Coking coal: a window for export opportunities for Russia, a problem for Ukraine

The Russian and Ukrainian steel sectors appear very similar to each other in so many respects such as enterprise structure, areas of product specialization and even export markets. Yet, there is one difference between the two countries' steel sectors which is crucial to steel production – the availability of coking coal reserves in the markets. On the one hand, Russia has enough coking coal reserves, not only to satisfy the needs of domestic producers, but also for export. On the other hand, Ukraine experiences shortages of coking coal in its domestic market. Turning our attention to the Russian coking coal market, it can be seen that the consumption of coking coal dropped by about five percent year on year in the first ten months of 2006. However, the decreasing trend in Russian domestic coking coal consumption is not expected to last for long due to the growing demand for pig iron and coke within the country. However, even in the event of scarcity of coking coal in the Russian domestic market, the prices are hardly expected to rise. The main reason for such assurance is the nature of the Russian steel industry. Most of the coking coal mines are in the control of the steelmakers, which makes it easier for the Russian steel mills not only to satisfy their needs in coking coal but also to control the price for the material in the market. On the other hand, export markets, especially in the case of CIS neighbor Ukraine, are becoming even more promising for the Russian coking coal producers. The scarcity in Ukraine makes it possible for Russia to increase its exports of coking coal to that country. For instance, in October the Ukrainian coke-chemical sector saw a shortage of 180,000 metric tons of coking coal. The decrease in Ukrainian domestic production had already started in September, when Ukrainian producers supplied 140,000 metric tons less than in August. In October, Ukrainian coking coal production saw a further drop. Imports, on the other hand, experienced an increase. For instance, while last year Ukraine imported about 8.3 million metric tons of coking coal, the figure is expected to rise to 11 million metric tons this year. In addition to the shortage in domestic production due to problems in the industry, the rise in gas prices has also forced the Ukrainian coking coal domestic demand to jump. Consequently, Ukrainian steelmakers even showed interest in buying products from the Russian companies which traditionally do not consider Ukraine as their primary export market. However, the imports of Russian coking coal might be a problem in the near future for several reasons. First of all, the Russian coking coal export market is currently ’overstuffed' by Chinese and Japanese consumers and so the price competition may not be so favorable for the Ukrainian consumers. Secondly, there is also a problem of transportation – the scarcity of railway-wagons. Possible solutions for the Ukrainian coking coal consumers could be further investments in the development of domestic mines or else to search for new sources of coking coal. Investments in the development of the coking coal sector seem to be even more problematic since many of the mines have still not been privatized and the Ukrainian government has neither the finances nor the inclination to invest. Thus, the second choice seems to be more promising.