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"What country will give coal?"
Head of the Coal conjuncture Institute Alexander Kovalchuk on diversification and export
The coal market is quite developed in Russia and competitive in the world, and therefore a rather difficult market. Alexander Kovalchuk, General Director of the Coal Conjuncture Institute, Doctor of Technical Sciences, Professor, Advisor to the General Director of the Russian Coal Company, told EastRussia why it’s impossible to put all coal in one basket and why it is necessary to increase exports.
- Yes, after the crisis, world coal prices have plummeted. Market recovery began only around the second half of 2016. It continues to this day. Of course, “peaks” occur, as in 2017, then a slight decrease in pace. But in general, prices not only for coking, but also for steam coal are kept at very high levels. The cost of coking coal of average quality is $ 150-160 per ton, the highest is about $ 180. Energy pays for $ 78-80 per coal with calories in 6 thousand kcal / kg. It is possible that in 2019-20's. prices will fall slightly, a consensus forecast gives a number of global agencies. But a sharp drop is unlikely.
- How confident is Russia among the world leaders in the coal market?
- We are in third place in terms of coal exports and are approximately in fifth place in terms of coal production. Its volumes were actively growing earlier, but this year a particularly serious increase is expected - almost to 430 million tons, with 2017 millions extracted in 410. But this is mainly due to exports. Domestic demand remains the same. The rise in prices on it this year has somewhat exceeded the rate of inflation, so the energy sector did not increase its coal purchases.
- Will it be possible in the foreseeable future to replace all coal-fired thermal power plants in Russia with gas?
- We have almost no pure coal-fired power plants in the Urals and in the European part of the country. With a few exceptions - for example, Troitskaya TPP, a large station in the Urals. She is a major consumer of coal. Although it is mainly Kazakh, from Ekibastuz.
Gas is cheaper, operating costs for its use are less - no coal depots, ash and slag removal systems, etc. are needed. In addition, in the European part of Russia there are no coal resources left, it is imported - either Kuznetsky, or Vorkuta, or (a small part) - Rostov.
And yet completely replace coal with gas across the country is now unrealistic. In Central Siberia and the Far East, coal competes mainly with hydropower. Gas already appears there, but he does not do the weather yet. The balance remains: there is no increase in coal generation in the Far East, but the former power plants are still operating. In Blagoveshchensk, they even launched the second block on 300 megawatts. On Sakhalin, the southern part of the island traditionally uses coal, the north - gas and associated gas. Although, of course, in the Asian part of Russia, the balance of primary energy is still in favor of gas. Gasification of entire regions is under way, and the price of gas is only 1,3-1,4 times the cost of a unit of equivalent fuel.
In order for coal to become interesting for buyers, it must fall in price by about three times. Or just as much - to raise the price of gas. Neither one nor the other will not allow. In general, there is no particular prospect for coal in the domestic market in the foreseeable future, it is unprofitable to invest in the development of coal-fired power generation in the country. It is not worth it. Bid must be made exclusively on export.
- First of all - to China?
- China has the largest energy consumption in the world, it’s 40% of the world total. Naturally, there is not enough gas to satisfy all needs. Coal for them - the main energy source. Despite tough environmental protection measures, China uses about 3,5 billion tons of coal per year. About 3,2 billion tons are produced. Imports have increased over the last year - mainly due to the fact that the Chinese are closing down part of the unprofitable, unsafe mines and at the same time investing in the development of new technologies and the construction of modern mining enterprises, sewage treatment plants, etc. For them, the eternal coal smog, especially not far from Beijing, is a real disaster. To improve the efficiency of generation, they tighten the requirements for the quality of coal - and their own, and ours too. This is a serious problem.
- They also introduce import duties, despite all the friendship and cooperation ...
- Sure. As well as Australia, which also restricts the admission of low-quality coal to its market, citing environmental protection law. In general, usually, by mutual agreement, the quality of raw materials is checked by the relevant organizations at the production site and certificates are issued. And the Chinese have border trade with us, and they keep Russian trains at the crossing stations for four days in order to take coal for analysis. We are losing money on empty waste, but the Chinese are adamant: "These are your problems, and we have the law." Quite recently, during the Energy Week at a meeting of the Russian-Chinese intergovernmental group, we once again spoke about this. But such friction is unlikely to be completely avoided.
This is one of the tools by which the customer, the buyer, can put pressure on the seller. It is clear that the Chinese do not miss the opportunity to use it. Of course, they are interested in our corner, but in the extreme case they can do without it, which they demonstrate. They know perfectly well that our raw materials are of high quality. However, the duties are not reduced and the examination procedures are not simplified.
China, as far as I know, does not plan to invest in joint ventures for the extraction of coal in Russia. While there are no such projects, the process freezes at the stage of negotiations and declarations of intent. Although in Australia and even in Africa, joint companies with China work.
By the way, Australia is a serious competitor that cannot be underestimated. Australians are ahead of us in many ways. And in the quality of coal, and technically, and in cost, and productivity. But the main thing - in terms of logistics. From the place of extraction to the coal loading point, the distance between them is minimal, the 400-kilometer run is already considered a problem. Coal is mined in the same place where the whole country lives, that is, in the coastal strip about fifty kilometers from the sea. And we are proud of the fact that in our country from the Elginskoye field - “total” km of 1800 by rail, from Neryungri - 2,5 thousands. An incomparable "shoulder", and transportation costs, too. Australians are going to finish in their new basins to 150 million tons per year, and this is mainly premium quality coking coal. The competition promises to be very difficult.
- And other countries?
- Japan consistently buys from us about 10-12 million high-quality thermal coal and coking coal separately. They have a modern, highly efficient electric power industry with an efficiency of 40-42%, which is interested in coal from 6 thousand kilocalories and above. They buy part of such raw materials (about a third) in Russia, the rest - in Australia and other countries. I remember that once every three years the Japanese ordered a study of the resource base of the Russian Federation at our Institute for Market Studies and explained that they could not rely only on Australia. You never know what can happen there. The commandment "do not put all your eggs in one basket" in relation to coal is strictly observed by the Japanese. They do not have their own resources, the last mine was closed 10-12 years ago. And Russia is the closest neighbor, and therefore they have bought and will buy 15-20% of the coal they need. For reliability. They even take our brown coal from Sakhalin - in terms of quality it is close to that which was previously mined in the mines in Hokkaido, its calorific value is about 4200-4500 kcal. The Japanese do not intend to either increase or decrease the volume of purchases. South Korea has the same logic.
India has traditionally focused on Indonesian and its own coal. India is going to produce 1 billion tons per year. But when some experts say that India will soon take China's place in the global coal market, I disagree. Today China determines the prices and volumes of the world coal market. India is a growing economy, the planned consumption of 1 billion 200 tons of coal fully meets its needs. But plans and sales of raw materials are a completely different matter. The Chinese are a disciplined nation, in the PRC there is a perfectly oiled administrative system that is integrated into market relations. It guarantees the fulfillment of all plans for the development of the coal industry. Indians have a different mentality, they are more inclined, so to speak, to contemplation rather than to active actions, and this is also noticeable in the economy. Plans are constantly being thwarted and delayed. I encountered this even when I was working on a mine construction with the Indians. India, unlike China, may not keep up with either the announced pace or the promised volumes on which the partners are counting. In addition, it has yet to build a system of coal-fired power plants, which now run on low-quality Indonesian coal, but must switch to high-calorific coal. From the point of view of logistics, it is unprofitable for us to transport cheap coal to India, and it cannot accept high-quality coal in large volumes until it has refurbished existing TPPs or built new ones. A thing in itself, a vicious circle.
There are problems with the countries of ASEAN, which proclaimed a course on "clean energy". Everyone wants to switch to alternative forms of electricity - solar, wind, etc. We have to take into account that times have changed.
We have good partnerships with Vietnam, in this country there is already a rebuilt coal industry. However, its own deposits of anthracite and semi-anthracite in this country are already being depleted, and the country's electric power industry is tied to them. Vietnam is a niche that we need to consider in addition to the other business partners: South Korea, Japan, Taiwan and China.
- Can the domestic equipment used in coal mining and transportation make at least some kind of import competition?
- Something is used, and quite successfully. But in general - we, of course, are technically far behind. If in the coal industry in the middle of the 90-s and the beginning of the 2000-s, it was still possible to modernize and restructure the coal industry, then mechanical engineering was not lucky. The state program of its structural adjustment was not something that was not fulfilled - they did not even begin. And in coal engineering we have practically nothing imported and did not have, everything was ours. Coal combines, excavators, including rotary and walking ... in the end everything seemed to be dissolved. Some of the equipment was made in Ukraine, and production did not stall in 2014 of the year, but even earlier, for economic reasons.
When the global market opened, it became possible to buy imported equipment at comparable prices, and the quality was clearly higher than that of domestic equipment. Private companies (coal industry privatized completely) began to give preference to foreign machines. And gradually, imperceptibly they fell into a strong dependence.
- Can you not manage import substitution in the coal industry?
- Strictly speaking, the sanctions of the coal miners are not affected, so you can buy equipment abroad. A question in cost. Salaries are rising, the price of electricity, too, respectively, increases the cost. If we suddenly stop supplying spare parts for imported equipment overnight, of course, everything will not collapse. But difficulties are possible.
Our engineering companies are trying to enter the market, although it is very difficult. Now, for example, Uralmash is trying to launch its first hydraulic excavator. But how it will compete with Japanese or American models is a big question. “BelAZ” are widely used, their ratio of price and quality is quite normal. But this is one of very few examples, if not the only one.
Coal prices are influenced by many factors. So is sales efficiency. Exporting coal is always a need to transport it on average for 4-5 thousand kilometers, and then also reload it in a Russian port, despite the fact that the cost of such reloading is twice as expensive as in Australia. Naturally, offshore coal terminals require additional costs for the purchase of new equipment, for solving environmental problems, as, for example, in Nakhodka. In Australia, for example, in the port "High Point", located in a resort area, the loading terminals, where they handle 100 million tons per year, are brought out to sea for 5 km. For unloading wagons, the bottom unloading method is used. The cars enter a long hangar, where there are pits under the canvas. The bottom is automatically opened and the coal is poured onto a continuous conveyor below. The discharge time is significantly reduced, the process itself is much cleaner and safer. The fact remains: we spent the whole day in the port, and spent the night in a hotel just four kilometers away in a beautiful resort town. Everything is thought out, there are no environmental problems.
There are subjective factors, there are objective ones. Coal mining in Russia severely limits the carrying capacity of railways. Our Achilles heel is logistics. And as soon as problems arise, for example, with empty or annual repairs, this immediately affects the volumes and rates of sales. I don’t even speak now about the tariffs for transportation, the prices that are set by the owners of the terminals, the other difficulties that are known to everyone and do not go anywhere.
- In the domestic market of Russia, the competition is also quite serious. Who is the leader now and can the balance of power change?
- In terms of production, SUEK is leading, of course. He longed for the top world leaders in the coal industry and finally achieved it: last year he crossed the line of one-millionth production (107,8 million tons) He was followed by Kuzbassrezrezugol - 45 million tons. In addition to volumes, the quality of coal is also important. SUEK produces significant amounts of brown coal (about a third of the total), D, DG and G grade steam coal and quite a few coking coal. Kuzbassrazrezugol inherited from Soviet times the best quality coal grades that are mined in the Kuzbass by the open method. Their cost compensates for the cost of complex logistics.
High-quality anthracite mines "Sibantratsit." “Kolmar” and “Mechel” work with Yakut coals - mainly coking coals of medium and premium quality. There, too, there are problems that are caused by the conditions of the extreme North and the difficulties of transportation. But these are good open coals. Their supplies are export oriented. By the way, the cut in Neryungri is the result of a joint project with Japan: the USSR paid for it with export coal for its construction.
- Now what is the Russian Coal?
- In “Russkoye Ugol” the export component is about twenty to twenty five percent, these are Khakass power-generating coals of grade D and coals of grade G from the Sayano-Partizansky open-pit mine in the Krasnoyarsk Territory supplied both to the West and the APR market. Although we conduct cross-border trade with China, its volumes are relatively small. 75% of the extracted raw materials go to the domestic consumer, in particular, coal from the Erkovetskiy open-cut mine is supplied to the Blagoveshchenskaya CHPP, higher-quality brown coal from the North-Vostochny opencast (more than 3 thousand kilocalories) is sold on the domestic market of the Amur Region and the Khabarovsk Territory.
Today, for any Russian coal company, including ours, the minimum task is to maintain the status quo and improve operations by optimizing costs, expanding our own production, where it is economically justified, and also by acquiring new assets when mining go down. We are acting like this.
- So you are looking at some new fields?
- The fields or existing enterprises that are interesting to us, which fit into the logic of our development strategy, complement the products that we already produce and sell. But I’m not going to go into specific details. Trade secret.