The National Development and Reform Commission of the People's Republic of China has ruled to suspend construction of new coal thermal power plants with total designed capacity of 150gigawatt until 2020. This contains certain risks for Russian coal export to China, which is experiencing growth currently: over 13 million tons for the first half of 2017 or $1.17 billion. The volume of exports increased by 53.8%, with incomes growing 2.7-fold.
Moisey Furshchik, Managing Partner at FOC - Financial and Organizational Consulting, anticipates no dramatic decline in exports from Russia even if world coal prices fall moderately due to falling demand. Furshchik says there is certain safety margin in the field and active investing in export infrastructures is continued.
“Like many other commodities, coal has a price cycle. Therefore, high world prices will not last more than two-three years. Noteworthy that the Russian coal exports growth depends by far not only on high world prices,” the expert says.
During the recent years, the expert says, recovery has increased significantly at relatively new deposits in Eastern Siberia and Far East (Buryatia, Yakutia, Khabarovsky and Zabaikalsky region) with high quality coal and relatively low recovery cost value. These deposits are located closer to the ports by 2-4-fold rather than traditional deposits are. This circumstance helps saving on railway transportation costs. Major investments have already been made in development of these deposits, so recovery will keep growing.
Besides, coal handling capacities at Khabarovsky and Primorsky ports have increased significantly. Some more coal handling projects are being implemented currently (including within the free port preferential regime). In addition, the capacity of Baikal-Amur Mainline is being increased too. Beringovsky and South Yakutia Priority Development Areas (PDA) have been included in large coal recovery projects. The sector receives additional government support in Far East.
As export grows, domestic market is experiencing difficulties. In late July, it became known that problems with coal supply may result in conservation of most of the power units at Novocherkassky state regional power station, part of OGK-2, the largest heat generating company in Russia. Rostov region government announced that one of the power units at Novocherkassky SRPS was conserved, with another seven units to be conserved by 2021. As a result, only one power unit will be left operating. Yet in April, Gazprom Energoholding Director General Denis Fedorov said Novocherkassky SRPS might shift to gas consumption instead of coal, which will require construction of a second pipeline for the enterprise. Since 2012, the share of gas in fuel balance of Novocherkassky SRPS has increased from 28% to 56%.
The point is that Obukhovskaya mine owned by Ukrainian oligarch Rinat Akhmetov’s DTEK Holding de-facto terminated the contract with Novocherkassky power station yet this spring by supplying just 4,500 tons of coal instead of the required 80,000 tons. Besides, the supplied coal quality was not good – 4,7 thousand calories energy density per kilogram instead of the required 5,2 thousand tons cal/kg. Another coal supplier of the power station explained the supply problems with export priorities.
A significant growth of coal export attractiveness may help redistributing domestic electricity generation in Russia in favor of gas-consuming and other plants, but this will not have a serious effect anyway, Moisey Furchshik says.
“First, shifting from coal to gas consumption is a very expensive procedure,” the expert says. “Therefore, I think, this is about accelerated decommissioning or reconstruction of inefficient coal generating facilities. However, total capacity of these facilities is not so high, since these are outdated boiling houses and small plants rather than big heat-generating plants or state regional power stations that will remain efficient even if power generating coal rises in price certainly.”
“Second,” he says, “many deposits of traditional coal fields (Kuznetsky, Pechorsky, Kansko-Achinsky, Irkutsky, Chelyabinsky) are either located far from sea ports or contain coal reserves with quality not fitting for exports or they are located too close to large coal-consumers (state regional power stations or metallurgical plants). Therefore, the Russian market is still prior for them. Meantime, most of the new deposits have been inherently export-oriented. Hence, the issue of losing the Russian market is irrelevant here.”
“Third, Russian metallurgical companies have no alternative to the Russian metallurgical coal. The only option is supply from Kazakhstan, but the growth of the world coal prices have affected the producers there. Consequently, one can expect a rise in metallurgical coal prices in Russia rather than loss of the local market by native coal producers,” the expert says for conclusion.