The Ukrainian freight industry is facing headwinds in 2015 as Ukraine's economy is set to remain in a deep recession throughout 2015 as the conflict in the east rages on. Soaring inflation, a crippled banking sector and severely weakened currency will keep the wider economy close to the brink of collapse over the coming quarters.
The disruption to industrial activity in the east - where the bulk of Ukraine's main industrial exports including steel are produced - has led to a decline in exports, posing problems for the freight industry going forward. Capital controls implemented by the authorities in order to cap exchange rate pressure are also hampering currency convertibility and by extension, international trade. Real export volumes fell by 7.4% year-on-year (y-o-y) in Q2 2014, from 2.3% y-o-y in the previous quarter, and we estimate a full year contraction of 15% in 2014, followed by a further 3.0% in 2015, before growing very modestly by 2% in 2016. However, the devaluation of the hryvnia has significantly weakened household purchasing power, leading imports to fall by 11.3% y-o-y in Q2 2014, and helping to offset the drag to headline real GDP from weaker exports.
In terms of our forecasts for the Ukrainian freight modes during the next 12 months, the picture looks set to be a miserable one across the board with growth contracting due to the political and economic situation in the country. Inland waterways will see the sharpest decline (13%), while air, road and rail will all see contractions in y-o-y growth in 2015. The Port of Odessa is set for measly annual gains of just 0.01% on 2014.
Headline Industry Data
2015 Air freight tonnage is expected to contract by 0.60%
2015 Rail freight is forecast to contract by 4.50%
2015 Port of Odessa throughput is forecast to grow by 0.01%
2015 Road freight is forecast to shrink by 2.80%
2015 Inland waterway freight is forecast to contract by 13.00%
2015 Total real trade growth is forecast at 0.02%
Key Industry Trends
Iron Ore Transport Deal To Boost Rail And Port - Canadian iron ore exploration and development company Black Iron signed a memorandum of understanding (MoU) with Ukrainian Railways' Pridneprovskaya Railway to transport more iron ore on Ukraine's rail freight network, a development that highlights upside risk to BMI's Ukraine iron ore production forecasts, with the country's rail freight and the port of Yuzhny set to be the primary beneficiaries from the country's expanding iron ore exports.
Odessa Increasing Its Container Shipping Role - The Port of Odessa in Ukraine has handled its largest containership to date, the 9,400 TEU CMA CGM Danube, with the new ship boosting capacity along the 18-stop service on the Bosphorus Express (BEX) route. This reinforces our view that Odessa is getting better connected to the global liner shipping network and that despite some of the negative economic impacts from ongoing political instability, the fact that bigger ships are making direct calls at Odessa will boost the medium term throughput outlook.
Putin Demands Kerch Strait Bridge Construction By End-2018 - Russian President Vladimir Putin has made it his aim to construct a bridge across the Kerch Strait joining Crimea and Russia by end-2018, reported TASS at the end of 2014. Earlier, the Russian and Ukrainian government jointly made plans to establish a car-only bridge, costing up to USD3bn. However, the Russian government expanded the project to include a railway line and other complementary infrastructure after Russia annexed Crimea and the Ukraine's withdrawal from the plans, which it is estimated by the Russian government, will cost USD6.17bn.
Risks to Outlook
Risks are weighed heavily on the downside for Ukraine's freight industry in 2015. The US Congress has pushed for a fresh set of sanctions against Russia for its role in the Ukraine crisis, Bloomberg reported in December 2015. The new legislation, the Ukraine Freedom Support Act, was passed by unanimous consent on December 13 and sent to President Barack Obama. The measure imposes sweeping sanctions on Russia's energy sector and authorises, but does not legally require Obama to provide lethal assistance to Ukraine. According to White House press secretary Josh Earnest, the administration was yet to complete its review of the legislation and could not comment whether Obama would sign or veto the measure. Meanwhile, Russian Foreign Ministry spokesperson Alexander Lukashevich has criticised the legislation as anti-Russian and 'deeply confrontational.'
However, more than USD15bn in financial aid is required to get the Ukrainian economy on back on its feet, according to European Commission President Jean-Claude Juncker. Addressing the European Parliament in Strasbourg, France, on December 17, he said: 'The assessment of Ukraine's financing gap has been completed by the IMF. Ukraine will need USD15bn in addition to what is already planned' (Bloomberg). The decision comes amid EU plans for tighten sanctions on Crimea, including bans on the export of transport and telecommunications gear and on package tours and cruises to the region.