Azarov Sees 2007 Gas Price at $135.

Nikolai Azarov, first deputy prime minister, said yesterday he was forecasting the price for imported gas in 2007 at $135/tcm at the Russia-Ukraine border, up 42% from the current price of $95. He called the projection “optimistic”, but said the real price could be higher or lower. The forecast is part of the government’s 2007 budget plan. Vladimir Nesterenko: Azarov’s forecast falls into the lower end of the $130-160 price range that we expected for 2007. It would translate into $160-170/tcm delivered to industrial plants. Such a price would make producers of nitrogen fertilizers barely profitable, forcing them to focus on cost-cutting and making all of them – including Cherkasy Azot (AZOT: BUY), Dniproazot (DNAZ: HOLD) and even Stirol (STIR: HOLD) – more open to possible takeover bids. The steel industry would bear higher gas costs more easily. Lower margins in the short-term would rebound in the mid-term as mills reduce gas consumption. GenCos would suffer a temporary decrease to their profitability but in the mid-term would pass the higher gas cost on via electricity tariff increases. The government might come up with ways to assist the most affected industries – for example, some form of cross subsidization is quite possible. Although the government insists there will be no gas price increase this year, we still believe there could be, as Ukraine has not yet contracted enough gas for the winter and the Turkmen president has threatened to shut off gas exports at the end of next month unless Russia and Ukraine agree to a big price increase (he wants $100 at the Turkmen-Uzbkek border, up from $65).