The role of coal in the economy of Russia during the post-crisis period

Prepared by Professor G.L. Krasniansky, Doctor of Economics,
Chairman of the Russian Organizing Committee of the World Mining Congress

Fig. 1. History of fuel-and-power traditions in the economy of Russia

The world crisis persists. Demand for goods and services is falling. Violent fluctuations have destabilized international and internal markets. Strategic targets of the largest transnational corporations and even regions possessing vast mineral resources are revaluated. That is why discussion of problems and perspectives of the mining industry in the light of the crisis and disappointing world economy forecasts is currently the most acute. Recently the subject of the special focus of members of the Russian National Committee of the World Mining Congress has become issues related to the world crisis.

What are the key problems that this or that sector of the mining industry faces during an economic crisis?

What are the main risks affecting fuel-and-power markets of some countries and that of Russia? In the pre-crisis period the majority of world-known expert agencies thought that up to 2030 world’s demand for energy resources would grow steadily: demand for gas fuel would grow twofold, that for coal will grow 1.8 times, and demand for oil only 1.14 times.

There are fears that a sharp increase and a similar sharp fall of the world prices for oil, and then for other energy resources may drastically change the forecasts made earlier. Starting from the second half of the 1950’s, due to an objective change of power traditions, Russian coal experienced some pressure from other competitive energy resources – first oil, then gas (see fig.1).

The relative coal share in organic fuel consumption in Russia decreased from 65% in 1955 to 18% in 2008. The share of coal in fuel consumption structure of heat power plants decreased from 30.5% (2000) toо 26% (2007), and the share of gas grew from 63.6 to 72% (see fig.2).

Meanwhile, coal fuel might have had a much more important role in strategic economic potential growth. All objective preconditions existed for this. Two key stages of Russian coal industry restructuring implemented in 1994–2000 released coal companies from detrimental and non-core production creating conditions for market pricing for coal products. All private ownership advantages have been used to the full extent.

Fig.2. Fuel-and-power resources consumption structure at Russian power plants

The problem of fundamental expenditures reduction in mining was solved on the system level. It is worth mentioning that the mining industry in Russia is the only industry that went through the complicated development stage (restructuring) and emerged from it renovated, competitive, socially protected and politically stable. Coal products volumes increased incrementally; investments into mining equipment became more numerous. The advantageous gas-coal price tendency was formed; in 2005 prices for these energy resources at the internal market equalled (earlier gas was cheaper) (see fig.3).

Over the period of the previous 10 years (1999—2008) the annual coal recovery in Russia grew 1.4 times and reached 326.6 mln. tons. Fixed capital expenditures grew from 13 bln. rubles (2000) to 60 bln. rubles (2008), at the same time 74% of investments was allocated to active basic funds renovation. Labour efficiency of mining workers has been growing from 1994, and recently has increased 3.2 times. Reduction of production costs provided for restriction of growth in coal prices at the internal market. If in 2002 power-generating coal was on the average 1.2 times more expensive than gas, then in 2008 this figure changed: gas became 1.3 times more expensive than coal.

Using the advantageous international coal market conditions, Russian coal companies started a dynamic increase of coal export volumes (the volume grew to 100 mln. tons; third place after Australia and Indonesia). It provided them with a flow of currency investments for mine fund renovation and partial modernization, and also for equipping the fund with heavy-duty equipment, including machinery supplied by foreign manufacturers.

Fig.3. Dynamics of gas and coal prices and their shares

Here the fuel balance in Russia is still gas-oriented. More than a half of all demand for energy resources Russia satisfies with natural gas, and the share of gas is only 16.5%. None of the countries in the world faces such a situation (see fig.4)

Fig. 4. Structure of primary energy resources consumption in the world Source: IEA Statistics

We think that during the crisis, as paradoxical as it is, Russia obtained one more unique chance to re-orient its fuel balance towards coal. With this end Russian coal consumption at power plants should be gradually, year-to-year increased from the current 108 to 160–170 mln. tons transiting to new, modern and ecologically friendly coal technologies. It will help to release up to 40 bln. cubic meters of gas annually reducing Gazprom’s dependence on imported gas. Together with the problems in the economy of our country, crisis phenomena in the world financial-and-credit sphere interrupted a ten-year tendency of Russian coal recovery growth. Because of low demand for coal products, starting from the second half of 2008 we witnessed decrease in the volume of production at coal enterprises, and the rate of reduction in the coal industry is higher than other industries.

In the first quarter of 2009 coal production in Russian in general reduced by 19%, while oil and gas production decreased only by 1.3% and 14.7% correspondingly; energy production reduced less than by 6%.

The high inflation rate combined with the growth of bank credit rates (to 24—26%) resulted in unacceptable credit conditions and, therefore, in lack of available credit facilities even at large mining companies.

It evidences the fact that coal continues to play the role of the closing resource in the fuel balance of the country and that is why the coal industry is primarily affected by negative crisis consequences.

Indeed, the anti-recessionary measures approved at the Russian federal level will help the coal industry avoid catastrophic consequences. However, the major part will depend on the clear perception of the key problems at this or that crisis stage.

The determinative factor in the crisis overcoming period is still the factors of demand for coal products at the internal and international markets and investments allocated by coal companies for market expansion. The key coal consumption tendencies in Russia are as follows. Approximately 138 mln. tons are delivered to thermal power plants, including 30 mln. tons Ekibastuz coal supplied from Kazakhstan. Nearly 100 mln. tons of coal products are exported. Domestic metallurgical industry uses over 40 mln.tons of coal concentrate. More than 50 mln.tons of coal concentrate go in other directions including consumption by the population, agro-industrial complex and public living needs (see fig. 5).

During the crisis Russian coal companies may stabilize their financial status due to maintaining of positions attained at the international coal market. The important role will be played here by active marketing and already built capacities of export-oriented transport and port infrastructure (use of Ust-Luga port capacities and Myrmansk port expansion – to the west, completion of Vanino port construction and Vostochny port reconstruction — to the east).

As far as electrical energy industry and domestic household sector are concerned, here some reduction in coal use may take place due to decrease in use of power and thermal energy. The biggest losses are incurred by coal companies recovering coal for coking, the demand for which has reduced twofold, especially at the domestic market.

Here state control of the coal business would be appropriate, especially during a sharp fall of coal prices at the international market. The main forms of such control may be:

provision of state guarantees for investment credits meant for replacement of fixed assets;
withdrawal of system restrictions in coal transportation, and competitive market environment in coal transportation.

The position of coal and the coal industry in the post-crisis economy may be viewed from various points of view.

Undoubtedly, coal will maintain its position as one of the key elements of the fuel balance of the country.

The most realistic forecast as regards the short-term perspective (1–2 years) of coal would be preservation of its current share in the fuel balance with an insignificant reduction in its absolute use. During the period of 2012–2015, due to the deficit of investments for a full-scale implementation of the electrical energy industry development scheme, there will be a decrease in the coal share in the electrical energy industry and fuel balance of the country. During the period after 2015 restoration and maintenance of the coal share in the economy of the country will be possible only if competitive coal advantages as compared to natural gas are present.

The determinative factor for coal advantages in the interfuel competition with natural gas is coal products prices (see fig. 3).

According to our estimates, coal competitive abilities will provide for a coal/gas price equal to at least 1:3. In the pre-crisis period, as we had estimated, the tendency of this balance was positive. However, currently we witness higher and rather alerting rates of reduction of coal prices.

We should be clearly aware of the fact that the role of coal in the post-crisis period will significantly (or even predominantly) depend on the level of expenditures for coal production and therefore of the coal prices.

That is why the key task that the post-crisis coal industry faces today is development and implementation by coal companies of range of measures ensuring a possibility to reduce production costs. Otherwise it would be rather problematic to maintain and so much the more to increase the coal share in the economy of the country.

Thus, in our opinion, key anti-recessionary measures may be as follows:

Continuation of the structural coal industry reorganization, but not in the form of a large-scale restructuring that was successful over the period of 1994–2000, but by means of a gradual withdrawal of outdated production capacities.
Speeding-up of (engineering and logistics) infrastructure preparation for new coal fields development, further exploitation of which will ensure a lower coal production costs level. The question is primarily about Kuzbas (Mencherepskoye field), and Elegetskoye field in the Republic of Tuva, Elginskoye field in Yakutia, and Ural field in Khabarovsk Region.
The post-crisis coal electrical energy industry should be characterised by an advanced development providing for a possibility of development of new, environmentally friendly coal burning technologies, a powerful impetus to power and coal engineering advance, it will free gas resources for steady and regular export supplies. It will ensure reliability of gas supply in Russia, Europe and even China (in future).
Improvement of competitive abilities of the Russian coal industry under a cardinal rise in production and labour efficiency based on provision of coal enterprises with modern high-performance machinery and technologies complying with the international safety and environmental standards. Improvement of coal business transparency, outsourcing systems development, achievement of the maximum volume of power-generating coal beneficiation with due account to the international and internal market requirements.
Expansion of use tendencies of coal and coal products. We have a task to involve not only the power and metallurgical potential of the mineral coal, but also its suitability for coal fuel chemistry products, carbon and composite materials manufacturing as much as possible.
Labour safety and ecological issues should be the key components of the further sustainable development strategy.

Fig. 5. Coal consumption streams formation in Russia