Ukraine's industrial production plunged 2.6% y/y in July after two consecutive months of growth. In the January-July period, output decreased by 0.7% y/y.

Industrial production in July from June in m/m terms grew by 0.3%, while the seasonally adjusted decline was 1.3% m/m, the State Statistics Service said on August 22.

The economy was starting to recover nicely in the fourth quarter of last year, but the economic blockade of the separatist-held Donbas region, amongst other problems, has set progress back. Industrial production has been slowing in recent months after posting 3.8% y/y growth in June and 1.2% y/y in May, according to the State Statistics Service.

All core sectors worsened except for chemicals, which improved 26.7% y/y compared to 1.0% y/y in June, Concorde Capital said in a note. Machinery output slowed to 9.1% y/y growth versus 15.9% y/y in June, utilities plunged 11.9% y/y (-9.6% y/y), metals declined 4.9% y/y (-1.8% y/y) and mining fell 9.4% (-0.7% y/y), including a 7.7% y/y drop in iron ore extraction.

The government blamed the fall in mining and quarrying in particular for dragging the overall industrial production result down, and the fall in electricity production as well but to a lesser extent. The blockage of Donbas has led to a short fall in coal for power stations.

The metals result is especially surprising given that metal prices are currently at a high and the metal sector in Russia, for example, is flourishing on the combination of high prices and reduced costs thanks to devaluation – conditions that apply to Ukraine as well. 

The slowdown was not homogenous, with the regions in the east being disproportionally affected due to the fighting there. The declines were led by Luhansk (-20.0% y/y) and Donetsk (-19.3% y/y), which have been the scene of much of the conflict. However, the capital Kyiv also saw a 7.4% y/y decrease.

The strongest regions were the Kyiv region (58.5% y/y growth), Kirovohrad (19.7% y/y) and Ivano-Frankivsk (13.8% y/y), which are regions in the centre and west of the country respectively.

“The industrial output numbers keep surprising. Volatility is normal for an economy experiencing structural changes, like broken trade relations with occupied Donbas, and the poor statistics for the steel and coal sectors (which lost some assets on the occupied territory) is logical. However, it’s very strange to see declining iron ore extraction amid soaring exports prices at the global markets,” Alexander Paraschiy, head of research at Concorde Capital, said in a note.

“We expect industrial fundamentals will improve in the coming months amid robust global prices for Ukraine’s key exports, steel and iron ore. However, July drop in production put under risk our industrial growth projection for 2017 (+1.4% y/y). Fulfilling it will require 4.3% y/y average monthly industrial growth between August and the year end. Given the pattern of extreme volatility this year, we are not rushing to revise our initial estimate. However, we recognize the higher risk for a downward forecast revision,” Paraschiy added.