For sale: Heavily subsidized, unprofitable state-owned Ukrainian coal mines

Last year, the mines were propped up with nearly $1.8 billion of financial aid to ensure salaries
get paid. Former President Viktor Yanukovych, a native of the coal-mining Donbas
region, paid special attention to the needs of miners, many of whom were his electorate.

However, the
current government’s austerity measure plans to cut subsidies to the coal mines
by $230 million, coupled with privatization plans are part of this policy,
said First Deputy Energy Minister Yuriy Zyukov on May 29.

Only some
120 coal mines in function in Ukraine, while another 70 are either temporarily or
permanently shut. Thus, more than 30 percent of the functioning mines will be
put up on the auctioning block.

Fifty
percent of the market is comprised of privately-owned mines, while billionaire
Rinat Akhmetov’s DTEK energy company remains the biggest player in the private
segment after it privatized many of the profitable.

Meanwhile,
state-owned coal mines have increased their net losses by 2.1 percent this
year, reaching $410 million.

“The
decision to hold a privatization is right,” says Denys Sakva, energy expert at Dragon
Capital investment house. The new owner may actually bring some changes into
the mines’ business model and turn them into profitable assets. He sees that
various insiders, who know the real condition of the mines, as key bidders.

The average
price for a mine is expected to be Hr 1, admits Institute for Energy Strategies
analyst Yuriy Korolchuk with a smile. “The government just wants to get rid of
these mines in order to avoid paying out grants,” he adds. Requirements on
investing capital in modernizing the mines’ extraction process may accompany the cheap prices.

As
Europe’s fourth largest coal producer, Ukraine extracted 86 million tons in
2013, consuming only 61 million and exporting another 6 million. Coal
production surplus stands at 19 million which is the reason why so many
Ukrainian coal mines generate losses – they simple do not have enough demand. Moreover,
illegal
mines – so called kopanky – are
bringing even more cheap coal to the market.

Another
reason for low market interest is the poor quality of the surplus coal.

Toronto-listed
East Coal, a company that owns two mines in Luhansk Oblast, initiated
bankruptcy proceedings in November 2013 after they did not succeed in selling
their coal on the market.

Two other
major privately-owned players on the market – Warsaw-listed Coal Energy and
Sadovaya – are experiencing significant problems with finding market demand
too.

All this
may discourage investors from purchasing the coal mines in Donbas, while
regional unease due to a Kremlin-backed separatist movement adds even more
problems to the privatization process.

However,
Zyukov of the Energy Ministry says that domestic coal prices grew by 34 percent
in May which will bring substantially larger revenue to producers. Moreover, the
government made a decision to sell all the coal, extracted by state-owned
mines, through Vugillya Ukrainy, another state-owned corporation. As a big
player on the market, Vugillya Ukrainy will have much more power to influence prices
and, thus, to help the mines achieve bigger profits.

Earlier
state mines had been selling coal to private companies at relatively cheap
prices. There have been whole schemes of intermediaries between the mines and
ultimate clients and mere speculation was taking place. As a result, the mines’
revenues remained low, while clients still had to pay high prices.

Even
state-owned energy companies sometimes were buying coal from fictitious
intermediaries, allowing them to make money out of nothing, which may be seen
as a heavy Yanukovych-era corruption, according to Ekonomichna Pravda.

Interestingly,
the Ukrainian government earlier had a plan to gasify the surplus coal in a bid
to reduce dependence on Russian gas supplies. However, Zyukov announced that
plans regarding construction of coal gasification plants in Ukraine have been
cancelled.

“I think,
we don’t have the proper technology today that could be used and allow to
invest the money effectively,” he said.

Korolchuk
of Institute for Energy Strategies sees this as a big loss for local energy and
chemicals mogul Dmytro Firtash, whose whole business model is based on low gas
prices and who could become a major client for the gas derived from coal.

Meanwhile,
a $3.66 billion loan on this project received from China will be used for
different projects, added Zyukov.

Kyiv Post associate business editor Ivan
Verstyuk can be reached at verstyuk@kyivpost.com.