Russian Coal Sector’s Slide Into Crisis Shows Cracks In Economy

Russia’s coal industry has slipped into crisis under the weight of high borrowing costs and sanctions as slowing demand in China compounds with falling prices to expose deeper cracks in the economy.

Only half of Russia’s coal companies remained profitable in 2024, according to the Federal Statistics Service, and the situation is continuing to deteriorate. One top miner, Mechel PJSC, said on June 30 that it may cut sales by a quarter this year and has already begun scaling back output as each newly mined ton deepens losses. Some mines in Siberia have had to halt output.

A key issue for the industry is an inability to secure equipment after three years of technological sanctions, according to people at two leading coal-mining companies, who declined to be identified because the information isn’t public. Miners often have to resort to a form of “cannibalization” — taking equipment from several sites to assemble a single working unit at one facility that can ensure the lowest possible production costs while cutting output, they said.

At the same time, companies face borrowing costs exceeding 20%, further weighing on profitability, while coal prices have dropped to multi-year lows due to slower demand from China.

“The coal industry faces what you’d call a perfect storm: all problems have converged at once,” said Natalya Zubarevich, a specialist on Russia’s regions at Moscow State University.

Although President Vladimir Putin has hailed the economy’s resilience to international sanctions, the industry’s situation highlights the cumulative impact of the penalties in certain sectors more than three years after the Kremlin’s invasion of Ukraine.

While officials have sparred in recent weeks over prospects for the economy, steelmaker Severstal PJSC has already warned that some producers of the metal may be forced to halt output amid slumping domestic demand due to a construction slowdown.

Before 2022, the coal industry relied heavily on mining equipment from Europe, the US and Japan. Technological restrictions on Russia since the start of the war have severed access to these critical supplies.

Initially, there was hope that Chinese suppliers could fill the gap left by the withdrawal of Western companies. The quality of Chinese equipment often falls short of industry expectations, though, and availability remains limited, according to the people familiar with the situation. In many cases, orders must be placed years in advance, they said.

Coal mining is also particularly capital-intensive. Before the war, leading producers were able to fund their operations at rates as low as 3% through European banks or by issuing eurobonds, but that avenue of financing is now closed.

The European Union, which previously accounted for about half of the country’s coal exports, banned shipments in 2022, forcing Russian companies to reroute volumes to China. This year, however, demand for the fuel in the Asian nation has dropped, adding more pressure.

Even though coal accounts for less than 0.5% of Russia’s gross domestic product, it helps to generate over 15% of the country’s electricity and plays a key role in maintaining socioeconomic stability.

The Kemerovo region, Russia’s biggest coal-producing area, reported a 20% budget deficit in the first quarter due to a drop in tax revenue from profits, according to Zubarevich. As a result, local authorities have already begun scaling back regional benefits, including special allowances for doctors, she said.

Should the situation persist, Russian coal-makers’ losses may more than double this year to as much as 350 billion rubles ($4.5 billion), the Interfax news service reported at the start of this month, citing Energy Ministry data. Debt remains a key issue, with the total load expected to reach 1.4 trillion rubles.

In May, the government announced measures to support the industry. They included a deferral on the mineral extraction tax and insurance contributions through December, subsidies for part of the expenses from logistics and compensation for some transport tariffs.

While helpful, the steps aren’t enough to resolve the crisis, according to the people at the mining companies. They said they remained hopeful that a hot summer in China will boost demand and provide at least some relief.

Source: Bloomberg Europe