In July, Ukraine’s Government announced coal market reorganisation for 2011 – 2014. The plan assumes the liquidation of unprofitable mines, coal trade liberalisation and privatisation.
Three major players will definitely compete in mine privatisation: System Capital Management (SCM), ArcelorMittal and the Russians. China may also enter the game.
Apple of discord
Coal reserves in Ukraine total 117.5 billion t. Coal mining fell over the last three years from 80.3 million t in 2006 to 70.4 million t in 2009. In H1 of this year, Ukraine increased coal production by 2.7%, but the country will not necessarily repeat 2008 figures. Ukraine has been a net importer of coking coal over the last six years, but is self sufficient in steam coal.
Before privatisation, the state-run mines produced 100% of the country’s coal. Active privatisation started in 2002/03 and, by 2009, private mines provided 45% of the coal production, including 55% in coking coal.
Ukraine’s authorities continue to control 55% of coal output. Government mines supply state power plants with coal (38% of shipments). Coking coal presents only 19% of their business.
Self supply is a mantra
Coking coal dominated production in Ukraine until 2005, when it accounted for 58% of coal produced. Since 2006, Ukraine’s coking coal production has shrunk, down to 33% in 2009.
There are 12 coke-chemical plants in Ukraine, producing a total of about 20 – 22 million tpa of coke. All of these facilities were acquired by steel groups to supply their mills, SCM and Donetskstal becoming the most successful among them.
Ukraine is still a net exporter of steam coal. The country’s domestic demand is 43 – 45 million tpa, while it exports 4.6 million tpa of steam coal to Europe and Georgia.
The great pretender
SCM self supplies 77% of its coke-chemical plants with coal; 23% is imported, mainly from Russia. However, since July, when SCM acquired a 75% stake in Ukraine’s second largest steel mill, Mariupol Ilyich, the situation has changed. SCM now needs to supply coke to that mill too. Moreover, SCM has recently started modernising the Azovstal steel mill, with the goal of replacing natural gas with coke in its blastfurnaces by 2015. This will also boost coke demand.
As a result, SCM’s coke-chemical plants have to increase coke production by up to 8 million tpa, but this will mean it will only be able to supply 50 – 55% of its coking coal demand. A possible strategy is to increase shipments with UCC, but there are obstacles that make this difficult. Another option is to import more coal from Russia, but this may meet political problems.
Participation in privatisation may be a good solution for SCM. To reach 100% self supply from Ukraine’s sources, SCM may buy Makeevugol and Dobropolyeugol, or any of these two together with few smaller mines.
In March 2010, SCM initiated a Ukrainian Hryvnia (UAH) 1.7 billion debt litigation against IUD. If SCM succeeds in establishing control over IUD’s assets, it would have to increase its supply of coal again for IUD’s plant. In this scenario, SCM’s demand for coking coal may grow to 13 million tpa, which would require it to buy Makeevugol, Dobropolyeugol and most of the smaller mines, as well as increase UCC imports, to reach 100% self supply.
Currently, DTEK self supplies 100% of steam coal to its power plants. SCM’s interest in buying Ukraine’s two largest anthracite producers, Sverdlovanthracite and Rovenki-Anthracite, may thus be determined by “indirect” reasons. The first reason is to replace bituminous coal with anthracite. Another reason becomes apparent if SCM plans to buy new power plants in Ukraine. The Government still has not decided what to do with its state-run power plants, but it is reasonable to assume that their privatisation is a probable option.
The Indian candidate
ArcelorMittal owns Ukraine’s largest steel mill but has no coal mining assets there. The company has few options for coal self supply. However, an option has arisen following the Ukrainian Government’s plans to privatise the coal industry: Arcelor could buy either Makeevugol or Dobropolyeugol. The purchase of smaller coal mines, such as Krasnolimanskaya or Scheglovskaya-Glubokaya, would also partially satisfy demand.
Now the bear looks west
There are a number of potential pretenders for Ukraine’s coal mines among the Russians, with Evraz first in the list. It has to solve three problems with the coal supply to its coke-chemical plants in Ukraine.
The first is to compensate for the import shortage from Russia following the Raspadskaya accident. The second is to solve the issue principally with coal self supply in Ukraine. Currently, it has the same steel capacity in Ukraine as ArcelorMittal Kryviy Rih, so to reach 100% self supply it has to buy either Makeevugol or Dobropolyeugol, or a number of smaller coal assets.
The third task may arise if Evraz really stands behind the recent acquisition of 51% in IUD and it continues to increase this share. In such a case, Evraz will also have to supply to IUD’s steel mills and would have to buy both Makeevugol and Dobropolyeugol to fully self supply.
Another scenario would be the creaton of another steel group in Ukraine under Russian control. In such a scenario, a new player would need to buy Makeevugol or Dobropolyeugol to self supply with coking coal.
The Russian interests in Ukraine’s steam coal are not so obvious. They may buy anthracite mines to supply Ukraine’s power plants. They may also buy steam coal mines in Ukraine – but it is not as likely as the coking coal scenario.
Demand from the east
China always wants to control the supply chains – thus the coal industry privatisation in Ukraine is a chance that this author believes Chinese investors will not miss.
However, in doing this, China will meet a logistics challenge: in order to export with rail it is necessary to resolve problems with the Russians regarding coal export in Asia.
China is a potential player in Ukraine’s coal mining, but its involvement is nascent.
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