Oil collapsed amid the spread of coronavirus
On March 9, due to the OPEC + deal breaking right after the market opened, world oil prices fell 31% to $ 31.43 per barrel, which was the largest drop in oil prices after 1991, when the Persian Gulf war took place. As you know, at the negotiations on March 6, the OPEC + countries were unable to agree and extend the agreement to reduce oil production. It was reported that the negotiations failed due to the position of Moscow, which refused to deepen restrictions. The intention of the Russian Federation and Saudi Arabia to aggressively compete in oil export markets was superimposed by a sharp deterioration in sentiment due to the spread of coronavirus in the EU.
Analysts at Bank of America do not rule out a drop in Brent prices below $ 30 per barrel in the coming weeks. At the same time, they lowered the forecast for 2020 for Brent from 54 to 45 dollars, and for WTI - from 49 to 41 dollars per barrel. The disappointing forecast was also showed by Goldman Sachs.
Due to the sharp collapse of stocks trading on the US stock exchange stopped for 15 minutes (to end the panic): it happened after a drop of almost 7.3% in the world benchmark - the Dow Jones Industrial Average index which covers the 30 largest US companies.
Due to the collapse in the stock markets over the past day, the 500 richest people in the world have lost about 238.5 billion dollars.
The world is on the verge of a global crisis that will gain momentum if a vaccine for coronavirus is not found or OPEC members cannot find an acceptable consensus.
How the crisis affected financial markets and the dollar rate
Indeed, the situation had a serious impact on the financial markets, and in the future it can provoke an increase in the dollar rate. Heated by the excitement, the dollar exchange rate can jump to UAH 26 per dollar by the end of the week and, according to short-term forecasts, can stay in the corridor of 26-28 UAH / dollar. We can’t ignore the fact that now the panic is being deliberately accelerated, and now the issue of maintaining the course is already not only an economic, but also a political challenge both for the authorities and for the National Bank itself. According to interviewed experts, now maintaining the exchange rate at 26 will depend on the position and professionalism of the main financial regulator. In Ukraine, the cost of GDP warrants has fallen sharply - by 9.2%, and the yield of Eurobonds has grown by 1.1%.
“In general, there shouldn’t be a catastrophe: we have 27 billion foreign exchange reserves. Our public debt is 50% of our GDP. We have the highest gold and foreign exchange reserves since 2014. But we need to be prepared that such instruments as government bonds and Eurobonds will not be successful, investors will prefer to invest not in securities but in gold. It’s worth recognizing that, apparently, the coming year is not the best for companies that plan to enter the stock exchange,” says Oleksiy Ustenko.
It is worth noting that the last time Ukrainian companies actively entered international exchanges in 2011. After this, in mid-February, Naftogaz Ukraine reported on holding a consultation with investment banks and potential investors on the prospects for the group to enter an IPO (initial public offering). Apparently, the largest oil and gas company will have to wait a while.
The threat to agricultural and metallurgical industries
The negative phenomena shaking the global economy can have the biggest impact on the sectors which bring the largest foreign exchange earnings to the country and in recent years have been the main pillar of GDP. It is, of course, the agricultural and metallurgical industries.
“A fall in oil prices (now it has reached a historic decline of 30%) will automatically lead to changes in consumer commodity markets. Oil is tied to global markets, and we have already seen a similar correlation in 2008-2009. We will see the greatest impact in the short term in groups of agricultural products such as grain, oil and oilseeds. Since Ukraine is an export-oriented agricultural country, the price change will hit us. In the next 2-3 weeks, if the situation does not stabilize, prices can fluctuate within 10-15% ", - Agro Polit editor-in-chief Natalia Belousova said.
According to her, in the long run, the factor of saturation of the world market will influence the situation. "If grain markets are in short supply, then a fall in prices does not oil compensate a potential decrease in prices for agricultural products, and the price will be balanced. But if not, prices will continue to decline, which will certainly affect the volume of foreign exchange earnings from exports from Ukraine," Belousova said.
In the metallurgical industry (these enterprises provide 12% of Ukraine’s GDP, 30% of foreign exchange earnings and about 700 000 jobs, taking into account related industries), the current crisis has intensified the ideal storm that the industry has been in since last year. “The industry entered the most difficult period since 2008. Since the middle of last year, we have already entered the field of lowering demand for steel and raw materials for the production of metal products. As a result, since the middle of last year, all metallurgical enterprises have been operating at a loss. Unfortunately, the situation is getting worse. According to Goldman Sachs experts, coronavirus subtracted 2% from the projected global economic growth, which is a significant indicator. This means that demand for metal and raw materials products will fall, "- said the president Ukrmetallurgprom association Oleksandr Kalenkov.
According to him, it should be expected that against the background of falling prices, metallurgical enterprises will suffer losses. “They have already reduced investments as much as possible, retaining only priority investments, including in environmental projects for which they have committed themselves. But the inevitable reduction in production volumes will put pressure on the cost of production, and it’s difficult to say how much more they can hold on: apparently, as much as the shareholders will have the resources to support them. Over time, other sectors will feel the situation that is happening in the industry: Ukrainian Railways will carry less cargo, port transshipment will decrease. Equipment suppliers will suffer. This situation will affect budget revenues, the dollar exchange rate, and jobs," Kalenkov emphasized.
Authorities were not ready for the challenges
But now the current situation has unequivocally demonstrated the complete unpreparedness of power institutions to respond to crisis phenomena and confront them. Due to this, the sectors of the Ukrainian economy turned out to be more vulnerable than they could be.
"In the current situation, the state should be very competent in its actions. In times when everything is more or less calm, mistakes of the state apparatus can still be smoothed out somehow, but during times of crisis, they are in plain sight," notes Oleksandr Kalenkov.
The head of the Ukrmetallurgprom association noted that over the past 20-30 years (despite promises and assurances), serious investments have not been attracted to Ukraine. In this regard, demand for metallurgical products has not appeared in the domestic market. If most countries with developed metallurgy have a significant home market that consumes a considerable amount of their own products, then our metal enterprises can sell within the country no more than 15-20% of the total production. 85% of metal products and half of the ore from Ukraine are exported, which, as has been said many times, makes enterprises vulnerable due to price volatility. The entire Ukrainian market is no more than 5 million tons of metal products of all kinds.
However, one cannot but note the sad truth: there is no one to improve the situation. After the last reformatting of the government and fixing a sharp drop in industry indicators, things did not go any further. There is still no person in the government who would be responsible for the vector of industrial development and initiate the steps necessary to protect the sector. However, just against the backdrop of the crisis in the oil, gas and fuel markets, there is no profile minister of energy. Oleksiy Orzhel, who held this position, said that he "chose the path not to be a minister."
In the current situation, the absence of an industry curator (the Ministry of Agrarian Industry was abolished during the formation of the Cabinet of Ministers), is especially acute, Belousova says: “In the situation of such global challenges as the Iran factor, the Chinese factor and the crisis, which arose in connection with a quarrel at OPEC, our agricultural sector turned out to be very vulnerable. The response to such calls should be automatic, and it would be best to deal with such challenges, of course, with the relevant ministry. "