CIS Coal: Russia's Game
BMI View: The CIS coal sector warrants a closer inspection of its long-term growth prospects as the development of coal mines in major producing countries, particularly Russia, could significantly lift output and alter trade flows in the global coal market. Below, we discuss the key dynamics that are currently taking place within the CIS coal sector, with a particular focus on Russia, Kazakhstan and Ukraine.
The Commonwealth of Independent States (CIS) has failed to generate as much interest amongst the mining community as other emerging coal basins such as Southern Africa and Mongolia. Apart from the high degree of political and social risks, the region is generally characterized by antiquated infrastructure that significantly undermines the economics of establishing coal projects.
With the exception of Russia, Ukraine and Kazakhstan, other countries such as Kyrgyzstan, Tajikistan and Uzbekistan play a relatively small role in CIS' coal industry, with modest production and consumption. That said, we believe CIS' coal sector warrants a detailed examination of its future growth prospects. The development of coal mines in Russia forms an important part of the global coal equation (both in terms of production and trade flows) given its rich reserves and geographic proximity to key consumers in Asia.
Russia - Coal mining sector to undergo a period of modest expansion over the coming years. Production growth from a pipeline of new mining projects will be partially offset by the decommissioning of outdated mining capacity. Coal supply to Asia will continue to increase, but logistical shortfalls and our subdued forecast for domestic output growth to constrain exports.
Kazakhstan - Coal production to increase in a bid to secure affordable energy for its citizens. However, coal to gradually lose its standing in the power sector over the long run as the government aims to boost the share of renewables in the country's overall energy mix.
Ukraine - Great promise for rapid growth. Government is seeking to boost domestic coal output amidst the push to reduce reliance on imported fuels, particularly natural gas from Russia. Liberalising its coal sector to enhance private sector participation.
Other - Developments in other CIS mining economies are unlikely to have a material impact on the region's coal equation anytime soon.
|Rich Deposits In CIS|
|Select Countries - Coal Reserves|
Russia: Maintaining A Tight Grip
We expect Russia's coal mining sector to experience modest growth over the coming years, with greater export volumes being directed to Asia. Given its status as both the largest producer and consumer of coal in the CIS, the country commands a high degree of power in shaping the outlook of the region's coal sector. Indeed, Russia will continue to dictate the future growth trajectory of the CIS coal industry.
While a handful of mining projects in secondary players Kazakhstan and Ukraine are on the drawing board, we do not believe such mines will be sufficient to dislodge the prominence of Russia over the medium term. The significant disparity in coal output between Russia and Kazakhstan (the next biggest CIS coal producer), at 230mn tonnes (mnt) in 2012, suggests that it is virtually impossible for other countries to overtake Russia in terms of coal production over our forecast period. The long lead time of mining projects, coupled with the austerity push in the mining industry, will curtail ambitions of developing major CIS coal deposits in the coming years.
|In Russia's Hands|
|CIS Coal - Production (LHS) & Consumption (RHS) by Country (As % of Region's Share)|
Encouragingly, President Vladimir Putin plans to spend an estimated US$123bn to develop the coal industry between 2012 and 2030. We expect coal production in Russia to reach 401mnt by 2017, growing at an annual average rate of 2.7%. This modest growth in coal output is largely the result of the scheduled decommissioning of outdated mining capacities by the Russia government, rather than a lack of new mining projects on the horizon. It was reported that 455mnt of unviable and unprofitable coal operations will be retired over the next 17 years, while 613mnt of new and upgraded facilities for coal extraction will be put in place.
|Russia In Firm Lead|
|Select Countries - Coal Production (mnt)|
In our view, Asia will command a rising share of Russia's coal supply in the years ahead ( see 'Russia Coal: Towards Coking & The East', November 25). Cheaper tonnage from countries such as Colombia, Canada and the US will challenge exports from Russia to Europe, reinforcing the shift in Russian coal trade flows towards Asia. In order to ink a larger presence in the export market, the government plans to develop and modernise its ports, railways and related infrastructure facilities. These include;
the development of the Murmansk transport hub between 2012 and 2015;.
developing the east Nakhodka transport unit;
constructing and improving the infrastructure in the seaport of Busan;
capacity expansion of the railways connecting Kuzbass and Ural, and the ports of the Baltic, Barents, Sea of Japan and the Azov-Black Sea Basin;
development of the Baikal-Amur mainline;
and the construction of a new Kuznetsov Tunnel and rail transport in Kuzbass.
Source: BMI, WorldCoal, Various News Sources.
Nonetheless, we are aware that attempts to alleviate infrastructure bottlenecks will be a gradual process and we do not expect a wave of Russian supply to hit the Asian market. Logistical shortfalls and our subdued forecast for output growth will limit Russian coal exports over the medium term.
|Turning To Asia|
|Russia - Coal Exports By Destination (% of Total)|
Kazakhstan: Coal-Hungry...For Now
We expect the share of coal in Kazakhstan's overall energy mix to increase from 78% at present to 81% by 2022. Similar to many other emerging nations, Kazakhstan has been steadily increasing its coal production over the past years in an effort to provide affordable energy to its citizens. The country is the second-largest coal producer in the CIS after Russia - accounting for 22.6% of CIS coal production and 1.5% of global coal output in 2012. The bulk of Kazakhstan's coal reserves are concentrated in 16 main deposits in three coal basins - Karaganda, Ekibastuz and Tengiz-Korzhankolskogo. These deposits are being developed by 33 mining companies, the largest of which include LLP Bogatyr Access Komir, JSC ECE and JSC Shubarkol.
|Kazakhstan - Total Electricity Generation by Type (TWh)|
A pipeline of coal mining projects and new coal-fired facilities will continue to support the growth of Kazakhstan's coal's industry in the coming years. Compared with oil and gas, coal is cheaper to mine and easier to transport using existing infrastructure. Additionally, the Kazakhstan government is looking to expand its presence in the international market by lifting coal exports from 22mnt at present to 36mnt by 2020. However, we expect coal to gradually lose its dominance in the power sector beyond 2017. In line with efforts to combat global warming around the world, Kazakhstan President Nursultan Nazarbayev has stated an aim to increase the share of renewables in the country's electricity mix to at least 50% by 2050. Furthermore, nuclear, which has been sidelined over the past years, could emerge as a key component of Kazakhstan's power portfolio over the long term given its huge uranium wealth.
Ukraine: Heating Up With Privatisation Push
We believe Ukraine's coal mining sector holds great promise for rapid growth. Traditionally dominated by state ownership, the Ukrainian government is liberalising its coal sector to enhance private sector participation. Crucially, President Viktor Yanukovych is seeking to boost domestic coal output amidst the push to reduce reliance on imported fuels, particularly natural gas from Russia.
Ukraine has designated 45 coal mines for privatization under a law adopted in April 2012 that aims to modernize the country's chronically unprofitable coal sector. The whole privatization process will be completed by late 2014, a year earlier than the initial target. State-owned facilities would be opened up to private investors through licenses and leases or outright sales in a bid to significantly boost coal production with the help of private capital. It is estimated that around 70% of Ukraine's coal mines are state-owned, with 80% of them unprofitable and requiring subsidies of up to US$160mn per annum to sustain operations.
|More To Come From Private Mines|
|Ukraine Coal Production - Thermal (mnt, LHS) & Coking (mnt, RHS), 2012|
The long-term development plan of Ukraine's coal industry will be implemented in three stages;
Stage 1 (2011-2014) -State-owned mines will be privatized, while uncompetitive mines closed or restructured. Total domestic coal production will not be allowed to decrease due to the lack of other energy alternatives.
Stage 2 (2015-2020) - Active modernisation of coal mining assets by private investors. Ceasing of state coal subsidies.
Stage 3 (2020-2030) - Total coal output to increase to 115mnt by 2030, including up to 75mnt of thermal coal. Coal industry to undergo stable growth.
Nonetheless, private investment into Ukraine's coal sector is not without hurdles. Under the privatisation law, buyers of coal mining assets will have to abide by guarantees of social protection for miners, including the continued and stable growth of miners' wages. Additionally, coal extraction in Ukraine is both technologically and environmentally challenging. The bulk of coal beds have low-powered seams laid relatively deeply (1,000-1,300m) and characterized as explosive due to their high gas content.
Despite rising domestic production, we expect coal exports from Ukraine to come under pressure in the coming years. The shale gas boom in the US will direct an increasing amount of thermal coal onto the seaborne market and gradually undercut Ukraine's supply to European countries. Already, coal exports from Ukraine to key EU markets fell by 21% year-on-year (y-o-y) to reach 3.4mnt in 2012.
|A Shrinking Pie|
|Ukraine - Thermal Coal Exports By Destination (2012)|
Aside from the countries mentioned above, we believe developments in other CIS mining economies are unlikely to have a material impact on the region's coal equation anytime soon. Countries such as Armenia, Azerbaijan and Moldova are poorly endowed with coal resources, while the lack of infrastructure in Kyrgyzstan and Uzbekistan will continue to put on lid on output growth. Although the desire to diversify away from costly gas imports in Belarus could ignite interest into coal mining, the absolute tonnage increase from new coal projects is unlikely to significantly alter coal dynamics in the CIS due to the sector's expansion from a low base.
CIS Countries - Coal Mining Prospects
Armenia: Weak - Lack of coal deposits.
Azerbaijan: Weak - Relies primarily on natural gas and petroleum for power generation.
Belarus: Improving - Relies entirely on natural gas and fuel oil for power generation. However, the government is seeking to replace costly Russian gas imports with local coal.
Kazakhstan: Moderate - Coal production to increase in order to provide affordable energy to its citizens and to expand presence in the seaborne market. However, coal could lose its dominance in the power sector over the long term as the government looks to boost the consumption of renewables.
Kyrgyzstan: Moderate - Growing mining interests from Chinese and Australian investors. Aims to become a major coking coal supplier to the Xinjiang Uygur autonomous region. Lack of infrastructure to remain a major roadblock.
Moldova: Weak - Poor coal resources. Low demand for thermal coal as domestic power plants depend largely on natural gas.
Russia: Strong - President Vladimir Putin to spend US$123bn to develop the coal industry. Decommissioning of outdated mining capacities to spur efficiency gains over the long term. However, logistical shortfalls and our subdued forecast for domestic output growth should set a ceiling on Russian coal exports in the medium term.
Tajikistan: Weak - Poor coal resources. Domestic power plants depend largely on hydropower plants.
Uzbekistan: Moderate - Seeking to reduce reliance on natural gas. New official policy to increase coal's share in the country's overall energy mix, from 3.6% at present to 11% by 2015.
Turkmenistan: Weak - No coal production or consumption.
Ukraine: Strong - Seeking to reduce reliance on imported fuels, particularly natural gas from Russia. Liberalising its coal sector to enhance private sector participation.
|% chg y-o-y||4.5||3.9||2.3||2.6||2.4||2.2|
|% chg y-o-y||2.5||2.1||2.3||2.5||3.0||2.9|
|% chg y-o-y||-4.8||2.5||2.0||2.1||2.6||1.5|
|f = BMI forecast. Source: BMI, EIA. Note: Production forecast for other CIS countries unavailable.|
|% chg y-o-y||2.2||0.2||10.9||1.2||13.5||-9.2||10.0||5.2|
|% chg y-o-y||8.9||-26.0||-4.2||23.1||24.6||22.4||-3.3||45.2|
|% chg y-o-y||0.8||9.2||0.6||1.6||5.5||2.3||4.4||2.5|
|% chg y-o-y||97.9||6.5||6.1||72.4||9.9||1.5||-1.0||0.0|
|% chg y-o-y||-7.2||1.3||2.2||-4.5||1.2||-6.9||-0.3||11.6|
|% chg y-o-y||-2207.2||9.5||4.9||6.0||-4.6||10.0||-9.4||-17.5|
|% chg y-o-y||-9.1||-20.0||-12.5||42.8||-40.0||0.0||-16.7||20.0|
|% chg y-o-y||-14.1||-24.1||-13.0||-23.4||-6.7||-5.2||3.4||-12.7|
|% chg y-o-y||16.8||3.2||7.3||5.9||7.3||-7.7||7.9||6.2|
|% chg y-o-y||-1.7||-6.8||-6.5||-18.8||-2.0||3.8||10.6||22.9|
|% chg y-o-y||-16.8||-10.1||14.8||-32.5||51.1||-8.6||2.8||-17.2|
|% chg y-o-y||-3.4||-0.7||2.9||-4.1||8.4||-2.5||2.1||3.2|
|% chg y-o-y||80.4||5.0||5.7||69.6||9.5||3.8||0.9||-6.0|
|% chg y-o-y||-10.6||2.0||7.7||1.1||1.4||-17.3||9.9||3.6|
|% chg y-o-y||17.2||-3.6||7.2||5.7||-0.4||8.5||-10.2||-14.5|
|Source: BMI, EIA. Note: CIS countries that are not listed do not produce/consume coal.|