Despite macroeconomic problems, the Russian coal mining industry ended 2015 on a positive note. Production grew as several new mines were launched in Siberia and the Far Eastern part of the country. An explosion at a coal mine in February reminded the world of the dangers Russian miners face. Authorities are now betting on further growth and urging companies to boost investments in operations. The economic forecast, however, is not so rosy, as coal production for many mines at current prices will be unprofitable, while inexpensive hydrocarbons displace demand for energy coal.
Russian Coal: Caught Between Weak Demand and Social Needs
According to data from the Russian State Informational Agency on Coal Market (Rosinformurol), last year, 73 underground mines and 126 open pits produced 373.4 million metric tons (mt) of coal, an increase of 4% (or 14.3 million mt) over 2014. Coking coal production rose 3.5% to 82.5 million mt, and energy coal grew 0.5% to 290.9 million mt.
Regionally, the greatest growth occurred in eastern Siberia and the Far East, where production increased 10.1 million mt. In particular, new output from the Elginsky deposit in Sakha-Yakutia totaled 5 million mt. The Apsatski deposit at Chita Oblast produced 2 million mt in the Kiyzassky section. Production from the Kuzbass grew by 2.6 million mt and in the Arshanovskom deposit in the Republic of Khakassia mined 1.6 million mt.
Rosinformurol’s information marks a rise of productivity at Russian mines last year by 7.1%, with the rise of average employee wages by 6.7% (excluding inflation). The average number of employees in the industry, however, decreased by 4.4% to 143,000 people.
In general, Rosinformurol’s data suggests that “last year, the industry had been influenced with the number of factors that are very different in their nature.” On one hand, the reduction in the volume of industrial manufacturing in Russia has significantly limited the domestic demand for electricity and coal. This shortfall in demand was mitigated by reduced hydroelectric power due to low water levels in Siberia. As a result, last year, the coal-fired power plants in eastern Siberia operated under fill load.
Even though changes in foreign exchange rates offset a drop in world coal prices, export revenues last year decreased by 18.3%. According to the Federal Customs Service, Russia’s revenues from coal export in 2015 amounted to $9.48 billion, including $8.73 billion to non-CIS countries — a decrease of 18.1% compared to 2014 and 23.7% for CIS countries. In nominal terms, however, the volume of Russian coal exports in 2015 remained about the same: 152 million mt, of which 142 million mt went to non-CIS countries. Demand from traditional markets such as China, U.K., Poland, Israel and Finland has decreased, but has been offset with a rise in purchases from number of other countries including Turkey, Germany, Spain, Slovakia and some Asian states. Representatives of the coal department at the Russian Energy Ministry see export development to Asia, including China, Vietnam and Malaysia, improving in the near term.
Maintaining Production at Any Cost
Despite some previous forecasts, the Kuznetsk coal basin (or the Kuzbass) remains the heart of Russian coal mining. Last year, the Kuzbass set new records for a production volume of 215.8 million mt, which exceeded levels in 2014 by 4.9 million mt. Production of coking coal amounted to 62.9 million mt, 3.1 million mt more compared to 2014.
The fluctuating global coal market has attracted the attention of Aman Tuleyev, governor of Kemerovo Oblast, who is well-known for his patronage of the coal industry. He called for representatives of coal producing companies to keep current mining levels at any cost. According to him, either way they will lose their position in the global market. In the opinion of Tuleyev, the world coal industry is on the verge of dark times, especially since some global leaders at the U.N. climate conference in Paris last December initiated a crusade against coal producers, proposing laws to limit the volumes for power generation during the coming decade.
Russia’s largest coal producers showed mixed operational results in 2015. Last year, the country’s largest coal miner, Siberian Coal Energy Co. (SUEK) produced 97.8 million mt of coal, a 1.1% reduction over 2014. Its subsidiary SUEK-Kuzbass produced 30 million mt, a 9% decline. According to the company’s CEO Vladimir Rashevsky, this year, SUEK will refrain from huge initiatives, trying to keep the level of mining the same as 2015.
SUEK enjoyed a rise in domestic demand of 9% to 54 million mt, but suffered a loss of exports of 10% in Asia and 6% in Europe. According to Rashevsky in 2016, the company will focus on increasing Kuzbass coal production, investing into this direction of RUB 10.22 ($149 million) versus RUB 9.2 ($134 million) last year. The company plans to mine at several new areas, increasing the overall volume of production in the region by 1.3 million mt, or 5.5%. In general, the company’s CEO also disclosed that in the coming three to four years, SUEK will invest mostly in coal enrichment.
Other companies are planning similar investments as well. Kuzbassrazrezugol last year launched the “Kaltanskay coal enrichment factory,” and as explained by deputy company director Andrei Golubin, the company will continue to commission similar facilities within the coming years, although the timing of such projects’ implementation could range depending on the market situation. Kuzbassrazrezugol has significantly cut investments over recent years from RUB 22 billion ($650 million) to RUB 7 billion ($102 million) in 2015. At least 70% of all investments are going to the modernization of equipment. The rest is directed to enrichment capacities. The company plans to launch the Taldinskaya factory in 2017. As explained by Golubin, Kuzbassrazrezugol has dedicated its efforts to the improvement of efficiency of mining operations, while initiatives in the enrichment area ensure the stability of the company in coming years as it lets manufacturer offer product with higher added value to consumers.
The head of Vostsibugol, Eugene Masternak, is a little bit more optimistic about the future. Last year, Vostsibugol produced 14.2 million mt of coal, a 600,000-mt increase over 2014, primarily due to export demand. In 2015, Vostsibugol exported 1 million mt of coal due to several big contacts with Chinese and Mongolian businesses; by 2020, it expects to bring this figure to 2 million to 4 million mt. By this time, the company believes it should be able to significantly increase production with two large projects. The first is the Zashulansky deposit at the Trans-Baikal Krai, a joint project with China’s Shenhua. On-balance resources of the deposit on the C1 category is 250 million mt and, according to Masternak, this coal has very good quality with a low ash content. At full capacity, it should produce at least 6 million mtpy. The other development project is the Beysky deposit in the Republic of Khakassia, where Vostsibugol already this year plans to produce first 150,000 mt of coal, exporting 100,000 mt.
The company is also investing in the Kasinovsky enrichment facility, which will be accompanied with an increase of production capacities. In 2015, it reached 10,000 mtpd, and its capacity should increase in 2016. Masternak also said the company is considering production improvement processes similar to the program used by Toyota. Internally, Vostsibugol will seek to optimize every process, including the purchasing of consumables and coal storage and logistics.
Sibirskiy Delovoy Soyuz Coal (SDS-Ugol) last year produced 30 million mt of coal, a 5% increase. The company spent RUB 1.5 billion ($21 million) for high-performance continuous miners and dewatering equipment to improve efficiencies at the Listvjazhnaja and Uznaya mines.
In 2015, Southern Kuzbass, a Mechel subsidiary, presented a new investment plan for the coming decade. A total of RUB 58 billion ($850 million) would be invested in several development programs to boost coal production volumes by 1.5 times to 19 million mtpy. According to Managing Director of Southern Kuzbass Victor Skulditsky, by 2025 the company also plans to heavily invest in coal enrichment, bringing its capacity to 16.7 million mt.
Much of the money would be spent on completing construction of the second stages at Sibirginskaja and Olzherasskay, as well as development and exploration works at deposits at Uregolskij and Raspadsky. Skulditsky also confirmed that the program does not involve the acquisition of any new deposits, since it already has sufficient coal reserves. He said the company currently owns licenses to operate in 12 areas with an overall reserve size of 1.7 billion mt.
Safety & Environmental Impacts
On February 25, Vorkutaugol’s Severnaya mine suffered a methane explosion that initially killed four miners and trapped another 26 underground. On the night of February 28, a second explosion at the mine killed five rescuers and the trapped miners; in all, 35 people lost their lives. After a short investigation, Russia’s technical safety organization Rostehnadzor declared that the accident occurred as a result of natural causes. Widows and surviving family members, however, disagree with the results of the investigation, claiming that it happened because safety rules were violated.
This is one of the biggest accidents in Russian coal mining, and it may have a significant impact on the future development of the industry. Severstal, which owns Vorkutaugol, already promised to spend additional RUB 2 billion ($29 million) on improving the safety of mining operations, and other mining companies also say they will keep a close eye on safety issues.
At a government meeting, however, the head of Mechel, Igor Zuzin, asked authorities to consider the complete closure of underground coal mines in the country, as most of them have large amounts of methane and coal dust. This offer has been partly supported by Deputy Energy Ministry Anatoliy Yaronovsky, who cited the shocking official data that out of 73 mines, only eight could be considered safe. At least 38 mines have the designation of extremely dangerous, while 12 are considered critically dangerous. Translation: a catastrophe similar to the one that took place at Severnaya could take place again at any moment. The closures would cost billions of dollars to the owners and create social upheaval with displaced miners.
Government representatives admit that there is no universal solution to this problem, because it is, in fact, impossible to make all mines fully safe, while the closure of most dangerous mines would mean that the Russian coal industry will lose 30-40 million mtpy, including the most valuable coals.
Mechel’s statements have been criticized by SUEK’s management, and in particular, by Deputy General Director Sergei Grigoviev. Such measures seem impossible and unreasonable and the Russian government would never support such initiatives. Also, he believes that every case of safety violations at Russian coal mines should be considered separately.
Safety is not the only threat the Russian coal industry faces. Within the framework of the U.N. climate conference, Oleg Deripaska, the owner of UC Rusal, one of the world’s largest bauxite miners and aluminum producers, offered to introduce a special tax on carbon in the amount of at least $15/mt of produced CO2. In addition, he suggested creating a coal-free area in Eastern Siberia shifting from coal-fired thermal power plants to alternative energy sources, such as hydroelectric power plants.
Vice Prime Minister Yuri Trutnev heard the proposal and ordered government agencies to study the possibility of its implementation. Russian environmentalists already support the initiative claiming that it will preserve the untouched nature of Siberia, and in general improve the environment in many of the country’s regions. However, the problem is that creation of a coal-free zone would mean the decrease of domestic demand for energy coal by 20 million mtpy, while introducing a tax would significantly increase this figure.
Business representatives said it will cause an increase in energy tariffs across the country by 1.6-2.5 times. In addition, according to Aman Tuleyev, a large number of coal mines in this case would become loss-making and stop operations, so about 70,000 miners could lose their jobs. The initiative has become a real battlefield between the Russian Energy Ministry and the Environmental Ministry.
Oleg Deripaska (far right), owner of major aluminum producer UC Rusal, has called for a carbon tax. Igor Zuzin, CEO, Mechel (center), has called for all underground coal mines to be closed. Aman Tuleyev, governor of Kemerovo Oblast, a major coal-producing region, believes those measures would have harsh societal implications as far as employment and electricity costs.
According to representatives of Ministry of Energy, by 2030 Russia may boost coal production volumes to 410-480 million mt, depending on the situation with export deliveries. By that time, share of coal for the country’s power generation may grow from 24% currently to 28% with the launching of several new thermal power plants. However, implementation of this strategy requires stability of mining legislation. According to ministry spokesman Eugene Kovalev, given weak demand for coal in the world and manufacturing problems of manufacturers, any environment-related restrictions may ruin all strategies and ultimately cause losses to the country’s budget.
Many representatives of the government oppose this position. The Ministry of the Environment in particular officially supports the introduction of a tax on CO2 output in the amount of $20/mt. Mikhail Ulkin, spokesperson for the Russian Union of Industrialists and Entrepreneurs, also suggests that there is a clear trend of shifting away from coal especially for power generation, so Russian authorities should make necessary amendments how, in the current program, to gradually reduce coal consumption.
At the same time, Alexei Teksler, Russian deputy minister of energy, said that any argument on this issue is senseless, since there is such a large distance between many Siberian and Far Eastern cities and the main energy infrastructure, so most of the regions here have no choice but to get energy from local thermal power plants using coal. Development of any reasonable alternative would require huge investments in the infrastructure, amounting to billions of dollars, and state budgets have no money for such initiatives, this current attacks on the coal industry in fact have very little chance of succeeding.
Daria Goloburdina is a freelance writer based in Poland. She can be reached at: DariaGoloburdina@gmail.com.