Russia’s coal industry: prospects and state of affairs

Global tendencies in the coal market

Coal remains the second major fuel in the world, at the same time, it is the number one in carbon dioxide emissions into the atmosphere. Its share has rapidly been falling since 2014 due to measures taken to cut greenhouse emissions. Coal consumption dropped by 7% in 2020 alone.

Renewable energy sources enter our lives more and more. The so-called Environmental, Social and Governance (ESG) policy makes investment funds and banks refuse to invest in projects related to the production and processing of solid hydrocarbons. For instance, in late 2020, Russian Railways PJSC placed so-called green bonds for 25 billion rubles, but not all investors managed to buy them because their environmental policy doesn’t allow investing in shares of the company whose freight turnover is mainly provided by coal transportation (44%).

These institutions will raise the price of borrowings for current manufacturers, which will certainly scrap a lot of new projects in the exploration and mining of new fields.

All these undertakings can put paid to the world’s coal industry at some point in the future. Judge yourself: coal accounts for 47% of the energy mix of the Asia-Pacific. While this region consumes 44% of the world’s energy. Coal holds 22% in Africa’s energy mix 13% in the EU, 14% in CIS countries. It is hard to imagine that something will dramatically change in the next 10 years: it is anyway a matter of decades. 250 GW energy units are built and scheduled to be built in China alone. What’s more, the management of the country in general claims a gradual refusal from coal in favour of cleaner fuel types.

Let’s see the statistics on the world’s energy production in fuel types in the last 50 years and outlooks for the next 20 years.

1. Oil is traditionally in the first place, the share in the mix falls from 47% in 1970 to 32,7% in 2020 with a forecasted decrease to 27,2% in 2040.
2. Gas shares the second and third position with coal, the share in the mix grows from 17% in 1970 to 23,6% in 2020 with a predicted growth to 25,8% in 2040.
3. Coal is traditionally third, though gas is driving this fuel out. The share in the mix reduced from 30,1% in 1970 to 26,4% in 2020 with a forecasted drop to 20,3% in 2040.
4. Nuclear power: the share in the mix rises from 0,4% in 1970 to 4,7% in 2020 with a forecasted fall to 4,3%. The world is anyway afraid of this type of energy: its use is too hazardous.
5. Hydropower: the share in the mix insignificantly increased from 5,5% in 1970 to 6,9% in 2020 with a slight forecasted growth to 7% in 2040.
6. Renewable energy sources: the share in the mix goes up from 0,1% in 1970 to 5,6% in 2020 with a forecasted rise to 15,4% in 2040.

The current state of the sector in Russia

As of 2020, Russia ranks second in the world in coal reserves after the USA. According to forecasts, given the current amount of production of 440 million tonnes a year, the reserves will last for 370 years. The sector provides a big number of jobs (150,000 people, another 500,000 people are employed in related sectors), secures a significant amount of export revenue in the country (4%).

The positions of Russian coal companies are competitive in prime cost, which allows handling the times of low prices in the market. Coal price volatility is the main risk factor of this industry. The coal industry is the first in our Fuel and Energy Complex to cover the path of reforms from subsidies to the full adaptation to competitive market conditions. Key assets were restructured, updated, workforce productively rose. The sector has mainly private companies that produce and supply coal to the domestic market for energy and metallurgy companies’ needs and European, Asian and Near Eastern markets. New fields actively develop, coal transshipment terminals are built. In the last five years, production has increased 1,3 times, about 300 million tonnes of new production capacities have been put into operation. 58 mines and 133 pen-pit mines, half of which has started to be used after 2000, operate in the sector. 42 mines use the progressive longwall face mining technology. It is a very high number.

Top 5 coal producers:

1. SUEK JSC (absolute leader with 105 million tonnes a year),
2. Kuzbassrazrezugol MG JSC,
3. EVRAZ plc,
4. SDS-Ugol HC JSC,
5. Sibanthracite Group.

Russia has both steam coal and coking coal (for metallurgists). Steam coal takes the lead in production and export volumes.

In Russia’s energy mix, coal is third with 12%. Gas is first (54%), oil is second (22%). Hydropower and nuclear energy share the fourth and fifth places with 6% each.

It is forecasted the coal production in Russia will be from 485 to 668 million tonnes by 2035 depending on the scenario (conservative or optimistic). Everything will depend on coal consumption in domestic households, electrical energy, prices in the international market, costs on coal production and export.

Future coal prices will be fixed by a global fall in demand and the average production prime cost because cheap coal (from a perspective of production) doesn’t run out in the world. We shouldn’t expect a collapse of the industry. Moreover, due to the low price cost of Russian coal production, our manufacturers can withstand periods of low prices operating with zero profitability unless the market recovers. And this will happen in any case because low prices will force “more expensive” producers to leave the market, thus decreasing supply — a classic example of Adam Smith’s “invisible hand”.

For investors, I recommend having a look at EVRAZ plc and Mechel PJSC — they produce coking coal, which costs more with similar production expenses.

Prospects

Considering global tendencies for a transition to cleaner fuel types and new rules to get funding, a tough future awaits the companies of this sector. Against, this process isn’t instantaneous, there is time to adapt. SUEK JSC that built dust and wind screens at the port of Murmansk, which is the main export coal transhipment port, is an example. Also, the companies of the sector implement programmes to develop high-calorie coal and refine coal to minimise emissions of dust and carbon dioxide in transportation and coal burning, recultivate lands where production ended, modernise energy assets to reduce carbon dioxide emissions. We will see how these measures can change the attitude of supporters of decarbonisation to the coal industry.

Nowadays China has nearly exhausted its own coal reserves and is exporting quite a large quantity for coal production, focuses on natural and liquefied gas and renewable. This market is under question for our coal suppliers. Japanese, Indian, European markets import a lot of coal, the prospects are in the next 10-15 years. It won’t be completely refuse coal in any case.

Russian coal export has been growing in the last 15 years regardless of current coal prices. 40 million tonnes were surpassed in 2005, in 2019, the number was over 180 million tonnes of coal. Key shipping destinations are Baltic states and the Far East. The railway and port infrastructure is actively developing in the Far East: debottlenecking in the Baikal–Amur Mainline and Trans-Siberian Railway, the construction of new transshipment port terminals to expand transshipment capacities from 60 to 180 million tonnes a year.

In general we have to admit that the prospects of the Russian coal industry are vague a bit but not critical in the near future. There will be a decline in export, domestic consumption, but the prices will remain high because producers from developed countries will leave markets because of a real ban on their products, while their not cheap coal isn’t needed in the Third World’s countries. Our company will occupy their place. In general I think that our coal industry will be the last in the world to leave the market. The prime cost permits taking the price blow. It will be interesting to watch how events will unfold.