Should we expect a crisis in the Russian coal industry?
Written by Stanislav Grachev, Russian Coal Group, Director General
At the end of 2017, Russia took sixth place in the world in terms of coal production, surpassed only by China, the United States, India, Australia and Indonesia. Last year the country produced 409 million tons of coal, which is 6% higher than in 2016. The Ministry of Energy of Russia predicts that by 2030 coal production will increase to 480 million tons.
The current resource potential of Russia exceeds 1.1 trillion tons of coal. There are 22 coal basins and 129 separate deposits in the country. Coal is mined in 25 regions of the Russian Federation by 150,000 miners.
The coal industry is the only industry in the fuel and energy complex of the Russian Federation fully represented by private capital.
Focus on exports
The Russian coal industry is currently increasing production volumes primarily through the increase of exports. Over the past 5 years, Russian coal exports have increased by 25%.
In 2017, deliveries to the domestic market grew only by 2%, while exports increased by 15% compared to 2016 and reached 186.3 million tons, which is 52% of total Russian coal shipments (356.1 million tons). 91% of export shipments were made up of steam coal.
Russian coal is exported to almost 80 countries. The main importers of solid fuel from Russia in 2017 were Japan, China, South Korea, Turkey, the United Kingdom, the Netherlands, Germany, Ukraine, Poland and Latvia. It is projected that in 2035 coal exports from Russia to the countries of the Asia-Pacific region will increase by another 50 million tons.
The growth in exports of Russian coal is due to the flexible price policy of Russian companies in the international market. It enables coal to be produced in Russia at a relatively low cost.
The assets of Russian Coal Group (one of the top five leading producers of steam coal in Russia, annually producing over 14 million tons of this fuel) include 6 coal mines in the Siberian and Far Eastern regions: Amur region, Krasnoyarsk territory and the Republic of Khakassia. Many years ago, we revised the company's asset portfolio, leaving only open-cast assets, since they are safer and more cost-effective. The company's products are consumed in 60 regions across the Russian Federation. In the domestic market, 70% coal is supplied to energy companies and 30% to utility companies.
The main export assets of Russian Coal Group are the Sayano-Partizansky open-cast mine in Krasnoyarsk territory and the Stepnoy open-cast mine in the Republic of Khakassia. These open-cast mines produce high-calorific coal, which is in demand abroad. Currently 85% of coal from the Sayano-Partizansky mine is exported through the ports of Murmansk and Ust-Luga. In 2018, we plan to increase production at the Sayano-Partizansky mine to 1 million tons of coal per year, and in the future to reach an annual production capacity of 3 million tons. In the Stepnoy mine, more than 4 million tons of coal are produced a year, which are exported to the countries of the Asia-Pacific region and East Europe. More than 80% of the coal from Stepnoy is processed at a coal preparation plant, which increases the calorific content and qualitative characteristics of solid fuel.
Geographical and other difficulties
Despite the annual increase in solid fuel exports, Russia has a significant problem that complicates its expansion in the global coal market – the remoteness of its coal mining centres from the ports through which about 70% of all coal is exported. This entails significant logistics costs which have an impact on the final price of coal products. The creation of new coal production centres on the eastern borders of the country will help address this problem and further develop the export potential of Russian coal industry. New coal production centres in the east of the Russian Federation located close to areas where solid fuel is consumed will address the problem of the large transport leg, reduce logistics costs, and as a result further improve the price advantage for Russian coal products in the global market. According to the projections of the Ministry of Energy of the Russian Federation, by 2030 coal production in the east of Russia will grow by almost 80 million tons.
A longstanding problem for the Russian coal industry has been infrastructural limitations, and namely the insufficient development of railways and seaports. Due to the limited capacity of ports and railway transport, the volume of Russian coal exports is also limited and significantly less than the actual production capacity of coal mining companies.
Other problems faced by the Russian coal industry include the high dependence on imports when purchasing mining equipment and spare parts (in some companies this reaches 80%), the shortage of highly qualified personnel in all parts of the production chain, the significant investment capacity of projects, the longstanding high level of capital expenditures, the need for large infrastructure costs (for the construction of railways, port infrastructure, shift camps, etc.), as well as long payback period of investments. For example, small open-cast coal mines with a production capacity of 0.5 to 1.5 million tons of coal per year require 1.5 to 2 years to reach full capacity. Only then can we talk about a return on investment. Investments in large projects (over USD 1 billion) have a longer payback period – 10 years and longer.
The main trends are the growth of coal processing and labour productivity
One of the most prominent trends in recent years in the Russian coal industry is the growth in coal processing volumes. In 2017, the volume of processed Russian coal increased by 3% to 196.5 million tons. Of these, 191.2 million tons of coal were processed at coal preparation plants. There are currently 65 coal preparation plants in Russia, which are responsible for increasing the calorific content, and therefore the quality of coal products, to make them even more competitive in the global market.
The creation of new products based on traditional raw materials will create new global opportunities capable of revolutionizing the entire industry. This is feasible with the development of deep coal processing technologies.
But in Russia everything is limited by the lack of investment in such large-scale projects.
Another positive trend is the growth of labour productivity in the Russian coal industry which has occurred during the free market years. Since the beginning of 2000, the labour productivity of Russian miners has increased threefold. Such growth is due to a combination of the remaining leading miner traditions of the Soviet era (such as production competitions, the mentoring system, professional skill competitions) and Western practices in the market economy – a flexible bonus system clear to all employees and bonuses tied to individual production results. However, a number of obsolete standards that have existed since USSR times remain a deterrent to further growth in labour productivity.
A beneficial crisis?
In the current unstable economic situation and the policy of sanctions, Russian coal companies are some of the few for which new opportunities and competitive advantages are opening up.
Firstly, demand for coal in the domestic market remains stable, and the main foreign consumers of Russian coal – the countries of the Asia-Pacific region – do not support the policy of sanctions enacted by the United States and Europe.
Secondly, due to the drop in the rouble/dollar rate, the cost price of coal products is lower and price competitiveness is increased.
In the new environment, Russian coal companies need to transform operational models and change their strategic priorities. Changes in organizational culture, business processes, technologies, and corporate culture will help Russian coal companies create new competitive advantages.
The most important thing for Russian coal companies is to not overlook the new opportunities that are opening up before them, to adapt to the new market realities, and to quickly implement all the necessary changes to their organizational structure and business processes.
The Russian coal industry remains resistant to external crisis phenomena, which means that it remains a strong player and reliable partner in the global coal market. The main objective of Russian coal companies is to manage internal crises: managerial, bureaucratic and technological crises. In this case, they will not only gain immediate benefits from the successful confluence of external factors and favourable market conditions, but will also secure stable and long-term competitive advantages as a leader of the global coal market.