Source of information:STRATEGY OF THE COAL INDUSTRY DEVELOPMENT
The coal industry products consumption is dominated by two major industrial customer groups, namely the coking industry and the electric power generation which together account for 69% of the total volume. Among the other customer groups, coal is supplied to municipal sector, industrial customers etc.
Prospective reserves of coal in Ukraine are estimated at 117.5 billion tons, including 56.7 billion tons in explored reserves of which 39.3 billion tons - thermal coal grades. Balance reserves of coal in the operating mines make up some 8.7 billion tons, including 6.5 billion tons of commercial reserves, with a proportion of thermal coal grades in the latter coming to 3.5 billion tons, which make up 54%.
The current development trends in the national metallurgical industry, power generation and other material production and the social sector boost up the demand for coal, with particularly fast growing demand for thermal coal grades. To meet the growing demand, the coal industry may significantly increase the production by mining 67 idle areas which total reserves amount to 13.1 billion tons, while their potential output could reach 124.9 billion tons of coal per year. Sludge reserves collected in sludge ponds also offer a good potential for the future productions: these reserves are estimated at 100 million tons.
The problem of efficient use of coal deposits still stands high among the top-priority challenges of the coal-mining sector. Complicated geological and mining conditions, shortcomings of planning and management activity and the inadequate engineering and technological levels of the coal-mining process result in the coal losses reaching more than 15% when working out the deposits.
The country still has to resort to foreign sources of coal supply due to insufficient supply of domestic coking coal grades, high sulfur contents in the latter and the notable shortage of light coal grades needed to Ukrainian TPPs. The coal imports are dominated by Russia (about 97%) and Kazakhstan. Imported coking coal grades are in demand by enterprises of the metallurgical sector of Ukraine, power generation sector (TPPs) and industries representing a few other industrial sectors.
In view of growing thermal power generation demand for coal the “Ukrainian Coal” Program adopted by Resolution #1205 of the Cabinet of Ministers of Ukraine dated September 19, 2001, provides for a package of measures to increase the national coal production and improve the competitive position of domestic coal. However, since the above Program has never been financed as required, the coal mining sector has failed to achieve the planned technical-and-technological and economic development levels, and the actual coal output has even fell to 78.0 million tons in 2005. Furthermore, due to the shortage of capital investments in the national coal mining industry, Ukraine’s active mining assets are rated as the oldest ones among the CIS countries; its fast aging has resulted in a negative balance of coal production in the sector. The downfall has become so steep and persistent, that the present situation may be only described as catastrophic. For the period of 1991 - 2005, coal production capacity of the national coal mining industry has fallen from 192.8 million tons to 91.5 million tons per year, that means almost 2.1 times reduction. This disturbing situation is further complicated by the inefficient use of the available production capacities as their average loading rate is estimated at as little as 85%.
About 96% of the operating coal mines have been in operation for more than 20 years, without any rehabilitation. As a result of delays in the coal mining sector restructuring, a significant number of small- and medium-size unprofitable and hopeless mines are still running.
The coal sector faces the following major problems: • physically obsolete and extremely outdated production assets of the mines that are dreadfully non-attractive for potential investors and therefore cannot be considered a lucrative subject for rehabilitation under any investment-based modernization model designed to galvanize the development of the coal mining sector in general; • low competitiveness of domestic coal due to its high production cost and relatively poor quality; considering that, it would be reasonable to have revised the accounting standards of the local coal mining industry and to switch to a commercial measuring as required by the internationally accepted practice; • lingering shortage of funds (own corporate funds, state subsidies, loans, non-governmental investments etc.) to finance both the current operations and the development of the coal mining companies; • uncertainty in the process for adaptation of the pricing mechanisms, applied in the coal mining sector, to the present market conditions; • lack of market mechanisms and motivations to encourage improvement of coal mining companies efficiency; • inefficient management structure of the coal sector that is further complicated by the multiple and poorly grounded restructuring campaigns; • legal inconsistency of the ownership aspects in the coal sector that results, among other things, in disagreement of interests of the relevant governmental agencies and business shareholders; • poor management at governmental level that slacks off the state-assets control in the coal mining sector and hampers establishing a sound regulatory framework with good management and economic mechanisms to support and defend interests of businesses willing to contribute to the coal sector development; • a backlog of unresolved problems in the environmental safety aspects relating to the coal mines closure; • a widening gap between the mining equipment and the coal prices; to balance the situation, the government shall either restrict the monopolistic pricing policies of the mining equipment manufacturers or take steps for the relevant upward adjustment of the coal prices; • low attractiveness of labor in the mining sector: first of all, due to the negative wage-sagging trends as compared to the wage situations in other sectors, and second, to unresolved social problems in the sector. A Strategic Goal of the coal sector development lies in stabilization of the situation and then in further sustainable development of the coal sector to meet the demand of national economy and residents for domestic coal. Approaches to be used to attain the above Strategic Goal of the coal sector development are based on the following grounds: • economically viable policies to maintain the existing production potential of the coal sector subject to it prudent rehabilitation and improvement of operational efficiency; • efficient development of the coal deposits based on a radical upgrade of the existing coal production technologies; • realistic assessment of the available financial potential of the coal mining companies and the relevant governmental agencies to ensure necessary financing of the sector development and to secure it on the governmental level; • adaptation of the coal mining companies to the market economic environment, establishment of effective legal and regulatory conditions to help them lure non-governmental investments in the coal sector development; • structural reforms in the coal sector based on a clear sharing of responsibilities between management subjects on all hierarchy levels; • Improvement of the labor safety and social protection of the sector employees.
To attain the above Strategic Goal, a long-term policy of the coal sector development was prepared and provides for the following three stages: short-term (2006 to 2010), medium-term (2011 to 2015) and long-term (2016 to 2030).
At the first stage (2006 to 2010), top priority will be given to a comprehensive approach to solve the current problems of the coal mining assets development that will be implemented through, first of all, its modernization based on the modern engineering and technological achievements and, then, further privatization. Under the Base Case Scenario, the coal output is expected to grow up to 90.0 million tons in 2010, provided the available production capacity is expanded up to 105.8 million tons per year. To provide for such growth, new production capacities estimated at 17.0 million tons shall be commissioned when the ongoing second-line construction projects on three mines are completed and when the active coal mining enterprises complete their rehabilitation projects and achieve planned growths of their production capacities with the relevant improvements of the Capacity Factor (CF) to the levels that will increase the average sector CF to 86%. In this process, the stalled construction of three new mines that was started in 2001 is expected to be resumed in 2006. The new mines will produce enough coal to meet the national demand for thermal coal and 77.3% of demand for coking coal. Coking coal imports will make up 9.2 million tons per year. Exports of steam coal will gradually lower to 3.1 million tons. Domestic coking coal will not be exported.
In the second stage (2011 to 2015), the coal output is expected to reach 110.3 million tons in 2015, provided that available production capacities are expanded to 122.5 million tons per year. As soon as these figures are reached, the local demand for steam coal will be satisfied in full, while the demand for coking coal will be satisfied by 82.6%. Coking coal imports will total 7.0 million tons. No steam coal will be exported in this stage. To ensure the coal sector development according to this scenario, new production capacities of 8.8 million tons per year are expected to be put in operation when the above-mentioned construction projects (launched back in 2001) on three mines are completed and other active coal mines are rehabilitated with expansion of their production capacity; their capacity factor (CF) shall be raised to as much as 90%. Furthermore, construction of seven new mines to be started in 2011, in order to maintain the positive trend of the production capacity expansion in the longer run. This will require financial rehabilitation and technical upgrade of the mine-construction branch which accelerated development will be a critical condition for successful implementation of the Strategy.
The third stage (2015 to 2030) is considered to be a long-term measure. The coal output is expected to come to 130 million tons, provided the positive development trends of the foregoing decade will be maintained in the national economy in general and the coal-mining sector in particular. In 2030, when the forecasted consumption of coal in the thermal power generation grows by 39% compared to 2015, the overall national demand for thermal coal and coking coal will be met by 97.1% and 72.6%, respectively. Domestic coal for export is not foreseen. The available production capacity by the end of this period is expected to grow up to 144.4 million tons per year, with the CF making up 90%. The above objectives will require timely rehabilitation of the active coal mining companies, with expansion of their production capacities, and construction of new mines on the explored sites of the coal deposits showing favorable geological and mining conditions, such construction projects will launch after 2015.
Ongoing mining activities of active coal mines produce (according to different studies) from 750 million to 2.7 billion cubic meters of methane per year, most of it is emitted into the atmosphere. The burning rock dumps also comprise one of the most harmful non-controlled sources of atmospheric pollution. Furthermore, operating mines and quarries pump out about 600 million cubic meters of water per year, of which only 250 million cubic meters (40%) are somehow used for service needs of the coal production companies or other users. Given insufficient mine water purification, more than 1 million tons of mineral salt are discharged in local rivers every year. The mounting technogenic burden on the geologic environment and hydrosphere results in frequent flooding of adjacent areas and subsidence of surface. The problem of monitoring the areas of closed mines, following their liquidation, to prevent possible flooding, subsidence of surface and mine gas emissions, remains one of the top priorities. Total area assigned to coal production and coal-processing companies makes up about 22 500 hectares. Critical environmental protection activities required to prevent the negative impacts of mining activities are now estimated at UAH 230 to 240 million.
In 2005, average price of saleable coal was UAH 217.67 per ton, while the production cost made up UAH 231.43 per ton that means that the coal companies faced losses of UAH 13.76 on every ton of coal produced; the total losses for a group of loss-making mines were estimated at UAH 1710.8 million. The State budget allocations were used to cover the production losses of UAH 1035.8 million, and the balance of UAH 675 million was left outstanding. For the year of 2004, coal prices grew up by 16.9% on average compared to the previous year: prices for coking coal and steam coal increased by 43.6% and 2.3%, respectively. In 2005, prices for coal went up by 10.5% on average. The disproportionate growth of wholesale prices for coking and steam coal resulted in deterioration of the financial standings of the coal mining companies which supply coal to the national power sector and communal utilities. The wholesale price of coking coal is about 1.6 times as large as the price of steam coal. The existing disparity of price growth trends for coal on the one hand and for material and technical assets used for coal production on the other hand is considered one of the major reasons for the rise in production costs of coal. At present, about 90% of mining equipment and machinery are supplied by private companies. Manufacturers and suppliers of the equipment take benefit of their monopolistic position on the market and come up with monopolistic high prices to make super profit, while the mining companies and open-excavation companies are forced to run into extreme losses. In 2002 equipment for newly commissioned long wall cost UAH 5 million, five times as little as in the current year when they have reached UAH 25 million. Prices for major items of mining equipment (coal production combines, components of automated sets of machinery, bucket and belt conveyors etc.) have risen 2 times on average for the last five years. The same trend applies to prices for rolled steel items and many other materials. At the same time the wholesale prices for steam coal have risen only by 49% while for the coking coal it grew by as much as 153%.
Market oriented price-formation driven by the world prices for the relevant coal grades, with due account of the alternative fuels offered on the market, and with special efforts aimed at demonopolization of supplies of mining equipment on the market, shall become an alternative to the existing price formation mechanism for coal products.
1. Rapid aging of mining assets at, as a result, reduction the coal production capacity are the primary reasons for the national coal output sagging to 78 million tons per year; the output is by far insufficient to meet the national demand for coal, and the country has to resort to coal imports. 2. Considering the growing trends of the worldwide consumption of primary energy and the available reserves of fossil fuels in Ukraine, the coal mining sector development becomes one of the most important factors ensuring energy security of Ukraine. 3. Despite the expected growth by a factor of 2.6 of the national demand for steam coal by the end of the period in question, the national coal mining sector has a good potential to meet the national demand almost in full, subject to reasonable revision of the current pricing policy and speeded up development of the sector.