by 2019. Details of BMI’s 10-year forecasts can be found in the appendix to this report.
Ukraine holds seventh place behind Romania in BMI’s composite Business Environment (BE) Ratings table, which combines upstream and downstream scores. The country now occupies 14th place ahead only of Slovenia in BMI’s updated upstream Business Environment Ratings, thanks to only modest hydrocarbons resources. Its gas reserves and favourable licensing regime account for much of the upstream score, but country risk factors and privatisation activity are less impressive. Ukraine arguably has the potential to challenge Slovakia above it, and is at little risk from Slovenia below. Ukraine is in the upper half of the league table in BMI’s downstream Business Environment Ratings, this quarter claiming fourth place below Poland. There are a few high scores but progress further up the rankings is unlikely. There are good scores for refining capacity, oil and gas demand, retail site intensity and population. The Czech Republic, Kazakhstan and Romania are four points below it in the regional rankings, so Ukraine should be at little near-term risk.
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Browse the complete Report on: Ukraine Metals Report Q3 2010
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The Ukrainian steel and aluminium industries are entering a period of heightened uncertainty, with tenuous growth revealing inherent structural weaknesses – namely a lack of integration – while predatory Russian investors are aggressively pursuing controversial acquisitions.
In the first five months of 2010, Ukrainian crude steel output grew 24.8% year-on-year (y-o-y) to 14.11mn tonnes, in line with BMI’s expectations. Ukrainian crude steel output stabilised at around 2.8- 3.0mn tonnes per month in Q210, while rolled output was around 2.7mn tonnes with little movement in terms of month-on-month (m-o-m) growth.
Growth comes from a very low base, with output at least 75% below the industry’s full potential. Growth appears to being spurred more by domestic consumption than exports, with flat products leading the way. Tubes are also providing a boost to output. In the first five months of the year, Ukrainian tubes production was up 9% y-o-y to 639,000 tonnes with tube plants increasing output by 6.7% to 542,400 tonnes and steel works by 26.5% to 97,000 tonnes. The recovery of the automotive industry, which collapsed in 2009, is shoring up flats growth, but a full recovery would require an increase in demand from the construction industry, which is currently in stagnation.
Based on the trends observed in H110 in both crude output data and within steel-consuming industries, BMI forecasts 12.9% growth in crude steel output to 33.6mn tonnes in 2010 and 13.2% growth in hotrolled output to 27.4mn tonnes. However, domestic output will struggle to keep up with market trends in 2010, with industry sources expecting a 16% growth in domestic hot rolled steel consumption. Structural constraints within the industry, coupled with policy flux and uncertainties regarding future sector consolidation, will militate against the domestic industry to the benefit of imports. The decline in the value of the euro and a fluctuation in steel prices are contributing to increasing uncertainty in the industry and holding back output.
Notable problems include a lack of access to high quality iron ore and coking coal at a competitive price. In addition, merger and acquisition activity by secretive front companies associated with Russian oligarchs is causing alarm and controversy within the industry. The Ukrainian steel industry is in critical need of consolidation and looks set to follow the global trend in which steelmakers are seeking integration with raw material suppliers to cut costs and bolster profitability. The choice for the industry is largely between being controlled by Ukrainian or Russian oligarchs. Russian oligarchs have snapped up control of the Industrial Union of Donbass (ISD), the Alchevsk Metallurgical Plant and other downstream mills, while System Capital Management, the holding company of Ukraine’s richest man, Rinat Akhmetov, which owns Ukraine’s Metinvest, is seeking to consolidate its hold on the Ukrainian steel industry.
Although the election of Viktor Yanokovych as president marks a turn towards a more pro-Russia foreign policy, it is still unclear to what extent the new president will tolerate Russian acquisitions in the Ukrainian steel industry. Prime Minister Mykola Azarov reportedly indicated in June 2010 that the government would seek to protect Ilyich Iron and Steel Works from a take-over by a Russian group of investors. Yanokovych also called for an investigation after a group of unnamed Russian investors registered in Cyprus claimed that it had actually acquired Ilyich by buying a 90.41% stake, despite the company’s board chairman Volodymyr Boyko protesting that the acquisition was illegal. He has called for Illyich to be merged with Akhmetov’s Metinvest, as he is politically allied with Yanokovych. The merger would create one of the world’s top 20 steelmakers by volume and makes commercial sense: more than 70% of Ilyich’s ore supplies and a quarter of its coke are already supplied by Metinvest.
Consolidation also makes sense amid a national financial crisis. The Zaporizhstal steel plant has also been a target for acquisition by another group of unknown Russian businessmen financially backed by the Russian government’s Vnesheconombank. Its bid appears to have muscled out a take-over move by Akhmetov, who was seeking a partnership with South Korea’s POSCO. The Ukrainska Pravda news agency said in May 2010 that the deal amounted to US$1.7bn but gave no further details.
Meanwhile, although we expect a full recovery in aluminium by 2014, it is dependent on RusAl maintaining operations in Ukraine. RusAl indicated even before the financial crisis that it may close the 130,000 tonnes per annum (tpa) Zalk smelter as it was unprofitable to keep it running. With output falling 56% y-o-y to 50,000 tonnes in 2010 – the worst performance in the RusAl group – and the debtridden company already facing severe financial problems, it may consider a permanent closure and sale.
If RusAl can find a way to improve efficiency, BMI believes the smelter can be returned to full capacity after the recession, assisted by a recovery in supplies to the automotive industry. However, until RusAl announces that it will close Zalk, BMI will forecast a return to full capacity within five years.

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Browse the complete Report on: Ukraine Commercial Banking Report Q3 2010
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Since Q108, we have described numerically the banking business environment for each of the countries surveyed by BMI. We do this through our Commercial Banking Business Environment Rating (CBBER), a measure that ensures we capture the latest quantitative information available. It also ensures consistency across all countries and between the inputs to the CBBER and the Insurance Business Environment Rating, which is likewise now a feature of our insurance reports. Like the Business Environment Ratings calculated by BMI for all the other industries on which it reports, the CBBER takes into account the limits of potential returns and the risks to the realisation of those returns. It is weighted 70% to the former and 30% to the latter.
The evaluation of the Limits of Potential Returns includes market elements that are specific to the banking industry of the country in question and elements that relate to that country in general. Within the 70% of the CBBER that takes into account the Limits of Potential Returns, the market elements have a 60% weighting and the country elements have a 40% weighting. The evaluation of the Risks to the Realisation of Returns also includes banking elements and country elements (specifically, BMI’s assessment of long-term country risk). However, within the 30% of the CBBER that takes into account the risks, these elements are weighted 40% and 60%, respectively.
Further details on how we calculate the CBBER are provided at the end of this report. In general, though, three aspects need to be borne in mind in interpreting the CBBERs. The first is that the market elements of the Limits of Potential Returns are by far the most heavily weighted of the four elements. They account for 60% of 70% (or 42%) of the overall CBBER. Second, if the market elements are significantly higher than the country elements of the Limits of Potential Returns, it usually implies that the banking sector is (very) large and/or developed relative to the general wealth, stability and financial infrastructure in the country. Conversely, if the market elements are significantly lower than the country elements, it usually means that the banking sector is small and/or underdeveloped relative to the general wealth, stability and financial infrastructure in the country. Third, within the Risks to the Realisation of Returns category, the market elements (ie: how regulations affect the development of the sector, how regulations affect competition within it, and Moody’s Investors Service’s ratings for local currency deposits) can be markedly different from BMI’s long-term risk rating.


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Browse the complete Report on: Ukraine Mining Report 2010
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Despite having a difficult year in 2009, our forecast for Ukraine’s mining industry is overall a positive one. At the end of 2009, the mining sector fell by 30.2% in real terms, but H110 saw the start of a recovery and by the end of the year, BMI forecasts that the sector will have increased its real growth to 1% %, taking the industry’s value to US$5.95bn.
In order for the industry to keep improving over the next five years, however, it will need to focus on its coal industry as outdated, inefficient and dangerous mines are having a stagnant effect on much-needed production levels. Ukraine’s coal mining industry has seen some very negative press throughout this year. Accidents resulting in fatalities have forced the government to look at its safety standards and consider extensive redevelopment.
Indeed, the coal industry requires major investment and the government has responded by announcing funding of UAH47.3bn (US$5.98bn) by 2015. The authorities have also revived plans to privatise parts of the industry, which will bring in further capital. Privatisation is controversial in the Ukraine but there is growing acceptance in government circles that increased productivity requires financing and methods from the private sector. In total, the government measures are expected to increase the total coal output in 2015 by 54% from 64mn tonnes in 2009.
This year has also seen improvements in the iron ore sector. Ukraine is listed as being the sixth largest iron ore producer in the world and despite 2009 seeing the lowest production rates of steel since 2000, iron production has improved in H110. The Industrial Policy Ministry announced that iron ore concentrate production had risen to 26.378mn tonnes in May 2010, a 37% increase y-o-y. In March 2010, Ukraine exported 2.522mn tonnes of iron ore, this was an 8% increase y-o-y, but to offset this, Q110 saw the country import 620,600 tonnes of iron ore concentrate; almost double what it did in Q109. BMI forecasts that with the much-needed improvements in the coal sector coupled with continued increased production levels in the iron sector the country’s mining industry will be on target for our predicted total value levels of US$13.63bn by 2014. However, China is expected to reduce its demand for iron this year and this threatens to reduce output levels in the short-term.
Despite being the site of the infamous Chernobyl disaster, Ukraine remains interested in nuclear power and the country has announced plans to construct 22 new nuclear power stations. Indeed, following news that a Russian bank had agreed to lend Ukraine US$2bn, in June 2010 it emerged that the funds will be used to build new nuclear reactors in the country. The news follows an improvement in Russia-Ukraine relations, with energy appearing to be a key area of co-operation.


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Browse the complete Report on: Ukraine Petrochemicals Report Q4 2010

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The weakness of the hryvnia will help sustain Ukrainian petrochemicals export growth, with the Russian market picking up pace, according to BMI’s latest Ukraine Petrochemicals Report. While production volumes are still below pre-crisis levels, the extent of the collapse in output throughout the 2009 crisis, combined with a tentative recovery in external demand, will help push growth levels higher in our view. However, continued poor performance in the Ukrainian automotive sector means it will operate well below maximum output capacity over the forecast period, leading to low levels of engineering plastics consumption by this crucial industrial sector. The country’s construction industry, a major consumer of PVC in Ukraine, is also plagued with lingering problems following a 40% contraction in 2009. It will take until 2014 at the earliest for plastics demand from the construction sector to return to 2008 levels.
Consequently, exports to Russia will feature strongly in the Ukrainian petrochemicals recovery. Exports will be encouraged by the warming relations between Russia and Ukraine following the election in February 2010 of pro-Russian candidate Viktor Yanukovych to the presidency. This prompted an immediate and positive response from Moscow towards trade and investment with Ukraine. The improved political relationship should prevent a return of the gas supply crises that have plagued the Russian petrochemicals industry over the past two years and has already prompted a downward revision in the cost of gas. However, the petrochemicals industry lacks competitive edge and is burdened by high costs and inefficiency. Unless the industry is modernised, there is a risk of permanent low capacity utilisation, loss-making and possible closure.
Notwithstanding plant closures, while Ukraine’s petrochemicals industry is not expected to contract any further, due to the depth of the decline, it will take until at least 2014 before it reaches 2008 levels, based on the slow recovery in the Ukrainian and Russian market. BMI forecasts plastics output of 365,000 tonnes in 2010, up by around 17.5% over 2009 levels. Although growth will be strong, it is largely due to base effects. Output will still be 16% down on 2008 levels, and Ukraine’s petrochemicals sector will be operating at around 70% capacity – which is well below the 80-85% level which BMI regards to be the break-even point for the industry. A diversification in markets and feedstock sourcing to remove the industry’s dependence on domestic and Russian demand would enhance Ukraine’s petrochemical prospects. With the kind of economic growth rates seen in 2000-2007 unlikely to be repeated, the petrochemicals industry will be more heavily reliant on export markets. The depreciation of the hryvnia may provide some slight relief in terms of competitiveness, but equally it raises the cost of feedstock; which has to be passed on to the consumer or simply absorbed by the industry – which is already financially precarious. This has, however, been mitigated by the Russian gas deal.
Ukraine is in 10th place in BMI’s Central and Eastern Europe Petrochemicals Business Environment matrix, with a score of 37.5, down 0.1 point since the previous quarter due to a decline in the country risk rating. This puts Ukraine 2.6 points behind Bulgaria and 4.3 points ahead of Azerbaijan. The score is the result of the imminent start of operations at a 300,000tpa PVC plant in Kalush and an improvement in market risk ratings due to a deal with Russia over cut-price gas supplies. The score has been strengthened by the election of a new Moscow-oriented government which provides some stability in the operating environment for the petrochemicals industry and trade relations with its largest market, Russia. However, the score is held back by very weak a long-term financial markets outlook, although this can get better in the event that IMF credit is sustained and the banking system revived. The overall petrochemicals rating score has plenty of upside potential.


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Browse the complete Report on: Ukraine Infrastructure Report Q4 2010

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Ukraine’s economy is expected to register growth in 2010 and ought to grow steadily, after being battered during the global financial crisis. The International Monetary Fund (IMF)’s approval of a roughly US$15.15bn stand-by arrangement in July 2010 will afford the government greater budgetary freedom in 2010 and 2011, which will filter through to construction and infrastructure spending. The country’s construction sector is in desperate need of revival after seeing its value slashed by 40.42% in 2009 to UAH22.11bn (US$2.75bn), according to BMI calculations. Indeed, we expect to see Ukraine’s construction industry stagnate in 2010 as it lags behind an upturn in economic growth, landing around UAH24.85bn (US$3.15bn) in 2010.
Major recent developments:
- Ukraine's infrastructure sector is reaping the windfalls from the new government's foreign policy reorientation towards Moscow. Russia's Sberbank announced recently, for example, that it would no longer restrict its lending in the country while reportedly arranging a loan for Ukravtodor, Ukraine's state-owned highways agency, for investments in Ukraine's road network. This loan presents a strong upside to BMI's forecasts for Ukraine's roads infrastructure industry value forecasts, which indicate that the sector will exit recession in 2010, albeit industry value will remain relatively small through to the end of our forecasts period, rising from a forecasted UAH1.95bn (US$247mn) in 2010 to UAH3.56bn (US$594mn).
- The government has received a Russian-sourced US$2bn loan for the completion of two units at Khmelnitsky Nuclear Power Plant in June 2010. The loan approval again highlights the growing influence of Russia over Ukraine especially in the area of energy policy. Support such as this will help the country’s energy sector climb out of stagnation after 2010.
- During a visit to Lviv stadium by President Yanukovych, vice-premier, Boris Kolesnikov, claimed that a number of problems delaying progress on the UEFA European Football Championship 2012 (Euro 2012) preparations had been resolved and that construction would be back on schedule by February 2011. The self-assessment was corroborated by UEFA’s decision in early-June 2010 to approve the four sites after its latest inspection. However, while preparations appear to have accelerated in recent months, the country’s next assessment is as early as August 2010 and the risk of some of the sites losing host-rights remains a possibility.
Along with preparations for Euro 2012, BMI expects Russian investment to help Ukraine’s recession in the construction sector turn around in 2011, as the industry grows by 5.28% to UAH29.08bn (US$3.93). Beyond this, growth will ease as Euro 2012-related infrastructure construction falls away, hovering at the 3% mark y-o-y through to 2014, when the sector will be worth UAH38.91bn (US6.49bn).

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