Like oil, coal is often referred to as "black gold." Unlike oil companies, however, Russian coal businesses are barely present on foreign markets, get little attention from politicians and have not even produced any real oligarchs.
Moreover, the sector is very much tied to the domestic social situation. The housing and utility sectors usually receive coal supplies at large discounts, and mines are often the only real source of employment in the towns where they are located.
Prices are not rising as fast in the energy sector as in others. According to a State Statistics Committee report on the sector, the average price-growth index for energy-sector producers in May 2003 from June 2002 was 102.3 percent lower than the price-rise index for industry overall, which was 113.6 percent in June 2002 and 116.1 percent in May 2003.
Within the energy sector, price growth for coal was 109.2 percent, 93.6 percent for gas, 147.3 percent for ferrous metals, 103.9 percent for oil and 122.7 percent for electricity.
The average price correlation for producers of coking coal and energy coal and oil in June 2003 came to 22.8 percent and 18.7 percent, respectively (20.6 percent and 20.5 percent in June 2002).
The electricity sector, which is the main potential customer for energy-giving coal, is reluctant to buy it, as these days it makes more sense to burn gas.
The share of gas in electricity production increased by 1.2 percent over 2003 compared to 2002 and is now at 43.8 percent. The share of coal, meanwhile, fell by 0.3 percent and is now at 19 percent. Coal companies say that there will be no solution to the sectors troubles as long as the energy sector remains hooked on artificially cheap gas. Debts are also causing the sector financial problems.
Siberian Coal Energy Co. (SUEK) says that electricity companies that are part of Unified Energy Systems (UES) account for more than 2 billion rubles of the debts it is owed. The overall situation in the sector remains complicated and paradoxical. Some coal mines in the Kuzbass regions, for example are producing more coal, while others are in obvious decline.
Coal companies in the main coal-producing regions Western Siberia, Eastern Siberia, the Far East and also in the Northwest Federal District had balance profits in May 2003, but these were offset by losses made by coal companies in the North, Central, North Caucasus and Urals regions, making for an overall loss in the sector.
The number of accidents at Russian coalmines raises the question of how effectively the money allocated by the World Bank for restructuring the sector is being spent. In 1996, the federal government received a first loan of $600 million for the sector. This was followed a year later by a second loan of $800 million.
The World Bank gives as its opinion that restructuring of the coal sector has gone fine. "We dont have any problems with Russia at the moment. All the conditions for the loan are being met according to the timetable," was the comment made by the the World Banks Russian office. But the mines in Rostov Oblast and Primorsky Krai that were hit by accidents in October 2003 were not part of the restructuring program.
The government decided to begin restructuring the coal sector in 1992 and, having no experience in this area, turned to the World Bank. Ivan Mokhnachuk, chairman of the coal-industry trade union, says that positive results of restructuring are already visible.
"We accepted the need to close particularly loss-making and dangerous mines that had no prospects, he said. "The number of people killed in mine accidents began to fall. In 2001, 132 people were killed, but in 2002 this figure was down to 85. The number of injuries overall has fallen since the closure of particularly unsafe mines.
"Today, we are seeing a rise in coal production. In 2001, we produced 267 million tons of coal This year, we will produce more than 270 million tons. Labor productivity has also increased, and we now have an average of more than 180 tons per person per month, which is a record for coalmining in Russia."
Coal production is up this year compared with last year, but some analysts say this is no particular achievement as production dropped considerably last year. According to the State Statistics Committee, the production-growth index for January-June 2003 in the coal sector was 111.5 percent compared to the same period of 2002.
The largest increases were for processing coal concentrate and mining brown coal up 12.5 percent and 14.3 percent, respectively. Most of the growth is a result of low volumes in 2002, when coal production dropped by 6 percent compared to 2001.
Production is also up due to a livelier energy sector. The general increase in industrial production has led to greater demand for electricity, which in turn has pushed up demand for coal. According to the Rosinformugol agency, coal supplies to thermal-power stations in the first half of 2003 rose by 18.7 percent compared with the same period of 2002. Housing and utilities services bought 3 percent more coal and coal exports, which now account for more than 20 percent of all coal mined, rose by 22.1 percent.
If these trends continue, exports could rise to almost 55 million tons by the end of the year up 14 percent on last year. One reason for the increase is greater demand for Russian coal from Ukraine, which has cut back imports of Polish coal in favor of coal from Russia (this is because Poland, in line with World Trade Organization demands, is cutting subsidies to the coal industry, which has led to less coal being produced).
The industry leaders
Four companies have contributed the most to the increase in coal production: SUEK (17 percent of the total increase), Kuzbassrazrezugol (9 percent) and Yuzhkuzbassugol and the Raspadskaya Mine (with 6 percent each).
Mines in the main coalmining regions have continued reconstruction and reequipment of their active mines this year. The most effective mines are part of the major vertically integrated companies. These include SUEK, which has mines in Siberia, the Far East and Kuzbass. SUEKs total coal production has risen by 21.3 percent this year compared to last.
SUEK Deputy General Director Vladimir Kudryavtsev says that this is helped by the growth in the energy sector, which is the main coal consumer.
An enrichment plant will be built in the town of Berezovsky (to be launched in the fourth quarter of 2004). Yuzhkuzbassugol is investing more than 1 billion rubles between Sept. 2001 and March 2004 in construction of the Tomusinskaya-5 and -6 mines and around 300 million rubles in 2003-2004 on reconstruction of the Kuznetskaya TsOF.
Other companies that have reached the investment stage include Kenotek (part of Novosibirsk group RATM), Sibir-Ugol, the Barzassky Mine (part of Kemero-vo group Rover), Sibirsky Antratsit (controlled by the Energoprom group that owns the Novosibirsk electrode plant, the mines main consumer) and a number of other companies. These companies are ahead of others in the market today that have not yet reached the investment stage and are still in the process of dividing up assets.
Coal production continues to fall in Tula, Moscow, Kaluga, Ryazan, Smolensk, Tver and Rostov Oblasts. The greatest drop in production was at Tula-Ugol, where production dropped by 52 percent compared to 2002. The mine produces brown coal, which cannot compete against higher-quality and cheaper energy-bearing coal. High production costs and low sales are pushing the company into a situation in which, representatives say, it will soon have to close up shop.
Although it did undergo restructuring, Rostovugol is another company that is still in a difficult situation. Production dropped by 23 percent in January-June 2003 compared to the same period of 2002. Deputy Gene-ral Director Sergei Baranov says that the problem is lack of money and that there is not even eno-ugh cash to pay wages.
"Under the restructuring plan, the most potentially profitable mines were separated from the other assets, and a new company was formed. Our investors, Russky Ugol and Mezhprombank, promised to invest 870 million rubles in development, but we have received only 252 million of this sum," Baranov said.
The accident at the Zapadnaya mine, which belongs to Rostovugol, raises new questions about the state of the coal industry. The Prosecutors Office in the town of Shakhty has tasked the local police department with investigating criminal charges against Sergei Molchanov, the head of the Rostovugol liquidation commission, who is suspected of having abused his authority and causing the company a loss of 625 million rubles. Molchanov denies his guilt and says the unlawful transaction he is accused of having been party to was never completed. Media reports say that the Rostovugol liquidation commission, 66.9 percent of the shares in which are held by the state, arranged a deal with a company called Lestopservice to sell 2 million tons of coal slurry at a price of 1.02 rubles a ton, though the market price for slurry was not less than 300 rubles. This brought the company a loss of 625 million rubles.
Hope for the north
Coal production in the Pechyorsky coal basin has picked up since the beginning of the year. Overall, the region has produced 4.8 percent more coal compared to last year. But companies do not see this necessarily as a sign for optimism. "Formally, there is an increase, but this is because there was a considerable drop in 2002, and we stopped mining," said Alexander Melnikov, assistant to the general director of Intaugol.
A number of coal companies in Vorkuta and Inta have begun a restructuring process and are looking at selling state shares. Coal-company representatives in the region think that Severstal Group will become the main owner in the Pechyorsky coal basin, as it needs the coking coal mined in Vorkuta for its metals business. In September 2003, Vladimir Torlopov, the head of the Komi Republic administration, and Alexei Mordashov, the general director of Severstal Group, signed an agreement on co-operation between the republics government and the steel holding under which Severstal will follow a common policy in developing the Pechyorsky coal basin.
"Our main task is to make Vorkutaugol a competitive, effectively managed and profitable business," Mordashov said at a press conference. "The business should be non-loss-making by the end of the year."
Severstal estimates that Vorkutaugol should produce around 6 million tons of coal in 2004.
20 most efficient coal companies
Sokolovskaya Investment Co.
Siberia-Urals Energy Co.
South Kuzbass Coal Co.
Erunakovskaya Coal Co.
Kaa-Khemsky Open-Pit Mine
Shestaky Open-Pit Mine
Kiselevskugol Coal Co.
Taibinsky Open-Pit Mine
Oktyabrinsky Open-Pit Mine