Reforming Coal

Economic News

22 Jul 2010
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Ukraine's coal industry has potential for massive growth, as the country seeks more energy independence and the use of hydrocarbons declines globally. Creating a modern and efficient coal industry in Ukraine could mean reform. This would be good news for the country, as coal remains Ukraine's most important fossil fuel, and it is finding a growing role in Ukrainian energy generation.



Coal is the only fuel that Ukraine possesses in large amounts, accounting for 95.4% of the nation's fossil fuel deposits. This fact is crucial given the recent importance energy security has been given in Ukraine's strategic goals. Industry insiders believe coal quantities at existing mines and prospective areas are sufficient to accommodate increased production.



The coal industry ministry predicted that in 2007 Ukraine will step up coal extraction by 2.3% up to 82.2m tonnes. Though estimates of the country's coal reserves can vary wildly, the general estimate hovers around 34bn tonnes, 48% of which are anthracite and bituminous coal. Coal in Ukraine is used for in both the energy and industrial sectors. Slightly under half goes toward coke production, which is by far the most profitable sector in the coal industry as these mines are all privately owned and the coke is used in Ukraine's leading industry, steel production. Of the remaining coal, just over a third is shipped to fuel-fired power plants and around 8% of production is exported.



One concern however is that coal mining is expensive in Ukraine as mines are quite deep, making it difficult for Ukraine's coal industry to be competitive with other coal producing countries in the region, such as Russia and Kazakhstan.



Coal is predicted to be a growth industry around the world. Experts predict that the share of coal in the global balance of fuels will increase as the share of petroleum trends downward. A March study by the German-based Energy Watch Group predicts coal production to increase by 30% over the next 10 to 15 years, with the former Soviet states among the predicted growth regions.



But Ukraine's mining industry has clearly seen better days. Though Ukraine belongs to the world's ten biggest extractors of coal, productivity of Ukrainian coal mines remains much lower than Central European mines and a dozen times lower than American and Canadian mines. Besides deteriorating Soviet-era facilities, enterprises have been troubled by management and financial issues. There has been a dramatic decline in the number of mining operations as well as production levels. Coal production in 1991 was 135.6m tonnes, while in 2006 it was about 80m tonnes.



Addressing the issue, President Viktor Yuschenko recently urged miners to work with the government to manage the coal market efficiently and liberalise coal prices to help mine owners cover their production costs. Ukraine's government currently supports the industry to the tune of around $1b annually, and the president hopes to create a more competitive coal market to help defray costs.



One small step forward is that Ukraine's government is planning to move from weight-based pricing of coal to an energy-based pricing mechanism. Though this change means electricity firms will buy coal at lower costs, some believe it will nonetheless benefit the industry, fostering more competition and better products.



While coal remains the most protected energy industry in the country, Roman Zakharov, deputy head of research at local securities firm Foyil Securities, told OBG the energy sector was moving toward fewer subsidies generally. "I don't see why the coal industry would be exempt from that. It may take longer, but I think the general trend is toward [more liberalisation]," he said.



The industry could also find help from foreign sources. Earlier in April, the Ukrainian government said ten German companies are expected to provide local mines with hydraulic equipment, ventilation systems and manufacturing automation systems aimed at ensuring safe working conditions for miners.



The politics of coal combined with the forces of globalisation make improvement of the sector politically fraught yet nonetheless imperative. The current political stalemate has seen both Yuschenko and Prime Minister Viktor Yanukovych make trips to the coal-rich Donbass region. Significant restructuring of the industry could mean the loss of thousands of jobs in a politically sensitive part of the country. Ambitious coal reforms could provoke angry reactions from those with vested interests in the region, or the metallurgical and energy-generation sectors.



Still, privatisation, according to some industry observers, could be the best way to improve the sector. Zakharov told OBG it should happen, but the main question was whether or not the process would be structured differently from the last round of privatisations in 2005. "What we have seen in the past was the packaging of unprofitable mines with profitable mines just to get rid of them. That apparently has not worked that well."



But the potential negative political consequences for privatisation champions could forestall this process indefinitely - particularly in the country's current delicate political climate. "In the last few years, the government has pushed a lot more populist tactics, and as a result it can not take the responsibility of essentially putting people on the streets... It would be suicide. If they push the responsibility onto private ownership, perhaps they will be willing to take the blame," Zakharov said.

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