Ukraine’s Cabinet of Ministers on May 29 ordered the State Property Fund to prepare an auction of 38 state-owned coal mines as part of a cost-saving measure in line with International Monetary Fund requirements. Most of these mines are loss-making and, moreover, enjoy direct subsidies from the central government to stay afloat.
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.