Transportation On Top of the Coal
// Tariff Policy
Coal mining is growing in Russia. The miners are trying to increase exports and thus to improve their position on the world market. However, the state’s unbalanced tariff policy makes this task a difficult one. The profitability of coal mining companies directly depends on railroad tariffs. Further increases of transportation tariffs will lower the competitiveness of Russian coal outside of the country. One possible solution is to change the tariff formula, which was suggested by the state-controlled corporation Russian Railroads. Now everyone is waiting for a statement from the state regulation organ Federal Tariff Service (FTS).
Export-Import Channel
According to the data of Rosenergo, Russia today occupies fifth place in the world in coal mining. Ahead of Russia are China, the United States, India and Australia. It is expected that this year China will mine about 2 billion tons, the United States –about 1 billion tons, Russia – 290 million tons. The existing capacities allow Russian miners to drastically increase volume of production; however the low demand from the energy sector (natural gas dominates Russian energy) does not allow them to do so. In this situation, many coal companies are placing their bets on export developments. Besides, the sale of coal abroad brings a higher price than in Russia and the foreign sales allowed the coal industry for the first time in 15 years to receive good investment money for modernizing the industry. The actual coal mining in Russia does not grow in fast paces – instead, it drops periodically. According to the forecast of FST Chairman Vitaly Evdokimenko, this year miners will mine only 10 million tons more than last year.
In the mean time, as coal industry representatives point out, growth of coal production and an increase of state export volumes depend of two factors – transportation infrastructure and state tariff policy. Today the passing capacity of Russian railways and seaports is limited (actually, beside coal producers, this problem also faces oil and gas producers). The state is trying to solve this issue and build new coal terminals. The Ministry of Transportation already developed a program of modernization of Russian transportation systems. The coal companies themselves also have started to build their own terminals (see interview with Anatoly Yanovsky). However, coal companies are actively investing in a number of railroad carts as well as into the development of overall railroad infrastructure. Siberian Coal Energy Company (SCEC), for instance, for the last several years brought the number of its railroad cart fleet to 2,000, and also applied several projects to develop the railroad stations, which the company uses for coal transportation.
The largest coal regions of the country are located far away from seaports and coal produers have to use railroad services. Today, about 50 million tons of coal a year is exported through the railroads. According existing cargo classification, the FTS considers coal as a cargo of first tariff class, which translates into the application of lower coefficients depending of the distance of the shipment. However, despite that, railroads tariffs eat up a significant portion of coal companies’ profits. The transportation portion of in the price of coking coal during its delivery through the seaports is about 15 percent, through the land border –about 18 percent; in the price of energy coal these numbers correlate to 35 percent and 36 percent.
In the same time, the tariffs are being increased every year: according to FST information, with consideration of changed prices and dynamics of transportation the exclusive tariff conditions for export, shipments in 2005 grew by 15 percent compared with year before. Another raise of railroad tariffs will happen again in January of 2006. However, in the current situation, when world market experiences a drop of prices with a simultaneous increase of tariffs, there is a danger of seizing coal shipments from Russia to Europe, and as a result – the overproduction of coal Kuzbass.
Flexibility of Tariffs is the Base for Success
It looks like the Russian Railroads understand the seriousness of this problem. Boris Lapidus, Senior Vice President of RR, while speaking in the beginning of November on the roundtable “Coal transportation: problems and solutions, made an attractive proposal – to fix the transportation component in the final price of the coal by making it directly dependent on market demand (see interview). In other words, if the price for Russian export coal on the world market will start to decline, the transportation tariff will follow. That would allow maintaining a competitiveness of the product. In the case of a favorable price climate, the part of additional coal producers’ profits through the transportation component will go to the railroad workers.
The coal producers took the proposal with optimism. “Such tariffs policy might become one of the founding factors of coal export development in Russia and would give a growth stimulus for the whole coal industry,” Igor Gribanovsky, Managing Director of SCEC’s export affiliate, said. He used the example of his company and told Kommersant about the expenses of coal exporters during the shipments through Latvian ports (about a third of Russian energy coal export goes through this route). “The cost of underground mining in average of Kuzbass is not less than $15 per ton. The cost of transportation to the border with Byelorussia is $20 per ton plus the transit component through Byelorussia --$2.3 per ton. Then we are adding the cost of transit and port labor on Latvian territory --$7.5 per ton, sea cargo ---another $10 per ton. The cost of one ton of coal delivered in Amsterdam is about $55. And today’s market price is about $50-$53. As a result the company gets either very small profit or doesn’t get it at all.” So far the coal delivery load did not decrease: in the beginning of the year the price for the coal in the world market was about $60-$70 per ton, and the exporters are completing previous contractual obligations. “The lowering of world price on the background of the increased railroads’ tariffs will turn the coal business into the loser,” Gribanovsky insists.
Coal producers see several ways to perfect the tariff policy. First – is constant cooperation of the companies inside of the coal industry and RR within the frame of a joint working group, which would be able to realistically predict the consequences of tariff policy. The second way is to connect the transportation component with the final price of the coal (idea of Lapidus). And, finally, the third way is to sign long-term agreements between the miners and transportation companies. These documents will reflect the agreed volumes of cargo and fixed tariff. The coal companies promise to provide to transportation companies a plan of shipments for next three-five years with monthly schedules. The oil companies also are ready to provide financial guarantees in case of different volumes than promised. However, the coal companies also need guarantees from railroad workers about the timely provisions of tariff conditions agreed with FTS.
The RR has its own proposals about the improvement of tariff policy: the railroad workers are ready to examine a proposal about the provision of seasonal discounts to the coal producers (in the summer, when the demand for the coal is in its lowest, the transportation can cost less.) Such system already was tried on passenger trains: the tariff gets increased during the peak season. In the rest of the time the lower coefficients are being introduced. Now, all the proposals to improve tariff policy have to be agreed with FTS. Evdokimenko so far did not make any comments.
In the mean time, it is evident that the perspectives of the successful trade of Russian coal companies on the world market would depend on the flexibility of tariff policy. In the same time, the expansion geography of coal shipments from Russia would depend on demand of the coal market. So far, it looks this way: according to the results of 2004 the overall volume of the trade of energy and coking coal was 720 million tons. By the year of 2008 the growth is forecasted to reach 800 million per year. Thus, 76 million tons of coal, which Russia supplied to the market in 2004, it is 11 percent from the total trade volume in the world market.
In perspective, by 2008 the shipments of Russian coal on the world market in favorable conditions could grow up to 90 million tons per year. However, the world experts predict the drop of prices for coal and forecast the continuation of this tendency all around the world in 2006. According to the forecast, the price for energy coal in the North-Western region would drop to $56 per ton, and in South East region -$59. It is hard to predict further dynamics because of a lot of variables involved: the pace of economic development of different states, market of alternative energy sources, and so on. In any case, it is clear: without an involvement of the state, the export problems of coal producers would not be solved.
Maria Glushenkova, Irina Rybalchenko
All the Article in Russian as of Nov. 29, 2005
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