Rich in resource but in the midst of an economic slump, our focus this month turns to Eastern Europe. Is this still a land of opportunity?
Each and every year there’s much discussion about emerging economies and rapidly growing gas markets, with Eastern Europe often among the volley of verbal enthusiasm.
Aside from the perhaps obvious China, the three key emerging gases markets at present are seen as Asia, the Middle East, and Eastern Europe.
While the optimism for both Asia and the Middle East remains relatively undeterred by current global conditions, a look at the East Europe business climate perhaps paints a less favourable view at present.
In the thick of a global recession described as the worst in almost 30 years, growth hopes and expectations have been counterbalanced by a slight sense of trepidation and weakened economies. It’s also thought that investment in the region, such as the vast geography that is Russia, is something of a slow process, while a number of gas-consuming sectors have suffered at the hands of a slump of late.
Back in 2007, gas revenues for Eastern Europe stood at around $2.4bn and a year ago for example, this positive vibe continued as a 2008 market value of just under $2.7bn was projected.
Then, in the final quarter of the year, the recession hit.
Optimism does remain, but is merely curbed to account for a number of adjusted factors. In our interview with Spiritus Consulting’s John Raquet last month, we understood that the independent consultancy anticipates a growth rate of 8% per year for Eastern Europe – a figure which may have been higher had circumstances been more ‘favourable’.
Newly updated figures suggest the East Europe market actually swelled to a value of around $3.2bn in 2008, while an analysis of the end-use sectors and their projected values would suggest a market value of approximately $3.3bn for 2009.
We are in the midst of something of an economic and industrial minefield at present however.
So where has the slump been seen?
A sign of the times
Declining steel production and steel prices, coupled with deteriorating ore, copper and nickel prices, have prompted a rethink in terms of what’s needed in investment projects in the former soviet union, and Russia in particular.
As a sign of the times and indicative of the steel slump, world-leading steel giant ArcelorMittal revealed plans to cut output this year – in addition to previous revisions at other global sites announced not long after the onset of recession.
Towards the close of January 2009, the company declared plans to cut liquid steel output at its Kazakh unit (ArcelorMittal Temirtau) to 3.167 million tonnes in 2009, from 3.431 million tonnes in 2008.
A company statement revealed how rolled liquid steel output is expected to decline to 3.029 million tonnes, from 3.133 million tonnes last year, while ArcelorMittal Temirtau Chief Executive Frank Pannier cited few orders and a ‘difficult’ market situation.
Pannier said in the statement, “The market situation is difficult. There are no orders from Kazakhstan at the moment and very few orders from Russia.”
Furthermore, the company is expected to reduce its capital expenditures in 2009, from $283m in 2008 to just $176m this year.
Elsewhere and another strong player in its own field, Russia’s leading petrochemicals company SIBUR, has been feeling the effects of a downturn in demand.
Having reduced output and suspended operations at a number of its petrochemical processing facilities towards the close of last year, SIBUR reported in March that most of its plants had now resumed production.
However, the fragile market conditions and an expectation that demand will not yet be fully restored ensure that ‘some enterprises of the holding will operate at reduced capacities’.
SIBUR President Dmitry Konov explained, “We shall resume production at our plants depending on the market situation. Our company opens new sales markets and develops marketing instruments to maintain its market position.”
In contrast, one industry in the ascendency in the former soviet union, is that of gold mining.
According to data released in February by the Russian Gold Industrialists’ Union, Russia boosted gold output by 13.3% in 2008 and there’s no immediate sign of that abating in 2009. Output reached 184.49 tonnes in 2008, reversing five consecutive years of decline and predicted to remain ‘steady’ this year.
Several leading Russian miners increased output last year, while a number of expansion plans in Siberia envisages production rising further still in the years to come. So rich in resources is Russia and East Europe overall, that Russia’s gold reserves are second only to those of South Africa.
Indeed, a wealth of resources and vast land to move into are thought to have been key to the strong interest in the region in recent years. So are the industrial gas companies still keen, or has interest cooled?
Rich in resources
As a region clearly rich in resources, both Russia and the Ukraine have attracted a great deal of interest in the last few years.
Iron ore, nickel ore, oil & gas, vast land mass, and a developing manufacturing sector are just some of the factors in the region’s favour – factors that afford much opportunity.
This opportunity is perhaps tempered slightly by a political structure thought to be something of an unknown quantity to many, with gasworld of the understanding that this environment may be a marginal concern for one or two in our industry.
In addition, entering the Russian market could be seen as something of a long-haul investment project. While the vast land mass is an attractive prospect for the gas companies, it could also prove to be detrimental to overall progress as there’s a relatively widespread market to capture.
And what of the region in the future? Despite the effects of the economic downturn and any negatives in the short term, there is still much optimism in the long term.
Eastern Europe remains an upcoming industrial gas market and is very much in that collective of emerging regions to watch out for in years to come. Current weakened economies will no doubt recover and as the East Europe-CIS region continues to develop, so too will the demand for gases.
Spiritus Consulting revealed to gasworld that it sees a considered growth rate of around 8% per year and the region is certain to possess an ever-growing industrial gas demand to perform its budding manufacturing, processing and refining operations.
Around a decade since The Linde Group seized the day and re-entered the Russian market, the group is now the largest gas company in Russia and the Ukraine and has certainly reaped the rewards.
In its recent full-year 2008 financial results, the group’s Gases Division performed well and the Eastern Europe operating segment (along with Asia too) was cited as showing the highest growth rates for the division. The opportunity is clearly there.
With Russia, the Ukraine and Kazakhstan regarded as the three largest countries in the CIS, this collective of nations accounts for around 95% of all installed oxygen owned by the end-user themselves.
With such a wealth of capacity, thought to be around 230,000 tonnes in East Europe overall, there exists a healthy opportunity for the gas companies when the time is right.
If the gas companies are slowly moving into that sector for example, there’s a good opportunity to expand the service offering and develop the currently under-developed onsite business. And wherever the gas companies go, surely a demand for the equipment companies follows – so there’s optimism to be enjoyed by all parties.
In the short term the skies are clouded, but in the long term the horizon takes on a familiar, positive complexion and a brighter future approaches.