Is "independent" Ukraine facing a crisis on petrochemical market? / News / News agency Inforos
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Is "independent" Ukraine facing a crisis on petrochemical market?

There will be no deficit on the market, but price hikes are inevitable

Is "independent" Ukraine facing a crisis on petrochemical market?
Context:

On June 1, restrictions on the supplies of oil, petrochemicals and coal to Ukraine from Russia took effect. These measures were first voiced back on April 18 as a response to the April 10 decision of the Ukrainian government to once again expanded anti-Russian trade restrictions. The embargo was extended to electric devices for railway automatic systems and communication systems, conductors exceeding 1,000 volts, springs for freight rail cars, formalin and carbamide-formaldehyde concentrate, as well as imports of glass from Russia to Ukraine that has doubled over the past year.

According to the resolution of the Russian government, starting from June 1 energy can be exported to Ukraine only after a special license is obtained. In fact, there is nothing new about this decision, as Russia tested the system of special licenses last year on supplies of liquefied petroleum gas, or autogas, to Ukraine. Only Rosneft got the license becoming a monopolist on this market. But if previously the delivery volumes were approved once a year, they will now be revised one a month.

How will this impact the Ukrainian market of petrochemicals? Assessing possible consequences, it should be noted that the Ukrainian authorities "with their own hands" almost destroyed their own petrochemical industry. They terminated supplies of Russian oil to their refineries, pumped off oil and sold it to Western countries (the total volume of the sold oil is evaluated at 500 million euros). The majority of refineries stopped their operations, because they didn't have other resources. As a result, the volume of oil processing fell more than 25 times compared to 1991, while just 2 out of 7 refineries are still active but again not at full capacity. Refinery operations have continued in western Ukraine thanks to domestic oil production. But it is small as well, with the volumes having dropped more than 3 times over the same period.

As a result, Ukraine is extremely dependent on the import of petrochemicals, buying about 45% of gasoline, 90% of diesel fuel and 75% of liquefied gas on foreign markets. About 70% of all supplies come Russia and Belarus (6 million – 7 million tons per year). Another big supplier is Lithuania (9.5%-11.3% of supplies over the recent years).

The main source of gasoline and diesel fuel for Ukraine is Belarus that produces them from Russia's oil. Belarus consumes a part of the refined products and also exports them to foreign countries, including Ukraine. It is likely that the import of petrochemicals from Belarus to Ukraine will continue, as Ukraine pays 1.5 times more than Russia.

Direct supplies of gasoline and diesel fuel from Russia are insignificant. Russia exports 4 million – 4.5 million tons per years. As far as the supplies of diesel fuel to Ukraine are concerned, it had been delivered through the system of oil-products pipelines. But it turned out that the Ukrainian authorities used it to fill armored personnel carriers fighting against the Donetsk and Luhansk people's republics. The supplies were subsequently banned and oil-product pipelines were blocked. Later, diesel fuel was delivered to Novorossiysk through the South system of oil-products pipeline and then to Ukraine by tankers, but after Ukraine had seized a tanker, the supplies via this route stopped as well.

So, Ukraine did everything it could to stop deliveries of Russian diesel fuel. And this is a "characteristic style" of the Ukrainian authorities in relations with Russia – to try to spoil the relations as much as possible. Expanding sanctions against Russia, the Ukrainian leadership considers the response of the Russian government as a part of the economic war against "independent" Ukraine. Prime Minister Volodymyr Groysman stated that, noting that the government was taking measures to mitigate the negative impact of such decisions. The team of the new Ukrainian president made more reserved comments on the situation. National Security and Defense Council Secreatry Oleksandr Danilyuk called these Kremlin's "anti-Ukrainian sanctions" a serious challenge for the country and asked businessmen to diversify the supplies as soon as possible.

According to expert estimates, little has been done to this end over the past 8 weeks since the "last Kremlin's warning." In particular, the Ministry of Energy and Coal Industry of Ukraine held a meeting on possible ways of delivering additional petrochemicals to the country. But the published expert recommendations have yet to be summarized, and no decision has been made. The country's leadership just limited itself to "soothing statements."

Profiting from the authorities' inaction, businessmen started to seek ways to diversify petrochemical deliveries, trying to "fish in troubled waters." Since there is little chance that deliveries from Belarus will grow, as Moscow and Minsk are in dispute over the tax maneuver and quotas on duty-free oil and products made of it at Belarussian refineries, Ukrainian fuel importers are establishing delivery routes from Greece, Italy, Bulgaria, Poland, Kazakhstan and other countries. They also started to more broadly use sea routes for transporting motor fuel through ports of Big Odesa, although logistically in this case the costs are higher compared to deliveries by railroads or pipelines. Meanwhile, mass and social media is pedaling the "fuel crisis," seeking to boost demand. Serhiy Kuyun, the director of the consulting group A-95, "this amusement ride which is called a "merry swing" is now the main market trend. It works the following way: first prices are accelerated through a media campaign. Then the diversification mechanism is launched, an arbitrage window is opened, and more expensive products from alternative sources go to the market. When the prices reach the peak, the Russian Ministry of Economic Development broadens the channel, and cheaper products from Russia go to the market, the arbitrage window closes. Some traders are calculating profits, some damages. And the circle starts again…"

To sum thing up, it's worth saying that Ukraine will not lack energy, but prices for imported resources will grow, for some products considerably. The markets of diesel fuel and autogas will suffer the most, as in recent years Ukraine has covered just 12%-14% of its demand in diesel fuel and 28%-30% of demand in liquefied gas. Ukrainian experts believe that the supplies of diesel fuel and autogas may fall 30%-50% in June, as the Russian Ministry of Economic Development limited issuing licenses to its exporters – Lukloil (33%) and Rosneft (according to unofficial reports minus 50%-75%). In order to ensure enough products on the domestic market, Ukraine should compensate for up to 160,000 tons of diesel fuel and about 20,000 tons of autogas in June. A drastic growth of prices for autogas, a 30% hike to 24,500 hryvni per a ton from May 22 to May 29, is a bright example. The restrictions will to a lesser extent affect the gasoline market, as approximately 33% of Ukraine's demand is covered by domestic producers.

As a result, Ukrainians citizens, in particular agriculture producers, will pay for this "wise policy" of the previous Ukrainian authorities.

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