Russia Coal: Asia Export Drive

BMI View: With coal being the second-largest cargo handled in Russian ports, the outlook in the country's coal industry will continue to have profound implications on port development plans in the shipping space. We expect the bulk of investment in coal-related logistics projects to concentrate on the east over the coming years as coal shipments from Russia are increasingly reorientated towards key consumers in Asia.

Following our previous discussion on the key forces that are shaping the growth of Russia's coal mining industry ( see 'Russia Coal: Towards Coking & The East', November 27, 2013), we have delved deeper into how continued growth in the coal sector will fuel developments in the country's port and freight transport space. We believe the push for greater tonnage onto the seaborne market will encourage more companies, predominately mining firms, to undertake transport projects in Russia. The bulk of these projects will concentrate on enhancing coal supply chains and directing greater volumes of coal towards Asia, a region which Russia is betting on for resilient growth in coal consumption.

Russia's coal mining sector is set to undergo a period of modest expansion over the coming years. Admittedly, President Vladimir Putin is spending around US$123bn to develop the coal industry between 2012 and 2030. However, growth in Russia's coal production is unlikely to be stellar by any measure as a pipeline of obsolete mining operations will be retired over the same period. In contrast to the government's expectation for coal output to increase at an annual clip of 1.7%, we forecast Russia's coal production to increase at an annual average rate of 2.7% between 2013 and 2017. We believe efforts to rein in production may encounter resistance from private investors, while the delays associated with the construction of new projects may force the government to tone down its rhetoric against the closure of obsolete mines.

Still Coal-Hungry In Asia
Global - Coal Imports (mnt)

BMI View: With coal being the second-largest cargo handled in Russian ports, the outlook in the country's coal industry will continue to have profound implications on port development plans in the shipping space. We expect the bulk of investment in coal-related logistics projects to concentrate on the east over the coming years as coal shipments from Russia are increasingly reorientated towards key consumers in Asia.

Following our previous discussion on the key forces that are shaping the growth of Russia's coal mining industry ( see 'Russia Coal: Towards Coking & The East', November 27, 2013), we have delved deeper into how continued growth in the coal sector will fuel developments in the country's port and freight transport space. We believe the push for greater tonnage onto the seaborne market will encourage more companies, predominately mining firms, to undertake transport projects in Russia. The bulk of these projects will concentrate on enhancing coal supply chains and directing greater volumes of coal towards Asia, a region which Russia is betting on for resilient growth in coal consumption.

Still Coal-Hungry In Asia
Global - Coal Imports (mnt)

Russia's coal mining sector is set to undergo a period of modest expansion over the coming years. Admittedly, President Vladimir Putin is spending around US$123bn to develop the coal industry between 2012 and 2030. However, growth in Russia's coal production is unlikely to be stellar by any measure as a pipeline of obsolete mining operations will be retired over the same period. In contrast to the government's expectation for coal output to increase at an annual clip of 1.7%, we forecast Russia's coal production to increase at an annual average rate of 2.7% between 2013 and 2017. We believe efforts to rein in production may encounter resistance from private investors, while the delays associated with the construction of new projects may force the government to tone down its rhetoric against the closure of obsolete mines.

Expanding...Slowly
Russia - Coal Production

With the introduction of new production centres, the regional structure of Russian coal mining will continue its gradual shift towards the east. Under the country's long-term coal mining development plan, the Far East's share of domestic coal output will rise from 9.7% in 2010 to 15.2% by 2030, while Eastern Siberia will grow from 25.8% to 31.9% over the same period. We expect the East Siberian mines to account for the bulk of output increase in the Far East, where the coal is of lower energy value and higher ash content (at around 5,500kc/kg compared with the 6,000kc/kg premium product sold into Europe and Japan). On the other hand, Western Siberia will account for a smaller share of Russia's coal production, from 58.0% in 2010 to 45.7% in 2030.

Shifting To The East
Russia - Coal Production By Region (mnt, % share of domestic production)

Apart from seeking to reduce domestic demand for natural gas by lifting coal production, Russia is planning to direct more coal towards the Asian markets. In a vote of confidence for resilient growth in Asia's coal demand, the country plans to more than double its coal exports to the East to 85mn tonnes per annum (mntpa) by 2030.

Betting On Asia
Russia - Coal Exports By Destination (% of Total)

We believe Asia will command a rising share of Russia's coal exports in the years ahead. Cheaper shipments from countries such as Colombia, Canada and the US will challenge Russian coal exports to Europe, bolstering the shift in Russian coal trade flows towards Asia. Apart from tighter environmental regulations in western markets, the emergence of tough competition from low-cost suppliers to Europe has seen the share of Russia's coal exports to Asia increasing from 21% in 2007 to 36% in 2011. To be sure, an increasing number of Russian companies have entered into coal supply contracts with Chinese steelmakers in recent quarters.

  • In June 2013, Mechel signed its third long-term agreement with Chinese corporation Shasteel Group to supply 80 thousand tonnes (kt) of coal per month via ports in the Far East.

  • In May 2013, the Siberian Anthracite Company signed a five-year contract for the supply of 4.8mnt of coal to Hebei Iron & Steel Group.

  • In March 2013, Mechel and China's Baosteel Resources announced a deal for the supply of 960kt of coking coal per annum. This was followed by a similar contract with South Korea's Posco in April 2013 for the supply of 500kt of coal per annum.

In our view, the gradual re-orientation of Russia's coal exports from Europe to Asia will be driven by growing demand for both thermal and coking coal. Demand for thermal coal will continue to increase as energy poverty remains a key concern in countries such as China and India. For coking coal, we expect Russia to benefit from the void left by major producers Australia and the US as exports from these countries come under pressure ( see 'Coking Coal: Feeling The Steel Pinch', August 14, 2013). According to the Ministry of Energy of Russian Federation (Minenergo), Russia will export a total of 125mnt of thermal coal and 45mnt of coking coal by 2030, up from 105mnt and 12mnt in 2011, respectively.

Thermal Dominates
Russia - Coal Exports By Type (mnt)

However, we are aware that attempts to ink a larger presence in the seaborne market depend heavily on efforts to arrest the country's supply chain problems. It is estimated that transportation cost constitutes around 60% of the cash cost for coal due to the deficiencies associated with transport infrastructure in the Far East. Indeed, Russia is the country with the longest rail distances from mine to harbour, at approximately 4,500-6,000km. The high cost associated with the movement of coal across such long distances places Russia at the top-end of the global cost curve for thermal coal, at around US$80-90/tonne. This compares with the current spot price of US$82/tonne for Newcastle steam coal.

Russia - Distance From Coal Production Area To Shipping Seaports
Origin of Coal Seaport Distance (km)
East-Siberian Basin Vostochny 3,785
Murmansk 6,758
Vysotsk 6,065
Kuznetsky Basin Murmansk 4,805
Kaliningrad 4,049
Baltiysky Les 4,304
Vyborg 4,158
Vysotsk 4,151
Avtovo 4,027
Ust-Luga 4,133
Taganrog 4,315
Tuapse 4,543
Eisk 4,429
Vostochny 6,023
Nakhodka 6,022
Vanino 5,304
Poiset 5,863
Donetsky Basin Taganrog 289
Tuapse 677
Kansk-Achinsk Basin Murmansk 5,246
Vysotsk 4,601
Azov 4,687
Vostochny 5,616
Neryungri Basin Vostochny 2,445
Average 4,417
Source: Korea Energy Economics Institute

Crucially, trainloads of coal were delayed for exporting on numerous occasions as a large number of Russian ports and the country's main railway, the Trans-Siberian Railway, operates close to full capacity. Rail bottlenecks are making it impossible to move coal from Kuzbass, the country's biggest coal-producing region where trains are loaded to go east. Indeed, logistical shortfalls and our subdued forecast for domestic output growth should set a ceiling on coal exports over the medium term.

Transport Network Development Underway
Russia - Major Coal Basins & Railways

Getting On Track

Nonetheless, the slew of positive developments currently taking place in Russia's freight transport sector is cause for optimism. With prices trading close to breakeven point for many thermal coal exporters, a growing number of companies are banking on infrastructure development to stem the high cost of transporting coal. Plans to modernise and expand capacity at the country's main railways - the Trans-Siberian Railway and Baikal Amur Mainline (BAM) are currently underway. Russia has also opened a new 54km cross-border freight railway line linking the Russian town of Khasan and the North Korean port city of Rajin in 2013, in order to enhance coal flows into Asia.

Encouragingly, the Russian government is looking to upgrade its railway network by tapping into funding from national health fund and pension funds. President Putin has also instructed the country's relevant departments to study the issue of implementing flexible tariffs on coal transportation in a bid to expand its gateway into the seaborne market.

As discussed below, a handful of port development plans are also underway in Russia's different coal basins. With coal being the second-largest cargo being handled in Russian ports, the outlook in the country's coal industry will continue to have knock-on implications on port development plans in the shipping sector.

Coal, After Oil
Russia - Cargo Flows (2012)

North-West Basin: A Subdued Picture

Coal miner SDS-Ugol is working on the development of a new coal harbour on the western side of the Kola bay in Murmansk. The new port, with an annual coal handling capacity of 18mntpa, will be operational by 2015.

However, we believe the expansion of the country's coal industry is unlikely to boost infrastructure investment in the North West. We expect growth in coal throughput at Ust-Luga and Murmansk to slow over the coming years as shipments to key consumers in Europe come under duress from growing seaborne competition and restrictive environmental regulations. Coal mining operations in the region, at around 4.0% of Russia's production, may also be forced to put on ice due to depressed demand. While mining companies may look to the Far East to cushion the blow of weakening export growth, gaping infrastructure shortfall between the two regions will continue to offer little solace for coal miners.

South Basin: Losing Attraction

Russia's South basin is expected to become the largest sea basin for cargo transfer. According to Russia's Seaport Infrastructure Development Strategy, 95% of the country's bulk, 66% of Ro-Ro and 41% of general cargo are planned to be transferred in the ports of the South basin by 2030.

While the Tuapse and Novorossiysk ports currently shipped coal to Turkey, Bulgaria and the Danube states, we believe infrastructure investment into the Southern region will be stemmed by the lack of mining projects on the horizon as mining companies gravitate their focus to the East. Moreover, there is limited space for expansion due to the mountainous backdrop and residential developments in the surrounding region. For instance, the expansion of the Tuapse port entails the removal of the coal export cargoes to the new port of Taman as a result of significant land constraints.

All Eyes On The East
Russia - Ports Handling Capacity By Direction (mnt)

Far East Basin: Geared For Growth

We expect the bulk of coal-related logistic projects to be concentrated in the Far East over the coming years. With a string of expansion projects in the pipeline, ports handling capacity in the East will more than double from 31mnt in 2011 to 77mnt by 2030, according to Minenergo.

  • Russian Global Ports Investments Plc would spend about 90% (or US$36mn) of its 2014 capex plan to expand capacity and upgrade equipment at Vostochny port. The company seeks to increase throughout at its container terminal in Russia's Far East by 100,000 twenty-foot equivalent unit (TEU) to 650,000 TEU by 2014.

  • Vostochny Port (the largest stevedoring company in the Far East) aims to boost coal throughput from 17mnt to 27mnt by 2017. In 2013, the company began building the third phase of its coal complex which involves the construction of an additional dock with two ship loading machines, two railcar dumpers and four additional coal storage yards.

  • In 2012, Siberian Coal Energy Company (SUEK) secured a US$200mn loan to refinance its ambitious investment projects including the development of the bulker terminal at the Vanino port, as well as enhancing the production capacity of its Tugnui coal mine in the Republic of Buryatia. Port Vanino, one of Russia's ten largest ports, handles cargo bound for the North East, predominantly countries such as Japan, South Korea, China and Australia.

Vostochny Takes Charge
Russia - Far East Basin Throughput By Port (mnt, 2011)

Miners To Pave The Way

We believe the majority of coal-related transport projects in Russia will lie in the hands of mining companies seeking to expand their footprints in the supply chain. By making their own foray into the port and freight transport space, mining companies can greatly reduce the risk of transport bottlenecks stemming from the sharing of export facilities with other firms. This should significantly enhance the supply of coal to key export destinations, with delivery times and transport costs slashed in most cases. Furthermore, an increasing number of miners will be encouraged to invest in their own supply chain as investment into ports and freight transport from the Russian government is not coming through fast enough.

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Sector: Mining, Shipping
Geography: Russia
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