Rise in electricity prices to affect power-hungry industries

19.02.2008

Credit-Rating believes the rise in electricity prices expected in 2008 may have negative impact on performance of companies operating in Ukraine's power-hungry industries. The most vulnerable to the rise are aluminum and ferroalloy sectors, where specific gravity of electricity in production primary cost makes up from 30 to 50 percent. First weeks of February 2008 saw median electricity price for energy supply companies recorded at UAH213/megawatt per hour at the electricity wholesale market, which is 19 per cent higher than in the year-earlier similar period.

The aluminum and ferroalloys producers' dependency upon electricity prices is encumbered by fluctuations in the global prices. We should, however, note that rise in electricity prices has become a global trend, yet many large consumers enjoy deep price discounts in many countries.

By the year of 2005 the impact from electricity prices on performance of the biggest Ukraine's consumers was alleviated by tariffs differentiated by regions and industries. In Credit-Rating's view, the cancellation of this practice has led to eroded competitiveness of power-hungry Ukraine's companies. There is also a global practice of correlation of electricity prices with the prices for company's end-products. In fact, pursuant to open information sources, at end-2007 the Russia's biggest aluminum producer UC Rusal concluded long-term contracts with RAO UES of Russia on electricity supply. According to the terms of the contracts the tariff formula shall be calculated basing on the electricity price in Siberian free market and on aluminium price at London Metal Exchange (according to public available information, the price UC Rusal paid for electricity at end-2007 made up a. USD20/megawatt per hour, which is much lower than that for Ukraine's consumers.

For today, there is uncertainty at the state level as to tariff differentiation for large consumers. Therefore it is company's management to settle such issues, which is contingent upon its understanding of the current situation and upon financial and legal capacity for reducing expenses for energy supply. 'The competitiveness of Ukraine's companies may be bolstered by updating of old highly-consuming facilities; the today's electricity input per production unit at Ukraine's companies exceeds these indicators of companies operating in developed countries', Dmitriy Melnik, head for Credit-Rating's specialized department said.

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