Ukrainian coal industry. Digging for light at the end of a tunnel
Over the last few years, the Ukrainian coal industry has been in deep crisis. It cannot meet the Ukrainian demand for coal and operates at a loss.
Sadness in figures
Until 2014, Ukraine extracted about 60-65 million metric tons of coal every year. The figures plummeted to 40 million metric tons in 2016 and 34.9 million in 2017.
With the decrease in extraction increased the profitability of coal mines. According to the Ministry of Energy and Coal Mining, the average cost among mines was ₴3,124.9 in February 2018, which is 1.5 times higher than the selling price (₴2,033.5 per metric ton).
Can it be all about war?
The downfall of the coal industry does indeed owe to the conflict in Eastern Ukraine among a great many of other reasons. Nearly 70% of coal mines (both private and state-owned) are situated in the uncontrolled territories.
It is hardly just the matter of quantity but the quality as these regions are where the anthracite coal (rank A and T) is located. More than half of Ukrainian heat power stations use this type of coal.
The escalation of the Donbas conflict seized almost the entire supply of coal, and Ukrainian heat power stations have now become exposed to a severe shortage of fuel.
In 2016, the attempts to solve the anthracite deficit resulted in the formula Roterdam+ introduced by the National Commission for State Regulation of Energy and Public Utilities. The projected cost of coal for Ukrainian heat power stations was calculated as follows: averaged 12-month quotations on Rotterdam stock exchange plus shipment to Ukraine.
Unfortunately, power suppliers do not use the tariff instrument particularly well to diversify the supplies. Instead, they continue the transportation of coal from uncontrolled territories, while including the Rotterdam+ formula in the tariff.
To that note, no rise in the cost of Ukrainian coal accompanied the price increase.
In 2016, for instance, the procurement of coal from state-owned coal mines was ₴1,380 per metric ton, and with the Rotterdam+ formula it hit over ₴3 thousand.
That said, the increased power expenditure of Ukrainian coal mines forced power suppliers to increase their tariffs due to the Rotterdam+.
The result was a conundrum: with the increased import, the rest of the Ukrainian coal industry has degraded completely.
Coal of a different sort
The problem can be solved by increasing the output at coal mines in those territories controlled by Ukrainian government (Western part of Donetsk Oblast, Dnipropetrovska Oblast, Lviv Oblast, and Volyn Oblast).
These coal mines have enough steam coal but of a worse quality, i.e. gas coal and long-flame coal (rank G and D).
To meet the demand for such coal, most thermal power units should abandon the use of coal A and T for the coal G and D.
However, it is not the best time for investments that convert boilers to use the gas coal since thermal power plants have been reducing their energy output for several years now. The declining Ukrainian GDP only adds to the issue being in direct proportion to the power consumption.
Secondly, the import of anthracite from the Russian Federation has become a much easier solution for Ukrainian energy specialists. After the trade with the occupied territories of Donetsk and Luhansk regions was banned, Russia became the largest coal supplier in Ukraine (almost 74% of imports in 2017 and 78% growth in June 2018).
According to the State Fiscal Service of Ukraine, the imports of coal from the Russian Federation for three months alone accounted for US$470 million in 2018.
That said, it is uncertain how much anthracite actually continues to flow in Ukraine from the occupied territories through Russia (formally as the Russian or overseas coal).
What can be done?
The solution should be comprehensive and cover both the issues of production and demand.
First and foremost, Kyiv has all the tools except for political will to encourage energy experts to abandon the use of imported anthracite for the Ukrainian coal.
It should be mentioned that efforts in this regard are being made. In September 2017, the wholesale power market passed a draft that changed the market rules and suggested prioritizing those thermal power generation units operating on the coal G and D over those using anthracite.
However, this draft was blocked by the Anti-monopoly Committee of Ukraine.
And the struggle between the lobbyists of Ukrainian coal and importers seems to continue.
Secondly, the long-awaited anti-corruption effect. The Prime Minister Volodymyr Groysmann has openly spoken on the fact that state-owned coal mines have local capos.
Thirdly, the enhancement of the corporate governance in state-owned coal mines. Some efforts were made in the form of State-owned Enterprise National Coal Company — a DTEK-like mega holding that unites around 30 coal mines remaining in the state’s possession.
The process implies a ‘purification’ of state-owned mines from surplus assets (primarily welfare facilities ought to be transferred to local governments).
Moreover, the merging of mines entails a liquidation of numerous coal mining associations to which they now belong. In theory, this will speed up the preparation of coal mines before privatization.
Another important component to ignite the coal industry is modernization and external financing.
More specifically, the Polish manufacturer of mining equipment FASING plans to enter the Ukrainian market. Negotiations have already started.
For the results to become material, there should be more players. However, the economic situation in Ukraine and the lack of substantial reforms does not contribute to that.
This post is also available in: Russian