Alexander Paraschiy
Head of Research
ap@concorde.com.ua
+38 044 391 55 77

Low prices super cycle: is the economy of Ukraine to survive it?

The financial world has a new mantra – the super cycle of low commodity prices. According to analysts surveyed by Bloomberg, it took about three years from the beginning of the cycle. If we consider that the last time the cycle lasted about twenty years, it will be long before prices for oil and metal rise again.

Aleksandr Paraschiy, Head of Analytical Department of the Investment Company Concorde Capital, explains how the falling commodity prices will affect the economy of Ukraine.

Indeed, the situation is not very favorable for Ukraine. Ore and steel prices are falling, and the process is still far from the end. The main reason - certain difficulties in the Chinese economy. The China construction market is now virtually stopped; respectively, demand for steel in the largest consumer of these products - China – has greatly weakened. There is really no reason to talk about a possible increase in prices for steel products in the near future.

Slab price, $ / ton at the Black Sea port, FOB

The same happens with iron ore prices. Falling demand for steel entails a reduction in demand for iron ore and other raw materials used in its manufacture. In addition, the major players in this market are gradually introducing new facilities - investment projects, which started 5-7 years ago. The offer increases by inertia, but the demand has actually cooled down. Therefore, speaking about the steel and ore markets, it really is no signs of the growth resumption.

Iron ore price (62% Fe) at the China's port, $ / ton, CFR

The situation with agrarian products is better. On the one hand, it is affected by reduction of oil prices. Agriculture is strongly related to this factor. When oil prices were high, a lot of acreage was allotted for industrial crops, which were lately processed into alternative fuels, like bioethanol. Therefore, agro food production lacked some areas. After the oil prices fall, preferences have changed. Now more land is given for food crops, more food is supplied to the market. At the same time, the population is not growing at a pace that keeps prices at the same level. Accordingly, we may forecast the further stabilization or a slight decrease in food prices on world markets.

Feed wheat, the Black Sea, $ / ton, FOB

It is worth noting that the competitiveness of Ukrainian products - both agricultural and rolled metal – is largely determined by the hryvna devaluation. Due to the fall of the national currency and the long production cycle, farmers were able to buy fuel and fertilizers at one exchange rate of the dollar, and sell at another. Now this is not possible, which complicates the situation for farmers. Nevertheless, costs of the Ukrainian agrarians per hectare of cultivated area are among the lowest in the world. The quality of Ukrainian lands allows investing less to obtain an acceptable yield. Therefore, agricultural enterprises may get a profit even at relatively low prices for agricultural products in foreign markets. But in the future, most likely, they will be forced to cut costs, and this in turn will lead to a drop in yield. This factor will also affect the export potential of Ukraine.

Corn, Black Sea, $ / ton, FOB

In the current situation - when commodity markets are stagnating, and this trend may continue for several years - Ukraine has to switch to high value-added products. The traditional problem of our country is the focus on the low value-added production. The exported metal remains, in most cases, the semi-finished product for foreign companies.

But it is impossible to do quickly, as several factors prevent. Outdated and inefficient equipment, primarily in the steel industry, will require significant investments in the modernization and improvement. Similarly is the mechanical engineering sector. Ukraine is far behind the Western and Asian manufacturers by the technology and product quality. To catch up, they need investments. At that, the state lacks foreign investments; to the contrary, both foreign and domestic investors withdraw capital from Ukraine. Until the investment climate is not improved, the industry will not transfer to the high value-added production.

Today, Ukraine feels confident in two key markets: metal and semi-finished agrarian products. Even to enter the finished metal market, it is necessary to press competitors, which is not easy. The same applies to the agriculture. The European market is opened gradually for our farmers, but almost for all high value-added items supply of our goods is restricted by quotas. Yes, it is possible to enter the African markets, the Central Asian markets, and some work is performed in this direction.

http://biz.liga.net/ekonomika/industriya/stati/314...