5Economic environment
In 2019, the overall economic environment was in VKG’s assessment still favourable, even despite the lower than expected global economic growth.
Jaanis Sepp
Chief Financial Officer, Member of the Board
At the beginning of the year, the World Bank’s expected economic growth rate was 2.9%, but various trading tensions limited the actual result for 2019 to 2.4%. That was the lowest after the global financial crisis. For 2020, the World Bank forecast a modest improvement of economic growth to 2.5% a year, but considering the virus outbreak which escalated in March, the current year will probably turn out to be significantly weaker.
The Estonian economy continued growing at a stately pace in 2019. According to Statistics Estonia, Estonia’s gross domestic product (GDP) grew by 4.3%, exceeding the level of 4% and the global economic growth for the third consecutive year. The average gross monthly salary, which is the biggest concern for undertakings, grew by 7.4% in 2019 (7.3% in 2018), but as productivity per employee simultaneously increased by 3%, the salary increase may be considered justified. Considering the emergency situation prevailing at the time of preparation of the report, both the GDP and the average gross salary can be expected to decrease in 2020.
As the sale of oils makes up the largest part of VKG’s turnover, the Group’s financial results are influenced the most by what is happening in the global oil market. The volatile macro-environment mainly caused by the US–China trade war also spilled over to the oil markets. The OPEC+ countries led by Saudi Arabia and Russia tried to keep the prices up with additional production agreements, but the resulting increase in the volume of US shale oil is making the task increasingly difficult. Conflicts in the Middle East caused additional volatility and price leaps, but the 2019 average Brent price of 64 USD/t was still 11% lower than in the preceding year (72 USD/bbl).
VKG sells most of the produced oils on the basis of the price of fuel oil with 1% sulphur content. Compared to the Brent crude oil, the 1% fuel oil market is less liquid and the price of fuel oil may move differently from Brent, depending on the ratio between supply and demand. As VKG’s expenses are denominated in euros, the company’s results are also influence by the US dollar rate. Thus, the Group’s results are best characterised by the following fuel oil price curve.
Fuel Oil 1-% (Rotterdam Cargo FOB) €/t
Source: OMJ
As the above diagram shows, the average price of 1% fuel oil was, unlike Brent, 348 EUR/t in 2019, i.e. 2% higher than in 2018. That was due to the strengthening of the US dollar on the one hand and the IMO’s 2020 marine fuel directive the entry into force of which on 1 January 2020 caused an increase in the demand for and price of 1% fuel oil in the 4th quarter of 2019.
The price of CO2 quota grew by a half
The Estonian shale oil production is equivalent to the production of crude oil in the European refining sector which is included in the list of industries with a risk of carbon leakage. Thanks to that, shale oil production is granted free of charge greenhouse gas (GHG) quotas in the extent of approximately 70% in the greenhouse gas trading system.
The overall number of units in circulation in the European Union GHG trading system was approximately 1,65 billion a year in 2019, of which 48% was auctioned by countries and 52% was allocated to enterprises and projects free of charge. Every year, the number of units in the system during the 3rd trading period of 2013–2020 is reduced using the coefficient of 1.74%. In order to regulate the price of the quota trading unit ERU and the supply and demand, the Market Stability Reserve (MSR) was applied from January 2019 with the aim to reduce the number of quotas on the market by 24% and include these in the reserve fund over the coming five years. Such a significant reduction of the traded quotas has an impact on the price of the quotas, which in 2019 fluctuated from 15.3 to 29.81 euros/t. At the end of the year, the price of the CO2 quotas stabilised and remained at the level of 25 euros/t. The 2019 average price of the CO2 quota was 24.9 euros/t, which is more than 59% higher than in the preceding reporting period
In 2019, free of charge quotas covered about 70% of all VKG’s emissions. As the remaining 30% had to be purchased from the market, the steep increase in the price of the quotas significantly damaged the competitiveness of VKG in the global marine fuel market. Considering also the new European Green Deal and the reduction of the free of charge CO2 quotas at the accelerated pace of 2.2% a year in the 4th trading period in 2021–2030, the decrease of the competitiveness of the EU producers will not stop before the taxation of GHG becomes a global agreement or the producers located in the Eu have been pushed out of the market.
Source: Refinitive
MARPOL 2020
Regulation caused a fundamental change in the market in the 4th quarter of 2019: demand for the formerly used fuel oil with a sulphur content of 3.5% dropped steeply and demand for 1% fuel oil grew. As the 0.7% sulphur content of VKG’s shale oils is very close to the new standard for marine fuels, the oils are mixed with various cleaner, but expensive products to obtain fuel that meets the requirements at an optimal cost. Whether the increased demand for VKG’s products resulting from the aforementioned circumstances is temporary or permanent will become clear in the coming year when the market participants have adapted to the new regulation.
Economic indicators
Consolidated income statement
in thousands of euros| 2016 | 2017 | 2018 | 2019 | |
|---|---|---|---|---|
| Sales revenue | 104 270 | 161 282 | 208 924 | 256 763 |
| Revenue from sales of products | -106 147 | -149 630 | -170 362 | -215 743 |
| Gross profit | -1 877 | 11 652 | 38 563 | 41 020 |
| Marketing expenditure | -3 213 | -4 046 | -5 841 | -5 304 |
| General administrative expenditure | -9 471 | -9 480 | -9 724 | -11 123 |
| Other business revenue | 9 827 | 7373 | 12 225 | 20 595 |
| Other business expenditure | -1 892 | -1 485 | -853 | -2 140 |
| Business profit | -6 625 | 4 014 | 34 370 | 43 047 |
| Financial revenue and expenditure | -8 589 | -9 776 | -6 901 | -6 077 |
| Profit before income tax | -15 214 | -5 762 | 27 469 | 36 970 |
| Unplanned expenditure | ||||
| Income tax | -560 | -1 235 | ||
| Net profit of financial year | -15 214 | -5 762 | 26 909 | 35 736 |
Investments into developments activities
in millions of eurosInvestments into environment and occupational safety
in millions of eurosConsolidated balance sheet
in thousands of euros| 2016 | 2017 | 2018 | 2019 | |
|---|---|---|---|---|
| ASSETS | ||||
| Current Assets | 64 649 | 75 552 | 108 992 | 149 819 |
| Fixed Assets | 519 104 | 479 175 | 613 357 | 568 980 |
| TOTAL ASSETS | 583 752 | 554 727 | 722 348 | 718 800 |
| LIABILITIES AND EQUITY CAPITAL | ||||
| Short-Term Liabilities | 52 343 | 50 093 | 172 469 | 76 640 |
| Long-Term Liabilities | 234 758 | 201 373 | 39 074 | 124 220 |
| Total Liabilities | 287 101 | 251 466 | 211 543 | 200 860 |
| Equity Capital | 296 652 | 303 261 | 510 805 | 517 940 |
| TOTAL LIABILITIES AND EQUITY CAPITAL | 583 753 | 554 727 | 722 348 | 718 800 |
Balance sheet total
in millions of euros- Equity capital
- Liabilities