Decline of production and state monopoly: analytical research of alcohol market of Ukraine

Alcohol market in our state is one of strategic sectors of industry; activities in this sector are controlled and regulated by the state. State monopoly for alcohol production and sale is the reason of low level of competitiveness of the offered products and slow modernization in this sector.

Ukrspirt state enterprise manufactures 95% of total volume of alcohol production in Ukraine; it is the key operator on internal and external markets.

Activity on the alcohol market in Ukraine is governed by a number of legal acts and regulations which determine not only the terms and conditions of existence of this segment and principles of operation, but also the terms and conditions of product licensing, the system of their taxation, possibilities of  product sales, etc.

The largest alcohol producing factories are located in the West and Central regions of our state, i.e. in the regions of Ternopil, Lviv, Vinnitsa and Zhytomyr. Some alcohol producing factories are not operating at the moment or operate not with full capacity.

Alcohol is manufactured from grain crops (such as corn, wheat, barley), potatoes and other vegetable components, demand for them is completely covered by national agricultural enterprises. Key consumers of the finished alcohol products are the companies operating in the food, chemical and pharmaceutical industry. Demand for alcoholic beverages also influences on the volume of alcohol production.

At the moment the region of Vinnitsa, one of the most developed regions of Ukraine, produces 10% of total production of ethyl alcohol in Ukraine. Nemirovskyi alcohol factory, Ovechatskyi alcohol factory, Martynovskyi alcohol factory, Bershadskyi alcohol factory and Extra, Ladyzhinskyi factory are specialized in alcohol production in this region. Despite the high production rates, operation of some factories is not regular. Alcohol products are manufactured in the region of Vinnitsa from the waste of sugar industry because sugar beet cultivation is concentrated here.

Concerning the general situation on internal alcohol market it should be noted that operation of this sector is under the influence of several factors at the same time. The first is existence of state monopoly which limits possibilities to establish competition among the producers. In addition, monopoly contributes to the increase of costs of production of Ukrainian alcohol which results in its non-competitiveness on external markets. In addition, partial load of production capacities manufacturing ethyl alcohol, low profitability in the whole sector and black turnover on the market are observed in our state at the moment.

The other factors which influence on the development of alcohol market in Ukraine also include decrease of official production of alcoholic beverages as a result of increase of excise duty, high price for alcohol and insufficient demand for the final products, limited use of ethyl alcohol in different industries (actually, only in one industry), low efficiency of alcohol factories and high costs of production.

As it was already mentioned above, existence of the black segment causes negative impact on development of alcohol market, according to the different evaluations, this segment is estimated at 40 - 50% of the total turnover. This factor results in growth of the costs of production, decrease of the level of competitiveness of products and may decrease revenues from excise duty to the state budget. In order to counteract to this trend, the methods of activity and management of alcohol manufacturing enterprises should be revised, and the possibilities to re-orient the market to manufacture of the other types of products should be considered.

If to talk about the numbers, during the years 2007-2016 the parameters of Ukrainian alcohol market went down. Not only production, but also consumption, export and import transactions in this segment are featured with this trend.

Thus, three-fold decrease of the volume of ethyl alcohol production in Ukraine was fixed in the last year to compare with 2007. The largest decrease was observed in 2012 – the volume of ethyl alcohol sold amounted only to 7% to compare with parameters of the year 2007.

In the segment of ethyl alcohol import situation remains rather complicated. As a result of continuous revision of taxation system, existence of state monopoly for alcohol and termination of product import from Russian Federation the parameters of ethyl alcohol import in Ukraine go down. The products supplied to the national market are used for production of organic synthesis products.