Economic environment and main economic results

Economic environment in 2022

2022 began with the continued effect of the COVID-19 pandemic, but the pandemic started to wane by the second quarter of the year thanks to vaccination and the virus becoming less dangerous. This allowed the people’s free movement to be restored and economic activity increased considerably, until we started even forgetting the coronavirus crisis.

However, before the complete withdrawal of the pandemic, a new crisis erupted – Russia’s invasion of Ukraine. This caused extensive economic sanctions for Russia, as a result of which energy and raw material prices steeply rose. This added inflation pressure which had already started with the removal of the COVID-19 restrictions and which was also supported by the aggressive monetary policy of central banks. In order to curb the inflation, central banks increased interest rates – the US Federal Reserve interest rate rose from zero to 4.33% and the European Central Bank’s depositing base rate rose to 2%, which was the highest since 2008. These steps caused the economic activity to drop and hindered economic growth.

The Estonian economy quickly responded to the global situation, causing a rise in consumer prices and a decrease in GDP calculated in real prices. In 2022, the average increase in consumer prices was 19.4% in Estonia, with GDP dropping by 1.3%. The rapid price increase and the salary pressure which caused a salary increase of 8.9% reduced the purchase power of Estonian people, as salaries could not keep up with the inflation.

Viru Keemia Grupp was influenced the most by events in the global oil market. The Brent oil price rose significantly in 2022, reaching the level of 128 dollars a barrel in March – the highest level since 2008. The crude oil prices remained volatile, fluctuating between 100 and 120 dollars, but dropped back to the same level as at the beginning of the year. The average price was 99 $/bbl.

Economic environment in 2023

In 2023, the world economy was characterised by the continued war in Ukraine, rapid inflation, and high interest rates. According to the assessment of the International Monetary Fund, the world economy grew by 3.1% in 2023, but that was lower than the historical average. The euro zone GDP grew by only 0.4%, curbed by high interest rates and inflation pressure. The US and European central banks raised the interest rates to record levels to combat inflation caused by the preceding expansive monetary policy and the increase in energy prices due to Russia’s invasion of Ukraine.

The economic situation was even more complex in Estonia. According to Statistics Estonia, Estonia’s GDP dropped by 3% in 2023. The constant price increase and high labour expenses reduced the competitiveness of the economy. The inflation and the increase in the average gross salary remained at a level that indicated a deepening economic recession.

VKG’s economic results were influenced by the global oil markets in 2023. The volatility of oil prices was smaller than in the previous year, but still notable. The Brent oil price dropped to 72 dollars a barrel in June, but rose again to 97 dollars by the end of September, dropping back to 77 dollars a barrel by the end of the year. The average price was 82 $/bbl, which was 17% lower than in the previous year.

VKG sells most of its products at the price of the 1% sulphur content fuel oil, the average price of which increased by 43% in 2022, reaching 542 €/t, which was higher than the increase in the Brent oil price measured in euros, as the euro exchange rate to the dollar weakened. The fuel oil price stabilised by the end of 2022.

The 1% sulphur content fuel oil prices were also volatile in 2023, starting the year from 400 €/t and rising to 539 €/t in September, and then dropping back to 405 €/t by the end of the year. The average price of fuel oil was 437 €/t in 2023, which was 19% lower than in the previous year. The proportion of VKG’s export sales grew to 62% in 2023, although some of the sales was recorded as local sales due to large buyers being located in Estonia.

The proportion of VKG’s export of the consolidated net turnover was 62% in 2023 (36% in 2022). Although the majority of the end consumers of our products are outside Estonia, the proportion of export was lower than usually in 2023 and particularly in 2022, as one major buyer has a permanent establishment and a VAT number in Estonia, and that sales was therefore recognised in VKG’s statements as local sales. In managing the Group’s financial risks, it is extremely important to take into account the volatility of the oil market and the growth trends in production prices. In order to ensure the sustainability of the company in the volatile market environment, it is important to maintain liquidity buffers that are larger than those of ordinary companies, so that we would be able to survive in steep drops in market prices. When competing in the global raw material market as a producer of base products, we must constantly control our production expenses in order to ensure the competitiveness of production also during low periods in the oil market.

In conclusion, we can say that the economic environment of 2022 and 2023 was full of challenges, starting from the waning pandemic and continuing with a military conflict in Europe, which had an impact on the energy markets and caused extensive inflation. The central banks’ increase in interest rates and a decrease in economic activity hindered economic growth both globally and in Estonia. Viru Keemia Grupp was strongly influenced by events in the global oil market, but was able to adapt to volatile prices and geopolitical tensions, maintaining its production and export competitiveness.

The prices of CO₂ emission quotas continued at historically high levels

The aim of the emission quotas system is to reduce the release of CO₂ emissions to air across Europe by compelling energy producers to use less polluting raw materials and invest in more efficient production technologies.

In 2022, the average price of CO₂ emission quotas was 81.2 €/t, which was 51.3% (+27.5 €/t) higher than in 2021. Until the end of the first half of the year, the prices were affected by high natural gas prices and the increased use of coal plants. At the beginning of the second half-year, a decision was made to finance the renewable energy and energy efficiency goals with the sale of CO₂ emission quotas, which together with the exceptional measures announced in summer reduced the price from the year’s peak – 92.2 €/t – to 66.5 €/t. The prices rose to 83.9 €/t by the end of the year, influenced by changes to Europe’s climate goals and increasing the emission reduction goal.

In 2023, the average price of CO₂ emission quotas was 85.3 €/t, which was 5% (+4.0 €/t) higher than in 2022. The average price of the first half of the year was 89.4 €/t, influenced by the more extensive use of coal plants. In the second half of the year, the average price was 81.2 €/t, influenced by the larger number of traded quotas, warmer weather and increased renewable energy production forecasts. The price dropped to 72.4 €/t in December, which was the lowest in the past 14 months, strongly in connection with a drop in natural gas prices.

Average CO₂ price

Investments

The 2022 volume of investments of the VKG consolidation group was 6.5 million euros in total, of which 5.5 million euros were the investments of VKG Kaevandused, mainly related to ensuring the reliability of equipment. As the assets related to the production of oil products and energy no longer belong to the VKG consolidation group, the investments related to these assets are not recognised in VKG’s statements. The majority of the investments made in 2022 were financed from the company’s own funds, but leasing financing was also used upon procuring more liquid assets.

The 2023 volume of investments was 34.9 million euros, of which 17.1 million euros went to the implementation of reliability projects, 10.8 million euros were development investments, and 1.4 million euros went to environmental protection. The asset-related investments are not recognised in VKG-s statements.

Loan burden

The Group is loan-free since 2021, the only valid loan obligations are related to leasing or long-term rental contracts. In 2023, however, the Group assumed a non-bank loan.