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IPEM - Indicators of Russian Industry Development

In 2009 IPEM developed IPEM-production index and IPEM-demand index – two indices alternative to the Industrial Production Index developed by Federal State Statistics Service (Rosstat). The research was commissioned by the Ministry of Industry and Trade in order to provide relevant and updated monitoring reflecting the impact of the economic crisis on Russian industry. Monthly calculations of the indices are based on the following indirect integral indicators: electric power consumption and volume of freight load on the rail. As these data are relevant and prompt, IPEM-indices methodology has significant advantages compared with Rosstat index. Significant relevance of the indices is shown during both periods of economic growth or stability, and periods of crisis. Moreover, comparison of IPEM-production and IPEM-demand indices allows to forecast possible economic and industrial crises.

Methodology

Russian Industry Monitoring Based on IPEM-indices – Year 2012

 

Russian Industry Monitoring Based on IPEM-indices – Year 2013

 

Key Findings

In 2013 IPEM-production index grew by 0.2% while IPEM-demand index showed a 4.3% decrease. In December 2013 IPEM-production index decreased by 1.4%, IPEM-demand index decreased by 1.5% compared with December 2012 (Figure 1). The results can be compared with Rosstat industrial production index which grew by 0.3% in 2013 (+0.8% in December 2013). Rosstat indicators are obviously overestimated, and they will be adjusted according to the methodology, a range of products on the watch-list were estimated using the 2012 data when the growth was rather high. These data distort the final indicators.

Figure 1. IPEM indices dynamics in 2012-2013 (Year-on-year growth rate)

During the whole year IPEM-demand index remained in the negative growth zone, while IPEM-production index fluctuated over a wide range of values amid unstable performance of certain industries in fuel and energy sector. Expected pre-crisis behavior of indices (production grows in parallel with the fall of demand) was being recorded during the whole year. As a result the 2013 trends showed downward dynamics. Amid a months-long cumulative lag between IPEM-demand and IPEM-production indices, volumes of warehouse stock hit the record levels several times; the peak was reached in October 2013 when warehouse stock amounted to 26.2 million tones. The lag between indices has always been followed by increasing of warehouse stock. Average annual volume of warehouse stock in January-November 2013 grew up to 24.9 mln tones, which is 9.5% more than in 2012 (Figure 2). However as the indices approached in November, warehouse stock reduced significantly (to 24.6 mln tons).

Figure 2 Annual average volume of warehouse stock in 2008-2013

*January-November, 2013

It is connected with some characteristics of a crisis, particularly with the way the industry responds to it: production plans of industrial plants are corrected slowly and reluctantly while demand responses to the crisis immediately. But the crisis, which could be expected to come in autumn basing on dynamics of indices, did not happen, and the situation stabilized, although instability in certain sectors of the industry remained. As for today, indices’ trend has leveled off, i.e. demand and production dynamics are balanced (Figure 3).

Figure 3 IPEM indices dynamics in 2008-2013 (seasonal factors excluded)

 

Results of IPEM Indices by Economy Sectors

Final results of IPEM-demand index for the following industries (Figure 5):

• mining and upstream +1.0%;
• low-tech industries +3.9%;
• medium-tech industries -5.6%;
• high-tech industries -10.3%.

Main trends (seasonal factors excluded):

• The growth of mining and upstream industries was very slow in 2012. The trend line remained horizontal in 2013. Main reasons are as follows: decline in gas production by Gazprom (-10%), decline in oil exports (-2.3%), which could not be compensated even by significant growth of gas (+7.3%) and coal (+10.2%) exports. Redistribution of extracted oil between export and refining remains the same: in 2012 46.2% of extracted oil was directed to exports, 51.3% - to refining; in 2013 44.7% of extracted oil was directed to exports, 52.3% - to refining. Share of high value added products has increased, which added to the growth of indices.
• Low-tech industries indicators reached last year’s peak in the end of 2013. Food industry became the main driver of growth (+1.6% in 2013 compared to 2012). It happened to a great extent due to various restrictive measures and quota allocations based on sanitary control sanctions limiting imports of certain food products.
• The trend of medium-tech industries development was descending during most of the year. This was determined by the negative contribution of non-ferrous metals industry to the general index. The demand for its products has been declining rapidly for 3 consecutive years, and this decline has been very rapid (Figure 4). Other mid-tech industries also showed downward trend, excluding “Chemical fertilizers” and “Production of rubber and plastic products” categories. Perspectives for development of Russian mid-tech sector are limited by the opportunities of competition with foreign producers as the burden of base costs is increasing and pricing environment on world markets is unfavorable.
• High-tech industries were showing negative growth during the whole year, and the decline was recorded for all the categories of high investment demand products, which is not surprising due to negative dynamics of fixed capital investment (-0.3% in 2013).
 

 

Figure 4 Dynamics of demand for non-ferrous metals and materials for their production

 

Figure 5. IPEM-demand index dynamics by economy sectors in 2008-2012 (seasonal factors excluded)

 

Main Trends 2013

Fuel and energy sector have historically determined the performance of industrial indices in Russia.

In 2013 oil production grew by 1.1%, and broke the record of average daily production, although oil exports declined by 2.3% compared with the previous year. Decrease of oil exports was caused by increasing volume of oil deliveries to refineries (+3.0% in 2013).

As for gas sector, Gazprom, the largest gas producer in Russia, reduced production of gas by 10%, amid strong fluctuations in production, caused by instability of export deliveries and significant decrease of gas prices. Gazprom share in total gas production also declined: from 73.6% in 2012 to 71.7% in 2013. Dynamics of gas exports were positive (+7.3%) but only due to the results achieved in second half of 2013. Internal consumption of gas declined by 0.7% and amounted to 465.2 bln cubic meters.

Indicators of power consumption reflect poor performance of industrial production in 2013. Internal power consumption decreased by 0.7%. Decrease of power consumption by metallurgy plants and abnormally warm weather in October-December 2013 are among the factors which caused reduction of power consumption.

We should mention the significant growth of prices on wholesale market for electricity and power (OREM). In 2013 it amounted to:

‒ 699.4 RUB/MWH in zone Siberia (-1.9% compared to 2012);

‒ 1068.7 RUB/MWH in zone Europe and the Urals region (-9.5% compared to 2012).

Figure 6. Fuel and energy sector in 2013 (Year-on-year growth rate, %)

Source: Ministry of Energy, System Operator of Unified Power System

 

Prospects and Limits to Further Development

Performance results of 2013 show that Russian economy can no more grow even if the prices for energy resources are stable. In 2013 average price for Urals oil was USD 107.88 per barrel which is 2.4% lower than in 2012.

External markets conditions have also been worsening. Sheer fall of coal and metal prices as well as prices for other materials causes reduction of export revenues. Russian metallurgy is the industry most negatively affected by export oriented policies. It’s been three years since the demand for non-ferrous metals began to shrink. In 2013 export of non-ferrous metals decreased by 8.8% while the domestic demand fell by 18.1%. Export share in total amount increased from 78% in 2012 to 80% in 2013. The situation may improve if government’s plans on development of Russian car and aviation industries are implemented.

Coal industry is also dependent on exports. As coal production in 2013 decreased by 1.2%, steady decrease in domestic supply (-7.3%) was followed by the waning growth of coal imports (+10.2%). Export share in total volume of coal supplies is at last year’s level.

We should mention that similar trends in industrial development were formulated in the updated forecast of socio-economic development of Russia in 2014-2016, issued by the Ministry of Economic Development in late October. The forecast of industrial production growth rate was revised to slower growth (+0.7%) in 2013, and from +2.0% to +2.3% in 2014-2016. The revised forecast is based on extremely low growth rate of fixed capital investment which is one of the main drivers of industrial growth. In 2013 fixed capital investment growth rate was only 2.5%, in 2014-2016 it is forecasted to be from +3.9% to 6.0%. Although the indicators of socio-economic development were revised to slower growth rates, they can still be considered overestimated as the actual indicators show much slower growth of industrial production (+0,3%) and investments (-0,3%) in 2013.

Analysis of investing activities in Russia shows that state investments are dominating; this fact does not indicate a healthy economy. Russian industrial production has yet to escape from dependency on huge state investments that have supported the industry for several years. This trend may be reversed if investment climate improves in order to attract private capital. In the near future we expect that state investments will remain dominant as 2018 World Cup preparations, Moscow-Kazan high-speed railway construction and implementations of measures on development of Russian Far East region are about to start.

Capital investment statistics (Table 1) show which industrial sectors will grow in the future. It is evident that volume of investments into the fuel and energy sector decreased significantly. One of the main factors negatively affecting the growth rate of investments into this sector is Russian government’s decision to limit the growth of natural monopolies’ tariffs in 2014-2016.

Table 1. Dynamics and structure of capital investment in January-September 2008-2013 (excluding small businesses and volume of investments undetected by direct statistical methods, percentage points)

Source: Rosstat, Ministry of Economic Development

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