Coal Industry Predicts Cuts in '09 Production

LONDON — Russia, the world's third-largest thermal coal exporter, has little option but to cut production and become a reluctant global swing producer next year, said senior industry sources in Moscow and beyond.

Any sizeable cut in Russian exports next year may help support coal prices despite weak demand. Coal has plunged over 50 percent to around $75 to $80 a ton delivered into Europe from a peak of nearly $200 in the summer.

Russia's exporters may have to be more flexible, selling on the spot market when profitable — an about-face from years of term contracts with end-users and attempts whenever possible to prevent coal being sold on.

The country is one of the highest-cost coal producers. Mining companies have struggled at times during the past five years when production and transport costs have risen above the free-market value.

This time around, the situation is worse because global coal demand is falling, many producers have substantial tonnages of unsold coal, domestic coal demand is slumping along with power demand and the usual credit avenues are drying up for the country's producers.

"They have no option, those that aren't heavily sold will have to cut production," said one senior source in the traditionally opaque coal market. "They can't sell any more until prices are in balance with their costs."

In September, Russian exporters were seeking up to $40 a ton above the API2 physical index, utility buyers said.

Buyers who can take a wide range of coal origins and do not need small vessels for specific ports said they have bought very little Russian coal for late 2008 or 2009 delivery because it was uncompetitive.

"We started to buy Russian coal very recently again because they're asking for reasonable premiums now. There's no shortage of supply of offers for Q4 and Q1 delivery, even from suppliers who'd been saying they were sold out for months," one utility source said.

Most Russian exporters had been confident that prices would recover to the year's earlier peaks and did not hurry to sign 2009 contracts.

The majority have substantial amounts of unsold coal, likely to be at least 7 million tons in total, industry sources said.

It is too early to tell how much exports will fall in 2009. Exporters with unsold coal will still sell some, even below cash costs, because they need revenue to continue operating at all, those in the industry said.

"Things are extremely difficult, for some companies more than others. Rail tariffs are going up again and the domestic power companies aren't paying for the coal they're getting," one producer said.

KRU, the biggest exporter, is the exception because it contracted almost all its coal for 2009 already at fixed prices.

SUEK is the next largest exporter, followed by smaller MirTrade. New York-listed Mechel exports coking coal and low-volatile thermal coal. There are also a host of small, independent miners who export directly but more often sell to the larger players.