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Ore for Export
// Big deposits require foreign participation
Ore-mining Industry
Ore and coal deposits in East Siberia can well be compared with those of Australia. According to geological prospecting data, the Siberian ores and coals are of a high quality and can be in great demand on both the domestic and world markets. However, in developing big deposits of metallurgical raw materials, mining industry workers run against a host of problems which put to doubt the expedience of this undertaking. To develop the deposits of iron ore, coal, copper, zink and titanium large investments are needed, which may not be recompensed. In the view of mining experts, the Siberian reserves can be developed profitably only in cooperation with a foreign partner possessing advanced technologies, markets and a brand for drawing credits.
Raw Material Rush
In the plans of metallurgical companies all over the world for this and subsequent years pride of place is taken by problems connected with getting the right to develop big deposits. The interest in various ore and coking coal deposits can be explained by two factors.
First, the considerations connected with the current world situation. Last year the demand for raw materials for metallurgical production sharply increased, which resulted in a rise in its cost (see table). For example, the contracts signed at the end of the first quarter for the supply of iron ore from Brazil (Companhia Vale do Rio Doce, CVRD) to steel-making companies in Japan showed an unprecedented rise in prices, by 90%. Before publishing the data on contracts, experts predicted that the cost of ore would rise by 30% at the most. The Japanese producers had to agree with suppliers, and following them, European and American metallurgists also agreed to the conditions put forward by CVRD and other raw material suppliers.
Secondly, the logic of the development of production. The mining business is facing the need to increase deposits due to the depletion of those being currently worked (“Kommersant” of December 7, 2004, wrote about mining projects starting from scratch, green fields, tackled by metallurgical companies). This is why competition in the sale of rights to coal and ore deposits or share packets of companies owning licences for their development is always very keen, even where big market operators considered this business unpromising and inexpedient a couple of years ago.
Transport Problems
Against the background of the world raw material rush, the presence of rich metal ore deposits in East Siberia (see reference information) can become a serious factor of the development of this region of Russia, along with the working of oil and gas deposits. But the proper mining of coal and ore, just as the extraction of oil and gas, is hampered by the absence of the transport infrastructure. Even the deposits in Yakutia, Buryatia, and the Chita and Amur regions, the licences for which have been bought comparatively cheaply several years ago, have not been developed well enough. A great number of deposits has not been distributed due to the absence of customers.
The rights to the Elegest coal deposit in Tuva were acquired in 2002 by the United Industrial Company (OPK belonging to Mezhprombank), but not a single secion of it will be commissioned in the nearest future. The main technological problem of its development lies in its remoteness from the railway line. In order to make the development of an infrastructure cheaper a daring project has been examined to build a waterway along the Altai rivers from Tuva up to the Sayan-Shushenskoye reservoir. Another project is quite expensive: the building of a railway line in partnership with the “Russian Railways” (RZhD). Last week it was announced that an agreement on cooperation was signed already.
The biggest Elgin deposit of high-quality coking coal (about 2 billion tons) in Yakutia is unavailable due to the same reason (it is 320 kilometres away from the BAM railway line, and the volume of investments in the building of a rail track is estimated at $500 million). Unofficially, four companies have expressed interest in developing this deposit, but so far there are no concrete plans to start work in the near future.
Nevertheless, according to available information, all metallurgical companies now hold consultations on Siberian coal and ore projects, but no practical steps have been taken so far for their realization. Ravil Geniatullin, the governor of the Chita Region (the Beryozovskoye iron ore deposit is situated there), said on April 4 that if one counts only on Russian entrepreneurs, the Siberial ore deposits would be left untouched for another couple of decades.
Dear Mining
True, last year's growth of the cost of ore and coal on the world market has made Russian metallurgists look more attentively at the Siberian green fields. At the end of January the auction for the sale of 25% of the shares of the “Yakutugol” Company (it has been set up for developing the Neryungri and part of the Elgin deposits) drew almost all metallurgical holdings of Russia: the “Mechel” Steel Group, Magnitogorsk Metallurgical Plant (MMK), Novolipetsky Metallurgical Plant and “Severstal-group”. It should be noted that “Severstal” took part in the auction in alliance with the Japanese Sumitomo and Anglo-American companies. After heated bidding, “Mechel” paid for the packet $411 million, although prior to the auction the representatives of “Severstal-Group” estimated its cost at $150-200 million. According to information available to “Kommesant”, “Mechel” has already started negotiations with the government of Yakutua for increasing its packet of the shares of “Yakutugol”. As representatives of the company say, “Mechel” is interested in getting the control packet. The press-secretary of the “Mechel” Company, Aleksey Sotskov, admitted that it would like to regard “Yakutugol” as a road to the rich deposits of Yakutia.
“Yakutugol” provides an example of the revaluation of the cost of mining companies, as well as ore and coal deposits, in the direction of their increase. “Last year coal on Russian auctions cost $01 per ton, on the world auctions it cost this much two years ago. This year a site of the Erunakovsky deposit was bought at $1 per ton,” says the general director of the “Severstal-resurs” Company, Roman Deniskin(see an interview with him on this page).
On the other hand, the mining departments of metallurgical groups express doubts as to the profitableness of the purchase of “Yakutugol” and “Erunakovsky” at this cost. The development of deposits requires big investments. The construction of an ore-dressing plant from scratch will cost about $1 billion, and it can be commissioned within three to seven years, while the deadlines of its recoupment depend on the situation on the market which can worsen at any time, as was the case in 2001. This is why not a single mining holding would pay $2 billion just for the right to the resourses of the Elgin deposit.
As a result, although the interest in the Siberial deposits of ore and coal is rather great among Russian metallurgists, they are not ready to start any major mining project from scratch even on promising deposits.
Foreigners Are Waiting for a Signal
However, metallurgists do not intend to turn down the prospect of developing the biggest ore and coal deposits. As a rule, the top managers of the leading metallurgical companies have the opportunity to protect their interests at a state level and prefer not to give away the promising regions. Besides, some leading representatives of the federal authorities have time and again emphasized the need to protect the country's economic security. Recently, he Minister of Natural Resources, Yuri Trutnev, has reiterated the government's position on the Udokan copper deposit, the world's biggest (the rights to develop it may be solved in November, but foreign companies will not be allowed to take part in the auction).
This position coincides with that of metallurgists. They realize well enough that direct competition with western mining companies with their large means, advanced technologies and capacious markets will lead to pushing the Russian companies to the background on their own territory.
At the same time it is clear that they alone will not be able to cope with the Siberian ore and coal projects. As “Severstal” experts believe, Russian mine-workers have no experience in implementing large-scale mining projects which will face them when developing the resources of East Siberia. The only acceptable variant for the development of the branch would be partnership with foreign companies, both mining and metallurgical.
Thus, the attitude of the government to foreign companies is the main signal for the market. There must be clearcut rules on what is permissible for and is given to foreigners, and what goes to Russian business. Then the state will act as the guarantor of the safety of investments of all participants on the market. Such is the stand of the Russian metallurgical groups. The position of Russian companies in the world and the deadlines of the development of big Russian deposits depend on the access of international companies to these sites.
Between China, Brazil and India
Foreign mining companies have long been prepared to invest in the rich fields of Siberia. Negotiations have been conducted on the opening of business in Russia with the transnational BHP Billiton, Anglo-American, Rio Tinto, as well as Japanese, Korean and Chinese companies based not far from Siberian deposits. Among them are Sumimoto and Mitsui (Japan) and LG and Posco (Korea). The regional authorities and small non-metallurgical groups having licences on these deposits willingly enter into cooperation with foreign partners, well realizing their means and opportunities to render assistance in building roads and developing social services in the region.
Having failed to find a Russian investor, the authorities in the Chita Region have turned to China with a proposal to start a joint venture for the development of the Beryozovskoye ore deposit and reached an agreement on it. The British Peter Hambro has reported recently that it will commission a mine on a titanium ore deposit in the Amur Region by 2007. The government of Yakutia has signed an agreement with the Korean company LG on the development of the Elgin deposit and the United Industrial Company prepares an agreement with the Korean Posco Company on joint work in Elegest. The “Metropol” Finanacial Company, which got a licence on the biggest zink and lead deposits in Buryatia at the end of 2004, stated that Chinese partners would finance the building of an ore-dressing plant.
The press manager of the Anglo-American Company has said that the Russian market is attractive to its business and the company examines the proposals for work on it. The BHP Billiton Company has confirmed that Russia is one of the four basic areas of the mining business, along with China, Brazil and India. The company's interests are centered around East Siberia. So far the most promising venture is the development of nickel deposits jointly with the “Norilsky nikel” Company.
by
Maria Molina
All the Article in Russian as of Apr. 12, 2005
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