Modern economic POTENTIAL OF UKRAINE

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Chemical industry

Ukraine inherited its chemical industry from a self-sufficient chemical organization within the Soviet Union. A peculiarity in the former USSR was that often chemical enterprises were located within regional frameworks, and as a rule, close to raw stock bases. Only fertilizer producing companies were built near consumers in agrarian regions. One should also note that many sub-segments of the chemical industry were important for the whole of the Soviet Union; therefore, Ukraine only had a part of the vertical production structure. Some industries, which used to manufacture end products out of semis and raw stock originated from other republics of the Soviet Union, were put into heavy economic hardship at once upon independence. These enterprises went bankrupt and changed owners. Foremost, these included companies in the petrochemical segment – Lisichanskiy Oil Refinery, OJSC Oriana, Chernigovskiy Khimvolokno (Chernigov Chemical Fiber), etc.

The companies based on raw stock of Ukrainian origin turned out to be more stable. In particular, CJSC Titan, Crimean Soda Plant, Lisichanskiy Soda Plant, ArtemSol (Artem Salt), as well as mining and dressing works and by-product coke plants prospered.

The companies which have the most developed technologies, most complete processing of chemicals, and a wide spectrum of end products, include producers of fertilizers: Azot, DneproAzot, Odessa Port Plant (OPZ), RivneAzot, Stirol, SumyKhimProm, Severodonetskiy Azot, and CJSC Titan. Because the plants produce not only fertilizers, but also other chemical products using relatively cheap raw stock of Ukrainian and Russian origin, none of the companies would theoretically be loss-making; however, almost all producers, except for Odessa Port Plant and SumyKhimProm are now in private hands.

By geographical location, Ukrainian chemical enterprises are situated in different regions of the country, which helps them not compete against each other, but at the same time makes each a natural monopolist in its own region.

Note that mineral fertilizers and ammonia have been strategic staple Ukrainian exports for a long time. Ukraine has eight large producers of fertilizers, of which six specialize in the production of nitric fertilizers and are the cornerstone of export and production potential of Ukraine. Ukraine is one of the top exporters of nitric mineral fertilizers in the world. The country exports mineral fertilizers to 70 countries of the world. The main buyers are Brazil, Turkey, Mexico, Vietnam, and India. Yet, the list of key buyers is changing its dynamics monthly. Regrettably, the market of mineral fertilizers has been hard to forecast recently. The Ukrainian commodity shifts the direction of sales from Asia to Latin America and the opposite – depending on the current market.

Ukraine’s monthly exports include on average 290-310 ths. tons of urea and approximately 80 ths. tons of ammonium nitrate, though earlier shipments of nitrate used to total 130-150 ths. tons. These are main export articles. Besides, Ukrainian enterprises provide monthly foreign-bound supplies of up to 33 ths. tons of ammonium sulphate (exports in 2004 were half this), 6 ths. tons of ammophos and 19-20 ths. tons of urea-ammonium mixture (its export boosted 4.5 times since 2004) (average monthly indicators).

The production of nitric fertilizers is based on ammonia as a raw stock, which in turn is produced of natural gas. In this light, the gas price is a serious determinant of the ammonia cost and has an important share in the value of fertilizers (cost of gas now makes some 20% in nitrate production).

Ukraine has notable reserves (up to 20%) of titanium ores (Volnogorskiy and Irshanskiy Ore Mining and Concentrating Works (GOKs and Fedorovskoye deposit), and the country is able to process ilmenite and titanium ores at CJSC Titan and OJSC SumyKhimProm plants.

Summing up, Ukraine has large reserves of raw stock to produce inorganic chemicals, but at the same time there is no raw material for organic chemical production.

The country’s own explored reserves of oil are scarce, which had its effect on the absence of raw stock for petrochemical production and the manufacturing of plastics and polymers. As a result, most of oil refineries already belong to Russian capital, which also manages facilities processing organic agents, polymers, and plastics.

As regards complex chemical compounds, dyers, glues, ferments, and composites, as well as plant protecting agents, they contribute less than 15% to the chemical market’s volume. The articles also account for only 11-14% of the chemical produce market. The lion’s share in consumption of chemical products belongs to group 39 (Commodity Classification of Foreign Economic Activities) – polymers and plastics (40-42%).

From the USSR, Ukraine inherited more than a dozen of large chemical complexes which regrettably were not able to survive on their own. Meanwhile, some of them used to be an economic cornerstone for the towns they were built in.

Except for export-oriented production, the volume of domestic output by Ukrainian enterprises has kept falling. It was only in the last 2-3 years that producers of fertilizers started expanding facilities. The largest portion of output is made up by mineral fertilizers and ammonia, which are mostly exported by Ukrainian firms. Production of mineral fertilizers in 2005 reached 6.5 mn tons. This volume included some 3.8 mn tons of urea, more than 2.2 mn tons of ammonium nitrate, and the rest was ammonia sulphate, phosphoric and compound fertilizers.

Production of mineral fertilizers in Ukraine

Ukraine is not yet able to consume the entire volume of fertilizers. Almost all of the urea is exported. A large percentage of ammonium nitrate is also exported; the rest of fertilizers are being actively sold on the domestic market. Unfortunately, the export position is often related to cheap raw stock, energy carriers, and labor. On the other hand important determinants are Ukraine’s location, along with transportation infrastructure, communications, stable currency, and mature market of financial services.

Although Ukrainian chemical production facilities were set up back in the first part of the 20^th century, constant renewal, capital overhaul, and current repairs on the plants mean that they are in good condition. This is borne out with stable production indicators. As a rule, facilities are loaded at 60-80% of capacity. However, the complete loading of facilities will only be possible after further capital overhaul and only with the development of transportation infrastructure and a favorable market environment.

As regards other chemicals, one should note the large volumes of inorganic chemical production, with ammonia and alumina foremost. Ammonia in Ukraine is produced by six large plants. Some of this is used for the internal production of these plants, some is sold in Ukraine, and a large percentage is shipped abroad. Meanwhile, as previously mentioned, Ukraine has a high position in the world ammonia trade.

One should also keep in mind the Togliatti-Yuzhnyi ammonia pipeline built back in 1981. The ammonia pipeline is a unique structure on continent. The USA has a similar but shorter line. Via the pipeline, not only Ukrainian ammonia, but Russian too is exported from Yuzhnyi.

The ammonia pipeline is 1,396 km long and has a diameter of 355.6 mm. UkrKhimTransAmmiak state enterprise serves the pipeline at the state border. The pipeline passes the Ukrainian city of Gorlovka, which is home to OJSC Stirol. The enterprise uses the ammonia pipeline to pump ammonia from Gorlovka to the town of Yuzhnyi. CJSC Severodonetskiy Union Azot and OJSC DneproAzot are also able to plug into the pipeline. These enterprises also export ammonia, but largely by railway transportation.

Special attention should be paid to alumina (aluminum oxide). The issues of alumina deliveries were not put for public discussion in Ukraine. However, if ammonia exports totaling USD 403 mn are made by six producers, alumina, whose export volumes consist of USD 257 mn come from a single enterprise – Nikolayev Alumina Plant.

As regards the chemical group showing the highest growth dynamics, polymers, Ukraine has just a few polymer producers. This is again the result of its USSR heritage. The polymer industry is a major environmental polluter, and was mostly set up close to raw stock deposits or not far from them in large industrial centers consuming polymers and plastics. Hence, production was mostly concentrated in Eastern and Central Siberia as well as in Privolzhskiy region of Russia.

The following producers of polymers operate in Ukraine: OJSC LiNOS (TNK-Ukraine), CJSC Lukor (LUKOil-Ukraine), OJSC KhimProm (Pervomaysk), OJSC DneproAzot (Dneprodzerzhinsk), and OJSC Stirol (Gorlovka). Also, the country has small producing enterprises and plants with production facilities which are not running because of the shortage of raw stock.

Hundreds of companies in Ukraine are involved in processing of polymers into plastics. Commodities leading the way in Ukraine are polypropylene (OJSC LiNOS), polyethylene (CJSC Lukor), and polystyrene (OJSC Stirol).

Production and consumption of polymers in 11M 2005 by types of products are as follows:

Let us stress that the rates of polymer production growth are way slower than growth tempos of polymer and plastics import supplies. This suggests that domestic production of polymers is so far less profitable than imports, while demand for polymers is growing very progressively.

As regards the production of paints, pigments, ferments, detergents, soap, surfactants, as well as herbicides and insecticides, production of these in Ukraine is rather low.

Producers of these commodities are oriented at the local market, although some goods are export oriented (brand-name detergents, cosmetics, surfactants, ferments, albumens). Yet, their shipments and production have a small share in the gross production and export of chemicals. Besides, they show weaker dynamics of development than the rest of the industry.

The chemical industry in Ukraine is mostly oriented at industrial consumers, the agricultural segment, and export shipments. Ukrainian chemicals get the widest demand from farmers and processors of agricultural produce, which buy fertilizers, plant protecting agents, as well as polymer packing. Also, Ukrainian-made chemicals are used as semi-products in metallurgy, light and textile industries, and pharmaceutical business.

There is a small volume of demand for Ukrainian chemicals by the public, since the country does not have a sufficient level of chemical processing. Nonetheless, the consumer segment is stable and developing. As a supplier of raw stock for the industry, Ukraine’s chemical production depends heavily on foreign economic factors, the conditions of the end-product markets, and prices for energy sources.

Consumption of polymers is developing the most rapidly in Ukraine. At present, Ukraine consumes polymers for total value of USD 2 bn each year. Half of the consumed output includes polyethylene, polypropylene, polyvinylchloride and polystyrene. Current estimates put polymer production by Ukraine at 2.5-4 times less than in developed countries. Consumption of PETF and PVC showed the highest growth rates. These products are mostly imported to Ukraine. While average per capita consumption of PVC in the European Union is 12-15 kg, Ukraine shows the figure of 4-5 kg only.

Coming to mineral fertilizers, (group 31 of the Commodity Classification for Foreign Economic Relations), demand for them is rapidly rising in Ukraine. If earlier, ammonium nitrate in Ukraine was produced to be exported, today companies are launching the infrastructure for regional warehouses in the country and are working out mechanisms to accumulate fertilizers in shoulder periods, which will stabilize prices and have a positive effect on the increasing consumption of fertilizers. The results can already be seen, with domestic consumption rising in recent years from 500-600 ths. tons to as much as 800 ths. tons.

To be honest, one should note that export is contracting not only because of growing internal demand, but also due to falling demand on the world market. Ammonium nitrate of Ukrainian origin has many tariff and non-tariff restrictions in markets of other countries – and not only of advanced states. In fact, foreign markets for nitrate have narrowed so much that shipments of ammonium nitrate will soon become difficult for Ukraine to stay at, and the local market will be more attractive.

Taxation is a restrictive factor in supplies of ammonium nitrate to the internal market. It brings up the issue of VAT, all schemes of commodity movement become transparent, and the accumulation of capital is more complicated as compared to export sales, including through offshore companies. Nonetheless, the real rate of profitability for local-bound sales is over 90%. Hence, Ukraine’s market of mineral fertilizers can be evaluated as attractive and very promising. Since independence consumption of mineral fertilizes per hectare has fallen from 140-150 kg of nutrients to 25-35 kg, though on some farms of Southern Ukraine the figure reaches 100-106 kg. This is still too low, as soils are being used intensively, so the consumption of mineral fertilizers will need to keep growing. Nutrient balance is at a low, since nitric fertilizers are mostly used. Ukraine has no potassium or phosphorite deposits, and production of phosphoric and potassium fertilizers dropped with independence.

Ukraine’s chemical industry has been oriented toward exports since independence. Despite heavy dependence on Russia’s energy sources and raw stock, Ukraine has been successfully competing with the RF at the world market.

The competitive advantages are:

• geographical location;
• availability of powerful and relatively modern chemical plants;
• transportation infrastructure, railways, and ports;
• coordinated actions of enterprises which are very often near each other.

Staple exports are still mineral fertilizers and inorganic chemicals. Gross exports grew 13% in revenue in 2005 over 2004. Growth rates are not really high; though. In terms of physical volumes by groups export shipments only rose by 10%. This suggests that the increase in currency earnings is partially related to higher prices for exported articles. Commodity Classification Group 31 – fertilizers – holds 28.4% of the export total. Ukraine still remains one of the world leading exporters of nitric fertilizers.

As was already mentioned, key import products were polymers and plastics (42% in import volume), smaller but even shares belong to organic chemicals, plant protecting agents, and caoutchouks (11-12%). The import of polymers and caoutchouks keeps growing. Polymer consumption and import supplies in 2006 are expected to grow by 35-38%. The rates of import growth should move down, and most likely in the end of the year Ukraine’s production of some polymers will recover and grow.

As regards import supplies of other types of chemicals, there are upward trends in import of mineral fertilizers, pesticides and herbicides. These commodity groups are of particular attention of chemical producers, but no serious import rise is expected.

Summing up, chemical production in Ukraine, having survived after the USSR collapse and remaining on the world market, already boasts long-standing ties with other economic segments, a good reputation on the world market with regards to exported articles, and a high rating of investment appeal. This is especially illustrative by prices within Ukraine, tendencies on the world market, and growing imports in large spectrum of polymers, caoutchouks, and plastics.

The increase in natural gas prices will seriously hurt Ukraine’s chemical industry. Yet, through strengthening the integration processes, Ukraine may still do well among European chemical producers. Also, as the chemical industry often has environmental risks, firms in markets with greater controls often locate and develop chemical production in emerging countries such as Ukraine.

In the next 5 years, Ukraine will see a period of stabilizing, overall upgrade, and reconstruction within the chemical industry. These steps may cause temporary weakening of positions on the world market. Yet, in the light of Ukraine’s advantages, the country’s chemical industry will become one of the most profitable and promising sectors.

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