Deadlocked coal

Amid weak profitability and insufficient financing of railway infrastructure, some coal business players question the prospects of the Far East ports development.

Under the threat of different sanctions from NATO countries, the turn of foreign policy towards Asia is being actively discussed in Russia today. However, this turn is necessary not only in the context of the political situation – Asian markets were growing while Europe was in recession. And it means survival for coal business in general. 

As Denis Ilatovsky, Logistics Deputy Director of SUEK (owing coal terminals in Murmansk, Vanino and Nakhodka) said at the All-Russian Scientific and Practical Conference “10 Years of Forward Development” arranged by Rosmorrechflot (Federal Marine and River Transport Agency), the situation of the global coal market is not favorable today – coal prices are at the level of the crisis period in 2008-09. 

According to Brunswick Rail, coal prices in February 2014 fell by $7 against January 2013 to $73 per tonne and by 20% against February 2012.

There is no hope, however, for the growth in demand for Russian coal at the short transport leg, which is the market of the North Europe. This market is presently estimated at 160 mln t of coal per year with the 40-pct share of Russia (60 mln t). There is no space for growth. Moreover, the Europeans are going to get rid of coal as ecologically dirty energy in the long-term future. 

On the other side, China annually consumes 4 bln t of coal while the share of Russia in China’s 600-mln t imports is meager so far.  So, primary prospects of Russia’s coal exports are associated with the East. However, coal has to be delivered to that region and that is the most challenging aspect. Denis Ilatovsky says average distance of railway transportation in Russia reaches 5,000 km for coal while in Australia, for instance, it is about 400-500 km. With low costs of coal production in Russia, transport component considerably decreases its competitiveness being the largest costs category influencing the final value.

The tariff setting of Russian Railways is now based on 5-year plan which has improved the planning and forecasting situation for coal companies. Nevertheless, the investment programme of the railway monopoly aimed at railway infrastructure improvement does not meet the realistic demand for transportation forecasted for 2020. SUEK expects the demand for coal transportation towards the Far East ports from 37 mln t to 60 mln t per year by 2020. In particular, the capacity of railway towards Vanino foreseen by the investment programme of Russian Railways is 35 mln t per year while the demand for 50 mln t per year is quite realistic.

Also, there is a problem with the railway from Kuzbass (towards Mezhdurechensk and Mariinsk). In February 2014, Russian Railways OJSC asked the RF Government for allocation of additional RUB 16 bln needed to solve the problem but the respond was negative. The attraction of coal mining companies to the financing of Kuzbass railway infrastructure development is being discussed today but it is a sort of endless circle if low coal prices are taken into consideration. Russian Railways has no money for that, neither has the budget – sequestration of the state programmes is in full swing.

Meanwhile, on March 26, 2014 the Federation Council held the Parliament hearings on the reconstruction of the Baikal-Amur and the Trans-Siberian railways. Following the discussion, RF Government was recommended to approve the volume of the cargo base for the project by taking into account the shipment of coal from Russia's Kuzbass region. It is quite probable that amid cooling in relations with the West, Russia will find resources for the infrastructure focused on the Asia-Pacific region.

Vitaly Chernov