Ukraine Markets Daily (April 24, 2017)

Market news

  • Industrial production declined by 2.7% y/y in March
  • Ukrainian Railway expects the Government to sanction a raise in freight tariffs

Market comment

The UX index decreased by 1.0% on Friday and the PFTS index decreased by 0.2% (in UAH terms). The WIG-Ukraine index increased by 0.1%. On the interbank exchange market, the USD/UAH decreased by 0.2% to UAH 26.68 (mid price), according to Thomson Reuters. The official exchange rate reported by the NBU was UAH 26.76


Industrial production declined by 2.7% y/y in March

Industrial production contracted by 2.7% y/y in March, 2017, redressing from a downswing of 4.6% y/y in February, the State Statistics Service reported on April 21, 2017. Mining output fell by 8.9% (-11.5% y/y in February) as the downswing in coal (-19.3%) and iron ore (-12.2% y/y) remains strong. Energy generation and distribution contracted by 13.8% y/y (+1.8% y/y), whereas manufacturing increased by 3% y/y (-3.2% y/y). Manufacturing output improved as a further 2.2% y/y reduction in metal production was offset by a strong rebound of 7.5% in food processing (up from -0.6% y/y in February), of 2.2% y/y (-1.4% y/y) in engineering, of 8.5% y/y (1.6% y/y) in rubber and plastics and 8.8% y/y (4.6% y/y) in textiles and clothing. On a cumulative basis, industrial production declined by 0.7% y/y in 1Q2017, as a 6.7% y/y decline in mining together with a contraction of 3% y/y in the energy generation and distribution offset a 3% y/y expansion in manufacturing. On a regional breakdown, the war torn Donbas and Lugansk region continued dragging the industrial sector down in March. The downswing in industrial production in Donetsk accelerated to -21.8% y/y in March from -10.1% y/y in February, and to -49% y/y from -29% y/y in Lugansk. The industrial downturn in the two regions mitigated the strong growth recorded in the other leading agricultural and industrial regions of the country. Namely, an industrial growth of 33.8% y/y is reported in the Mykolayiv region, by 27.3% in Zhitomir, by 20.7% y/y in Kirovograd, and by an average 14.2% in the regions of Vinnitsa, Volyn, and Odessa

Our view:

The data release is still NEGATIVE, showing the industrial sector to continue struggling against the negative impact of the escalating conflict in Eastern Ukraine. The negative development of the last two months finally drove the overall quarterly industrial result back to the negative zone in 1Q2017. In the meantime, we note that a strong growth momentum has formed in the engineering sector, therefore reinstating this industrial sector to its formerly prominent position among the country’s industrial segments. We expect that engineering together with food processing and the extraction of oil and gas will contribute to further strengthening of the industrial results through 2Q2017


Ukrainian Railway expects the Government to sanction a raise in freight tariffs

The Ukrainian state owned Railway Company Ukrzaliznytsia (UZ, Ukrzaliznytsia, Ukrainian Railway or the Company) plans to allot UAH 22.7 bn (c. USD 848 mn) in capital investments in 2017, Ireneusz Wasilewski, member of the Board of UZ stated at an infrastructure forum in Kyiv on April 20, 2017, according to a report from the Liga Business Agency. UAH 8.1 bn (USD 303 mn) will be used for purchase of moving stock, UAH 4.3 bn (USD 161 mn) for upgrade of existing assets, UAH 5 bn (USD 187 mn) for capital construction, and UAH 800 mn (USD 30 mn) for other modernization works. This year the Company will undertake large purchase of freight and passenger wagons, the official said. Namely, 9 thousands freight wagons will be acquired, making the large acquisition in this kind in the Company’s history. About 2890 new freight wagons will be purchased using EBRD loan. Additionally, the first time in 9 years, Ukrainian Railway will make a large purchase of passenger wagons (50 units). Currently over three third of UZ moving stock is completely worn, prompting the plan to overhaul 50% of the park in 2017-2021. The plan requires an amount of UAH 108.3 bn (USD 4 bn) of funding, of which UAH 86.5 bn (USD 3.2 bn) used for acquisition of moving assets, and UAH 21.7 bn (USD 811 mn) for capital repairs and modernization. UZ expects the Government to approve a raise in tariffs on freight transport from June 1, 2017. An increase of up to 25% is most likely probable, though the Company seeks an increase of up to 40% in order to meet its financial targets. In case of increase of tariffs by 22-25% in 2H2017, the Company expects to be able to accumulate up to UAH 7 bn (USD 262 mn) of fund for capital investments up to year end. However, the issue of tariff increase on freight transport is still under negotiations. Business representatives agree with a tariff changes only pending improvement in the turnover of freight wagons, requiring therefore a change in the terms of transportation. The Company’s management claims a curbing of corruption, stating that the issue may be solved only on a long-term basis. The cost of supplies to the company have been already reduced thanks to the measures to curb corruption

Our view:

The information from UZ management is NEGATIVE, seeing the Company to be still unable to confidently implement its modernization plan, and failing to overcome the opposition against needed adjustment in the transportation tariffs in order to secure the sustainability of its business. We think that the Company will be able only to partially implement its investment and development plan in the current year, considering its postponement already for nearly a half year, a reduction of the business prospects with consideration to the worsening economic outlook, and additional arguments against the tariff increase in connection with the negative development in Eastern Ukraine and the fuzzy outlook for Ukrainian exports