Coal industry: we must look in the future with optimism

01.03.2010 (23:08)

The most challenging factor for coal companies in 2009 was work in conditions of a serious shortage in financing. Last year there were no such opportunities for obtaining credits as before, for example in 2008, and this affected the sector. Investments in the coal companies' fixed assets also fell by more than 30%. In addition, new construction was halted on those sites which were originally supposed to boom the production.

In general, the coal industry profits from sales declined in 2009 by more than RUR 60 billion. Revenue shrank because there was less shipments than before and prices for raw materials fell. Traditional problems with this kind of cargo also became sharper. Thus, the share of transport in the cost of Russia's coal grew by more than 20%. Also, the number of financially unstable companies became larger in crisis, for example, 60% of coal companies finished 2009 with losses. "Enterprises of the Kuznetsk coal basin were an exception,” says Anatoly Skryl, General Director of Rosinformugol. “They were able to take necessary measures quickly, making maximal use of the public-private partnership mechanism to solve their problems.” Total 300 million tons of coal was extracted in 2009 in Russia compared with 326 million in 2008. The proportion of coking coal in this amount was 61 million tons, and the rest was energy coal.

RZD's figures are that 275.4 million tons of coal and 10.5 million tons of coke were transported last year, which is lower than in 2008 by 7.1% and by 13.7%, respectively. Supply flows also changed. Companies extracted less brown coal. Thus, last year Krasnoyarsk region extracted 10 million tons less coal than in 2008 (the largest enterprise SUEK-Krasnoyarsk made 8.9 million tons less supplies). The Far East production declined by 5 million tons, and this figure is 5.7 million tons in Yakutia.

In fact, large power plants also purchased 18 million tons less of steam coal than before. The reason is that there are good stocks in warehouses made previously by the energy sector, therefore so far it is provided with fuel. These stocks were even slightly higher than the standards demand, because coal consuming CHPs worked in the fuel saving mode, and therefore their costs became lower than in the previous year.

Since the beginning of 2010, the plants have started seeing the end of stocks, but still so far they are having more than enough. In addition, hydroelectric power plants could work at their full capacity, avoiding the need to buy fuel, because a lot of water had been accumulated in their reservoirs.

However, experts believe that the coal industry had already gone through the most severe crisis times during the first half of 2009. Figures of the second half of the year were more optimistic. Thus, extraction shrank by15% from January to June 2009, but as a result of nine months, 213 million tons of coal were extracted in Russia (12.3% less than for the similar period in 2008).

This fall made companies seek actively for new markets, and export of coal grew by 3% to 4%. It is noteworthy that the main export route has changed, and now APR countries are creating demand, where the crisis is not as strongly experienced as in Europe. Thus, delivery to the UK, the largest importer of Russia's coal in Europe, increased from 15 to 17 million tons, and at the same time shipments to China have changed multiple-fold (by dozens of times). More than 10 million tons of coal was sent there in 2009, whereas in 2008 only 244,000 tons of this cargo went in this direction.

However, the improved export performance exposed old problems. Among them are the share of transport in the final price of the product. The matter is that the cost of rail transport is among the main factors which reduce profitability of Russian coal enterprises. Experts emphasise undeveloped railway services, insufficient access roads to main ports of Russia, especially in the east, where the pending shipment can keep up to several hundred trains idling. "Moreover, railways do not have enough resources to provide the growth in traffic," says Mr Skryl. "Kuzbass is the main coal field, and it is in the middle of the country. 80% of Russia's coal is exported from there, and it is also a major supplier to the regions. So, it is necessary to make long trips transporting coal, therefore the problem of rail inconsistencies is crucial."

Moreover, difficulties arise at all transportation stages, and the main ones are low troughput of railway infrastructure, old loading and unloading equipment and the fact that too many operators have worn-out rolling stock. The issue of shortage in rolling stock is acute for many years. Cargo owners are sure that these difficulties will eventually bring to serious losses. For example, only in summer, the losses of Russian Coal company reached the number of 800 wagons per month. "This means that our supplies are a failure and that we did not manage to provide shipments of finished products to the consumer," states Vladimir Smirnov, Deputy Head of the Russian Coal Logistics Department. "So, I cannot call 2009 a success. Nevertheless, we must look to the future with optimism."

Experts predict that we should not expect a return to previous performance in 2010, either in prices or in quantities. Analysts note that today it is difficult to say, what the demand for electricity and steel is going to be this year, and noone can predict how much coal will be needed. But we can acknowledge that the developments are promising even in the traditionally lagging behind domestic market. The winter was cold, which means that total consumption of coal will be higher than in 2009.

Bella Kvarchia
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