Russian Coal on European Market - Influencer or Follower?
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Russian Coal on European Market - Influencer or Follower?

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Current presentation was presented on McCloskey's European Coal Conference in Nice, May 2009. ...

Current presentation was presented on McCloskey's European Coal Conference in Nice, May 2009.
It discusses competitiveness of Russian Coal on European market; historic trends of Russian coal export, current production, adn transportation constrains and costs, crisis challenges; discusses Russian coal industry development scenarios and gives recomendations to coal producers and coal users.

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    Russian Coal on European Market - Influencer or Follower? Russian Coal on European Market - Influencer or Follower? Presentation Transcript

    • Russian coal on European market ‐ market influencer or market follower? A8er crisis challenges. McCloskey European Coal Outlook Conference, Nice, May 2009 Igor Shelukhin Coal Market Research Ins5tute/Russian Coal Procurement Company
    • Some triggers for European coal users • Over last years Russian coal turned from market follower to market leader with more then 30% market share in Europe • Europe is already dependent upon Russian coal same way it is dependent upon Russian gas • Crises brought many uncertainKes into market ‐ can Russian coal industry offer compeKKve prices and provide stability of supply? • How much of Russian coal can be sucked by Japanese consumpKon with Far East infrastructure development and thus increase opKons for arbitrage for Russian coal producers?
    • A historic review shows unprecedented growth of export market supply With majority of growth and share coming from sales to Europe Russian coal sales by sector (mtpa) Russian coal export by desKnaKon Source: Russian Coal Market Research InsKtute
    • Demand has dropped and reply from Russian coal industry ‐ drop in producKon ‐6.7% ‐7.3% ‐8.1% ‐4.3% ‐3.8% 1.3% ‐5.0% 32% 2% 14% 4% 10% 5% ‐9% ‐10% ‐18% ‐20% ‐10.4% ‐10.0% ‐8.9% ‐7.7% ‐10.5% 3.4% ‐8.1% Source: System Operator RAO “UES”, Central Controlling AdministraKon of Fuel‐Energy Complex
    • As Russian coal is marginal on European market it is the most vulnerable to demand reducKon $/t Russian CIF ARA cash cost compeKKve posiKoning, $/t 2008 80 Current Price level 60 Indonesia Russia USA Russia 40 Australia South Africa Columbia 20 South Africa 40 80 120 160 Key factors 1. Internal Russian cost factors: railroad tariffs, naKonal currency exchange rate influencing compeKKveness 2. Global coal demand: South African coal diverKng to India and Australian to Asia of Russian coal 3. Dry cargo freight rate Source: Wood MacKenzie
    • Taking into account all realisKcally possible cost reducKons for Russian coal export it is sKll high cost $/t Average Russian coal delivered cost reducKon potenKal (in USD/t) ‐ current cost (RUR/USD = 33) 80 ‐ cost reduc5on poten5al 7.0 0 71.2 ‐10.8 ‐ lowest poten5al Russian coal cost 12.0 ‐3.6 ‐7.0 60 32.0 ‐4.8 53.3 46.2 40 Average Lowest 20 18.2 ‐1.8 Mining and Port, quality RUR/USD Railroad Total average Total potenKal enrichment and other Freight exchange rate transportaKon cost cost cost charges effect Low poten5al ‐ Railway monopoly Already at If second High port crises wave to Lowest cost is export mines use expected to charges existed historical low. come Ruble for high high produc5ve decrease tariff as due to value is produc5ve equipment, volumes drops, insufficient port expected to mines with no enrichment addi5onal capacity. This is decrease to enrichment required, pressure from coal expected to 38‐40 required government companies lobby ease up. RUR/USD employment regula5on
    • Future economy development is sKll extremely uncertain Some revival in leading indicators But constantly declining global GDP forecasts As an outcome investment decisions are paralyzed. Source: OECD, IMF
    • Three possible world economy development scenarios foreseen “Fast recovery” scenario “Back to normal” scenario “Slow recovery” scenario Each scenario will bring different Russian coal export prospects, from fast return on growth path in “Fast recovery” scenario, to drop in exports to 30% off from 2008 figures in “Back to normal”
    • European customers might find themselves short of Russian coal • Average reducKon of 2009 investment program for Russian mining companies is 30% • New port capacity aiming to add 50% of throughput is on‐line on Far East of Russia aiming increase of Asian export • Expected closure of BalKc ports will decrease throughput capacity available for European exports • Japanese companies are very acKve in Russian offering co‐investment opportuniKes and low‐cost financing • New projects developing Asian market supply are under consideraKon and realizaKon (Tugnui, Elga)
    • SoluKon is Kghter links with Russian coal miners ImplicaKons for buyers ImplicaKons for Russian producers • Scenario planning for procurement  strategy • Scenario planning  for market and investment required strategy required • Develop measures that can be implemented to • Focus your investment program on mines with good reduce share of high‐cost suppliers in your porlolio geology • Try to understand investment and development • Search for domesKc and niche markets for coal plans of your long‐term suppliers ‐ are they targeKng coming from low efficiency mines ‐ household cost reducKon heaKng, cement producKon, etc • Develop opportuniKes to co‐invest in mines with •Develop fast measures for freezing producKon on good efficiency prospects for stability of supply low efficiency mines in case of further downturn • Think about spin off opKons • Consider government relaKons acKvity that could bring to dialog for railway tariffs decrease and port regulaKon
    • Contacts CMRI / Russian Coal Procurement Company Russian Coal Procurement Strategies, Market Research, Investment Projects Due Diligence, Strategic Insight Igor Shelukhin Director on Strategy and Development, Tel: +7 926 535 3435 ishell@post.ru